Question

Properties in the city of Mumbai (formerly Bombay) in India are still subject to rent–control regulations that were imposed in 1947. At that time, thousands of people migrated into Mumbai as a result of the partition of the country into India and Pakistan. Rents were frozen at levels that prevailed in 1940, in order to prevent spikes in rental rates that might have resulted from this rapid increase in demand for housing. The questions below ask you to analyze the motivation and the consequences of rent control laws. All quotes are taken from a 2006 Wall Street Journal article. (Bellman, Eric. "Tenants in Mumbai Will Endure a Lot For an $8.50 Flat; Why Sojatwala Family Stayed In Rent–Controlled Digs After a Building Collapse", Wall Street Journal. Jun 5, 2006. pg. A.

a.The author points out that the result of the rent control law in Mumbai is that "landlords are leaving prime parcels of property to decay. The dearth of new apartments means that half of the city 12 million residents live in slums." Explain the economic logic of this outcome.

b.Rent control laws that keep rents below market in some districts have an impact on the unregulated sector as well. "Meanwhile, (in Mumbai) the tight supply of high–end residential properties has pushed rents to $2 to $3 a square foot –– higher than rents in some neighborhoods in New York or Singapore. A good two–bedroom apartment in Mumbai can easily go for $3,000 a month." Some people fear that the removal of rent controls would cause the equilibrium price to rise to these stratospheric levels. Explain why this concern is mistaken.

c.In Mumbai, "the rent–control measures, meant to be temporary, have been extended more than 20 times and currently apply to roughly 35,000 buildings, or about 60 percent of the real–estate market in the city center, the property owners association says." Explain why elected officials would choose, repeatedly, to extend a regulation that causes egregious misallocation of resources. (Hint: Consider this quote from the same article: "Unlike China, where residents regularly make way for new skyscrapers, the beneficiaries of Mumbai's rent controls flex political muscle to stay.")

Answer 1

The logic is simple. Smaller the price small will be the supply and greater will be the demand as per economics. This leds to fall in supply of buildings and prime land decays. On the other hand due to greater demand slums result

B The concern is mistaken. If price controls are removed supply will increase to take advantage of higher price. When supply increases price or rent will fall.

C This is to gain politically. The deregulation is viewed by poof masses as against them and any party deregulation rent will most probably loose election