Price Ceilings: Rent Controls
-
Not Synced[Alex] Today, we'll be looking
at rent controls, -
Not Syncedan application
of what we've done already, -
Not Syncedbecause rent controls
are simply a type of price ceiling. -
Not SyncedLet's get going.
-
Not SyncedHere's the list of the effect
of price ceilings, -
Not Syncedwhich you've now seen many times.
-
Not SyncedI'm going to talk about each one of these
in the context of rent controls, -
Not Syncedexcept for a loss in gains from trade.
-
Not SyncedThat doesn't really introduce
any new issues, -
Not Syncedso I won't talk about that.
-
Not SyncedLet's talk about the other items, however.
-
Not SyncedOkay. Rent controls create shortages.
-
Not SyncedLet's do our usual diagram,
except this time on the horizontal axis -
Not Syncedwe have the quantity
of rental apartments. -
Not SyncedOn the vertical axis, we have price.
-
Not SyncedHere's our demand
and here's our supply. -
Not SyncedThe main thing we want to add here
-
Not Syncedis that the supply of apartments
in the short-run -
Not Syncedis going to be very inelastic.
-
Not SyncedWhy? Well, in the short-run,
the apartments are simply there. -
Not SyncedThey're already built, there's not
much you can do -
Not Syncedto change the supply of apartments.
-
Not SyncedNow, this is not quite true.
-
Not SyncedYou can take an apartment
which is about to come on to the market -
Not Syncedand turn it instead into a condo.
-
Not SyncedYou might switch some uses.
-
Not SyncedYou might tear down an apartment early,
things like that. -
Not SyncedBut, basically, the supply
is going to be fairly inelastic -
Not Syncedin the short-run.
-
Not SyncedSo, we have a controlled rent.
-
Not SyncedThis means that they'll be a shortage
in the short-run -
Not Syncedand it's given by this amount
on the diagram. -
Not SyncedNote that most of the shortage
comes from an increase -
Not Syncedfrom the quantity demanded
when you push the rent below -
Not Syncedthe market equilibrium right,
when you lower therent. -
Not SyncedOnly a little bit of the shortage
comes from a decrease -
Not Syncedin the quantity supplied.
-
Not SyncedIn the long-run, however,
-
Not Syncedthe long-run supply is going to be
much more elastic -
Not Syncedthan the short-run supply.
-
Not SyncedSo, in the long-run, the shortage
will get much worse. -
Not SyncedIn the long-run, what will happen
is that fewer apartments will be built, -
Not Syncedmore apartments
will be allowed to run down -
Not Syncedto become dilapidated,
to slowly go off the market. -
Not SyncedApartments will be turned
into condominiums. -
Not SyncedInstead of building apartments,
people will build car garages, -
Not Syncedpeople will build other types of housing,
and so forth. -
Not SyncedSo in the long-run, the shortage
from a rent-control gets much worse -
Not Syncedthan in the short-run.
-
Not SyncedHere's an interesting graph
from Ontario, Canada, -
Not Syncedshowing how rent controls can reduce
the number of new units being built. -
Not SyncedSo, prior to rent control
even being debated, -
Not Syncedthere are about 30
to 40 thousand new units -
Not Syncedbeing built every year in Ontario, Canada.
-
Not SyncedAfter rent control was put into place
in 1975, -
Not Syncedthere were fewer than 10,000 new units
being built every year. -
Not SyncedAlso note, that the number
of new apartments being built, -
Not Syncedwhich might be rent-controlled,
-
Not Synceddeclined even before rent control
was put into place, -
Not Syncedand that makes perfect sense.
-
Not SyncedAn apartment has got to pay
for itself over 30 or 40 years. -
Not SyncedThey are very durable, long-lived assets.
-
Not SyncedSo if you hear today that in the next year
or two, rents may be controlled, -
Not Syncedyou're going to say,
-
Not Synced"Well, I don't want to build
this apartment unit. -
Not SyncedYou know, it's not going to be profitable
anymore. I was expecting so many rents -
Not Syncedfor the next 30 or 40 years -
-
Not Syncedthat's now being cut. This unit is not
going to be profitable, I don't want to -
Not Syncedbuild it anymore." And that's exactly
what we saw. A discussion in rent controls -
Not Syncedreduced the number of apartments being
constructed. We've also put, by the way, -
Not Syncedthe number in red, the number of
non-rental-controlled housing that was -
Not Syncedbeing built at the time. And you can see
it didn't change very much. So this -
Not Syncedillustrates that it was the rent control
itself and not other factors in the market, -
Not Syncedsuch as the state of the economy, which
reduce the number of rent-controlled -
Not Syncedapartments being built every year. So this
illustrates how rent controls can create a -
Not Syncedshortage by reducing the supply. As with
other types of price controls, rent -
Not Syncedcontrols create reductions in product
quality. So the rent controls reduce the -
Not Syncedreturn to landlords from renting
apartments, and owners are going to -
Not Syncedrespond to that price control by trying to
cut costs. So, they're going to reduce -
Not SyncedMaintenance, they're going to slow down
the repairs to elevators, they're not -
Not Syncedgoing to mow the lawns as often. After
all, you can still sell just as many units -
Not Syncedas they did before. They can keep all of
their units rented at the rent-controlled -
Not Syncedprice, even when they cut maintenance and
repair costs and amenities, and they don't -
Not Syncedput in the new pool or they don't put in
the playground and so forth. They're no -
Not Syncedlonger in a competitive market. They have
lots and lots of people who want to rent -
Not Syncedtheir apartments at the below-market
price, so they don't need to spend so much -
Not Syncedon maintenance and repairs, and other
benefits. And, since their profits are -
Not Syncedfalling, they want to try and cut costs as
much as possible. Indeed, when rent -
Not Syncedcontrols are very strong, serviceable
apartment buildings quickly turn into -
Not Syncedslums, and slums turn into abandoned and
hollowed-out buildings. This happened in -
Not SyncedNew York City, this happened in Paris,
this happened in many cities around the -
Not Syncedworld, which instituted strong rent
controls. Rent controls create wasteful -
Not Syncedlines and other search costs. So, finding
an apartment in New York City often takes -
Not Synceda long time and you have to spend a lot of
money to get a rent-controlled apartment. -
Not SyncedIn one famous example, episode of
Seinfeld, George looks for apartments by -
Not Syncedconsulting the obituaries and rushing to
the landlord anytime he sees someone who -
Not Synceddied who had a nice apartment. And that's
in fact one of the techniques which New -
Not SyncedYorkers use to try and get a
rent-controlled apartment. Another effect -
Not Syncedof rent controls is to increase
discrimination because rent controls -
Not Syncedreduce the price of discrimination. In a
free market, landlords might discriminate. -
Not SyncedBut then, they pay a price because it's
going to take them longer to rent out the -
Not Syncedapartment. But, precisely because the rent
control makes the quantity demanded exceed -
Not Syncedthe quantity supplied. There are more
people lining up to get apartments than -
Not Syncedthere are apartments. So, landlords can
more easily, or at lower cost, pick and -
Not Syncedchoose whom they rent to. Therefore, for
minorities or for people with children, or -
Not Syncedfor people whom landlords are perhaps
slightly don't want in their apartment, -
Not Syncedthe cost to them of obtaining apartment is
going to be even higher than for the -
Not Syncedaverage person. Another effect of rent
controls, which is very common, is paying -
Not Syncedbribes to get a rent-controlled apartment.
Bribes, of course, are illegal. This is -
Not Syncedillegal, but there are ways of disguising
the bribe. One way, for example, would be -
Not Syncedto charge extra for a furnished apartment.
What does a furnished apartment look like in -
Not SyncedNew York City for rent-controlled
apartment? It looks like this. That's a -
Not Syncedfurnished apartment. You get the idea -
it's a way of paying a bribe under the -
Not Syncedtable. As with other types of price
ceilings, rent controls create a -
Not Syncedmisallocation of resources. That is the
apartments are not allocated to the -
Not Syncedrenters who value them the most. If you
ever get control of a rent-controlled -
Not Syncedapartment in New York City, for example,
you never, ever, ever give it up. So, I've -
Not Syncedknown some people who keep an apartment in
New York City just as a vacation home, -
Not Syncedjust for the summer, they go there
occasionally. It doesn't have a lot of -
Not Syncedvalue to them, but the price is so low
that it makes sense to keep the apartment. -
Not SyncedIf they had to pay the market price, then
the high-value bidders, the ones who -
Not Syncedreally valued the apartment, would bid the
price up and the goods would be allocated -
Not Syncedto them. Instead, what we have is people
who only use the apartment occasionally, -
Not Syncedkeeping the apartment, while other people
with large families are scrunched into -
Not Syncedapartments which are much too small for
them. Another classic example: the older -
Not Syncedcouple who stay in their large
rent-controlled apartment even when their -
Not Syncedkids have moved out. It doesn't make sense
for them to move out because they're not -
Not Syncedpaying the full price, they're not paying
the actual value. So you get apartments -
Not Syncedwho are allocated to older couples who
actually have a low value for the -
Not Syncedapartment, even when there are people who
have a much higher value for that same -
Not Syncedapartment and they cannot find an apartment.
One study of this found, for example, that -
Not Synced21% of renters in New York City live in an
apartment that has more or fewer rooms -
Not Syncedthan they would choose if they lived in a
city without rent controls. So the -
Not Syncedapartments become misallocated. Okay.
That's it for price ceilings. Next time, -
Not Syncedwe're going to be looking at price floors,
a price below which it is illegal to go. -
Not Synced- [Announcer] If you want to test yourself,
click Practice Questions. Or, if you're -
Not Syncedready 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 |