Imposing a Maximum Rental Price
Short run: fixed supply of rental housing
- redistribution from landlords to tenants
Long run: elastic supply of rental housing
- redistribution from landlords to tenants BUT also between tenants
- efficiency loss of total market surplus
Note: The efficiency loss may be much larger than standard deadweight loss because price controls prevent selection of buyers with the highest willingness to pay.
The Broader Insights
- Trade-off for governments between redistribution and efficiency
- Deadweight loss comes from the change in behavioural responses of market participants (here: drop in supply)
- Deadweight loss is larger when behaviour is more elastic (here: flatter supply curve)
See Evidence on Rent Controls in San Francisco
Overall Policy Assessment
Fundamental issue: high demand, scarce supply
Rent controls make supply even scarcer
- take rental units off the market
- slow housing construction
- imbalance between demand and supply worsens
Other issues:
- inadequate investment incentives
- queues and underground market
- lock-in effects
Use a demand-supply diagram to analyse how a minimum wage affects the labour market?
- What constitutes supply and demand?
- Does a minimum wage entail a deadweight cost?
- Does it make some workers better off? All workers?