The total social welfare is maximized before the introduction of rent controls.
In short run after imposing a binding price ceiling for rental accommodation, a shortage appears. The lower price leads to an increasing in demand and a decreasing in supply. Both landlords and tenants cannot quickly respond to the change of market conditions. The number of houses for rent cannot be adjusted in early, and the tenants also need time to adjust their home. ‘Therefore, the short run supply and demand for housing are relatively inelastic’ and ‘the main effect in the short run is to reduce rents’ (Gans, King & Mankiw 2012, p.123).
However, in the long run, the landlords have no reason to repair and improve the quality of their house as well as adding new accommodations because the rent cannot go higher. People flock to the city to find their low price house. This will lead to increase the shortage in rental market. For example, in Washington, D.C., after imposing rent control, the number of apartments has fallen from 199,100 to 175,900, ‘and new construction has virtually ceased’ (Bandow 1990, p.327).
Diagram 4 shows consumer surplus and producer surplus before and after imposing binding price ceiling on rental accommodation. Consumers and producers surplus without...