The Cost of Rent Control
Name: group 2
Professor: J.M. Walecki
Course: 500B
June 13, 2012
Costs of Rent Control Over the past decades, the consequences of government intervention in housing markets have been widely discussed. Many governments have implemented rent control for a long period of time, because it ensures shelters of many low income and median income families efficiently in a short time. It seems that rent control might be the wave of the future. However, although many cities are still controlling their house rents for a short term benefit, harms of rent control are far more than it helps in the long run. Supply-demand theory indicates that when governments control prices, a gap will exists between supply and demand (Kearl, Pope, Whiting, and Wimmer, 1979). Consumers, of course, buy more goods as prices fall and less as prices rise, and sellers act in an opposite way. Once price ceiling is placed in markets, a shortage occurs. In this case, when governments control house rent at a price lower than its market value, people are inclined to rent more houses; in contrast, house suppliers are inhibited under this price regulation. In other words, rent control reduces the profitability of rental housing, guiding investment capital out of the rental market. Consequently, new construction and the total quantity of available houses decrease. By reducing the income of house providers, rent control also lead a drop in the quality of exiting houses. According to "The Effects of Partial-Coverage Rent Control on the Price and Quantity of Rental Housing", when house suppliers faced with a decline of their revenues in house rents, they tend to reduce their budgets on their house cares and repairs (Marks, 1984). Apparently, a community which charges more would be more livable and well supervised than a cheaper one. Shortcutting the actual value of communities, rent control dampens enthusiasm of house suppliers on providing better living environment. Shortages of
Professor: J.M. Walecki
Course: 500B
June 13, 2012
Costs of Rent Control Over the past decades, the consequences of government intervention in housing markets have been widely discussed. Many governments have implemented rent control for a long period of time, because it ensures shelters of many low income and median income families efficiently in a short time. It seems that rent control might be the wave of the future. However, although many cities are still controlling their house rents for a short term benefit, harms of rent control are far more than it helps in the long run. Supply-demand theory indicates that when governments control prices, a gap will exists between supply and demand (Kearl, Pope, Whiting, and Wimmer, 1979). Consumers, of course, buy more goods as prices fall and less as prices rise, and sellers act in an opposite way. Once price ceiling is placed in markets, a shortage occurs. In this case, when governments control house rent at a price lower than its market value, people are inclined to rent more houses; in contrast, house suppliers are inhibited under this price regulation. In other words, rent control reduces the profitability of rental housing, guiding investment capital out of the rental market. Consequently, new construction and the total quantity of available houses decrease. By reducing the income of house providers, rent control also lead a drop in the quality of exiting houses. According to "The Effects of Partial-Coverage Rent Control on the Price and Quantity of Rental Housing", when house suppliers faced with a decline of their revenues in house rents, they tend to reduce their budgets on their house cares and repairs (Marks, 1984). Apparently, a community which charges more would be more livable and well supervised than a cheaper one. Shortcutting the actual value of communities, rent control dampens enthusiasm of house suppliers on providing better living environment. Shortages of