Rent Subsidy

Assume there is a well-defined geographic area of a city. The area is composed exclusively of apartments and is populated by low-income residents. The people who live in the area tend to stay in that area because (1) they cannot afford to live in other areas of the city, (2) they prefer to live with people of their own ethnic group, or (3) there is discrimination against them in other areas of the city. Rents paid are a very high percent of peoples' incomes.

(a) Would the demand for apartments in this area be relatively inelastic or relatively elastic? Explain.

(b) Would the supply of apartments in this area be relatively inelastic or relatively elastic? Explain.

(c) Draw the demand and supply curves as you have described them, showing the initial equilibrium price and quantity. Label carefully.

(d) Now assume the government creates a rent supplement program. Under this program, the renter is required to pay 30% of income in rent any additional rent is paid by the government (up to a limit). For example, a low-income person with an income of $1,000 a month would be required to pay $300 in rent (30%). If the rent were $500, the government would pay the other $200. Analyze the results of this program. Show the changes on the graph and explain what will result. Who gains and who loses from this program?

(e) Instead, now assume that the government decides to provide a building subsidy to people who build apartments in this low-income area. The government will pay a certain percent of their costs. Analyze the results of this program. Show the results on the graph and explain what will result. Who gains and who loses from this program?

(f) From the point of view of improving housing for the poor, which is the better public policy? Justify your response.