The Theory of Market Mechanism Case Study Example | Topics and Well Written Essays - 1000 words

The Theory of Market Mechanism - Case Study ExampleDue to a fall in the rental, the supply of flats withal declines, however, the quantity demanded of flats increases. This follows from the law of demand and supply. As a result, at that place is a gap between demand and supply or in other words, in that location arises a shortage in the commercialise for home spaces. This shortage is not a natural outcome but created by the suppliers or the landlords which result in an excess demand situation. This shortage generates scope for black marketing of flats at a higher rental.From the land lords point of view, the creation of shortage is quite excusable because the cost of maintenance and electricity has remained the same. In the process of black marketing, the flats are rented out at market clearing rental or even more. Since dwelling place is a necessary item for any consumer, the tenants are ready to pay the excess amount above the ceiling price. Thus there is secernment because some are getting the flats at the Government determined rental whereas some have to pay out a huge amount. Thus there is a reverse effect of what the Government intended. Here the concept of economic rent also comes into play. Because of the price ceiling, a number of landlords are not uncoerced to rent out their space, they are restricted from entering the market in fear of loss. Now suppose the Government decides to remove the ceiling and the rental price is determined by market mechanism, there will be huge opposition from both landlords and tenants because those who were getting the flats at lower rent will fence and again the landlords who were operating in the black market will passively support the tenants who were opposing. This is because the landlords are better off in a black market where they extract huge profit. The lobbying cost, lawyer fees, public relation costs are substantial.