NAME: YASIR KABIR COURSE: NCUK/IFY TOPIC: Evaluatethe extent to which any government should intervene in the housing market, forexample by using subsidies, or leave the provision of housing to the freemarket. DATE GIVEN: DATE SUBMITTED: LECTURERS: Mr. Lawal and Mr. Adedeji INTRODUCTIONThe free market is aneconomic system in which prices of goods and services are determined by theforces of demand and supply without regulations and influence of government. Theissue of government intervention arises when the free market system is not ableto allocate resources efficiently and when the market fails to take intoaccount externalities which will lead to market failure. Governmentintervention is a process in which the government intervenes in markets inorder to address inefficiency or correct market failure. The government maydecide to use taxation or subsidies depending on the type of goods.
An exampleof market failure is shortage of housing. Shortage occurs when long-term demandis greater than long-term supply; this can lead to increase in rent, provisionof poor quality housing etc. The main arguments are; should the governmentintervene in the housing market or should they leave it to the free market?Which methods of intervention should the government use? How effective arethese methods? FREE MARKET The free market system is anunregulated economic system in which the invisible hand determines the pricesof goods and services, in this system the various forms of governmentintervention do not exist. This system is said to be beneficial because allresources are privately owned and members of the society are free to engage inany type of business. The main problem of this system is that it could lead marketfailure. Examples of market failure are:· Under-production of merit goods such as Housing, education, healthcarewhich will lead to inefficient/missing markets.
· Inefficient allocation of resources. MARKETFAILURE Market failure is asituation where the free market is unable to allocate resources efficiently. Insome cases the free market will overproduce or under-produce some goods or itmay fail to produce a good or service. For example; Housing which is a meritgood can be under-produced by the free market, this is a source of marketfailure that gives a rationale for government to intervene in the market. GOVERNMENTINTERVENTION Faced with the problems of the freemarket the government intervenes in the free market in order to correct marketfailure and achieve equitable distribution of income in the economy. There aredifferent policy instruments which the government can use.
The government candecide to provide goods and services by itself or decide to persuade producersand consumers to act differently. The instruments that can be used to achievethis are; subsidies, taxation, price controls, state provision etc. Forexample, the government may decide to intervene in the housing market becausehousing is a merit good which is under-produced by the free market. MERIT GOODS Merit goods are goodswhose consumption is intrinsically worthwhile, they are goods that the societythinks everyone should have irrespective of whether they are wanted by eachindividual. Merit goods are considered to be under-supplied by the free marketdue to imperfect information and positive externalities. Example of merit goodsinclude: housing, healthcare, education, sport facilities, museums etc.
HOUSING AS AMERIT GOOD Housing is considered asmerit good as it is a good that creates benefit for the community. As a meritgood housing is also under supplied by the free market as a result of imperfectinformation whereby consumers of merit goods fail to identify the true benefitto them and also positive externalities leading to shortage of housing. SHORTAGE OFHOUSING Shortage of housing occurs when thefree market under-supplies housing which could lead to missing markets inhousing. As demand for housing is rising faster than supply of housing, houseprices have increased reducing the affordability of housing.
Shortage ofhousing is experienced in most counties of the worldAccording to Chris Vidler and Charles Smith (2008), Inthe United Kingdom the long-term demand of housing is growing more quickly thanthe long-term supply, it has been estimated that 350,000 new housing units arerequired each year if supply is to keep up with demand. This is shown in thechart below. Figure 1: A Chart showing Housing Shortage in the UK(Gotten from; http://www.cherrymortgages.
com ) From the illustration above we can see that shortage ofhousing is prevalent in the United Kingdom. Housing shortage is an example ofmarket failure and has its impacts on the economy.Effects ofHousing Shortage on the Economy In countries like United Kingdom,Nigeria, Australia etc. housing shortage has been increasing as long-termdemand is more than long-term supply. This has affected the economy indifferent ways, these effects are;· Increased Cost of living:In the United Kingdom shortage of housing has increased thecost of living of the citizens due to large increase in house rent. Workers inshops, restaurants etc. are being priced out of living in the capital due tohigh rent, only best paid workers are able to afford rent.
· Inefficiency:Due to unaffordable housing people travel from long distanceto their workplace, this could lead to inefficiency as some employers might betired and late to work. In Nigeria, workers travel for hour’s from their homesto their workplace due to unaffordable housing. · Wealth/Income inequality:Housing shortage has led to inequality as house owners see arise in income and those who do not have houses experience higher costs ofrent. In the UK rise in house prices and the cost of rent have contributed tothe growth in wealth inequality. · Threatens Economic growth:In many countries shortage of housing shortage stallseconomic growth because housing shortage can cost communities new jobs andinvestment opportunities. In Australia due to a shortfall of 186,000 dwellings,housing shortage has led to a slump in economic prosperity.
Solution toHousing shortage · Government Intervention: I. SubsidyThis is a financial assistance given by the government to a producer toreduce cost of production and increase output. Since merit goods like housingcreate positive externalities, it would be subsidized by the government toincrease the supply of the good. In the UK the government uses two types ofsubsidies which are; housing benefits and low-cost government loans.
Forexample, In the diagram below due to under-provision of housing the governmentsubsidizes housing which will make the supply curve move from S1 to S2(MPC?Subsidy) this will make the price to fall from P2 to P1. The decrease in pricewill lead to an increase in demand which will make the demand curve to shift fromD1 to D2. The new equilibrium will be where (D1=D2). Price D1 D2 S1= MPC P2 G P1 E S2= MPC ? Subsidy H P3 S1 S2 D1=MPB D2= MSB 0 Q1 Q2 Quantity Government Intervention UsingSubsidies II. Price Control:The governmentcan use rent controls by imposing a maximum price that states how much alandlord can charge a tenant, this will make rent more affordable and alsoprotect tenants. It is shown graphically in the diagram below. Figure 2; A Graph showingthe imposition of rent controls(Gotten from: http://libertarianjew.
blogspot.com.ng ) III.
Regulations:The governmentcan use direct controls to reduce housing shortage by making laws. Thegovernment can decide to ban multiple home ownership ; this will increase thenumber of houses available. The government can also decide to give tax breaksfor investors willing to make properties available at affordable rent. IV. Government provision: The government canovertake the provision of housing if they feel it will not be provide by thefree market. This can lead to affordability and availability of good housingsince the government would aim at maximizing the welfare of the people. LIMITATIONAND EFFECTIVENESS OF GOVERNMENT INTERVENTION IN THE FREE MARKET· Subsidy given to companiesand individuals can be used for other projects instead of housing.
· Price control in form of rent control makes Quantity demandedto be greater than quantity Supplied this can lead to shortage of housing.· Execution of policies by the government may fail due to poormanagement and poor method of execution.· Direct production by the government can lead to inefficiency because;unlike the free market there are no Financial Incentives. Leaving Housing to the Free marketIf the government decidesto leave housing to the Free market there will be no financial cost and reward.This could lead to market failure in which housing would be under-providedsince it is a merit good and has positive externalities i.
e. the free marketwill not be able to provide for all those who require housing. In the end, thegovernment might have to intervene in the market eventually and the process offixing house rent might be expensive and have adverse effect such as blackmarket.
CONCLUSIONIn view of the analysis above, we can conclude thathousing should not be provided by the free market alone as it can lead to market failure. Sincehousing is a merit good it is under-produced by the free market, the bestsolution is for the government to encourage production by giving subsidies andgrants. Also, government can impose rent control. This will go a long way toreduce cost of production and increase the supply of housing. REFERENCE LIST· Anderton, A. (2008) Economics. Essex: Pearson Education Ltd.· Chu, B.
(2014) Britain is suffering from a housing crisis -who is to blame and how can we fix it?. Available at: http://www.independent.
co.uk/property/house-and-home/property/britain-is-suffering-from-a-housing-crisis-who-is-to-blame-and-how-can-we-fix-it-9113329.html. (Accessed on November 3rd,2017)· Powell, R. (2008) AS Economics. Oxford: Phillip Allanupdates.· Sloman, J. (2004) Essentials of economics.
England: PearsonEducation Ltd.· The Australian. (2011) Housing shortage threatens livingstandards, economic growth: report. Available at: http://www.theaustralian.com.au/national-affairs/housing-shortage-threatens-living-standards-economic-prosperity-report/news-story/7a5f0c325ce93425ad2eaf6800b1b7d4?sv=ac1d089ba38848f39ccb7644616f331d .
( Accessed on November 5th,2017)· The Guardian. (2016) Britain’s Housing Crisis is so seriousthat it must be tackled now. Available at: https://www.theguardian.com/business/2016/nov/20/britains-housing-crisis-must-be-tackled-now. (Accessed on November 4th,2017)· Viddler, C and Smith,C.
(2008) The AQA AS Economics. England: Pearson Education Ltd.