The Effects The Effects fromfrom “Rent “Rent Control”Control”

Wisarute Wisarute SrirojanakulSrirojanakul

““In many cases, rent control appears to In many cases, rent control appears to be the most efficient technique presently be the most efficient technique presently

known to destroy a city – except for known to destroy a city – except for bombing”bombing”

Assar LindbeckAssar LindbeckProfessor of International EconomicsProfessor of International Economics

University of Stockholm, SwedenUniversity of Stockholm, Sweden

Facts of Rent ControlFacts of Rent Control

• Rent control is price control functioning as Rent control is price control functioning as a price ceiling on residential housing.a price ceiling on residential housing.

• Rent controls were adopted in U.S. after Rent controls were adopted in U.S. after the World War II, when inflation was high.the World War II, when inflation was high.

• In the United States, many cities such as In the United States, many cities such as New York, Washington D.C., New Jersey, New York, Washington D.C., New Jersey, and San Jose, California have rent controls.and San Jose, California have rent controls.

• Rent control peaked in the mid-1980s; Rent control peaked in the mid-1980s; more than 200 cities, about 20% of the more than 200 cities, about 20% of the population, are affected by rent controls.population, are affected by rent controls.

• In recent years, some cities such as Boston In recent years, some cities such as Boston and Cambridge have ended their rent and Cambridge have ended their rent controls.controls.

Supply-Demand Supply-Demand BalanceBalance

• Like all other products, market rental price is the Like all other products, market rental price is the price at the equilibrium point where the demand price at the equilibrium point where the demand curve passes across the supply curve.curve passes across the supply curve.

Rental Price

Quantity of housing units

D

PE

QE

S

Reasons for Rent Reasons for Rent ControlControl

• To make housing available and affordable To make housing available and affordable for the elderly and the poorfor the elderly and the poor

• To prevent the landlords from increasing To prevent the landlords from increasing and charging unacceptably high priceand charging unacceptably high price

• To maintain the appropriate combination To maintain the appropriate combination from all ranges of ages in the communityfrom all ranges of ages in the community

• To sustain job growthTo sustain job growth

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

… … But …But …

Direct EffectsDirect Effects

• Because prices are not allowed to meet market Because prices are not allowed to meet market equilibrium, the quantity demanded is more than equilibrium, the quantity demanded is more than the quantity supplied, creating shortage.the quantity supplied, creating shortage.

QS QD

PE

Rental Price

Quantity of housing units

D

S

Shortage

PriceceilingP

C

Secondary EffectsSecondary Effects

• Black markets develop. Renters are willing to Black markets develop. Renters are willing to pay under-the-table to secure their housing.pay under-the-table to secure their housing.

• Future supply declines. Owners are Future supply declines. Owners are discouraged from adding more rental houses.discouraged from adding more rental houses.

• The quality deteriorates. Owners reduce the The quality deteriorates. Owners reduce the maintenance service to compensate for ceiling maintenance service to compensate for ceiling price.price.

• Non-price methods for getting housing are Non-price methods for getting housing are more important because owners favor their more important because owners favor their friends or people whom they know first.friends or people whom they know first.

• Space is used inefficiently. Renters cannot Space is used inefficiently. Renters cannot easily find a more suitable place for them.easily find a more suitable place for them.

ConclusionConclusion

• Limit the increasing price with the formula Limit the increasing price with the formula tied to some economic indices such as tied to some economic indices such as Income Index or Consumer Price Index.Income Index or Consumer Price Index.

• Create affordable housing by government Create affordable housing by government construction and offer subsidies for the construction and offer subsidies for the elderly and the poor.elderly and the poor.

Works CitedWorks Cited

• Gwartney, James D., et al. Gwartney, James D., et al. Microeconomics: Microeconomics: Public and Private ChoicePublic and Private Choice. 11. 11thth ed. South- ed. South-Western College, 2005.Western College, 2005.

• ““Rent Control.” Rent Control.” The Wikipedia The Wikipedia EncyclopediaEncyclopedia. 20 Oct. 2006. 7 Nov. 2006 . 20 Oct. 2006. 7 Nov. 2006 <http://en.wikipedia.org/wiki/Rent_control<http://en.wikipedia.org/wiki/Rent_control>>

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