Natural result of limiting landlords income via rent

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Natural result of limiting landlord’s income via rent-control law b. Landlord recoups losses by cutting costs (less-maintained) c. Tenants “get what they pay for” 2. Reduced incentives for new development a. Housing developers wary of starting projects in rent-controlled cities bc it might affect their buildings 3. Misallocation of households to dwellings a. Households paying low-controlled rent are reluctant to move b. Household must pay rent-controlled apartment at free-market level c. Rent-controlled units may be left in hands of wrong people, denying access to households who value the units most
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Figure 7.1 U.S. Stock of housing around 100mill units Flow is 1-2 mill units per year Model assumes all housing is rented, ignoring owner-occupied side of market for simplicity -Perfectly inelastic supply of housing from the existing stock -The line indicates Ho sq. ft. will be rented out regardless of price per sq. ft. Demand Shock (see figure 7.2) Shock Shifts demand curve to the right, may come from increase in population of market Start at D, shifts to D’ → price starts at P, shifts to P’ New pop must fit into existing housing → people must move in w/ relatives perhaps New increase of stock surges to ‘m’ Stock achieves size of H’ e , price falls back to equilibrium Existing residents suffer higher housing costs during transition to new equilibrium Rent-control law persuaded by residents to limit surging prices from higher demand P c set higher than Pe, but lower than P’ No new construction is exempt; developers concerns about future implementations Effects of rent control on new construction
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First round housing stock increases to ‘m’ without rent control P c elicits a smaller housing stock increase equal to ‘z’ Rent control slows down construction response to demand shock Housing stock grows slowly to H(hat) W/ rent control, stock grows slower to reach H(hat) than without it, taking longer to reach equilibrium Rent control is “counterproductive” because it prolongs time to eliminate the shortage of housing Misallocation of households to dwellings under rent control Excess demand equals H(hat) - H e Without rent control, old lady forced to move with her daughter because house too expensive, so Cuban immigrants can move in With rent control, old lady can pay but must pay more, but Cuban immigrants cannot move into the house Cuban family must live in poor conditions in a smaller space of a relative They want to consumer more housing, but none available because of demand shock and R.C. The outcome isn’t right from society’s perspective bc of misallocation of housing (Rent control benefits a particular interest group; those who cannot pay more to afford their own homes) at expense of society as a whole Justifications for rent control Low-income renters receive help NYC rent control benefits distributed unsystematically Not narrowly enough focused to be useful Must provide direct subsidies to that group so it doesn’t affect whole society
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