Rent Controls

• Rent control: price ceiling on rental housing

  • Create shortages, reduce quality, create wasteful lines and increase the costs of search, cause a loss of gains from trade, and misallocate resources

Shortages

• Rent controls usually begin with a “rent freeze”

  • Rent freeze: prohibits landlords from raising rents

• Rent controls are usually put into place when rents are rising, so controlled rent usually falls below market equilibrium rent

• Apartments are long-lasting goods that can’t be moved, so when rent controls are first imposed, owners of apartment buildings have few choices but to absorb the lower price

  • Short-run supply curves for apartments is inelastic

• Long run supply curve is much more elastic than the short run supply curve

  • The shortage grows over time from the short run to the long run shortage

  • Ex: rent controls in San Francisco encouraged landlord to reduce the stock of rental housing by 15%

    • Renters who had an apartment in that year benefited at the expense of the landlords and future renters who had to pay higher prices in the market sector

Reductions in Product Quality

• Rent controls reduce the housing quality, especially quality of low end apartments

  • When price of apartments is forced down, owners attempt to push off losses by cutting their costs

  • Ex: with rent controls, owners mow the lawns less often, replace lightbulbs more slowly, and don’t fix the elevators so quickly

  • When controls are strong, cheap but serviceable apartment buildings turn into slums and slums turn into abandoned and hollowed out apartment blocks