Suggested Answers of BT2 Revision Package - ASKnLearn

quantity transacted increases and house prices increase significantlysince supply of houses is in general price inelastic.OrAn increase of the maximum loan-to-value ratio from 80% to 90% àpeople can obtain more loans à demand for houses increases àquantity transacted increases and house prices increase significantlysince supply of houses is price inelastic.OrA reduction of cash down payments from 10% to 5% for home purchaseà demand for houses increases à quantity transacted in the marketincreases and house prices increase significantly since supply of housesis price inelastic.Max 2 marks if PES is not mentioned.(ii)With reference to the data provided where appropriate, and themicroeconomic goals of the government, discuss whether there isjustification for intervention in the housing market.Microeconomic goals of the government:-allocative efficiency-equity[8]On attaining allocative efficiencyWithout government intervention, the price of houses and the quantity ofhouses transacted in the free market are determined entirely by themarket forces of demand and supply. The market-clearing quantity wouldnot be at the socially optimal level as the free market will not take intoconsideration the positive externalities (social cohesion and socialstability) of homeownership, resulting in under-consumption and henceallocative inefficiency.Marginal social benefit (MSB) of housing exceeds the marginal privatebenefit (MPB) and the quantity transacted in the market is lower than thesocially optimum. Unless there is some form of government intervention,there will be under-consumption, resulting in welfare loss to society.[Explain with the help of a diagram to show market failure --- underconsumptionof housing]To ensure a higher level of home ownership, house prices must be madeaffordable. All governments are obliged to provide public housing throughdirect intervention in supplying housing and making them affordable to