Economics of Housing Vouchers (Section 8). Overview and Explanation

Some countries use housing vouchers as a way to ensure that all families can have access to affordable housing. For example in the United States, we have a program called section 8, and section 8 provides vouchers to low-income families to make sure they can get housing. 

How Section 8 works (Housing Vouchers)?

The way that section 8 works are, for a given neighborhood you assess what is the fair market rent for that neighborhood, and then the tenant, he or she is going to contribute 30% of his or her income toward the fair market rent. So let's pretend that the fair market rent for a neighborhood was $1200 and that the tenant 30% of his or her income let's say that is $400. So what's going to happen is that $1200 fair market rent we're gonna subtract the $400 that the tenant pays and that's gonna leave a shortfall of $800. There's gonna be $800 left that the tenant can't afford. This section 8 housing voucher is going to cover the remaining amount. So that $800 is going to be a subsidy from the federal government. So we have this subsidy and that's going to cover part of the rent so $400 comes from the tenant and then $800 would come from a subsidy, so that's how housing vouchers work at least in the U.S.

So I want to show the effect that this would have on supply and demand in terms of the market for housing. So let's think about this, if we have our initial quantity of housing and in an area happens to be let's say 5000 units at the equilibrium so we've got supply and then we've got demand so at our equilibrium we have 5000 as our quantity of housing and then our initial price let's say is $700 a month.

Introducing Housing Vouchers

So if we have an initial quantity of 5,000 and then we have an initial price of $700 and we say "We're going to introduce these vouchers, that is gonna make it easier for more people to obtain housing." That's the goal of the vouchers is we want people who before couldn't afford a house, maybe they're homeless or maybe they were doubled up living with relatives, we want to make it so that they can get housing or maybe they to want to move into a new area, etc but we're going to be increasing the demand for housing. That's the whole goal, that's what we're doing here we're gonna increase demand for housing so here's our new demand curve D2. So we had our initial demand curve D1 and we are shifting to D2, we're shifting the demand curve outward.

So what's gonna happen now we've got a new equilibrium. So now our equilibrium quantity it's gonna be higher let's just say that it's 6500. So it's going to be higher than before and I'm just pulling these numbers out of a hat. So our new quantity of housing is higher than our old quantity. It worked, that's what we wanted. We wanted to get more people into housing and so this makes sense. Now, what happens to price? Let's look for from our equilibrium we've got our new price of housing, well we can see immediately the new price is higher than the old price, the initial price before the vouchers. So let's just say that it's $900 a month or something like that. So you see that the $900 is higher than the $700. So what has happened here? We've introduced these vouchers so we've made it easier for people to get housing, we've increased the equilibrium quantity of housing that has gone up because our demand curve shifted to the right. We've also increased the price because we have more people now who are entering the market for housing if the price didn't go up then we'd have a shortage. So landlords are going to say "While there are more people now wanting to buy housing they've got vouchers and so we're going to increase the price." 

Positive Externalities in Housing Vouchers

Now you might be wondering, well is this a good thing or is it a bad thing? I mean we're intending to make up housing more affordable and now the price is going up, so what is going on there? I will leave to you whether it's a good or bad thing but here's a justification for why that might not be a serious problem, we might have a situation with our market for housing where affordable housing can be viewed as a situation where there's a positive externality. I have another article on positive externalities if you want to check it out but let me just give you the basic idea. So when families are able to obtain affordable housing there are certain benefits that come from having affordable housing. So people who get affordable housing and couldn't afford it before, let's say before they were in a homeless shelter it didn't have to be a homeless shelter maybe they were living with relatives or whatever but they didn't have stable housing and now we get them into housing because now the housing has become an affordable option to them, it also could be that they were in a rough area it was high crime and now we got them into a better area a number of things could happen but the idea is that we get them into a better situation housing wise. 

Now when we do that when we get them better housing if they have children, for example, their children might be more likely to graduate from high school and if they graduate from high school they're going to probably have higher lifetime earnings, they're gonna have higher lifetime earnings that mean they're going to be a more productive worker. We're gonna have a more productive workforce and they're also less likely to engage in crime and they're going to have lower health care costs, there are a number of benefits because now they've got the affordable housing maybe they're out of a bad area or they're not worried about being shuttled around from homeless shelter.

So the children can focus in school and so we have these different benefits. We have these benefits that come from having affordable housing but here's the issue and this is the nature of the positive externalities. Now when a family is considering, when they're making the decision whether to buy housing not to buy housing etc they're only considering their private benefits. All of us consider our own private benefits our own private costs when we decide to do anything to buy a car, to take the train, etc and so when we consider our private benefits we can map this out as a demand curve or Marginal Private Benefit (MPB) curve here and then we've got our Marginal Social Costs (MSC). Our equilibrium for the amount of housing that would be demanded would be where the Marginal Private Benefit (MPB) intersects the Marginal Social Costs (MSC). So let's say I'm just gonna throw out some numbers here let's say that the equilibrium quantity is 8,000 units of housing and that the price is let's say $750 a month.

Here's the nature of this positive externality that the marginal social benefit that curve is actually higher people being in affordable housing is higher than the private benefit to that family and here's why. So if we think about the family and we talked about all the benefits like a higher graduation rate and a lower crime that helps the family, they're better off if their child graduates from high school but the neighbors are better off as well. If the child graduates from high school don't commit a crime and so forth everyone's better off. Society enjoys these benefits, not just the private individuals who are making the decision whether or not to get housing and so actually our socially efficient level of housing would be here

Effects of Positive Externalities in Housing Vouchers

I'm just going to call that Q1 that's the socially efficient level and then our price at that would be P1 and so our equilibrium, if we were at a socially efficient level we're considering the costs and benefits not just to the individual family but to all of society the socially efficient equilibrium would be the new red point here and we're not there. So what we can do, can see this difference in price what we can do is we can have a subsidy we can subsidize the families to encourage them or enable them to invest in housing. So as we get them into housing we move toward our socially efficient equilibrium. So this Q1 and P1 that's the equilibrium here if we just let the free market work but we have a market failure whenever we have any type of externality and in this case, it's a positive externality because the individuals who are making a decision of whether to buy or not to buy housing are not capturing all the benefits and their benefits that accrue to all of society and so we want to get to this new equilibrium here and so by subsidizing the family we can get to that equilibrium. Now as you've seen it increases the price but we're getting to the socially efficient or optimal level of housing.

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