Question

Short Answer: For the topic of rent control, please explain how rent control works when compared to a free market. Explain the effects of rent control upon prices and quantities and the impacts to the consumer and producer surplus.

Answer 1

Rent control often refers to laws that set caps on rents, while rent stabilization generally refers to policies that regulate how often and how fast rent levels can increase.

Rent Control works in the following ways when compared to a free market;

Rent control will keep rents of units in controlled buildings lower than market rents, but if rent control results in a decline in the rental housing supply, then rents for uncontrolled units will be higher than what they would be without a rent control program in place.

Rent control limit rents that could reduce the availability of rental housing in both the short- and long-term. Rent control could induce landlords of properties covered by the law
to convert their buildings to condominium ownership, thereby taking rental units off the market. The supply of affordable rental housing could also be diminished if landlords redevelop their properties such that the new units are not subject to rent-controlled laws. Longer-term, while rent control regulations almost always exclude new construction, if rent control puts downward pressure on market rents or if developers fear that in the future new units will be subject to controls, they may not build new housing.

Limiting rent levels or rent increases under a rent control law allows lower-income individuals and families to gain access to housing they can afford in high-cost housing markets. Depending on how it is implemented, a rent control strategy can create and preserve mixed income neighborhoods and that leads to consumer surplus.

Rent control acts as a price control and also rarely leads to Producer surplus ie. Renters who gain access to rent-controlled apartments stay in those units longer than they would in a market-rate unit, even if the unit is no longer appropriate for their household (e.g., too big or too small, based on changes in household composition).