Question

One economist remarked in his article on rent controls, “Rent control apprears to be the most efficient technique presently known to destroy a city – except bombing.” Rent controls place price ceilings on rents at levels below equilibrium rental rates for the stated purpose of making housing more affordable for low-ncome families. Using demand and supply analysis, answer the following questions:

1. Who gains from rent controls? Who loses?

                                                                                                                                      

2. Why would the economist think rent controls are destructive?

                                                                                                                                                                                                   

3. Can you think an alternative policy to make plenty of housing available to low-income families that would not be subject to the problems of rent controls?

                                                                                               

Answer 1

a) First we need to understand that rent controls act like a price ceiling . It does not allow market price of apartments to reach equilibrium because equilibrium free market price or rent is exploitative . So in order to become binding a rent control must be placed below equilibrium price .

Landlords or producer of apartments are biggest losers because rent falls . People in low-income category are also losers because they cannot pay " key payment " , which is an illegal payment charged up front by some landlords to compensate for their low rents . Also as number of houses supplied falls due to rent control , low-income families are the first one to be weeded out of the market . Only upper-income tenants gain from rent-controlls who occupy rent-controlled housing because their consumer surplus rises .

b) Rent controls are destructive because they make poor people suffer more . Rent control leads to illegal practises and curbs supply of apartments overall , which alleviates the problem of housing and makes more people homeless .  It reduce the number of low-income people who can live in a city . Also rent controls cause huge demand for houses , which causes rent to rise in other places without rent controls .

c) Yes alternative policy is government spending on housing or government houses alloted only to poor people on low rents . This increases the number of houses build and available . This puts a pressure also on landlords to reduce rents as more supply of houses means market equilibrium rent falls .