A price ceiling sets the maximum price at which a buyer and seller can make a trade. Rent control is the economist's classic example of a price ceiling and of what happens when governments prevent capitalistic acts between consenting adults.
Supporters of price ceilings may intend to help consumers by keeping prices "affordable." In economics, however, good intentions do not guarantee good results. Basic economic theory shows that rent ceilings reduce the quantity supplied of rent-controlled housing in the short run and decrease supply in the long run. Renters who successfully lease an apartment benefit from the lower prices, but those who cannot rent are left out in the cold and must search for alternative housing.
As the article notes, rent controls have multiple negative effects: Rent control discourages new investment in rent-controlled housing and encourages landlords to seek alternative uses for their rent-controlled properties. In addition, price controls for some types of apartments will increase prices for apartments without price controls. Renters frustrated in the controlled market will seek apartments in the uncontrolled market, shifting the demand curve in this market to the right and thus increasing equilibrium price. Rent controls also reward long-term residents of rent-controlled apartments, and punish new arrivals to the housing market who cannot find apartments, thereby discouraging the mobility on which cities thrive. In addition, effective rent controls require spending government funds to police and enforce the price ceiling while criminalizing voluntary acts of trade.
Questions:
1. What does it mean to say that there is a downward-sloping demand curve for apartments? In practice, when the quantity supplied of apartments is less than the maximum possible quantity demanded, what happens to the people who don't get apartments? If someone like Ellen or Charlie can't get an apartment, does this mean that he or she will end up being homeless? Where might he or she end up living? (Think, for example, about the retirees in the article. Or about young people. Or recent college graduates deciding where to live.)
2. Most economists have long argued in introductory microeconomics classes that rent controls are bad policy. The main basis for this argument has been the basic model of supply and demand in a competitive market. What is the basis for arguments in favor of rent control? See the New York City Rent Guidelines Board and look for other arguments favoring rent controls. How do these arguments address or modify the basic supply-and-demand model?
3. If the economists' argument is correct that rent controls do more harm than good, why have rent controls existed in so many U.S. cities? Discuss who directly benefits from instituting and maintaining rent controls besides the renters who occupy the lower-cost housing.
4. Check out the housing market in your home town. What regulations exist that control the market interaction of landlords and renters? What goals are the regulations intended to achieve?