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The Social Costs of Rent Control Revisted

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  • Edward L. Glaeser

Abstract

The textbook graphical analysis of price control (see Figure 1) is inappropriate any time there is substantial consumer heterogeneity. In cases such as rental apartments, where one unit is usually the maximum bought per customer, and the downward slope of the demand function comes exclusively from consumer heterogeneity, this analysis misses a primary source of welfare loss. A major social cost of rent control is that without a fully operational price mechanism the 'wrong' consumers end up using apartments. When prices are set below market price, many consumers want to rent apartments even though they receive little utility from those apartments. Unless apartments are somehow allocated perfectly across consumers, rental units will be allocated to consumers who gain little utility from renting and rental units will not go to individuals who desire them greatly. The social costs of this misallocation are first order when the social costs from underprovision of housing are second order. Thus for a sufficiently marginal implementation of rent control, these costs will always be more important than the undersupply of housing. Figure 2 shows the losses graphically.

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Bibliographic Info

Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 1747.

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Date of creation: 1996
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Handle: RePEc:fth:harver:1747

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References

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  1. Arnott, Richard, 1987. "Economic theory and housing," Handbook of Regional and Urban Economics, in: E. S. Mills (ed.), Handbook of Regional and Urban Economics, edition 1, volume 2, chapter 24, pages 959-988 Elsevier.
  2. Suen, Wing, 1989. "Rationing and Rent Dissipation in the Presence of Heterogeneous Individuals," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1384-94, December.
  3. Richard Arnott, 1988. "Housing Vacancies, Thin Markets, and Idiosyncratic Tastes," Working Papers 722, Queen's University, Department of Economics.
  4. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Wiley Blackwell, vol. 41(4), pages 477-91, October.
  5. Gyourko, Joseph & Linneman, Peter, 1989. "Equity and efficiency aspects of rent control: An empirical study of New York City," Journal of Urban Economics, Elsevier, vol. 26(1), pages 54-74, July.
  6. Cheung, Steven N S, 1974. "A Theory of Price Control," Journal of Law and Economics, University of Chicago Press, vol. 17(1), pages 53-71, April.
  7. Olsen, Edgar O, 1972. "An Econometric Analysis of Rent Control," Journal of Political Economy, University of Chicago Press, vol. 80(6), pages 1081-1100, Nov.-Dec..
  8. Barzel, Yoram, 1974. "A Theory of Rationing by Waiting," Journal of Law and Economics, University of Chicago Press, vol. 17(1), pages 73-95, April.
  9. Deacon, Robert T & Sonstelie, Jon, 1989. "The Welfare Costs of Rationing by Waiting," Economic Inquiry, Western Economic Association International, vol. 27(2), pages 179-96, April.
  10. Deacon, Robert T & Sonstelie, Jon, 1991. "Price Controls and Rent Dissipation with Endogenous Transaction Costs," American Economic Review, American Economic Association, vol. 81(5), pages 1361-73, December.
  11. Smith, Lawrence B & Rosen, Kenneth T & Fallis, George, 1988. "Recent Developments in Economic Models of Housing Markets," Journal of Economic Literature, American Economic Association, vol. 26(1), pages 29-64, March.
  12. Richard Arnott, 1995. "Time for Revisionism on Rent Control?," Journal of Economic Perspectives, American Economic Association, vol. 9(1), pages 99-120, Winter.
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Cited by:
  1. Bloze, Gintautas & Skak, Morten, 2009. "Rent control and misallocation," Discussion Papers of Business and Economics 7/2009, Department of Business and Economics, University of Southern Denmark.
  2. Edward L. Glaeser & Erzo F. P. Luttmer, 1997. "The Misallocation of Housing Under Rent Control," NBER Working Papers 6220, National Bureau of Economic Research, Inc.
  3. Mason, Carl & Quigley, John M., 2007. "The curious institution of mobile home rent control," Journal of Housing Economics, Elsevier, vol. 16(2), pages 189-208, June.

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