Essay plan for this Edexcel 25 mark essay question: Evaluate the possible microeconomic and macroeconomic effects of the UK government introducing policies to encourage an increase in new house-building (25 marks)

1. Evaluate the possible microeconomic
and macroeconomic effects of the UK
government introducing policies to
encourage an increase in new house-
building (25 marks)

2. The UK Housing Shortage
Government sets target for increased house-building
According to current projections, an average of 210,000 new households will form in England
in each year between 2014 and 2039. In 2017, the total housing stock in England increased
by around 217,000 residential dwellings: 15% higher than the previous year’s increase but
short of the estimated 240-250,000 new homes needed to keep pace with household
formation.
Housing need manifests itself in a variety of ways, such as increased levels of overcrowding,
acute affordability issues, more young people living with their parents for longer periods,
impaired labour mobility resulting in businesses finding it difficult to recruit and retain staff,
and increased levels of homelessness.
The 2015 Government set out an ambition to deliver one million net additions to the
housing stock by the end of the Parliament, which was expected to be in 2020. Net additions
includes, for example, conversions and changes of use. Critics said that the figure did not
take account of the backlog of housing need. Taking vacant and second homes into account,
there is a crude shortage of around 1.25 million homes.
Source: http://researchbriefings.parliament.uk/ResearchBriefing/Summary/CDP-2018-0032

3. Micro points: POPISCLE
• Price
• Output
• Profits
• Structure of the Market
• Inefficiency
• Competition
• Labour Market
• Externalities
For micro points, focus on individuals, households, firms
and industries/markets

4. Macro points: DIGESTIF
• Development
• Inflation
• Growth
• Employment
• Structure of the Economy
• Trade Balance
• Inequality
• Fiscal Balance

5. Microeconomic effects of increased
house-building
Main Point Analysis and Application Evaluation of the point
An increase in new
house-building will
lower prices and
therefore help to
make property
more affordable for
home-buyers
For example, eliminating VAT on
building new homes on brownfield
sites reduces costs for building firms
and therefore make it more
profitable to construct new homes.
An increase in supply can bring down
prices for home-buyers if the
number of new homes exceeds the
increase in demand for property.

6. Microeconomic effects of increased
house-building
Main Point Analysis and Application Evaluation of the point
An increase in new
house-building will
lower prices and
therefore help to
make property
more affordable for
home-buyers
For example, eliminating VAT on
building new homes on brownfield
sites reduces costs for building firms
and therefore make it more
profitable to construct new homes.
An increase in supply can bring down
prices for home-buyers if the
number of new homes exceeds the
increase in demand for property.
Whether prices fall and makes
housing more affordable depends
on the other costs of building
homes. The construction industry
might be affected by skills
shortages which leads to higher
wage costs or higher costs caused
by tougher building regulations
such as meeting emissions targets.

7. Microeconomic effects of increased
house-building
Main Point Analysis and Application Evaluation of the point
An increase in new
house-building will
lower prices and
therefore help to
make property
more affordable for
home-buyers
For example, eliminating VAT on
building new homes on brownfield
sites reduces costs for building firms
and therefore make it more
profitable to construct new homes.
An increase in supply can bring down
prices for home-buyers if the
number of new homes exceeds the
increase in demand for property.
Whether prices fall and makes
housing more affordable depends
on the other costs of building
homes. The construction industry
might be affected by skills
shortages which leads to higher
wage costs or higher costs caused
by tougher building regulations
such as meeting emissions targets.
Increased house-
building may lead
to environmental
damage which
could then be a
cause of market
failure.
Building new homes can lead to
external costs in the form of noise
pollution and waste products.
Building hundreds of new homes in a
local area might negatively affect
people already living there and lead
to increased congestion on roads.

8. Microeconomic effects of increased
house-building
Main Point Analysis and Application Evaluation of the point
An increase in new
house-building will
lower prices and
therefore help to
make property
more affordable for
home-buyers
For example, eliminating VAT on
building new homes on brownfield
sites reduces costs for building firms
and therefore make it more
profitable to construct new homes.
An increase in supply can bring down
prices for home-buyers if the
number of new homes exceeds the
increase in demand for property.
Whether prices fall and makes
housing more affordable depends
on the other costs of building
homes. The construction industry
might be affected by skills
shortages which leads to higher
wage costs or higher costs caused
by tougher building regulations
such as meeting emissions targets.
Increased house-
building may lead
to environmental
damage which
could then be a
cause of market
failure.
Building new homes can lead to
external costs in the form of noise
pollution and waste products.
Building hundreds of new homes in a
local area might negatively affect
people already living there and lead
to increased congestion on roads.
However a counter argument is
that the local authority might
insist on construction companies
spending money on improving
roads and also building new
facilities for the local community
as part of the planning process.

9. Macroeconomic effects of increased
house-building
Main Point Analysis and Application Evaluation of the point
Policies that
successfully
increase the rate of
new house-building
will help to
stimulate UK
economic growth in
both the short and
the long run.
This is because investment in new
housing is a component of aggregate
demand and one that is likely to lead
to a strong multiplier effect as
building is a labour-intensive
industry. More and better homes
increases the geographical mobility
of labour which will reduce
unemployment in the longer term.

10. Macroeconomic effects of increased
house-building
Main Point Analysis and Application Evaluation of the point
Policies that
successfully
increase the rate of
new house-building
will help to
stimulate UK
economic growth in
both the short and
the long run.
This is because investment in new
housing is a component of aggregate
demand and is likely to lead to a
strong multiplier effect as building is
a labour-intensive industry. More
homes also increases the
geographical mobility of labour
which will help to reduce the rate of
unemployment in the longer term.
The size of the multiplier effect
depends on whether the building
industry is able to expand their
labour force. They may face skills
shortages which leads them to use
workers who have migrated from
overseas. Their remittances sent
home would be a leakage from
the circular flow of income.

11. Macroeconomic effects of increased
house-building
Main Point Analysis and Application Evaluation of the point
Policies that
successfully
increase the rate of
new house-building
will help to
stimulate UK
economic growth in
both the short and
the long run.
This is because investment in new
housing is a component of aggregate
demand and is likely to lead to a
strong multiplier effect as building is
a labour-intensive industry. More
homes also increases the
geographical mobility of labour
which will help to reduce the rate of
unemployment in the longer term.
The size of the multiplier effect
depends on whether the building
industry is able to expand their
labour force. They may face skills
shortages which leads them to use
workers who have migrated from
overseas. Their remittances sent
home would be a leakage from
the circular flow of income.
An increase in
house-building will
lead to a rise in
government tax
revenues which will
help to bring down
the fiscal deficit.
House-building companies will make
more profits when new homes are
sold and pay more corporation tax.
More houses will also be bought and
sold leading to an increase in
revenue from Stamp Duty and VAT
on building/DIY materials.

12. Macroeconomic effects of increased
house-building
Main Point Analysis and Application Evaluation of the point
Policies that
successfully
increase the rate of
new house-building
will help to
stimulate UK
economic growth in
both the short and
the long run.
This is because investment in new
housing is a component of aggregate
demand and is likely to lead to a
strong multiplier effect as building is
a labour-intensive industry. More
homes also increases the
geographical mobility of labour
which will help to reduce the rate of
unemployment in the longer term.
The size of the multiplier effect
depends on whether the building
industry is able to expand their
labour force. They may face skills
shortages which leads them to use
workers who have migrated from
overseas. Their remittances sent
home would be a leakage from
the circular flow of income.
An increase in
house-building will
lead to a rise in
government tax
revenues which will
help to bring down
the fiscal deficit.
House-building companies will make
more profits when new homes are
sold and pay more corporation tax.
More houses will also be bought and
sold leading to an increase in
revenue from Stamp Duty and VAT
on building/DIY materials.
This macro effect depends on the
extent to which building homes is
actually profitable. Building firms
might face higher costs (e.g.
imported raw materials) which
lowers the rate of return and cuts
corporation tax liability.

13. Final reasoned comment:
There is substantial unmet demand for housing in the
UK and a rise in new house-building is likely to provide
significant micro and macro benefits. But the
government needs to maintain a balance between
homes available to buy and those offered for rent
since new homes are unaffordable for many people.

14. Analysis diagrams:
AD-AS diagram for the macro effects
Labour market diagram – increased employment in
construction, inelastic supply of skilled labor
Externalities diagram – external costs of new homes