Model essay (a): what a rent cap does

What this lesson teaches

• I can describe taxes, subsidies, price controls and quotas as ways a government intervenes in a market.

  Syllabus 9570, 2.1.3(a). Government Intervention in Markets: Governments may intervene in markets in the form of taxes, subsidies, price controls (maximum and minimum prices) and quantity controls (quotas)

• I can show how each intervention changes price, quantity, spending, revenue, consumer surplus and producer surplus.

  Syllabus 9570, 2.1.3(b). Government Intervention in Markets: Government intervention in markets can affect the equilibrium price and quantity, consumer expenditure and producer revenue, consumer surplus and producer surplus

Make a guess

A city caps rents. In the first year, rented homes fall a little. Five years later, they have fallen much more. Why?

1. Demand for rented homes keeps falling over time.
2. The cap gets stricter every year by law.
3. Supply is more price elastic in the long run.

The answer to part (a)

Introduction

A maximum rent is a legal limit on the rent a landlord may charge. It has an effect only if it is set below the equilibrium rent. It makes housing cheaper for tenants who find a home, but it also causes a shortage. That shortage tends to grow as landlords and builders respond over time.

Paragraph 2: who gains

In Figure 1, the market clears at E0, at rent R0. The government sets a maximum rent below R0. Tenants who already rent, or who find a home, now pay less each month. For a low-income family, a lower rent leaves more of its income for food, transport and school costs, so housing becomes more affordable for them. This is the aim of the policy.

Paragraph 3: why a shortage appears

At the capped rent, more people want to rent. Young adults move out of their parents' homes and families seek bigger flats, so the quantity demanded rises to Qd. Landlords earn less from each home, so in the short run they offer only Q1. Quantity demanded exceeds quantity supplied, so there is a shortage of Q1 to Qd. Because the rent cannot rise, the shortage does not clear. Homes are rationed in other ways: waiting lists, landlords choosing the tenants they like, or illegal side payments. Landlords also have less reason to repair and maintain homes, so quality falls.

Paragraph 4: why the shortage grows

In the short run the number of homes is almost fixed, so supply is price inelastic (SSR). Over time, supply becomes more elastic (SLR). Landlords sell homes to owner-occupiers, turn them into short-stay lets or offices, or let them run down. Builders put up fewer new rental homes, because the capped rent earns too little to cover their costs. So the quantity offered falls from Q1 to Q2, and the shortage widens to Q2 to Qd. When Berlin capped most rents in 2020, reports suggested the number of flats advertised for rent fell sharply before a court struck the law down in 2021.

Conclusion

A maximum rent makes housing more affordable for tenants who find a home, but it causes a shortage at the capped rent. The shortage grows over time because the supply of rental homes becomes more elastic as landlords and builders respond, so fewer and poorer-quality homes are offered.

Margin notes: how each paragraph scores

Introduction

Defines the policy and the condition for it to bite, and previews all three requirements.

Paragraph 2

The first requirement, who gains, explained with Figure 1 and a concrete household. Many answers skip the gain and lose marks.

Paragraph 3

Explains the shortage on both sides of the market, then its knock-on effects (non-price rationing, falling quality). This depth is L3 rigour.

Paragraph 4

Uses short-run and long-run PES with both supply curves in Figure 1, and real evidence from Berlin. This is the step that separates top answers.

Conclusion

Answers all three parts briefly. No evaluation marks are available for a 10-mark part.

Overall: L3, 9 or 10 marks

All requirements explained with a correct diagram showing both time periods. Without the reason the shortage grows, the answer would be capped at L2.

Worked example: A 3-minute plan

Three linked points: gains, shortage, a growing shortage.

1. Intro: a maximum rent only bites below equilibrium.
2. Gains: tenants who find a home pay less; Figure 1.
3. Shortage: Qd above Q1; queues, side payments, landlords choosing tenants, poorer upkeep.
4. Over time: supply more elastic (sell, convert, build less): Q1 falls to Q2; more people want to rent.
5. Close: affordable for the lucky, harder to find for the rest.

Watch out for this

A maximum rent makes housing affordable for everyone who needs it.

Only tenants who find a home gain. At the capped rent fewer homes are offered than people want, so others cannot rent at all, however low the official rent.

Check your understanding

Why is the supply of rental homes more elastic in the long run than in the short run?

1. In the long run tenants find more substitutes, so demand becomes more elastic.
2. Over time landlords can sell or convert homes, and builders can build fewer new ones.
3. The government builds more public homes in the long run, so the supply curve shifts right.