Economics - General

The Problem with Rent Control

Most economists rail against rent control.  Rent control distorts the real estate markets.  Individuals in rent controlled apartments are receiving ‘rents’ (in the economic sense) because they live in higher quality apartments than they are paying for.  In addition, it provides them a strong incentive to stay in their apartment even if they would prefer to move to a different apartment or location.  Rent control also limits the supply of new housing because developers know they will not be able to earn a profit for new housing if the rents are held down.

Those who support rent control argue that the program helps people who can not afford to live in their house.  But a more effective way to may housing affordable would be to give direct cash grants to poor individuals so they can afford the market rents.

On one of my days off, I was watching a Law and Order episode and found another drawback to rent control, it distorts the landlord’s incentive.  Oftentimes, rent control remains with a unit until the tenant moves out.  Typically, a landlord has an incentive to maintain an apartment quality to keep their current tenant or attract new ones.  They balance the cost of making improvements against the cost of losing their tenants.

For a rent controlled unit, however, the landlord had an incentive to minimize the quality of the apartment.  On the T.V. show, the landlord would turn off the heat and lock tenants out of their apartment for a day or two at a time.  The goal of this was to get the tenants to leave their unit, and then rent the apartments to new tenants at market rents.  Of course, no landlord should turn the heat off in their apartment building.  Those who do should be punished.  However, no law should give landlords such a large financial incentive to do provide such bad residential services.

Society should help individuals find a home who can’t afford a place to live.  Rent control, however, is not the solution.

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