Question

Explain with a diagram the social cost of rental control. Is this is a good means to assist the poor?

Answer 1

Rental control, is a government imposed ceiling in the market for rental housing. In this case, the government sets a price lower than the equilibrium rental price in the market for housing. The purpose of this control is to make affordable housing available to the people and maximize their consumer surplus.

However, since the ceiling price is set lower than free market price, quantity of houses demanded exceeds supply, leading to shortage of housing in the market.

This leads to a rather adverse impact on the consumers, who are left without houses or poor quality houses. They cannot get good quality houses even if they are willing to pay more.

This leads to deadweight loss in the economy, and also creation of black markets, which ends up hurting the people.

This represented the social cost of rental control in the market.