McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 34 Rent Control

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter Outline RENTS IN A FREE MARKET REASONS FOR CONTROLLING RENTS CONSEQUENCES OF CONTROLLING RENTS WHY DOES RENT CONTROL SURVIVE

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Rent Control Laws that restrict the ability of landlords to raise the rent from one year to the next. This is a form of a price ceiling (the level above which a price may not rise). These laws are more prevalent on the coasts: Boston, New York City, more than 100 cities in New Jersey, and San Francisco and San Jose in California. Such laws typically come into being when market rents are rising quickly. The east coast laws date from World War II and the west coast laws date from the skyrocketing land prices during the 1970s.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Rents in a Free Market Quantity Rent Demand Supply A R* B C 0 Q* Value to the renters: 0ACQ* Renters pay landlords OR*CQ* The variable cost to landlords: OBCQ* Consumer Surplus to renters: R*AC Producer Surplus to landlords: BR*C

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Rent Control Relevance Rent control is only relevant if it is below the market rent. A controlled rent above the market rent is irrelevant. –The landlord must accept the market rent to attract tenants. –Charging above the market rent is not in the landlords interests because such a rent would not attract tenants to the landlords building.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Whats Wrong with the Rent Control The gain to the renters who keep their apartments and pay less rent is less than the loss to the losers who are –people who lose their apartments and –landlords who receive less rent.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Quantity Rent Demand Supply A R* B C 0 Q* R min QSQS QDQD E F Demonstrating the Case Against the Rent Control Value to the renters: 0AEQ s Renters pay landlords OR min FQ s The variable cost to landlords: OBFQ S Consumer Surplus to renters: R min AEF Producer Surplus to landlords: BR min F People who must move out: Q*-Q S

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. The Short and Long Run Consequences of Rent Control In the short run supply and demand for apartments in inelastic. Rent control lowers rent without much displacement of renters. In the long run supply and demand for apartments gets more elastic and the negative consequences become more pronounced.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Comparing the Short Run and the Long Run Quantity Rent Demand Supply R* C 0 Q* R min QSQS QDQD Quantity Demand Rent Supply R* C 0 Q* R min QSQS QDQD The Short Run The Long Run

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Consequences of Rent Control Landlords have a motivation to get tenants out of their building by failing to maintain it. Renters have an interest in selling (on an illegal black market) their rights to a lease. People go to funerals to negotiate subleases from the dead persons executor.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Why Rent Control Survives The people who benefit from Rent Control (people who continue to live in the same apartment for years) are the same people who vote. By definition, someone who is displaced from an apartment or someone who would like to move in but cannot find a place, cannot vote to overturn the law because they do not live in the city.