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Use a diagram to show the consequences of government imposing a price above or below the free market equilibrium

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Introduction

Nadinda Ayu 11RIn Microeconomics MOD 1. Use a diagram to show the consequences of government imposing a price above or below the free market equilibrium. (10) When government imposes the free market and prohibits a price from going above a certain level, we call it price ceiling. If the price ceiling is below the equilibrium price, then shortages are created. The intention of price ceiling is to protect consumers from rapid price increases. However, this intention comes with consequences that are unintended. An example of price ceiling is the gasoline shortages in the 1970s. The diagram below will show the consequences of price ceiling: In the first stage (before government imposing), the equilibrium price of oil per gallons is $1.20. This is where the number of demand equals to the quantity of product sold. The graph of demand and supply when government imposes the price below the free market equilibrium is shown below: We can see form the graph that the supply contracts from point A, the equilibrium, to point B, which represents the quantity of gallons if the price of oil was to be changed to $1. ...read more.

Middle

This is a law that prohibits landlords to raise the price of rent to go above the price that they have determined. This law is determined by state or country legislatures. In Mumbai, the rent control act started in 1947, with the intentions of making houses affordable to more people. In rent control, the government imposes the price below the free market equilibrium, making the price lower than what it is supposed to be. Although the government intended well, the act proved that instead of benefitting the whole country, it mostly only benefit some of the poor and the people who already rented a place before the rent control. In the short run, rent control helped many people in obtaining places to live. This mostly helped the poor people who could not afford rents before. However, the effects of rent control have not fully happened in the short run. The number of people who look for housing may not be as high as it takes time to arrange housing. ...read more.

Conclusion

The lack of supply of rents is also seen as the biggest reason for slums in Mumbai. As the number of rents occupied increase and the number of the rents available decrease, more people would not have a place to live, resulting to the slums in Mumbai. Not only does rent control affect the tenants, it also effects what the landlords do. Because the price of rents fall, the landlords would not earn as much money as they did before, when it has potential to earn much more money. As a result, the landlords would decrease the quality of the houses. They could also charge the tenants for things that are supposed to be included in the rent expense, such as TV. In conclusion, rent control acts, particularly in Mumbai had more disadvantages than advantages. Even though it protects the rights of the poor by decreasing the price below the equilibrium, rent control only lead to a shortage of rent. The shortages would then cause slums to increase, as the demand extends but could not be fulfilled. ...read more.

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