Rent control is a common example of price ceiling. Under this the government fixes a legal maximum value on rents that landlords may charge their tenants. The goal of this policy is to help the poor by making the housing more affordable.
In the short run time period, landlords have a fixed number of apartments to rent and can't adjust this number. The number of people searching for housing in a city may not be highly responsive to rents in the short run making both the short run supply and demand for housing relatively inelastic. Thus in the short run the rent control causes shortage. Yet because the supply and demand are inelastic in the short run, the initial shortage caused by the rent control is small. The primary effect in the short run is to reduce rents. Hence it is efficient in the short run.
However in the long run, the landlords respond to low rents by not building new apartments or by failing to maintain the existing ones. On the demand side the low rents encourage more people to seek apartments available on rent. This makes both demand and supply more elastic in the long run. The quantity of housing supplied falls substantially and that of housing demanded rises sharply leading to a large shortage of housing in the long run. Thus it becomes inefficient in the long run.
In rent control the landlords use various mechanisms to ration housing. Some keep long waiting lists while others give preference to particular groups of tenants and may discriminate on the basis of race. Some may offer apartments to those willing to make under the table payments and these bribes bring the total price of the apartment (including the bribe) closer to the equilibrium price defeating the purpose of rent control. Landlords loose the incentive to maintain their apartments. With acute shortage and long waiting lists the landlords become unresponsive to tenants’ concerns. The tenants may get lower rents to pay but only at the cost of lower-quality housing. Hence tenants are losers and landlords are winners. The regulation suppresses the construction of new rental buildings and force landlords and indirectly taxpayers to subsidize those tenants who have one of the regulated apartments. Thus the system over time becomes unfair. However if additional regulations are imposed along with rent controls like laws that make racial discrimination in housing illegal and require the landlords to provide minimally adequate living conditions the tenants are better off. These laws are however costly and difficult to impose.
It is very difficult to get rid of rent control in New York that started as temporary measure during World War I. "Nelson's Third Law," says that the worse a government regulation is, the harder it is to get rid of it. Some people believe that both tenants (who receive cheap rent regulated housing) and some landlords (who found tenants as per their interest over who gave them bribes) actually profit from the rent control. These people then create a strong lobby for retention of the rent control policy. Specifically when the lobby group is of tenants that forms a near-majority of a municipality, the issue of scraping rent control becomes politically sensitive and the policy becomes difficult to evict.
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