The Effects from “Rent Control”

“In many cases, rent control appears to be the most efficient technique presently known to destroy a city – except for bombing” Assar Lindbeck Professor of International Economics University of Stockholm, Sweden The Effects from “Rent Control” Wisarute Srirojanakul

Facts of Rent Control • Rent control is price control functioning as a price ceiling on residential housing. • Rent controls were adopted in U.S. after the World War II, when inflation was high. • In the United States, many cities such as New York, Washington D.C., New Jersey, and San Jose, California have rent controls. • Rent control peaked in the mid-1980s; more than 200 cities, about 20% of the population, are affected by rent controls. • In recent years, some cities such as Boston and Cambridge have ended their rent controls.

Rental Price S PE D QE Quantity of housing units Supply-Demand Balance • Like all other products, market rental price is the price at the equilibrium point where the demand curve passes across the supply curve.

Reasons for Rent Control • To make housing available and affordable for the elderly and the poor • To prevent the landlords from increasing and charging unacceptably high price • To maintain the appropriate combination from all ranges of ages in the community • To sustain job growth

… But … “Good intensions do not guarantee desirable outcome”

Rental Price S PE PC Price ceiling Shortage D QS QD Quantity of housing units Direct Effects • Because prices are not allowed to meet market equilibrium, the quantity demanded is more than the quantity supplied, creating shortage.

Secondary Effects • Black markets develop. Renters are willing to pay under-the-table to secure their housing. • Future supply declines. Owners are discouraged from adding more rental houses. • The quality deteriorates. Owners reduce the maintenance service to compensate for ceiling price. • Non-price methods for getting housing are more important because owners favor their friends or people whom they know first. • Space is used inefficiently. Renters cannot easily find a more suitable place for them.

Conclusion • Limit the increasing price with the formula tied to some economic indices such as Income Index or Consumer Price Index. • Create affordable housing by government construction and offer subsidies for the elderly and the poor.

Works Cited • Gwartney, James D., et al. Microeconomics: Public and Private Choice. 11th ed. South-Western College, 2005. • “Rent Control.” The Wikipedia Encyclopedia. 20 Oct. 2006. 7 Nov. 2006 <http://en.wikipedia.org/wiki/Rent_control>

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The Effects from “Rent Control”