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The Social Costs of Rent Control Revisited

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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.

Suggested Citation

  • Edward L. Glaeser, 1996. "The Social Costs of Rent Control Revisited," NBER Working Papers 5441, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5441
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    1. Martin L. Weitzman, 1974. "Prices vs. Quantities," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 477-491.
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    Cited by:

    1. Ralph Bradburd & Stephen Sheppard & Joseph Bergeron & Eric Engler, 2006. "The Impact Of Rent Controls In Non-Walrasian Markets: An Agent-Based Modeling Approach," Journal of Regional Science, Wiley Blackwell, vol. 46(3), pages 455-491.
    2. Morten Skak & Gintautas Bloze, 2013. "Rent Control and Misallocation," Urban Studies, Urban Studies Journal Limited, vol. 50(10), pages 1988-2005, August.
    3. Edward L. Glaeser & Erzo F. P. Luttmer, 2003. "The Misallocation of Housing Under Rent Control," American Economic Review, American Economic Association, vol. 93(4), pages 1027-1046, September.
    4. le Blanc, David & Laferrere, Anne, 2001. "The Effect of Public Social Housing on Households' Consumption in France," Journal of Housing Economics, Elsevier, vol. 10(4), pages 429-455, December.
    5. Chang Yang-Ming & Sanders Shane D., 2010. "The Welfare Implications of Rent Control: A Rent-Seeking Contest Approach," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-20, October.
    6. 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.
    7. Micheli, Martin & Schmidt, Torsten, 2015. "Welfare effects of rent control — A comparison of redistributive policies," Economic Modelling, Elsevier, vol. 48(C), pages 237-247.

    More about this item

    JEL classification:

    • H89 - Public Economics - - Miscellaneous Issues - - - Other
    • R52 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Land Use and Other Regulations

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