Rent Control:
The Dangers of Good Intentions
Kevin Zheng
Principles of Microeconomics
Professor Pritchard
19 November 2018
Kevin Zheng
Professor Pritchard
ECON 1116
19 November 2018
Rent Control: The Dangers of a Good Intentions
All major cities across the world follow one common trend: Their rental costs are through the roof. In San Francisco, “the poster city for housing sticker shock, the average one-bedroom rents for about $3,300 a month … an increase of about 50% since 2011” (Andrews 2018). While hot cities host a variety of events, night clubs, and job opportunities, living there is more often than not problematic for people who are not racking in hundreds of thousands of dollars per year. To keep prices at bay, rent control seems like one of the most logical answers. Rent control is a law mandated by local governments that places a maximum price on how much a landlord can charge a tenant for rent. The policy aims to help the poor by keeping the cost of housing low. Even though the idea attempts to solve the inequality in the economy, rent control ultimately does more harm than good because the economic forces lead to a distribution of apartments in a manner that is inherently unequal and unfair. The competition for an apartment is often plagued by discrimination and bribery once rent control is in play. The effects are often invisible to the general public since the economic aspects of rent control like price ceilings, shortages, and elasticity take place over many years.
Rent control starts with the forces of supply and demand. A supply curve is a graph that maps out the quantity supplied by producers at a given price. A demand curve is a graph that maps the quantity demanded by consumers at a given price point. The intersection of these two graphs is known as an equilibrium price, or the price at which the quantity demanded equals the quantity supplied. Without rent control, a market for housing would settle at an equilibrium price point where the people who had the money would be able to afford housing and the ones who could not would not be able to afford housing. The idea behind rent control attempts to resolve this issue by introducing a price ceiling. A price ceiling is a legal maximum on the price at which a good can be sold. However, price ceilings may not always affect the market equilibrium. There are two types of ceilings: binding and non-binding. A non-binding price ceiling is one that does not not disrupt the market equilibrium. In this case, the price ceiling would have to be placed above the equilibrium price point. On the other hand, a binding price ceiling must be placed below the equilibrium price point to disrupt the market equilibrium (Mankiw 2017). Thus, a shortage arises since the quantity demanded is greater than the quantity supplied at the given price point. Shortages force sellers to ration the limited number of goods among a large amount of potential buyers. The nature of economics and its limited resources means that much of the discrimination and unfair treatment takes place in how these sellers decide to distribute the apartments to the buyers. Thus, rent control shows that even though price ceilings are meant to benefit buyers, not all buyers benefit from the policy.
The problems of rent control may also be invisible to the public due to the time frame of the policy. In general, rent control is not as harmful in the short run but can have devastating effects on a city in the long run. This is mainly due to concept of elasticity and the ability of a market to adjust over certain periods of time. Elasticity is the responsiveness of quantity demanded or supplied of a good to changes in the price of a good (Mankiw 2017). Demand for an elastic good will respond substantially to a small change in price whereas demand for an inelastic good will respond very slightly to changes in price. Examples of elastic goods include luxury goods like yachts while inelastic goods are usually essential, irreplaceable items that people use in their everyday lives. In some cases, elasticity can vary over different periods of time. Supply elasticity depends on the flexibility of the seller to change the amount they produce. Supply is usually more elastic in the long run than in the short run. Over short periods of time, firms are unable to easily change the size of their factories to provide more or less of a good. Thus, in the short run, the quantity supplied is not very responsive to the price. However, in the long run, firms are able to alter the production since they can close factories or build new ones. Because of this, supply usually becomes elastic in the long run. Elasticity of demand depends on how willing consumers are to buy less of a good as its price rises. Overall, necessities like food, housing, and doctor visits are inelastic since they will always be in demand no matter the price and are essential to human life. Like supply, demand also tends to be more elastic in the long run. For example, when gas prices rise, people are forced to deal with the higher prices for the first couple months. However, as the years go on, consumers will switch to more fuel efficient cars or start to use public transit.
The same idea applies to rent control: In the short run, landlords, the suppliers, have a fixed number of apartments to rent and cannot quickly adjust as market conditions change. Thus, supply is inelastic. On the demand side, the number of people searching for housing in a city may not be highly responsive to rents in the short run since people take time adjusting their housing arrangements. Therefore, short run demand is also relatively inelastic. To the general public, rent control initially does not seem like a great issue because supply and demand are inelastic in the short run. This means that the curves of the supply and demand graphs are steeper which results in a smaller shortage in the short run.
However, as time goes on, it becomes evident that rent control becomes much more dangerous. Once buyers and sellers begin responding to the market for housing, rent control starts destroying cities. On the supply side, landlords lose interest in maintaining their current apartments and stop providing newer ones (Block). On the demand side, low rents induce more people to find their own apartments and move into the city rather than sharing with roommates or living with their parents (Mankiw 2017). These adjustments show how supply and demand become more elastic in the long run. On a graph that depicts the housing market, elastic supply and demand curves have flatter slopes which leads to a massively larger shortage. Once rent control depresses below the equilibrium level down to the level of the price ceiling, the quantity supplied of apartments falls while the quantity demanded rises drastically. This is the stage at which many people begin to see the damage of rent control as a large shortage of housing visibly affects the city. The following graphs illustrate the differences between shortages in the short run and long run. The shortage of housing is magnified once supply and demand become more elastic.
One of the most basic economic principles states that people respond to incentives. Similarly, when the economy is faced with a shortage, landlords have no incentive to keep their apartments well maintained: “When supply and turnover in the market are limited by rent caps, landlords have little incentive to compete to attract tenants” (The Economist 2015). In a free
market, landlords would do their best to keep their apartments organized since people desire the most attractive apartments. However, when there is such a huge demand, landlords have no burden to keep their apartments well kept. With such a large shortage, if one person refuses to buy the apartment, another person will. This is where the core of the inequality in rent control takes place. Poor people might not have any access to apartments, and even if they do, they may be in extremely poor condition. The substantial social costs of rent control disproportionately affects the poor. With reduced maintenance expenditures, the quality of existing housing drops steeply.
While the middle class can move out with the amount of money they have, the poor are left competing for undesirable apartments. Furthermore, in such a tight market, “there has been widespread agreement that rent controls discourage new construction, cause abandonment, retard maintenance, … exacerbate discrimination in rental housing, create black markets … and generally short-circuit the market mechanism for housing” (Arnott 1995). Restricting rent levels allows landlords to turn to other factors to distribute housing, such as race or income. More often than not, “These factors tend to bias the selection process against low income families, particularly female-headed, single-parent households” (Blackwell and Lapides). Even if some of the lower income families do end up with cheaper housing, “people who came later faced higher upfront rents and a growing scarcity of rental housing. The number of rent-controlled units declined by 25% between 1994 and 2010, and the total stock of rental housing (some of which isn’t under rent control) declined about 5%” (Andrews 2018). Thus, the very policy that was meant to help the poor actually ends up hurting them even more. At the end of the day, tenants do get lower rent but it also comes along with lower quality housing.
Even though “economists from both the right and the left are in almost universal agreement that rent control makes housing problems worse in the long run,” only “37 states prohibit their cities from enacting such laws” (Dougherty 2018). In the US, rent control still continues to be an issue in states like California where a supply of housing sufficient to shelter all the residents seems far from likely. Perhaps there is a policy that can better manage the housing crisis that many people in large cities face. Or perhaps a revision of how rent control is implemented may be the solution. Either way, the current state of rent control is not the answer.
While the idea of rent control is based in good intentions, it is ultimately plagued with economic problems and inequality. Through the forces of supply and demand, rent control spirals out of control when a binding price ceiling is placed on the market. Although rent control may not seem like a huge issue in the short run, elasticity magnifies the the problem in the long run, causing shortages to drastically increase. Once the shortages increase, landlords are left with less incentive to maintain the remaining apartments since the demand is so high. These less-than-desirable apartments are then rationed off at the landlords’ discretion. More often than not, these rationing mechanisms are rooted in discrimination in some way, whether it be by income, gender, or race. Many argue that removing rent control would be a better way to combat the inequity: “More recently, a MIT study of the 1995 repeal of rent control in Cambridge, Massachusetts, found that investment in housing increased after rent control ended, leading to ‘major gains in housing quality’” (Tatian 2013). Overall, rent control is one of the most socially relevant economic issues in the modern day; as cities continue to be attractive living locations for all types of people, policymakers should be wary of the issues that come with rent control. When left unchecked, rent control can be one of the most dangerous issues that disrupt the lives of all residents in the city.
Works Cited
Andrews, Edmund. “Rent Control's Winners and Losers.” Stanford Graduate School of Business, 2 Feb. 2018, www.gsb.stanford.edu/insights/rent-controls-winners-losers.
Arnott, Richard. 1995. "Time for Revisionism on Rent Control?" Journal of Economic Perspectives, 9 (1): 99-120.
Blackwell, Lisa, and Jim Lapides. “The High Cost of Rent Control.” NMHC, National Multifamily Housing Council, www.nmhc.org/news/articles/the-high-cost-of-rent-control/.
Block, Walter. “Rent Control.” Mill, On Liberty, Chapter 1 | Library of Economics and Liberty, The Library of Economics and Liberty, www.econlib.org/library/Enc/RentControl.html.
“Do Rent Controls Work?” The Economist, The Economist Newspaper, 30 Aug. 2015, www.economist.com/the-economist-explains/2015/08/30/do-rent-controls-work.
Dougherty, Conor. “Why Rent Control Is a Lightning Rod.” The New York Times, The New York Times, 12 Oct. 2018, www.nytimes.com/2018/10/12/business/economy/rent-control-explained.html.
Mankiw, N. Gregory. Principles of Microeconomics. Cengage Learning, 2017.
Tatian, Peter A. “Is Rent Control Good Policy?” Urban Institute, Urban Institute, 13 May 2015, www.urban.org/urban-wire/rent-control-good-policy.