"The imposition of legislation that forbids landlords to increase rents will... D lead to lower rents and fewer people living in rented houses." Are you sure? Imposing a ban on rent increases is not the same as a rent cap (which would, I agree, force landlords charging over the cap to (reduce rents or) leave the market, so leading to lower rents and fewer tenants). If a ban on rent increases were imposed, no landlord would reduce their rent: surely only those charging too low a rent (to cover future cost increases) will gradually leave the market, leaving those making higher profits. I think this would cause the supply curve to shift left: fewer landlords at any given price. And, over time, this shift left would continue. Hence fewer tenants, but higher rents. Am I missing something?
I can see that the supply curve will shift left but I can't see how the rent will rise, as it's not allowed to.
Good point... For any given rent for any particular type of property, the rent isn't allowed to rise. However, I would expect (maybe wrongly) that the higher rents for more expensive properties would have more "slack" in their pricing to be able to absorb rising costs (without rising costs, the new law would make no difference). So those landlords will be able to stay in the market longer than the cheaper property landlords. Overall effect: higher average rents. I am sure I am making a number of assumptions that aren't given in the question. But I think I would need to make less likely assumptions to come up with the given answer.
