Lecture Issues in economics today - Chapter 34

The following will be discussed in this chapter: A short history of the labor movement, labor legislation, the economic power of unions and employers, the economic power of monopsonies, collective bargaining, the strike.

Chapter 34 Rent Control   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Chapter Outline • RENTS IN A FREE MARKET • REASONS FOR CONTROLLING RENTS • CONSEQUENCES OF CONTROLLING RENTS • WHY DOES RENT CONTROL SURVIVE McGrawưHill/Irwin â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved Rent Control Laws that restrict the ability of landlords to raise the rent from one year to the next • This is a form of a price ceiling (the level above which a price may not rise) • These laws are more prevalent on the coasts: Boston, New York City, more than 100 cities in New Jersey, and San Francisco and San Jose in California • Such laws typically come into being when market rents are rising quickly • The east coast laws date from World War II and the west coast laws date from the prices during the 1970s   skyrocketing land   McGraw­Hill/Irwin © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Rents in a Free Market Rent Supply A • • R* C • B Demand Q*   McGraw­Hill/Irwin Quantity   • • Value to the renters: • 0ACQ* Renters pay landlords • OR*CQ* The variable cost to landlords: • OBCQ* Consumer Surplus to renters: • R*AC Producer Surplus to landlords: BR*C â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved Rent Control Relevance • Rent control is only relevant if it is below the market rent • A controlled rent above the market rent is irrelevant – The landlord must accept the market rent to attract tenants – Charging above the market rent is not in the landlord’s interests because such a rent would not attract tenants to the landlord’s building   McGraw­Hill/Irwin â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved Whats Wrong with the Rent Control The gain to the renters who keep their apartments and pay less rent is less than the loss to the losers who are – people who lose their apartments and – landlords who receive less rent   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Demonstrating the Case Against the Rent Control Rent Supply A E R* C Rmin • Value to the renters: • 0AEQs • Renters pay landlords • ORminFQs • The variable cost to landlords: • OBFQS • Consumer Surplus to renters: • RminAEF • Producer Surplus to landlords: • BRminF F B QS   McGraw­Hill/Irwin Q* QD Demand • Quantity   People who must move out: Q*-QS â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved The Short and Long Run Consequences of Rent Control • In the short run supply and demand for apartments in inelastic Rent control lowers rent without much displacement of renters • In the long run supply and demand for apartments gets more elastic and the negative consequences become more pronounced   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Comparing the Short Run and the Long Run Rent Rent Supply R* Supply R* C Rmin C Rmin QS Q* QD Demand Quantity   Q* QD The Long Run The Short Run McGraw­Hill/Irwin QS Demand Quantity â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved Consequences of Rent Control Landlords have a motivation to get tenants out of their building by failing to maintain it • Renters have an interest in “selling” (on an illegal black market) their rights to a lease • People go to funerals to negotiate subleases from the dead person’s executor   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved Why Rent Control Survives • The people who benefit from Rent Control (people who continue to live in the same apartment for years) are the same people who vote • By definition, someone who is displaced from an apartment or someone who would like to move in but cannot find a place, cannot vote to overturn the law because they not live in the city   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved  ... â2002TheMcGrawưHillCompanies,Inc.,AllRightsReserved Consequences of Rent Control Landlords have a motivation to get tenants out of their building by failing to maintain it • Renters have an interest in “selling” (on... Charging above the market rent is not in the landlord’s interests because such a rent would not attract tenants to the landlord’s building   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved.. .Chapter Outline • RENTS IN A FREE MARKET • REASONS FOR CONTROLLING RENTS • CONSEQUENCES OF CONTROLLING RENTS • WHY DOES RENT CONTROL SURVIVE   McGraw­Hill/Irwin   © 2002 The McGraw­Hill Companies, Inc., All Rights Reserved