RENT CONTROL IN THE SHORT RUN AND LONG RUN

One common example of a price ceiling is rent control. In many cities the local government places a ceiling on rents that landlords may charge their tenants. The goal of this policy is to help the poor by making housing more affordable. Economists often criticize rent control arguing that it is a highly inefficient way to help the poor raise their standard of living. One economists called rent control the best way to destroy city other than bombing.

The adverse effects of rent control are less apparent to the general population because these effects occur over many years. In the short run landlords have a fixed number of apartments to rent and they cannot adjust this number quickly as market conditions change. Moreover the number of people searching for housing in a city may not be highly responsive to rents in the short run because people take time to adjust their housing arrangements. Therefore the short-run supply and demand for housing are relatively inelastic.

The short-run effects of rent control on the housing market. As with any binding price ceiling rent control causes a shortage. Yet because supply and demand are inelastic in the short run the initial shortage caused by rent control is small. The primary effect in the short run is to reduce rents.

The long run story is very different because the buyers and sellers of rental housing respond more to market conditions as time passes on the supply side. Landlords respond to low rents by not building new apartments and by failing to maintain existing ones. On the demand side low rents encourage people to find their own apartments rather than living with their parents or sharing apartments with roommates and induce more people to move into a city. Therefore both supply and demand are more elastic in the long run.

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