1 / 25

Markets and efficiency

Markets and efficiency. Today: Why controlling the market is often bad for efficiency. Rent control in Isla Vista. Who thinks it is a good idea? Why? Who thinks it is a bad idea? Why?. Current Isla Vista rental market. About $1400-$1500 per bedroom

geordi
Télécharger la présentation

Markets and efficiency

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Markets and efficiency Today: Why controlling the market is often bad for efficiency

  2. Rent control in Isla Vista • Who thinks it is a good idea? Why? • Who thinks it is a bad idea? Why?

  3. Current Isla Vista rental market • About $1400-$1500 per bedroom • About $700-$750 per person per month (assuming 2 people per bedroom)

  4. Rent control in Isla Vista • Suppose that rent control was implemented in Isla Vista, at $1500 per month for a 2-bedroom apartment • Who currently lives in I.V.? • Who would want to live in I.V. if rent control was passed?

  5. Outcome • More people want to live in I.V. than apartments are available • This, by itself, will lead to a shortage of apartments in I.V. • Some of you will be very unhappy that you cannot live in the home of first choice

  6. What will managers do? • Apartment managers will know that a flood of applications will come in for leases starting in June and September • They will be able to pick and choose who lives in their apartments

  7. What will managers do? • Other methods can be used to choose tenants • Increased credit requirements • Increased deposits • Increased application fees • Reduced amenities (low quality carpet, infrequent painting and maintenance) • (Illegally) accept bribes

  8. What will happen over time? • Nobody will want to build new apartments for rent, lowering the long-run supply • Some apartments may convert to vacation condos if short-term rentals are not included in rent-control law • More grad students, post-docs, faculty, and staff will likely live in I.V.

  9. But wait! • Don’t I have a right to live in I.V.? No • Unless the government steps in once again, rent control will lead to a sizable excess demand

  10. Long-run consequences of rent control ($100s) • Suppose that the long-run equilibrium of 2-bedroom apartments in I.V. is $3,000 per month rent, and 2,000 units rented • With rent control of $1,500/month, we see excess demand excess demand 30 15 (100s units)

  11. Long-run consequences of rent control ($100s) • Notice that supplied apartments for rent are cut in half in the long run with rent control • Only 1/3 of the people that want apartments will get them excess demand 30 15 100s units

  12. Let’s survey the class again • Rent control in Isla Vista • Who thinks it is a good idea? Why? • Who thinks it is a bad idea? Why?

  13. Rent control summary • Who wins? • People renting in I.V. w/rent control (maybe) • Who loses? • People who want to live in I.V. w/o rent control but are unable to find an apartment • Apartment owners and managers • Some people currently renting in I.V.

  14. Elasticity and price control ($100s) • How does elasticity play a role in price controls? • We need to look at elasticity on both the supply and demand sides excess demand 30 15 100s units

  15. Elasticity and price control ($100s) • Demand • Q, 20  30 (↑50%) • P, 30  15 (↓50%) • ε = %ΔQ / %ΔP = 1 • Supply • Q, 20  10 (↓50%) • P, 30  15 (↓50%) • ε = %ΔQ / %ΔP = 1 excess demand 30 15 100s units

  16. Elasticity and price control ($100s) • When both price elasticity of supply and demand are 1, a price control 50% below the equilibrium price leads to an excess demand equal to the initial equilibrium quantity excess demand 30 15 100s units

  17. Elasticity and price control • What if each elasticity is smaller than in my example? • What if excess demand in I.V. apartments is only 200 units instead of 2,000 units? • None of the arguments change, although the severity may decrease some

  18. Price control and surplus • With lower consumption, total economic surplus goes down • One side of the market may make gains, however

  19. Price control and surplus • Equilibrium without price controls • Price: B • Quantity: Q1 • Consumer surplus: ΔABC • Producer surplus: ΔBCD • Total surplus: ΔACD

  20. Price ceiling at G • Quantity supplied: Q2 • Excess demand: Q3 – Q2 • Consumer surplus: Trapezoid AEFG (at most) • Producer surplus: ΔDFG

  21. Price ceiling at G • Total surplus is trapezoid ADFE (at most) • ΔCEF is potential surplus that is never gained

  22. Price ceiling at G • Are consumers better off with price controls? • Gain • Rectangle BGFH • Losses • ΔCEH • Queuing costs

  23. Price ceiling at G • Suppliers are worse off • Producer surplus falls to ΔDFG

  24. Summary/Other ideas • A price ceiling, such as rent control, is an ineffective means of providing low-cost rent to those that want it • Maybe there is another way of achieving a goal of low rent • Two possible ways of doing this • Subsidies to students that rent • First-come, first-served policy

  25. For Wednesday • Think about whether or not subsidies or a first-come, first-served policy could be more efficient than rent control • Read pages 197-199

More Related