Chapter 29 Rent Control
Chapter Outline • RENTS IN A FREE MARKET • REASONS FOR CONTROLLING RENTS • CONSEQUENCES OF CONTROLLING RENTS • WHY DOES RENT CONTROL SURVIVE
Rent Control • Laws that restrict the ability of landlords to raise the rent from one year to the next. • This is a form of a price ceiling (the level above which a price may not rise). • These laws are more prevalent on the coasts: Boston, New York City, more than 100 cities in New Jersey, and San Francisco and San Jose in California. • Such laws typically come into being when market rents are rising quickly. • The east coast laws date from World War II and the west coast laws date from the skyrocketing land prices during the 1970s.
Rents in a Free Market Rent Supply A R* B C Demand 0 Q* Quantity • Value to the renters: • 0ACQ* • Renters pay landlords • OR*CQ* • The variable cost to landlords: • OBCQ* • Consumer Surplus to renters: • R*AC • Producer Surplus to landlords: • BR*C
Rent Control Relevance • Rent control is only relevant if it is below the market rent. • A controlled rent above the market rent is irrelevant. • The landlord must accept the market rent to attract tenants. • Charging above the market rent is not in the landlord’s interests because such a rent would not attract tenants to the landlord’s building.
What’s Wrong with the Rent Control • The gain to the renters who keep their apartments and pay less rent is less than the loss to the losers who are • people who lose their apartments and • landlords who receive less rent.
Demonstrating the Case Against the Rent Control • Value to the renters: • 0AEQs • Renters pay landlords • ORminFQs • The variable cost to landlords: • OBFQS • Consumer Surplus to renters: • RminAEF • Producer Surplus to landlords: • BRminF • People who must move out: • Q*-QS Rent Supply A R* B E C Rmin F Demand QS QD Quantity 0 Q*
The Short and Long Run Consequences of Rent Control • In the short run supply and demand for apartments in inelastic. Rent control lowers rent without much displacement of renters. • In the long run supply and demand for apartments gets more elastic and the negative consequences become more pronounced.
Comparing the Short Run and the Long Run Rent Rent Supply Supply R* R* C C Rmin Rmin Demand Demand Q/t 0 Q* QS QD Q/t 0 Q* QS QD The Short Run The Long Run
Consequences of Rent Control • Landlords have a motivation to get tenants out of their building by failing to maintain it. • Renters have an interest in “selling” (on an illegal black market) their rights to a lease. • People go to funerals to negotiate subleases from the dead person’s executor.
Why Rent Control Survives • The people who benefit from Rent Control (people who continue to live in the same apartment for years) are the same people who vote. • By definition, someone who is displaced from an apartment or someone who would like to move in but cannot find a place, cannot vote to overturn the law because they do not live in the city.