Model essay (b): rent subsidy or rent cap?

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

• I can explain how price elasticities of demand and supply change the effect of an intervention.

  Syllabus 9570, 2.1.3(c). Government Intervention in Markets: Impact of government intervention on markets may be affected by price elasticities of demand and supply

Make a guess

A government gives low-income tenants $300 a month towards rent. Housing supply is very inelastic. Who gains most?

1. Tenants, who pay $300 less in rent each month.
2. Landlords, because the extra demand mostly raises rents.
3. The government, because higher rents bring in more property tax.

The answer to part (b)

Introduction

A rent subsidy is a payment from the government that covers part of a low-income tenant's rent. A maximum rent caps what landlords may charge everyone. Both aim to make rental housing affordable. This essay argues that a targeted subsidy is better than a rent cap because it helps those in need without causing a shortage. But neither fixes the root cause, a lack of homes, so the subsidy works best with measures that raise supply. The judgement depends on who is helped, the side effects and costs, and the elasticity of supply.

Paragraph 2: the subsidy is targeted

A subsidy can be aimed at the households who need help. The government can set it by income and family size, so a low-income family gets more support and a high earner gets none. The rent is not capped, so landlords still earn the market rent and have no reason to take homes off the market. There is no shortage, no waiting list and no fall in upkeep. Tenants also choose where to live, so they can rent near work or schools.

Paragraph 3: but much of it may go to landlords

However, a subsidy raises demand. In Figure 2, tenants can now afford more, so demand shifts up by the subsidy, from D0 to D1. In the short run the number of homes is almost fixed, so supply is inelastic. The extra demand mostly bids up the rent, from R0 to R1. Tenants pay only R2 after the subsidy, so they gain R0 - R2, while landlords gain the larger part, R1 - R0. Unsubsidised tenants, often young workers on modest pay, now face higher rents. The subsidy also costs public money, which has an opportunity cost in other spending.

Paragraph 4: the case for a rent cap

A maximum rent costs the government nothing and acts at once. Every sitting tenant pays less from the day it starts, without forms or means tests. When rents are rising very fast, it can protect families from being forced to move, and it stops landlords from gaining just because homes are scarce.

Paragraph 5: the costs of a rent cap

But, as part (a) showed, a rent cap causes a shortage that grows over time as landlords sell or convert homes and builders build less. People who most need a home, such as newcomers and young families, may not find one at all. The cap also helps every sitting tenant, including those on high incomes, so it is poorly targeted. Falling maintenance means tenants pay less for worse homes. The cap makes the real problem, too few homes, worse.

Paragraph 6: evaluation

Which policy is better depends first on the elasticity of supply. Where supply is very inelastic, a subsidy mainly raises rents, while a cap mainly cuts landlords' income, so neither adds homes. Over time supply becomes more elastic. Then a cap shrinks supply, while a subsidy can draw more homes onto the market, so the subsidy wins. It depends second on the aim. If the aim is to help low-income households, the subsidy is far better targeted. The best approach tackles the root cause by raising supply. Singapore, for example, provides public rental flats for low-income households and has built more public housing, which lowers pressure on rents without a shortage.

Conclusion

A rent subsidy for low-income tenants is a better way than a maximum rent to make rental housing affordable. It helps those in need without creating a shortage that worsens over time. It is not a full solution, since with inelastic supply much of it ends up as higher rent. Lasting affordability needs more homes, so the subsidy should be combined with policies that raise supply.

Margin notes: how each paragraph scores

Introduction

Defines both policies, states a stand with a condition, and names three criteria.

Paragraph 2

The subsidy's strengths, explained through targeting and the absence of a shortage. Each strength is linked to the aim of affordability.

Paragraph 3

L3 analysis on Figure 2: who really gains from the subsidy (incidence), using price elasticity of supply. Few answers spot this, so it lifts the script.

Paragraph 4

Gives the cap its fair case. A balanced comparison is needed before judging 'better'.

Paragraph 5

Links back to part (a) and adds poor targeting and quality. Reusing earlier analysis shows a coherent essay.

Paragraph 6

E3: two well-explained judgements (elasticity over time, the aim), then a root-cause solution with Singapore context.

Conclusion

Answers 'whether ... better' directly with a reasoned condition and a recommendation.

Overall: L3 and E3, 13 to 15 marks

Both policies analysed with mechanisms, side effects and a diagram. Listing pros and cons without weighing them would score E1 at most.

Worked example: A 4-minute plan

Same aim, two tools. Compare them under the same criteria.

1. Stand: the subsidy is better targeted, but neither fixes the root cause. Criteria: who is helped, side effects and cost, elasticity of supply.
2. Subsidy: targets the poor, no shortage. Limits: inelastic supply raises rents (Figure 2), budget cost.
3. Cap: no budget cost, quick. Limits: shortage, poorer upkeep, helps rich and poor alike.
4. Judge: subsidy better, best with more supply; public rental flats.

Watch out for this

A rent subsidy lowers the rent tenants pay by the full amount of the subsidy.

The subsidy raises demand, so the market rent rises too. How much tenants gain depends on the elasticity of supply: when supply is inelastic, landlords capture most of it.

Check your understanding

In Figure 2, why do landlords gain more from the subsidy than tenants?

1. Supply is inelastic, so extra demand mostly raises the rent rather than the number of homes.
2. Demand for housing is price elastic, so tenants spend the subsidy on other things instead.
3. The government pays the subsidy straight to landlords rather than to the tenants.