11/30

Economics of Price Controls: Price Ceilings and Rent Controls

• Rent: Two meanings
• payment for use of a unit
• something that is accrued to you that was not the result of your abilities; income not earned(economic meaning)
•  ex: landlord receiving a rent of $200 in addition to his normal  prices
• should this kind of rent be taxed
• Equilibrium [important]
• Market
• example alpha: P= $1000 Q= 12,000 (set as 1 Q)
• Controlled
• change from market equilibrium
• example alpha (cont.): P= $800 Q1= 14,000 Q2= 10,000 (Binding)
• Q1 is now more than 1 Q this means: this equilibrium is NOT MARKET CLEARING
• Price Ceiling [important]
• Binding: when it is set below the level that would have brought about market clearing
• Does lowering the price of a unit means it has become more scarce? [important]
• It depends on reason for lowering the price
• price ceiling change for a controlled equilibrium = no
• no explanation available = yes
• Consequences of Rent Control
• Reduced availability and harder to get
• many people, few apartments
• Lower Quality
• have to tolerate it because others are willing to have your room
• Other $ will be paid
• Black Markets will emerge
• Misallocations
• side deals left on the table; this time people who value the unit the most won't get it
• Other Markets are impacted
• increased prices in the city causes shortage of consumers who will look to live outside of the city which will raise their prices
• look at example alpha, Q1 to Q2 there is a shortage of 4,000 apartment renters
• Fairness
• what about the poor
• Discrimination
• the costs of doing so are not felt; many people will come to rent
• race, looks, size, gender, etc.
• Monitoring/Enforce Costs: 3
• long run supply curve will shift in and become flatter
• monitoring itself is destructive
• no production of goods and services that people want; 
• taxes to fund them which is costly
• Price ceilings are destructive and too constraining 
• Recitation
• public good- no one is excluded from sharing the benefits
• free rider- person who benefits from a public good without contributing to it