Answer to Question #117690 in Microeconomics for Tlotlie

Question

Suppose rent control is in force in a particular town, with the rent fixed at a level which is lower than the equilibrium rent. Which one of the following is likely to happen if rent control is abolished?

Answer 1

Since the rent was subject to a maximum price control (rent is set lower than the equilibrium rent), the following will happen if the rent control is abolished:

1. The rent prices will tend to rise as they had been fixed below the equilibrium price hence consumers will pay more.
2. Because of the increase in rent, investments in real estate will increase as the prices are now realistic.