Rent Control Essay, Research Paper

In theory rent control sounds like a perfect way to help the poor by setting the price ceilings on the rent, but in reality it only will hurt them. In the real world rent controls do not work like most people would expect them to, maybe its because not many people had their lesson in economics. Controls on rent will lead to less efficient allocation of scarce resources, and people at the top of the economic ladder will not be hurt. Only those at the bottom of the economic ladder will be hurt because even with price ceilings bottom ladder of the society is still not participating in the market. Instead of trying to transfer wealth from landlords to tenants, people at the lower ladder should be helped by allowing them to participate in the market just like the rest of economic society. The effects of the rent control will be shortages; higher prices and landlords would eventually allow their buildings to deteriorate, this is the time where government should let the “invisible hand” do its job and let the supply and demand determine the price of rent.

Rent control has been enforced in many major American cities for many decades. The best know examples of rent control are in New York, which still has rent control from the temporary wartime price controls imposed during World War II. During 1970’s it looked like price ceilings on rent would be the wave of the future. Boston implemented rent control during the inflation years of 1969 through 1971. Many cities that adopted rent controls eventually made them permanent even after they have expired. Even though rent controls were becoming very popular some cities still remained immune to this temptation. Chicago has one of the largest populations of renters in America, but they have never seriously considered adopting this system. At this time there are about 31 American states that have created laws and constitutional amendments forbidding rent control.

Once in place, rent controls are very difficult to remove from our everyday life. Economists Arthur Nelson’s “Nelson’s Third Law” states that the worse a government regulation is, the harder it is to get rid of it, can be applied to the rent control. Because when there is a regulation created by a government people will figure out a way to adjust to it and some people will even try to make profit from the situation presented to them. When these groups of people become adjusted they will fight to retain the regulation. If this group of people is the majority of tenants, removing rent control through local political efforts are not very good.

In addition the costs of rent control usually will fall on other taxpayers, because when landlords start losing money they get their property assessments lowered. When the property value is lowered less revenue will go to the government. People who live in high property tax cities end up compensating the amount that was not paid by the people living in the low property tax cities.

Tenants activists argue that if rent controls are removed it will result in increase of rent prices, mass evictions, and increase in the homeless population. In reality none of this occurs if the rent control is abolished, rent prices will rise but it will stimulate the incentive for the construction of new apartments. As we learned in our economics class people respond to incentives, when costs and benefits change the behavior of landlords will also change. When rent was low landlords had no incentive to build new apartments, and with such a high demand and not enough supply the equilibrium could not be reached thus creating shortages. The rent prices might go up in the short run but with new supply of apartments competition will be created again and the prices will be driven down to the market equilibrium.

We can also look at the issue of rent control through the concept of “shadow markets.” This concept was developed by Denton Marks in the Journal of Urban Economics in 1984. As stated earlier, price ceilings will produce higher demand and lower quantity supplied, which will lead to shortages and low quality housing. When shortages occur it is very hard for a government to help and regulate the supply. If the government is unsuccessful in subsidizing supply that has been lost due to market regulations, black markets will arise. Government can prosecute the individuals participating in the black market or it can just ignore these markets so that they can compensate for the shortages. In a lot of cases government will purposely leave part of the market unregulated to serve as a “safety valve” for the overwhelming demand. This unregulated portion will become the “shadow market”. What usually happens is that unregulated market will have to compensate the shortages in the regulated market, and since the prices are low in the regulated markets they will be forced very high in the unregulated market. In the end the prices from both markets will average out to about as high as the prices in the free-market level. They can also end up higher because of the diseconomies in the regulated part of the market.

There are many more problems that arise in the black market, because of the shortages for apartments waiting lists most likely will develop. Landlords will start illegally accepting money from the people who would like to move up on the list or in some cases just to skip the waiting lists altogether. In this case individuals in the bottom ladder of the society will not be able to come up with this extra income, and this will defeat the whole purpose of rent control. Once again from this example we could see that people at the bottom of the economic ladder would be hurt more than people at the higher economic ladder. Also when landlords have such long waiting lists they have no incentive to fix anything that breaks in their apartments because they know that if the tenants move out they will be easy to replace. Of course the government foresaw this and different laws were passed, one of them allowed tenants not to pay rent if something in their apartment was broke or not functioning well. This solution only presented another problem, tenants would start breaking and abusing their apartments so that they would not have to pay the rent. All these problems are effects of the black market, and when apartments in regulated parts are taken up people are forced to search for the apartments in the black markets or so called “shadow market”.

After all this information one might be wondering that if these rent controls are inefficient why do politicians have success in passing these laws. One of the reasons brings us back to the fact that rent control hurts poor people more than it does middle class and we know that in controlled market apartments tend to fall into the hands of middle class professionals. The majority of people who vote are middle and upper class people, so when time comes to vote middle and upper class tend to oversee the problems of rent control and they don’t include these facts when choosing a politician to vote for even though that potentially future politician maybe promising to bring rent controls with when he or she is elected.

I have tried to come up with some solutions to replace rent controls and the ones I came up with are very simple. By placing rent controls we are not helping lower ladder of the society, we need to help them by letting theme participate in the market with the rest of the society. Government needs to find a way to subsidize the money that lower ladder is lacking in order to participate in the market with the rest of society. This way government will have higher spending only in the short run, in the long run I think that government will benefit more by subsidizing than implementing rent controls. Of course government doesn’t have to subsidize the whole amount, a good solution for that problem is for government to help low income families to find loans with low interest. Then government could pay for the interest while families could be paying off their loans without any pressure of high interest rates. One of my other solutions is very similar to the last one, low income families could be assisted in finding a house that they could purchase instead of the apartment. This way if government subsidizes the interest payments, people would have more incentive to work harder to pay off they payments because they will realize that in the long run the house will become their own private property unlike the apartment they are renting.

Some of these solutions might have problems of their own if applied in the real world, but I think that if any individual would be presented with all these facts they would change their minds very quick. I would have supported rent controls if I was presented with this problem in September because I would be thinking without applying economics to this problem. I would be very angry to see tax money that we pay go to subsidizing rent of low income families, but after learning more about this problem I realized that benefits in the long run would not only be great for the low income families and myself but also for the society as a whole.