Rent control, just like all other government-imposed price controls, places a ceiling through legislation on the rent the property owners may charge the tenants. In order to be effective, the rent control ceilings are to be fixed below the rates which otherwise would have prevailed in the market. When the rents are fixed at a level lower than that of the equilibrium levels, there will be a change in the quantity demanded. The demand will naturally exceed the amount supplied.
This situation will lead to a shortage of housing. In a competitive market and in the absence of price controls, when the quantity demanded is more than the quantity supplied, there will be a rise in the prices, which will increase the supply position. With the increased new supply, the amount of demand will go down and the equilibrium will be maintained. However, this is not the case with the rent controls. Rent controls restrict fresh supply and prevent rents from attaining market-clearing levels. Therefore, the shortage of housing prevails (Block, Rent Control, 2008).
With shortages of housing in the lower rental controlled segment, the excess demand spills over to the higher rental non-controlled segment. Typically, this segment consists of upper bracket higher rental housing units or condominiums. However, this non-controlled segment is more likely to be having a lesser quantity to offer than it would be with controls. This is because there is always the fear among the property owners in this segment that rent controls will one day cover their properties also.
The resultant high demand in the non-controlled segment and lesser quantity in supply because of the rent controls make the prices in that segment soar. Paradoxically, therefore, rent controls lead to a heavy price rise in the non-controlled segment, although the rents are lower in the controlled segment. In effect, there prevails a higher rental for housing as a whole.
Price controls in general in respect of other commodities result in shortages, reduction in the quality levels of products, and queues to get the goods, as it happens in the case of price control on gasoline. However, in the case of rent controls, because of the operations of the law to place the sitting tenants first in the queue, many of the tenants benefit from the controls on rent.
Economists unanimously agree that rent control measures are destructive and reduce the quantity and quality of dwelling places available (Alson, Kearl, & Vaughan, 1992). Rent controls also divert new investment, which otherwise would have created new buildings to be let on rent and results in poor maintenance of rental buildings (Block & Walker, 1988). Rent control affects the property owner by making him ill-afford to pay the escalating fuel bills, labor and material costs. Sometimes, the property owner may not be able to service the refinancing costs. Rent controls also affect the tenants. Although the rentals may be cheaper, he has to be satisfied with inadequate maintenance, poor repairs and painting.
Price Control on Gasoline
In the case of gasoline, paying a lesser price under a controlled regime would result in a shortage of supply, as the producers may not be willing to supply at costs lesser than their production costs. This will lead to rationing and waiting in the lines for getting gasoline.
Price Control and Allocation of Resources
In some instances where the market is controlled by monopolists, or a cartel of manufacturers controls the prices by controlling the supply, the government intervention in the form of price control would be beneficial to the society. In other cases, the market forces of demand and supply should be allowed freely to determine the price, as the competitiveness will ensure the quality of the products and the supply without interruption. Price controls for commodities in general under normal circumstances would not result inefficient allocation of resources.
References
Alson, R. M., Kearl, J. R., & Vaughan, M. B. (1992). Is there a Consensus among Economists in the 1990s? American Economic Review , 82 (2), 203-209.
Block, W. (2008). Rent Control. Web.
Block, W., & Walker, M. A. (1988). Entropy in the Canadian Economics Profession: Sampling Consensus on the Major Issues. Canadian Public Policy , 14 (2), 137-150.