Price Ceilings: Rent Controls
-
0:09 - 0:11[Alex] Today, we'll be looking
at rent controls, -
0:11 - 0:13an application
of what we've done already, -
0:13 - 0:18because rent controls
are simply a type of price ceiling. -
0:18 - 0:19Let's get going.
-
0:23 - 0:25Here's the list of the effect
of price ceilings, -
0:25 - 0:27which you've now seen many times.
-
0:27 - 0:30I'm going to talk about each one of these
in the context of rent controls, -
0:30 - 0:33except for a loss in gains from trade
-
0:33 - 0:35that doesn't really introduce
any new issues, -
0:36 - 0:37so I won't talk about that.
-
0:37 - 0:39Let's talk about the other items, however.
-
0:39 - 0:41Okay. Rent controls create shortages.
-
0:41 - 0:45Let's do our usual diagram,
except this time on the horizontal axis -
0:45 - 0:47we have the quantity
of rental apartments. -
0:47 - 0:49On the vertical axis, we have price.
-
0:49 - 0:51Here's our demand
and here's our supply. -
0:51 - 0:54The main thing we want to add here
-
0:54 - 0:58is that the supply of apartments
in the short-run -
0:58 - 1:01is going to be very inelastic.
-
1:01 - 1:07Why? Well, in the short-run,
the apartments are simply there. -
1:07 - 1:10They're already built, there's not
much you can do -
1:10 - 1:14to change the supply of apartments.
-
1:14 - 1:16Now, this is not quite true.
-
1:16 - 1:19You can take an apartment
which is about to come on to the market -
1:19 - 1:22and turn it instead into a condo.
-
1:22 - 1:24You might switch some uses.
-
1:24 - 1:27You might tear down an apartment early,
things like that. -
1:27 - 1:31But, basically, the supply
is going to be fairly inelastic -
1:31 - 1:32in the short-run.
-
1:32 - 1:35So, we have a controlled rent.
-
1:35 - 1:38This means that they'll be a shortage
in the short-run -
1:38 - 1:42and it's given by this amount
on the diagram. -
1:42 - 1:46Note that most of the shortage
comes from an increase -
1:46 - 1:49in the quantity demanded
when you push the rent below -
1:49 - 1:51the market equilibrium right,
when you lower the rent. -
1:52 - 1:55Only a little bit of the shortage
comes from a decrease -
1:55 - 1:57in the quantity supplied.
-
1:58 - 2:00In the long-run, however,
-
2:00 - 2:03the long-run supply is going to be
much more elastic -
2:03 - 2:05than the short-run supply.
-
2:05 - 2:09So, in the long-run, the shortage
will get much worse. -
2:09 - 2:14In the long-run, what will happen
is that fewer apartments will be built, -
2:14 - 2:17more apartments
will be allowed to run down -
2:17 - 2:21to become dilapidated,
to slowly go off the market. -
2:21 - 2:25Apartments will be turned
into condominiums. -
2:25 - 2:30Instead of building apartments,
people will build car garages, -
2:30 - 2:34people will build other types of housing,
and so forth. -
2:34 - 2:40So in the long-run, the shortage
from a rent-control gets much worse -
2:40 - 2:41than in the short-run.
-
2:42 - 2:45Here's an interesting graph
from Ontario, Canada, -
2:45 - 2:51showing how rent controls can reduce
the number of new units being built. -
2:51 - 2:55So, prior to rent control
even being debated, -
2:55 - 2:59there are about 30 to 40 thousand
new units being built every year -
2:59 - 3:00in Ontario, Canada.
-
3:00 - 3:05After rent control was put into place
in 1975, -
3:05 - 3:09there were fewer than 10,000 new units
being built every year. -
3:09 - 3:14Also note, that the number
of new apartments being built, -
3:14 - 3:15which might be rent-controlled,
-
3:15 - 3:20declined even before rent control
was put into place, -
3:20 - 3:21and that makes perfect sense.
-
3:21 - 3:25An apartment has got to pay
for itself over 30 or 40 years. -
3:25 - 3:28They are very durable, long-lived assets.
-
3:28 - 3:34So if you hear today that in the next year
or two, rents may be controlled, -
3:34 - 3:35you're going to say,
-
3:35 - 3:37"Well, I don't want to build
this apartment unit. -
3:37 - 3:42It's not going to be profitable
anymore. I was expecting so many rents -
3:42 - 3:44for the next 30 or 40 years -
-
3:44 - 3:45that's now being cut.
-
3:45 - 3:49This unit is not going to be profitable,
I don't want to build it anymore." -
3:49 - 3:51And that's exactly what we saw.
-
3:51 - 3:55A discussion in rent controls
reduced the number of apartments -
3:55 - 3:57being constructed.
-
3:57 - 4:01We've also put, by the way,
the number in red, -
4:01 - 4:03the number of non-rental-
controlled housing -
4:03 - 4:05that was being built at the time.
-
4:05 - 4:07And you can see,
it didn't change very much. -
4:07 - 4:11So this illustrates
that it was the rent control itself -
4:11 - 4:15and not other factors in the market,
such as the state of the economy, -
4:15 - 4:18which reduced the number
of rent-controlled apartments -
4:18 - 4:20being built every year.
-
4:20 - 4:23So this illustrates
how rent controls can create a shortage -
4:23 - 4:25by reducing the supply.
-
4:25 - 4:28As with other types of price controls,
-
4:28 - 4:30rent controls create reductions
in product quality. -
4:30 - 4:37So the rent controls reduce the return
to landlords from renting apartments, -
4:38 - 4:40and owners are going to respond
to that price control -
4:40 - 4:42by trying to cut costs.
-
4:42 - 4:43So, they're going to reduce maintenance.
-
4:43 - 4:46They're going to slow down
the repairs to elevators, -
4:46 - 4:49they're not going to mow the lawns
as often. -
4:50 - 4:53After all, you can still sell
just as many units -
4:53 - 4:54as they did before.
-
4:54 - 4:58They can keep all of their units rented
at the rent-controlled price. -
4:58 - 5:03even when they cut maintenance
and repair costs and amenities, -
5:03 - 5:04and they don't put in the new pool
-
5:04 - 5:07or they don't put in the playground
and so forth. -
5:07 - 5:09They're no longer in a competitive market.
-
5:09 - 5:13They have lots and lots of people
who want to rent their apartments -
5:13 - 5:17at the below-market price,
so they don't need to spend so much -
5:17 - 5:21on maintenance and repairs,
and other benefits. -
5:21 - 5:23And, since their profits are falling,
-
5:23 - 5:26they want to try and cut costs as
much as possible. -
5:27 - 5:30Indeed, when rent controls
are very strong, -
5:30 - 5:35serviceable apartment buildings
quickly turn into slums, -
5:35 - 5:39and slums turn into abandoned
and hollowed-out buildings. -
5:39 - 5:42This happened in New York City,
this happened in Paris, -
5:42 - 5:45this happened in many cities
around the world, -
5:45 - 5:48which instituted strong rent controls.
-
5:49 - 5:52Rent controls create wasteful lines
and other search costs. -
5:53 - 5:57So, finding an apartment in New York City
often takes a long time -
5:57 - 6:00and you have to spend a lot of money
to get a rent-controlled apartment. -
6:00 - 6:03In one famous example,
episode of Seinfeld, -
6:03 - 6:07George looks for apartments
by consulting the obituaries -
6:07 - 6:11and rushing to the landlord
anytime he sees someone who died -
6:11 - 6:12who had a nice apartment.
-
6:12 - 6:15And that's in fact one of the techniques,
which New Yorkers use -
6:15 - 6:18to try and get
a rent-controlled apartment. -
6:18 - 6:22Another effect of rent controls
is to increase discrimination -
6:22 - 6:26because rent controls reduce the price
of discrimination. -
6:26 - 6:30In a free market,
landlords might discriminate. -
6:30 - 6:32But then, they pay a price
-
6:32 - 6:36because it's going to take them longer
to rent out the apartment. -
6:36 - 6:40But, precisely because the rent control
makes the quantity demanded -
6:40 - 6:42exceed the quantity supplied,
-
6:42 - 6:45there are more people lining up
to get apartments -
6:45 - 6:47than there are apartments.
-
6:47 - 6:51So, landlords can more easily,
or at lower cost, -
6:51 - 6:53pick and choose whom they rent to.
-
6:53 - 6:56Therefore, for minorities
or for people with children, -
6:56 - 6:59or for people whom landlords
are perhaps slightly -
6:59 - 7:01don't want in their apartment,
-
7:01 - 7:05the cost to them of obtaining apartment
is going to be even higher -
7:05 - 7:07than for the average person.
-
7:08 - 7:11Another effect of rent controls,
which is very common -
7:11 - 7:16is paying bribes
to get a rent-controlled apartment. -
7:16 - 7:18Bribes, of course, are illegal.
-
7:18 - 7:22This is illegal, but there are ways
of disguising the bribe. -
7:22 - 7:26One way, for example,
would be to charge extra -
7:26 - 7:28for a furnished apartment.
-
7:28 - 7:30What does a furnished apartment look like
in New York City -
7:30 - 7:34for rent-controlled
apartment? It looks like this. -
7:34 - 7:35That's a furnished apartment.
-
7:35 - 7:40You get the idea - it's a way
of paying a bribe under the table. -
7:40 - 7:42As with other types of price ceilings,
-
7:42 - 7:45rent controls create
a misallocation of resources. -
7:45 - 7:49That is the apartments
are not allocated to the renters -
7:49 - 7:50who value them the most.
-
7:50 - 7:53If you ever get control
of a rent-controlled apartment -
7:53 - 7:57in New York City, for example,
you never, ever, ever give it up. -
7:57 - 8:00So, I've known some people
who keep an apartment in New York City -
8:00 - 8:03just as a vacation home,
just for the summer, -
8:03 - 8:05they go there occasionally.
-
8:05 - 8:07It doesn't have a lot of value to them,
-
8:07 - 8:11but the price is so low
that it makes sense to keep the apartment. -
8:11 - 8:14If they had to pay the market price,
-
8:14 - 8:19then the high-value bidders,
the ones who really valued the apartment, -
8:19 - 8:22would bid the price up
and the goods would be allocated to them. -
8:22 - 8:27Instead, what we have is people
who only use the apartment occasionally, -
8:27 - 8:28keeping the apartment,
-
8:28 - 8:33while other people with large families
are scrunched into apartments -
8:33 - 8:35which are much too small for them.
-
8:35 - 8:37Another classic example:
-
8:37 - 8:41the older couple who stay in their large
rent-controlled apartment -
8:41 - 8:43even when their kids have moved out.
-
8:43 - 8:45It doesn't make sense for them
to move out -
8:45 - 8:48because they're not paying
the full price, -
8:48 - 8:51they're not paying the actual value.
-
8:51 - 8:55So you get apartments
who are allocated to older couples -
8:55 - 8:57who actually have a low value
for the apartment, -
8:57 - 9:01even when there are people
who have a much higher value -
9:01 - 9:04for that same apartment
and they cannot find an apartment. -
9:05 - 9:10One study of this found, for example,
that 21% of renters in New York City -
9:10 - 9:13live in an apartment
that has more or fewer rooms -
9:13 - 9:14than they would choose
-
9:14 - 9:17if they lived in a city
without rent controls. -
9:17 - 9:20So the apartments become misallocated.
-
9:21 - 9:23Okay. That's it for price ceilings.
-
9:23 - 9:26Next time, we're going
to be looking at price floors - -
9:26 - 9:29a price below which it is illegal to go.
-
9:31 - 9:34[Announcer] If you want to test yourself,
click "Practice Questions." -
9:34 - 9:38Or, if you're ready to move on,
just click "Next Video."
- Title:
- Price Ceilings: Rent Controls
- Description:
-
Rent controls are a type of price ceiling. We’ll use our diagram to show how rent controls create shortages by reducing the supply of apartments available on the market. Rent controls also result in reduced product quality, since they reduce the returns to landlords from renting apartments. Landlords respond by cutting costs or performing less maintenance, leading to lower quality. There are search costs associated with rent controls, and they also lead to a misallocation of resources since apartments are not allocated to renters who value them the most.
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- Video Language:
- English
- Team:
- Marginal Revolution University
- Project:
- Micro
- Duration:
- 09:43
Melanie Ty edited English subtitles for Price Ceilings: Rent Controls | ||
Melanie Ty edited English subtitles for Price Ceilings: Rent Controls | ||
Melanie Ty edited English subtitles for Price Ceilings: Rent Controls | ||
Melanie Ty edited English subtitles for Price Ceilings: Rent Controls | ||
Melanie Ty edited English subtitles for Price Ceilings: Rent Controls | ||
Melanie Ty edited English subtitles for Price Ceilings: Rent Controls | ||
Melanie Ty edited English subtitles for Price Ceilings: Rent Controls | ||
Melanie Ty edited English subtitles for Price Ceilings: Rent Controls |