Question

Market Behavior: Rent Controls - There are several major universities and colleges in Boston, Massachusetts. It is a city with high rents and low vacancies. Students attending these schools have complained that they cannot find “affordable” housing in areas near their schools and asked the City Council of Boston to impose rent controls at rates student could afford. As an economics student, the Council has asked for your opinion concerning this request. What is your opinion?

Answer 1

Rent control to reduce rent is also termed as price ceiling. Here, price is reduced intentionally by the government in order to make rental houses affordable to the poor. Such an reduction in price from the market equilibrium price causes excess of demand in the market. As shown in the figure below, point E denotes equilibrium , where equilibrium price is P1 and quantity is Q1, when government reduces price to P2, causing an interruption in the market equilibrium, excess demand is visible. ( refer to the price P2 level in the demand and supply curve)

If city council of Boston accepts the demand of students and reduces its price by exerting conrol over the rent prices, it will negatively affect the market as vacancies are very low already (stated in the question). Moreover a reduction in price by Boston will discourage owners to rent their appartment as it is no more profitable as before thus resulting to more shortage of rented houses. However rising price is also a concern as it affects the marginalised poor. This is thus a topic of debate as it has both benefit and side affects. Hence it would be much better if universities and colleges are asked to set up residential housing facilities so that they can help marginalised people get housing facilities at lower price by the respective universities and colleges keeping market unaffected. However if such an option is not acceptable by the colleges and universities, then price control can be exerted by keeping in mind that the price to be fixed must benefit both suppliers and students so that it doesnt affect the market.