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Lecture Issues in economics today - Chapter 34

The following will be discussed in this chapter: A short history of the labor movement, labor legislation, the economic power of unions and employers, the economic power of monopsonies, collective bargaining, the strike. | Chapter 34 Rent Control Chapter Outline RENTS IN A FREE MARKET REASONS FOR CONTROLLING RENTS CONSEQUENCES OF CONTROLLING RENTS WHY DOES RENT CONTROL SURVIVE 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. 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 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 landlord’s interests because such a rent would not attract tenants to the landlord’s building. What’s 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. Quantity Rent Demand Supply A R* B C 0 Q* Rmin QS QD E F Demonstrating the Case Against the Rent Control Value to the renters: 0AEQs Renters pay landlords ORminFQs The variable cost to landlords: OBFQS Consumer Surplus to renters: RminAEF Producer Surplus to landlords: BRminF People who must move out: Q*-QS 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. Comparing the Short Run and the Long Run Quantity Rent Demand Supply R* C 0 Q* Rmin QS QD Quantity Demand Rent Supply R* C 0 Q* Rmin QS QD The Short Run The Long Run 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 person’s executor. 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.