Week 13: Wednesday Blog Post

·         Price Ceilings: Rent Controls

o   “Besides carpet bombing, rent controls are the fastest way to destroy a city”

o   Starts with people saying “let’s freeze the current price of apartments” before they rise any further due to increased demand

o   If prices were allowed to adjust:

§  Market Equilibrium: P=$1000, Q=12,000

o   If prices are frozen for the sake of rent control:

§  Controlled Equilibrium: P=$800, Q_supplied=10,000, Q_demanded=14,000

§  Quantity supplied drops because it is harder to supply quality apartments for the suppliers

§  Shortage of 4,000

o   Binding Price Ceiling: A price ceiling which results in a shortage in the market

o   Price ceilings can be put above the equilibrium, but they don’t affect the market until prices rise up to that level

o   Something needs to happen to drop the Q_demanded to equal the Q_supplied at 10,000

§  Supply of apartments is highly elastic

·         People can simply rent rooms are sections of their apartments out if demand is high enough

o   The Consequences of Rent Controls:

§  1) Reduced availability AND the good is harder to get

§  2) Lower quality goods

§  3) Other $ will be paid

·         i.e. black markets will emerge

§  4) Misallocations

·         Someone who values the apartment the most is not nearly as sure to get it

·         Roommates who aren’t compatible stay together because it’s so hard to find a new apartment

§  5) Other markets are impacted

·         Rent control in city apartment market leads to 4,000 people who need housing; these 4,000 people increase demand for housing in neighboring areas, leading to an increase in prices there

§  6) Fairness

§  7) Discrimination

·         Obese people and minorities have a harder time getting apartments in N.Y.C.

·         If the market were at equilibrium, discrimination makes it harder on the renter, but with price ceilings, discrimination has no effect on renters because the demand is so high that somebody else will end up getting good

§  8) Monitoring/Enforcement Coasts

·         Very costly review boards

·         By law, the landlords have to do certain things, but those laws must be enforced by police forces

·         MORE regulation