Rent control establishes a maximum rent set by the government. Rent control is an example of a price ceiling.
Detailed Explanation:
Affordable housing is becoming more difficult to obtain for many people. Rental rates in many cities have escalated faster than income. High levels of unemployment make housing more difficult to afford, which can lead to undesirable living arrangements for those with limited resources, or worse, it may force some people to live on the streets. Occasionally there is a public outcry about the inequity of these living conditions causing municipalities to place limits on rents, also known as rent control. Today, New York City, which has had some form of rent control for 50 years, sets a maximum for rent on some apartments. Rents are generally set below the market equilibrium to assist the people who could not otherwise afford the housing costs.
The lower rent (price) increases the quantity demanded as it draws residents from apartments that do not have a rent ceiling. As expected, a shortage occurs when the price is below the equilibrium price. It is common for these neighborhoods to deteriorate since there is little incentive for landlords to maintain or improve their units if they are not permitted to increase rent. Discrimination, bribes, and black markets may develop as a way to allocate housing. The video below focuses on the conditions, shortage, and allocation of a rental unit.
The graph below illustrates rent control in Hottown. Rent would equal $600 per month without rent control. The market would provide 120,000 rental houses. Assume the town commissioners establish a ceiling of $400 per month. There is little incentive for landlords to increase the number of rental units. In fact, some may convert housing into office space. The number of units available would drop to 110,000. Meanwhile, many people who did not rent before would be attracted to the lower rent and enter the market. The quantity demanded at $400 equals 140,000 units. There is a shortage of 300,000 units. Unfortunately, this will persist since there is little incentive to increase housing.
