Suppose Nottingham City Council imposes rent contr Essays - Economy

Suppose Nottingham City Council imposes rent contr Essays - Economy Suppose Nottingham City Council imposes rent control on all accommodation rented by students. Use the market model to conduct an economic analysis of the policy. There are three types of market systems. A command or planned economy, a market economy and a mixed economy . A command economy is one in which all resource allocation decisions are taken by the government. The government decid es what to produce, how to produce and for whom to produce (A mess 2017) . A market economy solely uses the price mechanism : the forces of demand and supply to allocate resources and a mixed economy is a combination of both a command and market economy. Imposing rent control is an example of government intervention and this can only be done in a mixed economy where the government steps in to correct the free market. In order to impose rent control on student accommodation , Nottingham County Council will have to place a price ceiling on rent prices . A price ceiling is a maximum price level that must be set below the free market equilibrium price in order to be effective. Landlords offering student accommodation must not raise their prices above this price ceiling. As seen in the diagram, the price ceiling P max has been placed below the free market equilibrium . The law of demand states that as price increases quantity demanded decreases and vice versa, ceteris paribus. The law of supply states that as price increases quantity supplied increases and vice versa, ceteris paribus (Amess 2017) . Consequentially, the price ceiling will result in a new and higher quantity demanded Q d as a greater number of students will now be willing and able to rent student accommodation. However, the quantity supplied will fall to Q s because fewer landlords will be willing and able to offer their properties for rent. This will lead to a shortage of student accommodation in Nottingham which diagrammatically is the horizontal distance between Q d and Q s . Initially under free market conditions, the equilibrium price Pe and output Qe are Pareto efficient. Pareto Efficiency occurs when it is impossible to make anyone better off without making someone else worse off (Sloman, Wride and Garratt 2015). This can be demonstrated using the Production Possibility Curve (PPC). The PPC is a representation of all the possible combinations of two goods that an economy can produce within a specified time period with all its resources fully and efficiently employed (Sloman, Wride and Garratt 2015). Producing at any point on the PPC (points A, B, C and D) is pareto efficient because all of the economies' existing resources are being fully exploited, producing the maximum possible outputs of both student accommodation and consumer goods. Producing at a point below the PPC (point E) is not pareto efficient because the economies' existing resources are not being fully utilised as greater quantities of both consumer goods and student accommodation can be produced. Production cannot take place at a point beyond the PPC curve because the economy doesn't have sufficient resources to produce the desired quantities of both student accommodation and consumer goods. Nottingham County Council attempts to achieve point F, a point beyond the PPC, by imposing rent control which may be desirable but is currently unachievable. All other residents of Nottingham must be made worse off in order to make students better off because resources will have to be reallocated by producing fewer consumer goo ds and more student accommodations for the new demand to be met. Therefore, the output price and quantity after government intervention is not pareto efficient. The short run is a period of time in which at least one factor of production is fixed. The supply of student accommodation in the short run will be price inelastic with an elasticity of supply value less than 1. This can be represented in the market model by drawing a very steep supply curve. Price elasticity of supply (PES) is a measure of the responsiveness of demand to a change in the price of the good or service. PES equals the percentage change in quantity supplied divided by the percentage change in the price of the product (Amess