Question

Suppose the government of a state imposes rent ceiling. Will it necessarily increase consumer surplus? Show with a graph.

Answer 1

If rent ceiling is binding in nature, then it can change the consumer surplus as supply of the houses for rent will come down. It means that the rent ceiling must be below the rent level at the equilibrium to be binding. Though, it is the value of rent ceiling w.r.t. the equilibrium rent, that will decide the gain or loss in consume surplus. If rent ceiling is non-binding in nature, then it will not affect the consumer surplus.