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80 Chapter 4 Demand and Supply
Price (dollars per housing unit)
p 2
p 3
p 0
p 1
E 0
E 3
E 1
D 1
q 0
q 1
q 2
q 3
Quantity (housing units)
that price ceilings and price floors often have unintended, undesirable consequences of
creating surpluses and shortages, can also suggest alternate public policies that do not
have these same trade-offs.
Let’s return to the issue of rent control. If the goal is to have an expanded supply
of affordable housing, then a rightward shift in a demand curve, a supply curve, or both
as shown in Exhibit 4-12, can accomplish this goal. A shift to the right in the supply
of affordable housing from S 0
to S 1
, for example, might be achieved if a government
grants subsidies to builders who construct apartment buildings that include have
relatively smaller rental units, which will have a more affordable price in the market.
This step taken alone would cause a shift to the right from the original equilibrium,
E 0,
to the new equilibrium, E 1
, and would increase the quantity of housing from q 0
to
q 1
. A shift to the right in the demand curve from D 0
to D 1
might be achieved by giving
a subsidy to low-income renters, perhaps in the form of cash or of a voucher that the
renters could use to pay some of the rent, so that low-income renters could then have
more to spend on housing. This step taken alone would cause a shift to the right from
the original equilibrium, E 0
, to the new equilibrium, E 2
, and would increase the quantity
of affordable housing from q 0
to q 2
. Instituting both sets of policies would shift supply
from S 0
to S 1
, demand from D 0
to D 1
, the equilibrium from the original E 0
to E 3
, and the
quantity of affordable housing from q 0
to q 3
.
Any combination of these policies is likely to be more useful in expanding affordable
housing than rent control, because these policies tend to increase the quantity of
affordable housing, whereas rent control tends to decrease it. Moreover, these alternative
policies sidestep many of the problems that arise when suppliers and demanders react
to price controls.
Similarly, there are a number of alternative policies to support farmers or rural
areas that do not involve setting price floors for crops. For example, the government
could provide income directly to farmers, especially to those with lower incomes.
The government might also assist rural economies in many other ways: establishing
new branches of state colleges and universities in agricultural areas, creating parks or
D 0
Exhibit 4-12 Policies
for Affordable Housing:
Alternatives to Rent
Control
The original equilibrium is the
intersection of demand D 0
and
supply S 0
at the equilibrium
E 0
. Providing subsidies to lowincome
buyers of housing will
shift the demand curve from
D 0
to D 1
, leading to a new
equilibrium at E 2
. Alternatively,
a policy of providing subsidies
to builders of affordable
housing would shift the
supply curve from S 0
to S 1
,
leading to a new equilibrium
at E 1
. Undertaking both
demand-side and supplyside
policies would move
the market to equilibrium
E 3
, at the intersection of
the new demand curve D 1
and the new supply curve
S 1
. As drawn here, both of
these policies will increase
the equilibrium quantity
of affordable housing. An
increase in demand will also
raise the price of affordable
housing, but as long as the
subsidy received by buyers is
larger than the higher price,
buyers will not be adversely
affected by the higher price
that occurs from an increase
in demand.