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The Economics of Housing Provision

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Introduction

Umist Manchester School OF Management Economics Principles: Microeconomics Essay Bsc. Management and Marketing in Textile Year 1 The Economics of Housing Provision Title Suppose a government wishes to ensure that its citizens can afford adequate housing. Consider 3 ways of perusing that goal. One method is to pass a law requiring that all rents be cut by one- quarter. A second method offers a subsidy to all the builders of homes. A third provides a subsidy directly to the tenants equal to one- quarter of the rent they pay. Predict what effect will each of these proposals will have on the price and the quantity of rental housing in the short and in long run. Discuss the merits of each approach. The mother of all economic problems is the problem of scarcity. While there are infinite human wants and only limited resources to satisfy these wants. Economics is therefore concerned with the study of allocation of these scarce resources. Hence choices have to be made which means there is an opportunity cost to every use that the resources are put to. Opportunity cost is the value of the next best alternative that has been forgone in making that choice. It is the forfeited alternative. A Production Possibility frontier shows this concept of how much of one commodity is sacrificed to produce one unit of the other. How these choices are made depends on the nature of the economic system. ...read more.

Middle

If there is an increase in supply the supply curve will shift to the right (S2) and if there is a decrease in supply the supply curve will shift to the left (S3). Equilibrium for an economy in the short run is established when aggregate demand intersects with short-run aggregate supply. This is shown in the diagram below At the price level Pe, the aggregate demand for goods and services is equal to the aggregate supply of output. In the housing market this is the price of the rented housing as determined by the demand and supply deemed to be too high by the government. The output and the general price level in the economy will tend to adjust towards this equilibrium position. In the short run, producers are faced with the problem that some of their factor inputs are fixed in supply. In the long run all factor inputs a variable. The producer can vary the land, buildings capital as it chooses. The government intervenes in housing in a number of ways to correct for examples of market failure, to achieve a greater degree of equity / fairness in the distribution of goods and services and to enable markets to work more effectively. For example the problem of homelessness. Measuring the true scale of homelessness in the United Kingdom is extremely difficult. The Shelter web site provides some evidence on how many people are classified as homeless. ...read more.

Conclusion

Supply is relatively inelastic so that when the demand curve shifts out, the equilibrium market price will rise to P2. Demand-side factors affecting the housing market Housing benefit for low-income households is paid to people in rented properties. In the UK this is done through housing benefit, which is effectively a government subsidy for the rented housing sector. Over 3 million households are in receipt of housing benefit. The benefit is means-tested and covers all or part of the rent that low-income households have to pay. The government does not discriminate between private and social rented housing. They leave the benefit recipient to choose which type of rented accommodation they prefer. It does help the low-income groups however it can trigger of high demand push inflation. In the UK The Government White Paper on Housing published in December 2000 stated that the private rented sector suffered from a historical lack of investment. In local authority housing, the Government identified a �10 billion backlog of overdue renovation work particularly in social estates many of which were built to poor standard of design and construction. In unregulated markets, the prices and quantities are determined by supply and demand. Where there are effective price ceilings, the forces of supply and demand are overridden. Money prices are lower than the free market equilibrium, and shortages arise. As a result there are incentives, especially for lower paid, to spend time quing or searching for limited housing that are available. Black markets may also develop, especially those with higher incomes my purchase these houses. ...read more.

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