Price Controls

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Price controls are usually justified as a way to help consumers, but those who advocate them often ignore their incentive effects. Consider, for example, rent controls, a popular form of a price ceiling. If the demand curve and the short-run supply curves are inelastic, then a sizable drop in rents may result in a very small shortage. The benefits to consumers (lower prices) will, in the judgment of most, clearly outweigh the costs to consumers (less housing). Further, the short-run supply of housing should be quite inelastic because apartment buildings take time to build and even longer to wear out.

However, incentives matter a great deal in the long run. Effective rent controls discourage the construction of new buildings and encourage the retirement of old buildings. Apartment buildings wear out faster when they are not properly maintained, and if an owner cannot pass on the cost of improvements, his incentive to maintain the building is lessened. With time, sellers will approach a long-run supply curve that is much flatter than the short-run curve, and the small initial shortage may become quite large. Rationing will be on a first-come, first-served basis, and under-the-table payments will be encouraged. Even if the long-run costs to consumers outweigh the benefits, the program may remain politically popular because those who benefit by living in rent-controlled apartments can vote, whereas those harmed cannot vote since the shortage of housing forces them to live in other political jurisdictions.

New York City has had a system of rent controls since World War II. It is a complex program, without all rental property controlled, yet it has had consequences that a supply and demand model leads one to expect. Obtaining an apartment in a rent-controlled building is very difficult, and the city has had a major problem with property abandonment. Those planning to abandon (which is illegal) try to maximize their cash flow by cutting or eliminating maintenance...
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