Question 2

Assume that interest rates have recently risen, and housing shortages have created a rental crisis in Melbourne. In the absence of rent controls, the free forces of demand and supply will create the equilibrium levels. Draw a diagram to illustrate the equilibrium rental price of $1200 per month, and quantity of 4000 rental dwellings. What would be the effect if a rent ceiling of $1000 per month was imposed on the market? Show this in your diagram. In your opinion, should the rent control be implemented or should the free forces of demand and supply be allowed to determine equilibrium in the rental market. Explain your reasoning.