Markets and efficiency
Today: Why controlling the
market is often bad for efficiency
Rent control in Isla Vista
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Who thinks it is a good idea? Why?
Who thinks it is a bad idea? Why?
Rent control in Isla Vista
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Suppose that rent control was
implemented in Isla Vista, at $1200 per
month for a 2-bedroom apartment
Who currently lives in I.V.?
Who would want to live in I.V. if rent
control was passed?
Outcome
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More people want to live in I.V. than
apartments are available
This, by itself, will lead to a shortage of
apartments in I.V.
Some of you will be very unhappy that
you cannot live in the home of first
choice
What will managers do?
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Apartment managers will
know that a flood of
applications will come in
for leases starting in
June and September
They will be able to pick
and choose who lives in
their apartments
What will managers do?
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Other methods can be used to choose
tenants
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Increased credit requirements
Increased deposits
Increased application fees
Reduced amenities (low quality carpet,
infrequent painting and maintenance)
(Illegally) accept bribes
What will happen over time?
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Nobody will want to build new
apartments for rent, lowering the longrun supply
Some apartments may convert to
vacation condos if short-term rentals
are not included in rent-control law
More grad students, post-docs, faculty,
and staff will likely live in I.V.
But wait!
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Don’t I have a right to live in I.V.? No
Unless the government steps in once
again, rent control will lead to a sizable
excess demand
Long-run consequences of
rent control
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Suppose that the
long-run equilibrium
of apartments in I.V.
is $2,400 per month
rent, and 2000 units
rented
With rent control of
$1,200/month, we
see excess demand
($100s)
24
excess
demand
12
(100s units)
Long-run consequences of
rent control
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Notice that supplied
apartments for rent
are cut in half in the
long run with rent
control
Only 1/3 of the
people that want
apartments will get
them
($100s)
24
excess
demand
12
100s units
Let’s survey the class again
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Rent control in Isla Vista
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
Who thinks it is a good idea? Why?
Who thinks it is a bad idea? Why?
Rent control summary
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Who wins?
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People renting in I.V. w/rent control
(maybe)
Who loses?
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People who want to live in I.V. w/o rent
control but are unable to find an apartment
Apartment owners and managers
Some people currently renting in I.V.
Elasticity and price control
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How does elasticity
play a role in price
controls?
We need to look at
elasticity on both
the supply and
demand sides
($100s)
24
excess
demand
12
100s units
Elasticity and price control
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($100s)
Demand
Q, 20  30 (↑50%)
P, 24  12 (↓50%)
ε = %ΔQ / %ΔP = 1
Supply
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Q, 20  10 (↓50%)
P, 24  12 (↓50%)
ε = %ΔQ / %ΔP = 1
24
excess
demand
12
100s units
Elasticity and price control
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When both price
elasticity of supply
and demand are 1, a
price control 50%
below the equilibrium
price leads to an
excess demand equal
to the initial
equilibrium quantity
($100s)
24
excess
demand
12
100s units
Elasticity and price control
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What if each elasticity is smaller than in
my example?
What if excess demand in I.V
apartments is only 200 units instead of
2000 units?
None of the arguments change,
although the severity may decrease
some
Price control and surplus
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With lower consumption, total economic
surplus goes down
One side of the market may make
gains, however
Price control and surplus
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Equilibrium without
price controls
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Price: B
Quantity: Q1
Consumer surplus:
ΔABC
Producer surplus:
ΔBCD
Total surplus: ΔACD
Price ceiling at G
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Quantity supplied:
Q2
Excess demand:
Q3 – Q2
Consumer surplus:
Trapezoid AEFG (at
most)
Producer surplus:
ΔDFG
Price ceiling at G
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Total surplus is
trapezoid ADFE (at
most)
ΔCEF is potential
surplus that is never
gained
Price ceiling at G
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Are consumers
better off with price
controls?
Gain
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Rectangle BGFH
Losses
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ΔCEH
Queuing costs
Price ceiling at G
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Suppliers are worse
off
Producer surplus
falls to ΔDFG
Summary/Other ideas
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A price ceiling, such as rent control, is
an ineffective means of providing lowcost rent to those that want it
Maybe there is another way of
achieving a goal of low rent
Two possible ways of doing this
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Subsidies to students that rent
First-come, first-served policy