High School Economics Quiz: Economic Policy Analysis
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Economic Policy AnalysisQuestion 1 of 20

To reduce traffic congestion and air pollution, a major city implements a policy that requires employers with 50 or more employees to offer a subsidy to workers who use public transportation. The subsidy is intended to cover 50% of the cost of a monthly transit pass.

Which of the following describes the most likely unintended consequence of this policy based on economic reasoning?

The policy will cause a significant decrease in wages for employees at large firms as companies offset the subsidy cost.
Firms may face an incentive to reduce their workforce to just below 50 employees to avoid the cost of the mandate.
Public transportation systems will likely experience a decrease in revenue due to the subsidized fares for many riders.
The demand for personal vehicles will increase as employees seek to avoid crowded public transportation.
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High School Economics Quiz

High School Economics Quiz: Economic Policy Analysis

Practice Economic Policy Analysis in High School Economics with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Economic Policy Analysis, giving you a quick way to practice the rules, question types, and explanations that matter most for High School Economics.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

To reduce traffic congestion and air pollution, a major city implements a policy that requires employers with 50 or more employees to offer a subsidy to workers who use public transportation. The subsidy is intended to cover 50% of the cost of a monthly transit pass.

Which of the following describes the most likely unintended consequence of this policy based on economic reasoning?

  1. The policy will cause a significant decrease in wages for employees at large firms as companies offset the subsidy cost.
  2. Firms may face an incentive to reduce their workforce to just below 50 employees to avoid the cost of the mandate. (correct answer)
  3. Public transportation systems will likely experience a decrease in revenue due to the subsidized fares for many riders.
  4. The demand for personal vehicles will increase as employees seek to avoid crowded public transportation.
Explanation: The correct answer is B. The policy creates a discrete cost threshold at 50 employees. A firm with 49 employees has a significant cost advantage over a firm with 50 employees. This creates an incentive for firms near the threshold to either lay off workers or slow hiring to stay below 50 employees, which is an unintended consequence. A is a possible but less direct consequence; firms may try to offset costs, but direct wage cuts are often difficult. C is incorrect; the subsidy is paid by employers, so the transit authority still receives the full fare, likely leading to an increase in revenue. D contradicts the primary incentive of the policy, which is to make public transit cheaper and more attractive.

Question 2

A national government, concerned about the decline of its domestic textile industry due to foreign competition, imposes a high tariff on all imported clothing.

Beyond the intended effect of helping domestic textile producers, what is a critical tradeoff associated with this policy?

  1. The quality of domestically produced clothing will necessarily increase to justify the higher prices.
  2. Domestic consumers will face higher prices and fewer choices, effectively subsidizing producers at the expense of consumers. (correct answer)
  3. The government's tax revenue will decrease because fewer imported goods are being purchased by consumers.
  4. Other domestic industries, such as agriculture, will benefit as foreign countries retaliate with their own tariffs.
Explanation: The correct answer is B. A tariff raises the price of imported goods, which reduces competition for domestic producers. This allows domestic producers to sell more and potentially at higher prices. However, this benefit comes at a cost to consumers, who now face higher prices for all clothing (both domestic and imported) and have fewer choices. This represents a transfer of welfare from consumers to producers. A is a normative claim and not a guaranteed outcome; reduced competition can sometimes lead to lower quality. C is plausible, but if the tariff is high enough, the revenue generated per item could offset the decrease in quantity, potentially increasing total tariff revenue; the effect is ambiguous. D is incorrect; retaliatory tariffs from other countries would harm, not benefit, export-oriented industries like agriculture.

Question 3

A federal government offers a generous tax credit to businesses for every new job they create. The stated purpose is to lower the national unemployment rate.

What is a potential unintended consequence that could limit the effectiveness of this policy in creating net new employment?

  1. The policy will cause wage inflation, as businesses compete to hire from a smaller pool of unemployed workers.
  2. Businesses might report job creation that would have happened anyway, thus claiming the credit without changing their hiring behavior. (correct answer)
  3. The tax credit will exclusively benefit large corporations, as small businesses do not have the resources to expand their workforce.
  4. The unemployment rate will remain unchanged because the policy does not address the skills mismatch in the labor market.
Explanation: The correct answer is B. This highlights the concept of additionality. It is difficult for the government to distinguish between jobs created because of the subsidy and jobs that firms were already planning to create due to normal business growth. The policy creates an incentive for firms to claim the credit for these pre-planned hires, resulting in a transfer of wealth from taxpayers to firms without a significant impact on net employment. A is a potential secondary effect, but it assumes the policy is highly effective in the first place. C is an overstatement; while larger firms might benefit more, the policy is available to all. D identifies a real problem (structural unemployment) but doesn't analyze the incentive structure of the specific policy itself. The policy could still be effective for cyclical unemployment, but the issue in B limits its impact.

Question 4

To encourage healthier eating habits, a state government imposes a significant excise tax on sugary drinks. The revenue from the tax is earmarked to fund public health campaigns.

Which statement provides the most complete economic analysis of the policy's potential impact?

  1. The policy is guaranteed to reduce sugar consumption because the higher price will make sugary drinks unaffordable for all consumers.
  2. The tax burden will fall entirely on the producers of sugary drinks, forcing them to absorb the cost and reduce their profit margins.
  3. Consumers may substitute other untaxed, high-calorie foods and drinks, potentially limiting the overall health benefits of the policy. (correct answer)
  4. The earmarked revenue ensures new funding for health campaigns, as government spending in other areas will remain unaffected.
Explanation: The correct answer is C. This identifies a critical unintended consequence based on the concept of substitution. While the tax increases the price of sugary drinks, it doesn't affect the prices of other unhealthy options like milkshakes, fruit juices with added sugar, or high-calorie snacks. Consumers may respond to the price signal by simply switching to these substitutes, which would undermine the policy's public health goals. A is too strong; demand is not perfectly elastic, so consumption will decrease but not to zero. B is incorrect; the tax burden is shared between consumers and producers, with the exact split depending on the price elasticity of supply and demand. D ignores the concept of fungibility; governments might reduce health funding from the general budget, knowing the earmarked tax revenue will fill the gap, resulting in no net increase in health spending.

Question 5

To protect its endangered national bird, a government passes a law making it illegal to own or trade the bird's feathers, which are highly valued for traditional crafts.

Which of the following describes a likely unintended economic consequence of this prohibition?

  1. The price of the feathers will drop to zero, eliminating the incentive for poaching the birds.
  2. A legal market for ethically sourced, synthetic feathers will immediately emerge and replace the illegal trade.
  3. The ban may drive the trade underground, potentially increasing the price of feathers and the profitability of poaching. (correct answer)
  4. The population of the endangered bird will recover quickly as the primary threat to its existence is removed.
Explanation: The correct answer is C. Prohibiting a good for which there is strong demand often creates a black market. In this illegal market, suppliers (poachers) face higher risks (fines, imprisonment), which reduces supply. The combination of strong demand and reduced, riskier supply typically leads to a much higher price. This higher price can, paradoxically, make poaching even more lucrative, potentially worsening the threat to the bird. A is incorrect; the price in an illegal market will be well above zero. B is a possible long-term development but is not an immediate or guaranteed outcome. D is the intended goal but ignores the powerful economic incentives that might undermine the policy's effectiveness.

Question 6

A city council, concerned about pedestrian safety, votes to lower the speed limit in all residential areas from 30 mph to 20 mph.

An economic analysis of this policy would highlight which tradeoff?

  1. The policy achieves a certain increase in safety at the cost of increased travel time for all drivers in those areas. (correct answer)
  2. Drivers will have a strong incentive to obey the new speed limit because the safety benefits are obvious to everyone.
  3. The reduced speed limit will lead to less traffic congestion as cars will be moving at a more uniform, slower pace.
  4. There is no real tradeoff, as the value of preventing a single injury far outweighs the minor inconvenience to drivers.
Explanation: The correct answer is A. This correctly identifies the fundamental tradeoff of the policy: increased safety versus increased travel time. The policy imposes a time cost on every driver in exchange for a potential (but not guaranteed) reduction in the frequency and severity of accidents. Economics analyzes this by weighing the value of the time lost against the value of the safety gained. B ignores the economic concept that individuals weigh personal costs (time) and benefits (safety), and may choose to break the rule if enforcement is weak. C is incorrect; lower speeds generally increase travel time and can sometimes worsen congestion. D is a normative statement, not an economic analysis. Economic reasoning requires acknowledging that a tradeoff exists, even if one believes the benefits outweigh the costs.

Question 7

To promote water conservation during a drought, a city changes its water pricing structure. The first 1,000 gallons per month are priced low, but any usage above that amount is priced at a much higher rate.

This policy creates the strongest incentive to conserve water for which group of residents?

  1. All residents will face an identical incentive to reduce their water consumption.
  2. Residents who currently use very little water, well below the 1,000-gallon threshold.
  3. Residents whose current usage is just above the 1,000-gallon threshold. (correct answer)
  4. Residents with very high water usage, such as those with large lawns and swimming pools.
Explanation: The correct answer is C. Economic decisions are made at the margin. For residents whose usage is just above the 1,000-gallon threshold, every gallon they conserve directly saves them money at the higher marginal rate. This provides a very strong and immediate financial incentive. Residents in group B are already paying the low rate, so they have less financial incentive to conserve further. Residents in group D also face the high marginal rate, but reducing their usage to below 1,000 gallons may be very difficult or costly, so their behavioral response might be smaller in percentage terms than group C. A is incorrect because the tiered pricing structure means the marginal incentive is not identical for everyone.

Question 8

A government wants to increase the number of doctors working in underserved rural areas. It offers a policy of full student loan forgiveness for any medical student who commits to practicing in a designated rural county for at least five years.

Which potential unintended consequence could arise from the design of this incentive?

  1. The quality of healthcare in rural areas might temporarily decline if doctors leave immediately after their five-year commitment is over. (correct answer)
  2. Fewer students will choose to attend medical school due to the restrictive nature of the program.
  3. Urban hospitals will face a severe shortage of doctors as most graduates move to rural areas.
  4. The cost of medical school will decrease for all students as a result of the government subsidy.
Explanation: The correct answer is A. The incentive is tied to a specific time period (five years). This may attract doctors who are primarily motivated by the financial reward rather than a desire to live and work in a rural area long-term. A potential consequence is a 'revolving door' of physicians who fulfill their minimum requirement and then leave, leading to a lack of continuity of care and potentially lower overall quality than if doctors were more permanently settled. B is unlikely; the program makes medical school more attractive, not less. C is an overstatement; while it could have some effect on urban supply, it's unlikely to cause a 'severe shortage.' D is incorrect; the policy is a targeted subsidy for a specific group and doesn't affect the overall cost of tuition.

Question 9

A country's central bank implements a policy of significantly lowering interest rates to stimulate economic activity during a recession.

While the intended effect is to encourage borrowing and investment, what is a primary tradeoff or risk associated with this policy?

  1. It may lead to a decrease in the national savings rate and encourage investment in overly risky projects. (correct answer)
  2. It will cause immediate deflation, as the lower cost of borrowing reduces prices across the economy.
  3. It will reduce the government's budget deficit by lowering the cost of servicing the national debt.
  4. It discourages international trade by making the country's exports more expensive for foreign buyers.
Explanation: The correct answer is A. Lower interest rates reduce the reward for saving, which can lead to a lower national savings rate. Simultaneously, when the cost of borrowing (the interest rate) is very low, projects that would not be profitable at higher rates can get funded. This can lead to malinvestment, where capital is allocated to excessively risky or inefficient ventures, potentially creating asset bubbles (e.g., in housing or stocks). B is incorrect; lowering interest rates is an expansionary policy designed to combat deflation and is more likely to lead to inflation. C is a secondary effect that is beneficial to the government, not a risk or tradeoff of the policy itself. D is incorrect; lower interest rates tend to cause a country's currency to depreciate, making its exports cheaper and more attractive to foreign buyers.

Question 10

To increase local recycling rates, a city replaces its flat-fee trash collection system with a 'Pay-As-You-Throw' (PAYT) system. Under PAYT, households are charged for each bag of non-recyclable trash they generate, while recycling collection remains free.

Besides the intended increase in recycling, what is a likely unintended behavioral response to the PAYT incentive?

  1. Households will produce less total waste (both trash and recycling) due to the new focus on consumption habits.
  2. Illegal dumping of trash in public spaces or commercial dumpsters may increase to avoid the per-bag fee. (correct answer)
  3. The market for recycled materials will become oversupplied, causing the price of these materials to increase.
  4. Neighboring towns with flat-fee systems will adopt PAYT to prevent residents from taking advantage of their system.
Explanation: The correct answer is B. The policy increases the marginal cost of disposing of trash legally. This creates an incentive for some individuals to find ways to dispose of their trash that avoid this cost. One such way is illegal dumping, which shifts the cost from the individual to the public. This is a classic unintended consequence of policies that increase the cost of a specific behavior. A is a possible, positive outcome, but illegal dumping is a more direct and frequently observed negative consequence. C is incorrect; an increase in supply would cause the price of recycled materials to decrease, not increase. D is a possible long-term policy diffusion, not a direct behavioral response from households.

Question 11

A law is passed requiring all motorcyclists to wear helmets. Public health advocates argue the law will save lives and reduce medical costs.

An economist points out the possibility of 'risk compensation' as an unintended consequence. What does this concept suggest will happen?

  1. Motorcyclists, feeling safer due to the helmet, may engage in riskier riding behaviors, partially offsetting the safety gains. (correct answer)
  2. The cost of motorcycle insurance will decrease for all riders because the mandate reduces the insurance companies' expected payouts.
  3. Fewer people will choose to ride motorcycles because the helmet requirement makes the activity less appealing.
  4. The price of motorcycle helmets will decline as manufacturers compete for a larger market of legally required buyers.
Explanation: The correct answer is A. Risk compensation (or the Peltzman effect) is the theory that individuals adjust their behavior in response to the perceived level of risk. In this context, a helmet mandate makes riding feel safer. This perceived increase in safety might incentivize some riders to take on more risks (e.g., higher speeds, more aggressive maneuvers) than they would have without a helmet. This behavioral change can counteract some, or in extreme cases all, of the direct safety benefits of the helmet itself. B is the intended outcome, not an unintended consequence of behavior. C is a possible consequence, but it's a change in participation, not risk compensation. D is unlikely; a mandate increases demand, which would tend to increase, not decrease, the price of helmets.

Question 12

To support domestic farmers, the government establishes a price floor for milk, set above the market equilibrium price. To maintain the floor, the government agrees to purchase any surplus milk that farmers cannot sell to consumers at the set price.

Which of the following describes the most significant long-term tradeoff of this policy?

  1. Consumers will benefit from a stable, predictable, albeit higher, price for milk.
  2. The government must deal with the costs of purchasing and storing a persistent surplus of milk, which is a deadweight loss to society. (correct answer)
  3. The policy will lead to a shortage of milk as producers, unable to sell all their product, will cut back on production.
  4. The quality of milk will decline as farmers face less competition and have a guaranteed buyer in the government.
Explanation: The correct answer is B. A price floor above equilibrium creates a surplus because at the higher price, the quantity supplied by farmers exceeds the quantity demanded by consumers. The policy's design requires the government to buy this surplus. This creates a significant, ongoing cost for taxpayers who fund the purchases. Furthermore, the resources used to produce milk that is then stored or destroyed represent a deadweight loss—a loss of economic efficiency. A mischaracterizes the effect on consumers, who are harmed by the higher price. C is incorrect; a price floor creates a surplus, not a shortage. D is a possible but not the most significant or direct economic tradeoff, which is the massive cost and inefficiency of managing the surplus.

Question 13

A government passes a law requiring companies to provide six months of paid parental leave for all new parents. The law does not provide any public funding; the cost must be borne by the employer.

How might this policy create an unintended, adverse incentive in the hiring process?

  1. Employers will have an incentive to increase wages for all workers to compensate for the new benefit.
  2. The policy will encourage more small businesses to form, as they are often exempt from such mandates.
  3. Workers will have less incentive to have children due to the potential for career disruption.
  4. Employers might become subtly biased against hiring younger workers who are perceived as more likely to use the parental leave benefit. (correct answer)
Explanation: The correct answer is B. Because the mandate imposes a significant potential cost on the employer, it can change their hiring calculus. An employer might (consciously or unconsciously) view a candidate of child-bearing age as potentially more costly to employ than an older candidate or a candidate they perceive as less likely to have children. This can lead to discrimination in hiring that harms the very group the policy is intended to help. A is the opposite of what would likely happen; firms would seek to control, not increase, labor costs. C describes a personal decision, but the policy itself is designed to make having children easier, not harder. D is a possible secondary effect but not a direct incentive within the hiring process itself.

Question 14

To fight obesity, a local government bans large chain restaurants from opening in a low-income neighborhood. The stated goal is to improve residents' access to and consumption of healthier, non-fast-food options.

An economic analysis of this policy would raise which of the following as a significant potential tradeoff?

  1. The policy directly increases the supply of healthy food options available to residents in the neighborhood.
  2. The policy guarantees that residents will choose to spend their money on healthier food from local grocers.
  3. Existing small, local restaurants will be forced to close due to the lack of competition from large chains.
  4. The ban may reduce employment opportunities for residents, particularly for entry-level jobs that such restaurants often provide. (correct answer)
Explanation: The correct answer is B. Large chain restaurants are often a major source of local, entry-level employment. While the policy aims to achieve a public health goal, it does so by restricting a certain type of business. A significant tradeoff is the loss of potential jobs and economic activity that these businesses would have brought to the community. A is incorrect; the policy restricts the supply of one type of food but does not, by itself, create a supply of another. C is the opposite of the likely effect; existing local restaurants would face less competition. D is incorrect; the policy restricts choices but cannot force residents to change their underlying preferences or spending habits. They may simply travel to an adjacent neighborhood to eat at chain restaurants.

Question 15

A city enacts a policy requiring developers of new apartment buildings to set aside 20% of the units to be rented at below-market rates to low-income tenants. This policy is known as 'inclusionary zoning.'

How might this policy unintentionally affect the supply and price of market-rate apartments in the city?

  1. It will have no effect on market-rate apartments, as the costs are absorbed entirely by developer profits.
  2. It will increase the supply of market-rate apartments as developers build more to compensate for the mandated units.
  3. It may decrease the overall construction of new housing and increase the price of market-rate units. (correct answer)
  4. It will lower the price of market-rate units by increasing the total number of apartments available in the city.
Explanation: The correct answer is C. Inclusionary zoning acts like a tax on new development, as developers must subsidize the below-market-rate units. This reduces the overall profitability of building new housing. This reduced incentive can lead to less new construction than would have otherwise occurred. With a smaller supply of new housing, the prices for the remaining 80% of market-rate units in any new project may be pushed higher to cover the cost of the subsidized units, and the overall market-rate prices in the city may rise due to the constrained supply. A is unlikely as developers will try to pass costs on. B is incorrect; the policy discourages, not encourages, building. D is incorrect because the policy is likely to reduce, not increase, the total new supply, thus putting upward pressure on prices.

Question 16

A government agency wants to encourage innovation in renewable energy. It announces a large cash prize for the first company to develop a solar panel that achieves 50% efficiency.

Which statement best analyzes the incentives created by this 'winner-take-all' prize structure?

  1. It encourages collaboration among competing firms to ensure the prize is won as quickly as possible.
  2. It provides a strong incentive for firms to pursue incremental improvements rather than radical breakthroughs.
  3. It guarantees that the most efficient and cost-effective research path will be discovered and utilized.
  4. It may lead to wasteful, duplicative research efforts as multiple firms race to solve the same problem independently. (correct answer)
Explanation: The correct answer is B. A prize creates a powerful incentive to be first. This can lead to multiple research teams working in secret, duplicating each other's efforts and failing to share knowledge that could accelerate progress. While competition can spur innovation, the 'winner-take-all' nature can lead to an inefficient allocation of research resources from a societal perspective, as the efforts of all but the winning team are, in a sense, wasted. A is incorrect; the structure encourages secrecy and competition, not collaboration. C is not guaranteed; the winner might be the luckiest or fastest, not necessarily the one with the best long-term approach. D is the opposite of the incentive; a prize for a major breakthrough encourages 'moonshot' projects, not small, incremental steps.

Question 17

A government agency mandates that all new cars must include an advanced safety feature, raising the base price of every new car by $500. The goal is to reduce traffic fatalities.

Which of the following represents a potential unintended consequence of this policy based on consumer incentives?

  1. The demand for new cars will increase because consumers place a high value on the mandated safety feature.
  2. Consumers may delay purchasing new cars and hold onto their older, less-safe vehicles for longer, offsetting some of the policy's safety gains. (correct answer)
  3. Automakers will absorb the entire $500 cost to remain competitive, leading to lower profits but no change in consumer behavior.
  4. The number of traffic accidents will decrease solely due to the new feature, independent of any changes in driver behavior.
Explanation: The correct answer is B. By increasing the price of new cars, the mandate makes used cars relatively more attractive. This creates an incentive for consumers, particularly those who are price-sensitive, to either buy a used car or keep their current, older car for a longer period. Since older cars lack the new safety feature (and possibly other modern safety features), this behavioral response could slow down the rate at which the overall vehicle fleet becomes safer, an unintended consequence that works against the policy's goal. A is unlikely; some consumers may value the feature, but a mandatory price increase typically reduces quantity demanded. C is unlikely; automakers will pass on at least some of the cost to consumers. D ignores the potential for risk compensation, where drivers with safer cars might behave more recklessly.

Question 18

A government establishes a system of tradable pollution permits for carbon emissions. A total cap on emissions is set, and permits representing the right to emit one ton of carbon are distributed to firms. Firms can buy and sell these permits from one another.

What is the primary economic advantage of this policy compared to a simple command-and-control regulation that requires every firm to reduce emissions by a fixed percentage?

  1. It ensures that pollution is eliminated entirely, whereas a percentage reduction allows some pollution to continue.
  2. It provides a stronger incentive for all firms, regardless of their costs, to reduce emissions by the same amount.
  3. It generates more tax revenue for the government than a direct regulation on emissions.
  4. It allows the total amount of pollution reduction to be achieved at a lower overall cost to society. (correct answer)
Explanation: The correct answer is B. The key advantage of a cap-and-trade system is cost-effectiveness. Firms that can reduce their emissions cheaply (low-cost abaters) have an incentive to reduce their emissions by more than they are required to, so they can sell their excess permits. Firms for whom reducing emissions is very expensive (high-cost abaters) have an incentive to buy permits instead of undertaking costly reductions. This means that the pollution reduction is accomplished by the firms that can do it most cheaply, lowering the total societal cost of achieving the desired environmental outcome. A is incorrect; the system caps pollution at a certain level, it does not eliminate it. C is incorrect; if permits are given away initially (as is common), the system generates no government revenue. D is the opposite of how the system works; it provides an incentive for firms to reduce emissions by different amounts based on their individual costs.

Question 19

A city launches a bike-sharing program. For a small annual fee, members can make unlimited 30-minute trips on publicly available bikes. The goal is to reduce car usage for short trips.

The program's design, offering 'unlimited' short trips for a fixed fee, creates an incentive that could lead to what unintended consequence?

  1. A tragedy of the commons, where bikes are overused, poorly maintained, and not available when needed. (correct answer)
  2. A significant increase in the price of privately owned bicycles due to the increased popularity of cycling.
  3. A decline in public health as people exert themselves less by riding bikes instead of walking.
  4. An increase in traffic congestion as former public transit riders switch to the slower-moving shared bikes.
Explanation: The correct answer is A. Because the marginal cost of taking a trip (under 30 minutes) is zero for members, there is little incentive for any individual user to treat the bikes with care or to return them promptly to a designated dock. The bikes are a common-pool resource. This can lead to a 'tragedy of the commons' scenario, where the collective resource is degraded through individual overuse and lack of care, resulting in broken bikes and poor availability, undermining the program's utility. B is a possible but indirect market effect. C is incorrect, as cycling is a form of exercise. D is a plausible but less central consequence related to the incentive structure; the core issue created by the zero marginal price is the potential for overuse and neglect of the common resource.

Question 20

A city government passes a rent control ordinance that freezes all residential rents at their current levels for the next five years. The goal is to make housing more affordable for current residents.

An economist analyzing this policy would be most likely to predict which long-term consequence?

  1. The supply of rental housing will increase as landlords seek to attract tenants with stable, predictable rent.
  2. The quality of the existing rental housing stock will likely decline due to reduced incentives for maintenance and improvement. (correct answer)
  3. A surplus of high-quality rental units will develop as the fixed rents become more attractive to potential renters.
  4. Landlords will compete for tenants by offering non-price amenities, leading to an overall improvement in housing quality.
Explanation: The correct answer is B. When revenues are capped by rent control, landlords' return on investment for maintenance, repairs, and capital improvements is diminished. This creates a powerful incentive to cut costs by deferring or neglecting upkeep, leading to a deterioration in the quality of the housing stock over time. A is incorrect; rent control reduces the profitability of being a landlord, which discourages new construction and can lead existing landlords to convert apartments to condominiums or other uses, thus decreasing the supply of rental housing. C describes a surplus, but rent control, as a price ceiling below the equilibrium price, creates a shortage. D is incorrect; with a shortage, landlords have little incentive to compete for tenants, as there are typically long waiting lists for rent-controlled units.