Price ceiling:
Suppose the rent is $800. Everything is ok, and then a boom happens so that increases the demand, driving up rents to $1,000. The term “rent” in economics has a very particular meaning:
i. When we say “rent” for an apartment, we mean a payment for a piece of the use of equipment, a payment for the use of capital.
ii. Something (unearned rent) that accrues to you that is not a result of your productive activity.
Let’s of the value in society we get in every single day, comes from rent, comes from the staffs we ourselves have little hand on producing. (so we cannot accuse the landlords for the unearned rent)
Rent control usually starts by freezing where it is today (when demand drives the price up) when you freeze the price, the market is not clearing.
The first impact is that the quantity of apartment supplied will be less and all potential units that may become part of an apartment when prices rose will never come to the market. The Second thing we need to think is what happens in the long run. I’ll argue the supply of apartment is much more elastic than you think it is.
The quantity demanded will increase when the price is lowered.
We get a weird equilibrium (not clearing) in this market.
Price ceiling results in shortage. (We say that this price ceiling is binding with the result of shortage)
Who in this case is being able to satisfy their plans? Sellers!
Question: Scarcity vs. Shortage (not the same thing. When the price of sth. falls in the free market, it does become less scarce. But in control, not really)
Consequence of rent control:
i. Reduced availability: If you cannot ration by price, some other rationing mechanisms must be there to get rid of the other demanders. Some other costs are going to arise:
(1) Queue: time and effort
(2) Favored group: you have to impress the landlord, which may be costly.(bribe, race, gender, sex, size of family, etc.
(3) Black market: more cost.
ii. The deterioration of quality: When we talk about supple, generally we assume identical quality. If we decrease quality, it’s the same as reducing quantity. It’s not free to maintain the quality, you may are just not able to pay for the improvement.
iii. Black market will emerge: Other money just may be paid by someone in somewhere. The price in black market is at least the same as that in free market, only higher.
iv. Misallocations: People who value the most are not ensured to get it.
v. Impact on other market: If you post a price control, 4000 people need place to stay. All the people who cannot afford or cannot find house in New York City finally turned to neighborhood. You increase the price of houses in surrounding areas. You make fewer apartments available globally, so it must be the case that price rise globally.
vi. Fairness: Who’s most able to pay for the black market fee? Who’s most able to travel far away? First, the binding price ceiling is unfair to landlords, who cannot charge a higher price. Second, the price ceiling law is intended to let poor people get houses, but the fact is that the poor will bear great loss. Price ceiling won't bother rich people because for them they can buy house in black market or become favored group of landlords easily, but the poor have to spend more time and energy looking for houses, and end up with living in bad quality houses.
Finally, the fucking stupid law is unfair to the whole society because it stops people from reaching an agreement in a higher price and quality. The social freedom and liberty will be hurt.
Finally, the fucking stupid law is unfair to the whole society because it stops people from reaching an agreement in a higher price and quality. The social freedom and liberty will be hurt.
vii. The reduced cost in discrimination:
Free market clearing: there is no customers right there when you refused one, you have to look for another one, advertise more and keep the house vacant longer. So it doesn't mean that there is no discrimination in the free market, but you have to pay for it. Even if you’re a discriminating bastard, you’re still doing social good because you’re offering houses (I don’t give you means I’ll give somebody else).
Free market clearing: there is no customers right there when you refused one, you have to look for another one, advertise more and keep the house vacant longer. So it doesn't mean that there is no discrimination in the free market, but you have to pay for it. Even if you’re a discriminating bastard, you’re still doing social good because you’re offering houses (I don’t give you means I’ll give somebody else).
viii. Monitoring/enforce costs
<1> long run rent supply will shift in and becomes flatter
<2> Regulations are costly. The people and resources spent monitoring are not producing goods and services that people want (not productive). Monitoring is destructive. It’s classic broken window. If destructive things following the price ceiling law, like riots, never happen, why do we pay for the monitoring? We enforce the law, we create the problems, and now we use resources to quell the problems, isn't it a cost?
<3> the government could have done something else more constructive. Tax itself is not costly (just a transfer).Raising tax, the action of taxing is costly.
<1> long run rent supply will shift in and becomes flatter
<2> Regulations are costly. The people and resources spent monitoring are not producing goods and services that people want (not productive). Monitoring is destructive. It’s classic broken window. If destructive things following the price ceiling law, like riots, never happen, why do we pay for the monitoring? We enforce the law, we create the problems, and now we use resources to quell the problems, isn't it a cost?
<3> the government could have done something else more constructive. Tax itself is not costly (just a transfer).Raising tax, the action of taxing is costly.
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