Question

3. Explain why an effective rent control policy has a different impact over 10 years than over 1 year. Include the ideas of demand elasticity and supply elasticity in your answer.  

Answer 1

3.

Rent control policy is adopted as it is thought that supply of flats or home is relatively inelastic in nature and in short term such as 1 year, the supply of home for rent will remain in the market even if there is a rent control. So, in the short run, due to the inelastic supply of home, the consumer surplus will increase and it will benefit the consumers in the area. Since the demand will rise due to the elastic demand at lower rent, it will absorb the available supply in the market.
In the long run, the home or flat owners will go for reorganization or different usage of flat and supply of flats for rent will come down at the lower level of rent. As a result, the supply will decrease in response to the rent control and supply will become relatively more elastic in nature. Hence, the short term effect of rent control will be different than that of the long run effect.