Question

The cities of Albury and Wodonga are less than 15 minutes’ drive apart. Suppose Wodonga enacts a rent control law on apartments that puts a ceiling on rents that is well below their competitive market value. Predict the impact of this law on the competitive equilibrium rent in Albury, which does not have a rent control law. Illustrate your answer with a demand and supply graph.

Answer 1

Here, both the cities of Albury and Wodonga provide alternate housing options for people

1 ) The housing market of Wodonga

As, the Wodonga housing market enacts a rent control law that

• Puts a price ceiling on rent that is well below their competitive level ( P₀ )
• Hence, the price of housing (rent) guided by market forces would want to rise, but, as it hits the ceiling (P₁), by law, the rent can't rise any further
• Therefore, it gives rise to excess demand (Q_DQ_S) as the quantity demanded apartments (OQ_D) will be greater than the quantity supplied of apartments (OQ_S)

That's why there will be an inefficient allocation of housing as people who are willing and able to afford apartments will not be able to get one

2 ) The housing market of Albury

On the other hand, there are no such rent control laws in Albury.

• There was an excess demand for apartments in Wodonga which is less than 15 minutes' drive away.
• Therefore, we can expect at least some of those people to search apartments in Albury
• That's why it will raise demand for apartments in Albury and will shift the demand curve for apartments to the right ( D₂to D₃ )
• That's why the price of housing (rent) rises from P₂ to P₃
• Also, as there is a high rent it increases the number of apartments from OQ₂ to OQ₃