Question

In: Economics

1. What is a ‘price ceiling,’ exactly? 2. What is ‘pure’ rent control, in theory? 3....

1. What is a ‘price ceiling,’ exactly?

2. What is ‘pure’ rent control, in theory?

3. What are the GOALS of a ‘pure’ rent control law, or ordinance? I mean, why would a city government PASS a ‘pure’ rent control law in the first place? What are the goals?

4. A. In theory, why does the implementation of ‘pure’ rent control fail to achieve those goals? What “goes wrong,” in theory? B. In theory, what happens to the Supply Curve and the Demand curve one year after a pure rent control law has been put into effect?

5. A. How do the ‘four alternative forms of allocation’ manifest themselves in a city with ‘pure’ rent control, in theory? B. What, exactly, is “black market” activity? How can it harm society, in theory?

6. Why do most cities that CLAIM they have ‘rent control” end up allowing the landlord to raise the rent 5% a year or 7% a year? Doesn’t this undercut the goals of any rent control law??

7. Some cities are imposing a true ‘ceiling’ or cap or ‘freeze’ on rents during the pandemic. Is this a good idea? Why?

8. Should our state outlaw all evictions during the pandemic? Why or why not?

Solutions

Expert Solution

1. Price ceiling is a situation when the price charged is more than or less than the equilibrium price determined by market forces of demand and supply. It has been found that higher price ceilings are ineffective.Price Celiing is the minimum price set by the government which does not allow the current price to be higher. Price ceilings prevent a price from rising above a certain level. When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result.

2. Rent control is a government program that places a limit on the amount that a landlord can demand for leasing a home or for renewing a lease.In its purest form, rent control is a freeze on rents.It is this hard form of rent control.When rent control is imposed, a price ceiling is created that artificially lowers the price that landlords can charge for rent. The amount of housing supplied will drop in reaction as property owners see smaller incomes from renting out units

3. Goals of Rent-control laws are to maintain existing affordable housing and to limit disruptions caused by rapid rent increases to ensure landlords receive enough compensation to maintain their properties and earn a reasonable profit. Such laws might also have secondary goals of protecting tenants from unjust eviction, creating mixed-income neighborhoods, and decreasing tenant turnover.Most rent control laws limit the amount a landlord can increase rents on existing tenants.Rent control reduces the supply of decent housing since landlords would rather convert a building to condos or adapt it to commercial use than abide by a law that limits their profits. Investment in new rental housing screeches to a halt. Maintenance of buildings under rent control is lax or nonexistent because of the poor return on investment.

4. Rental prices in many U.S. cities are rising far faster than wages for moderate-income jobs. Rent control, especially when left in effect over an extended period of time, can lead to a sharp reduction in profit, and in some cases even a loss for investors. This occurs because the rent control can keep rental prices below the market rental price. Overtime this can lead to a situation where the investor’s income is below the costs associated with owning the rental property.Rent control enables moderate-income families and elderly people on fixed incomes to live decently and without fear of a personally catastrophic rent hike. Neighborhoods are safer and more stable with a base of long-term residents in rent-controlled apartments Rent control can also lead to decay of the rental housing stock; landlords may not invest in maintenance because they can't recoup these investment by raising rents.Due to the fact that rent control is government based, the local government must establish systems which handle the process of determining costs (and dealing with complaints). This adds additional expenses, which must be covered by taxes.When rent control affects the availability of properties, this can lead to an added expense for leasing a rental property (and signing a lease agreement). In many areas where rent controls are used extensively, it becomes necessary for those interested in renting a property to pay what is known as a finder’s fee. This can often outweigh the savings, which may be experienced by renting in a rent controlled area.

4 B) But if rents are established at less than their equilibrium levels, the quantity demanded will necessarily exceed the amount supplied, and rent control will lead to a shortage of dwelling spaces. In a competitive market and absent controls on prices, if the amount of a commodity or service demanded is larger than the amount supplied, prices rise to eliminate the shortage (by both bringing forth new supply and by reducing the amount demanded). But controls prevent rents from attaining market-clearing levels and shortages result. As in the case of other price ceilings, rent control causes shortages, diminution in the quality of the product, and queues. But rent control differs from other such schemes.


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