Problem 1. Distinguish between the resource market and the producer market in a circular flow model. In what way are businesses and households both sellers and buyers in this model? What are the flows in the circular flow model?
Application:
Task: The famous Swedish economist Assar Lindbeck remarked in his book on rent controls, "Rent control appears to be the most efficient technique presently known to destroy a city - except for bombing." Rent controls place price ceilings on rents at levels below equilibrium rental rates for the stated purpose of making housing more affordable for low-income families. Using supply and demand analysis, answer the following questions:
a. How does imposing rent controls affect the number of housing units available to low-income families?
b. Under rent controls, can all low-income families get rent-controlled housing?
c. Who gains from rent controls? Who loses?
d. Why would Professor Lindbeck think rent controls are destructive?
e. Is there an alternative policy to make plenty of housing available to low-income families that would not be subject to the problems of rent controls? Explain in detail.