Question

Suppose the housing market is characterised by supply constraints, such that the supply is fixed in the short-run: X _S=100. The market demand function for housing is D(X)=1000-4X, where X is the number of houses in the market.

The government is thinking of introducing a home-buyers' grant of $150. The grant would be given to buyers once they purchase a property. As an economist working at the Treasury you are asked to determine the efficiency of this grant.

1.What is the cost of the grant to the government? Cost=  

2. What is the excess burden generated by the grant? EB=

Assume now that the supply is no longer fixed, and is given by S(X)=6 X. The government is still thinking of introducing the same home-buyers' grant of $150.

3. What is the cost of the grant to the government in this scenario? Cost=

4. What is the excess burden generated by the grant in this scenario? EB

Answer 1

We have Gnd DCX)= 1oso-4x S150 Xs= 1OD C1-) PaicecP) Exces buden of art goont Price Lo thot Sne of oont $150) Pace with at 450 137-5 250 Chunber of House)X Cost of the goont to the Aouemnerd (ast C$150) (37.5) $20,625 $20,625 .Cast CD Exces bnden genoratd by the gorant CEB) XCS150) X C37.5) 2812. 5 $2812.5 . EG

C3.) Aicece) Pseuts 6o0 PGayer 5 y0 100 115 250 (Numbes d Houso)) Cast Cast of goont to the Sovermment $ C150) X 17, 250 Cast $17,250 C40 EAcess bunden genee ated CIUS) by at CEB) x S1S0) XC1S Sl125 .. EB 81125