[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

A
Supply
curve of
apartments
than Q c , the marginal cost exceeds what consumers are willing to
pay for the last unit, and so total surplus would be increased by
reducing output. At Q c and p c , the sum of consumer and producer
surplus reaches its highest level.
RENTAL PRICE
R*
Demand
curve for
apartments
Fundamentals of Competitive Markets 1
HOUSEHOLDS AND FIRMS ARE
PRICE TAKERS
Q*
NUMBER OF APARTMENTS
B
Supply
curve of
apartments
In competitive markets, there are many firms and many consumers.
Because each consumer and each firm is small relative to the size of
the market, each takes prices as given. Firms, maximizing profits,
produce at the level where price equals marginal cost. Households,
making rational choices, purchase up to the point where the marginal
willingness to pay equals the market price.
RENTAL PRICE
R 1
Figure 10.2
Shortage
Demand
curve for
apartments
Q 1 Q*
NUMBER OF APARTMENTS
THE EFFECTS OF RENT CONTROL
Panel A of Figure 10.2 shows the supply and demand curves
for rental apartments. The equilibrium rent at which supply
equals demand is R*. At this rent, the total surplus to renters
and landlords is maximized. In panel A, the blue area is the
consumer surplus—the value of apartments to renters in
excess of the actual rent, R*, they have to pay. The green
area is the surplus that goes to landlords.
Example:Efficiency Losses from Rent Control In Chapter
4, we used the basics of supply and demand to illustrate why rent
control interferes with the workings of a competitive market. We showed
how rent control could create an artificial scarcity of housing, reducing
the supply of low- and moderately priced apartments and making
it more difficult for newcomers to find a place to live at a reasonable
price. Now we can use the concepts of consumer and producer
surplus to see how rent control reduces economic efficiency.
Panel A of Figure 10.2 shows the supply and demand curves for
rental apartments. The equilibrium rent at which supply equals
demand is R*. At this rent, the total surplus to renters and landlords
is maximized. In panel A, the blue area is the consumer
surplus—the value of apartments to renters in excess of the actual
rent, R*, they have to pay. The green area is the surplus that goes
to landlords.
Panel B illustrates what happens when the local government
imposes a law that prevents rents from rising above R 1 . A rental
shortage results, as there will be an excess of demand over supply at
R 1 . We can use this simple supply and demand model of the market
for apartments to see what happens to consumer surplus and producer surplus.
The blue area of panel B equals consumer surplus at the rent R 1 . The green area is
the landlords’ surplus. Comparing panels A and B, we can see that total surplus
is smaller as a result of rent control. Total surplus has fallen by the area shown in
yellow. The reduction in total surplus measures the inefficiency resulting from
rent control.
Our analysis also highlights the distributional impact of policies such as rent
control. Look again at panel B. Total surplus falls when the rent ceiling is R 1 , and
the available supply of apartments also falls, from Q* to Q 1 . Some consumers may be
218 ∂ CHAPTER 10 THE EFFICIENCY OF COMPETITIVE MARKETS