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Question from Past Microeconomics Qualifying ExamEdit

Spring 2004 - Section I, Question one, George Mason University

State first whether the following statement is true, false or uncertain. Then briefly explain your reasoning in four or five sentences. You may use a graph if it helps clarify your answer.

Because abolishing rent control has both winners and losers, it is impossible to say whether doing so is "more efficient" than keeping rent control.

AnswerEdit

False. Abolishing rent control would not be a Pareto efficient move, but it could be a Kaldor-Hicks efficient move. A change from the status quo is Kaldor-Hicks efficient if the sum of amounts that all individuals would pay to effect the change is greater than the sum of amounts that all individuals would pay to avoid the change. In the case of rent control, it is plausible to imagine an evenhanded analysis finding that would-be renters and many landlords would be willing to offer a greater total amount for the change than current renters, certain landlords, and politicians who favor rent control would be willing to pay in order to keep it.

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