Data Question: Housing since 1945

3. Assess whether economic welfare would be increased if government either (a) reintroduced subsidies on buying a house or (b) reduced rentd for those in social housing (mainly for tenants of councils or Housing Associations).

Economic Welfare: Consumer Surplus and Producer Surplus

Consumer Surplus: Consumer surplus is the excess of the price that buyers are willing and able to pay for the good over the actual price paid. This is defined as the extra satisfaction gained by consumers from paying a price that is lower than that which they are prepared to pay.

Producer Surplus: Producer surplus is the excess of what a producer is willing and able to put up on sale for a good over the actual price her receives. This is defined as the excess of actual earnings that a producer would be prepared to accept for that output.

Subsidies: A per unit subsidy is a fixed amount of money given to the producers or consumers for each unit they sell or purchase.

Abstract from article (Useful Evidence): from the 1960s, a strong financial incentive to buy houses was introduced through the scrapping of a tax on the notational rent on owner occupied houses and the introduction of tax relief on mortgage payments. Tax relief reduced cost of mortgage repayments once the relief was given and so allowed house buyers to afford higher mortgage repayments, and therefore able to buy more expensive houses. It was justified in terms of making home ownership, more affordable to a wider range of income groups.
However, in the 1980s, the government started to phase out tax relief.

Reasons for doing so:
-Subsidies went to better off households.
-With highly inelastic price elasticity of supply of houses, the subsidy did not make housing more affordable, instead, it pushed the price of houses up.

As defined in the earlier question, housing is mostly a merit good and has external benefits. As social marginal cost is greater than private marginal benefit, a subsidy equivalent to the external marginal benefit at the socially efficient output level, QSE would shift the PMC curve vertically down by that amount PMC’=PMC-subsidy. The imposition of the per unit subsidy results in an output that corresponds to the socially efficient level of output QSE.

[Incomplete]
Credits to YiLing.
Group Members: Uyen, Natalie, YiLing, Aaron