The economics of price controls
Price ceilings---rent controls
Initial market equilibrium of rent: Price=$1000, Quantity=12000
Controlled market "equilibrium" of rent: Price=$800, Quantity demanded=14000, quantity supplied=10000 Shortage occurs when there is a binding price ceiling
Price ceiling is binding when the price is set below free market equilibrium price, which will then create shortage.
What's rent?
(1)a payment for the use for capitals
(2)something that accrues to you that is not a result of your productiviality.
When there is a binding price ceiling, quantity demanded increases and quantity supplied decreases.
Question: Does shortage mean scarcity?
No. Scarcity is permanent and ubiquitous. People's wants are unlimited. Shortage is a price phenomenon. As for price ceiling, in the short run there is no physical scarcity of houses but an artificially low price stimulate more quantity demanded; in the long run suppliers respond to incentives, giving money to some areas that are more profitable. Thus a scarcity of houses may really occur.
Consequences of rent control.
(1) A shortage of houses means the reduction of availability.
Some other ways of rationing will appear.
<1> Queue: but it means that you have to sacrifice your time and energy, which is quite precious to many people.
<2> Favored group: you have to impress the landlord, which may be costly.(bribe, race, gender, sex, size of family,etc)
<3> Blackmarket: I will talk about it later
(2) The deterioration of quality.
When in a free market, landlords have to keep their houses clean and comfortable in order to attract the customers. But with the appearance of binding price ceiling, landlords cannot charge a price higher than the regulated price, so he is now unwilling to spend time and money maintaining the quality of the house; besides, since there are more customers than before, landlords can get satisfaction even though they don't keep the house in a high quality.
Price ceiling means that suppliers no longer have to please the customers.
(3) Other money may be paid by other customers: some people value the house more than the ceiling price, so they wanna pay more. Black market will appear. High prices not only show how people value the house, it also present the risk of selling house illegally, so the price in the black market is often exorbitantly higher than the free market price.
(4) Misallocation
People who value the house more may not get the house.
(5) Impact on other market
Suppose the 4000 people who cannot get the house in this city go to buy house in the countryside, thus the increase of quantity demanded in the countryside will increase the price (the demand curve shifts out because of the increase of number of buyers)
(6)Fairness
First, the binding price ceiling is unfair to landlords, who cannot charge a higher price. Second, the price ceiling law is intended to let poor people get houses, but the fact is that the poor will bear great loss. Price ceiling won't bother rich people because for them they can buy house in black market or become favored group of landlords easily, but the poor have to spend more time and energy looking for houses, and end up with living in bad quality houses.
Finally, the fucking stupid law is unfair to the whole society because it stops people from reaching an agreement in a higher price and quality. The social freedom and liberty will be hurt.
(7) The reduced cost in discrimination.
Free market clearing: there is no customers right there when you refused one, you have to look for another one, advertise more and keep the house vacant longer. So it doesn't mean that there is no discrimination in the free market, but you have to pay for it.
With the binding price ceiling, however, there are more buyers, so landlord can now use discrimination as a tool to choose customers.
But on the other hand, Landlord so social good because they still give the house to some people.
(8) Monitoring/enforce costs
<1> long run rent supply will shift in and becomes flatter
<2> the people and resources spent monitoring are not producing goods and services that people want.If destructive things following the price ceiling law, like riots, never happen, why do we pay for the monitoring. We enforce the law, we create the problems, and now we use resources to quell the problems, isn't it a cost?
<3> The government could have done something else more constructive.
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