Discretionary profit in subsidised housing markets

In the subsidised housing sector, building corporations can use their marke t power as purchasers to raise output of subsidised housing to a level high er than it is with perfect competition on both sides of the market. This ho lds true if the building society is perfectly X-efficient, The proposition is not necessarily true if the corporation maximises a utility function in which discretionary profit, or organisational slack, is an argument. The X- inefficient building society may set output higher or lower than with perfe ct competition. If the government grants a fixed subsidy per house and trie s to constrain X-inefficiency by imposing a maximum price, this might be an incentive for the building corporation to maintain a planned shortage of s ubsidised houses. However, housing shortages will be smaller and welfare po ssibly greater than it is with perfect competition. The existence of a perf ectly competitive non-subsidised housing sector is for the building corpora tion an incentive to increase strategically the output of subsidised housin g and reduce planned shortages; but it does not necessarily eliminate such shortages.