Rent Control

Question

Read William Tucker's article on rent control (published by the Cato Institute).
Questions:
What was the original intent behind rent control?
Why did voters in Boston decide to eliminate rent control?
The author argues that rents are higher in cities in which rent control exists than in cities without rent control. Does this necessarily suggest that rent control raises the rental rate for housing? Is there another possible interpretation?
Use a diagram containing demand and supply curves to illustrate the effects of rent control on the quantity of housing demanded and supplied.
Briefly describe the "shadow market" for housing existing in New York City. How might the existence of this market account for the large difference between median gross rent and median advertised rent

Answer 1

Rent control was introduced during World War II to help keep housing prices affordable during a period in which the wartime economic expansion places substantial upward pressure on prices throughout the economy.
In Boston, rent control was eliminated because of pressure from property owners who had to pay higher property taxes due to the decline in the value of, and assessments of, rent-controlled property. In particular, property taxes were higher in those cities that did not have rent control.
While it is certainly possible that rent control is a cause of high rents, it is also possible that higher potential rental rates in some cities have lead to more political pressure to maintain rent control. The correlation between high rents and rent control, by itself, does not necessarily imply a direction for the causality.
This diagram illustrates the effect of a rent control. At the rent-controlled price (P'), the quantity of available housing (Q') is less than the competitive equilibrium quantity (Q*). The difference between quantity supplied and quantity demanded at this price results in a shortage in the market for rental housing (as illustrated above).
The shadow market is the market for non-rent-controlled housing. A shortage of rent controlled housing results in an increase in the demand for this alternative housing. This, in turn, results in higher prices in the noncontrolled sector. Since those who have low-cost rent-controlled apartments tend to "hoard" their apartments, the apartments that are available for rent are, disproportionately, those with higher rental rates.