AS Micro Multiple Choice: Subsidies for Social Housing

Here is an example of an AS micro multiple choice question on subsidies for social housing

Question

The UK Government currently subsidises the building of social housing. Social housing is provided to low income households at rents which are lower than the free market rent. Which one of the following would provide an economic justification for these subsidies?

• A The unequal distribution of income and wealth caused by the free market results in an unsatisfactory allocation of resources.
• B Subsidising low cost housing reduces inequalities in the distribution of wealth.
• C Social housing is a public good because it is both non-rival and non-excludable.
• D There is market failure in the housing market because of the existence of missing markets.

The correct answer to this question is A

Remember that each multiple choice question tests one key idea drawn from the syllabus - if you have a great working knowledge of the syllabus and the main concepts you will be able to recognise quickly in the exam what the question is about!

So why is the answer A?

Because a subsidy is a form of government intervention used when it is argued that the allocation of scarce resources in a free market economy is inequitable. Many people on low incomes cannot afford to buy their own home and housing rents have also become increasingly unaffordable in recent years.

Social housing is typically provided by local councils and by bodies such as housing associations.

Social housing differs from owner-occupied housing and properties available for rent from private landlords

A subsidy can be justified on the grounds that inequality of income and wealth prevents people from finding suitable, basic, affordable places to live. It helps to cover some of the monthly rental cost and will provide financial relief for poorer families.

What about the other options? I have added some brief comments to each:

• B Subsidising low cost housing reduces inequalities in the distribution of wealth - social housing is rented and not owned, so a subsidy does not increase the wealth of those receiving the subsidy
• C Social housing is a public good because it is both non-rival and non-excludable - social housing is a merit good and not a public good. If one family lives in a property, that reduces the amount of housing available for others to use. Councils can also exclude tenants and make use of waiting lists as a form of rationing
• D There is market failure in the housing market because of the existence of missing markets. - missing markets refers to public goods and not social housing, the subsidy is designed to make an existing market more equitable