Question

Suppose that the supply curve for housing in an American sunbelt megacity is:

P = 0.125 Q

where P is the price per month per bedroom of an attractive central location, and Q is the number of bedrooms—the number of people—in millions. (People in less attractive locations get a discount, and people who own rather than rent have a more complicated problem. But for simplicity assume that we can represent this whole market by just one supply curve and one demand curve.)

Demand for housing in a west coast sunbelt city—call it Ellay—is: P = 4 - 0.125 Q

where, once again, P is the price per month per bedroom of an attractive central location, and Q is the number of bedrooms—the number of people—in millions.

What is the equilibrium price? What is the equilibrium quantity?

What is the consumer surplus? What is the producer surplus?

Now let’s consider another west coast megacity: call it Esseff. The supply curve and the demand curve for housing in Esseff are the same as in Ellay. But local politics have given control over zoning to the NIMBY lobby—Not In My Back Yard—and so the housing stock in Esseff is fixed by government regulation at a maximum of 6 million bedrooms. Suppose rent control has been outlawed—landlords lucky enough to have built can charge what the market will bear. What is the equilibrium price? The equilibrium quantity? The consumer surplus? The producer surplus?

Are landlords as a class happy or unhappy that Esseff has powerful zoning and growth restrictions—that Esseff is not Ellay? How happy or unhappy are they?

Are people trying to live in Esseff as a class happy or unhappy that Esseff has powerful zoning and growth restrictions—that Esseff is not Ellay? How happy or unhappy are they?

What effects other than on price do the zoning restrictions have on housing in Esseff relative to Ellay?

Answer 1