The Social Costs of Rent Control Revisited
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.
|Date of creation:||Jan 1996|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- M. L. Weitzman, 1973.
"Prices vs. Quantities,"
106, Massachusetts Institute of Technology (MIT), Department of Economics.
- 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.
- 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.
- 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.
- Richard Arnott, 1995. "Time for Revisionism on Rent Control?," Journal of Economic Perspectives, American Economic Association, vol. 9(1), pages 99-120, Winter.
- 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.
- 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.
- Andrei Shleifer & Robert Vishny, 1992.
"Pervasive Shortages under Socialism,"
RAND Journal of Economics,
The RAND Corporation, vol. 23(2), pages 237-246, Summer.
- Arnott, Richard, 1989.
"Housing Vacancies, Thin Markets, and Idiosyncratic Tastes,"
The Journal of Real Estate Finance and Economics,
Springer, vol. 2(1), pages 5-30, February.
- Richard Arnott, 1988. "Housing Vacancies, Thin Markets, and Idiosyncratic Tastes," Working Papers 722, Queen's University, Department of Economics.
- 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 1361-1373, December.
- 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 1384-1394, December.
- 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.
- 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..
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:5441. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.