a) In some markets, governments intervene to keep prices of certain items higher or lower than what

would result from the market finding its own equilibrium price. Price controls can take the form of
Maximum Prices whereby price cant rise above a certain level or Minimum prices which are mainly
used to give producers a higher income.
A price ceiling occurs when the government puts a legal limit on how high the price of a product can
be. This can reduce prices below the market equilibrium price. The advantage is that it may lead to
lower prices for consumers. It is also known as maximum price.
Rent control is an example of a price ceiling, a maximum allowable price. With a price ceiling, the
government forbids a price above the maximum. A price ceiling that is set below the equilibrium price
creates a shortage that will persist.

For the price that the ceiling is set at, there is more demand (Q2) than there is at
the equilibrium price. There is also less supply (Q1) than there is at the
equilibrium price, thus there is more quantity demanded than quantity supplied
i.e. shortage. This leads to waiting lists and the emergence of black markets as
people try to overcome the shortage of the good and pay well above market
price. In such cases, subsidies may be offered to the firms to encourage the
production of such goods. However it involves an opportunity cost to the
government as they might have to divert funds from other activities.
Government may also consider the option of producing the goods by themselves
or release previously stored inventory of such goods to ensure that there is no
shortage in the market, however, it might not be possible for all the goods, for
example, perishable goods.
All these options will lead to the shift of supply curve to the right and thus
forming a new equilibrium at Pmax as shown below.

Some other examples of maximum price controls are:-

During the second world war, price of goods was fixed and good rationed. However, this
encouraged people to sell on the black market through inflated prices.

The advantage of setting this maximum prices is that it keeps football affordable for the
average football supporter. It is argue if prices were set solely by market forces, it would
be just the wealthy who could afford to go to games.

The disadvantage is that it means some who want to go to the game cant because there
is a shortage of tickets.

A minimum allowable price set above the equilibrium price is a price floor. With a price floor, the
government forbids a price below the minimum Price Floors are minimum prices set by the
government for certain commodities and services that it believes are being sold in an unfair market
with too low of a price and thus their producers deserve some assistance.

The main aims why minimum price controls are adopted are to raise income for producers such as
farmers and protect them from frequent fluctuations in the commodity market. In this respect, the EU
had a Common Agricultural Policy (CAP) set up to increase the income of farmers by setting minimum
prices. Furthermore, minimum price controls can protect workers and ensure that they get enough
wages to sustain a reasonable standard of living. This is why minimum wages for certain occupations
are legislated.
As seen from the diagram. The equilibrium price for a particular good is Pe and the Quantity
demanded is Qe.

The government thinks that it is too low for that good thus they set up a minimum price for a good
Pmin.
This will lead to a fall in demand to Q1 and increase in supply to Q2, thus creating excess supply or
surplus.
Government can eliminate the surplus by buying the excess supply at the minimum price. This will
result in the shifting of demand curve to the right, thus creating a new equilibrium at Pmin.
The Government may store it or sell it abroad. However, both these options have consequences.
Buying the surplus and storing it will cost an opportunity cost for the government as they have to
divert funds from other important areas and exporting it other countries may be considered as
dumping.
b) Rent control is part of a system of rent regulation, administered by a court or a public authority,
which limits the changes that can be made in the price of renting a house or other real estate
property. The objective of controlling the prices of rent is usually to counteract the inequality of
bargaining power between landlords and tenant, as part of a minimum set of rights to make the
market fair.
As a direct effect of the first and second world wars buildings were destructed and consequently
economic crisis created a shortage in the housing stock which resulted in provoking high demand of
the houses. To take the benefit of the situation Landlord's imposed consistent high rents which further
exacerbated this situation. In the aftermath of the Second World War rent control legislations began to
sweep across major countries of the world. Some of the people were on the lower end of the demand
curve (below the equilibrium price), they did not have extra or enough income to pay the equilibrium
rent. Through this problem, they ended homeless. To cure this situation, the government imposed a
rent ceiling that is below the equilibrium price. Following this, lower price made housing more
affordable for everyone than. At the controled price, people are willing to consume more housing and
this will cause the quantity demanded to increase. On another hand, the rent controls do not increase

the number of housing units available and therefore supply remains the same. Hence, the price
controls tend to have an opposite effect. The rent ceiling had created a housing shortage- a gap
between the quantity demanded and quantity supplied. The markets will allocate the available units to
those consumers who are willing and able to pay the rent at equilibrium price.
In many cases, a portion of the market is left untouched from being regulated by the governments so
as that excess demand can serve as a safety valve. This unregulated portion ends up on the "black
market." With rental controls, the prices in the so called black market are forced to be more in
comparison to their normal market value. The reason behind this is that there is the limited supply in
the black market and the excess demand in regulated market. In order to cover that excess demand,
as prices are too low in the regulated sector, they are forced to move up. The diseconomies in the
regulated market let them end higher. Individuals, poor and young people who enter this market are
hit hard by these high prices. This is an additional cost, which they have already incurred in search of
suitable property in regulated market. However the landlords or investors in this black market get
benefitted with these higher rents.
The problem that arises on the supply side of the market is the deterioration of new construction
projects because as rents are forced to remain below the market price, it reduces the profitability of
rented houses which directs switching of investment capital from rental market to other more profit
generating markets. New constructions reduce and even existing rental houses are used to convert
into other useful activities. Rent controls send a message to builders not to construct new housings
and stop new investments and it discards current suppliers from investing in existing housing
accommodations. That means rent controls have the impact of reducing the supply, instead of
expanding, in time of shortage. The rent controls benefit those consumers who feel lucky in finding
themselves in a house with controlled rent and since consumers do not want to lose the subsidy, they
dont move. This loss of mobility increases other costs like travelling expenses to those who used to
travel to other places for work. To achieve fairness and administrative efficiency a broad framework
needs to be provided by the government within which the enforcement of contracts can be done. The
guiding principles for this could be:
a. restriction of the act for protection to deserving tenants;
b. removing protection to those who not require;
c. inviting new investment for increase of supply of rental housing;
d. fixation of rent as agreement between the two in such a way that the landlord gets a
remunerative rate of return;
e. revision of rents periodically and in existing tenancies increase of rent;
f. To bring the old rent tenancies to market level a time frame needs to be set up;
g. responsibilities to be divided between the two for maintenance;
h. bringing of semi tenancies contracts under the Rent Control Act;
i. loopholes of the existing rent control acts to be plugged in so as to make them more
effective
In todays world, many argue these pros and cons of rent control. Governments in most European
countries are opting to minimise their control over rent pricing. History has taught us that the longer
governments allow rent controls to continue, the more distorted will housing markets become and the
more governments will have to intervene in them, legislatively, administratively, and financially.