The Economics of Price Controls

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Introduction

The laws of supply and demand are subject to external forces such as government restrictions. The US has implemented some of these restrictions like minimum wage and rent controls. However, economic analyses indicate that they may not be the best way to go. It is therefore critical to examine the benefits and detriments of such controls and then establish whether the country is heading in the right direction.

Probable consequences of rent controls

Rent controls do not address the housing shortages that they are meant to curb and instead only serve to perpetrate a cycle of more rent controls. This is because the process fails to deal with the underlying economic reasons behind unfair housing and instead focuses on the symptoms of the problem. Additionally, rent controls cause tenants who have access to decent housing to operate under the false notion that there is no housing scarcity. Consequently, there is no incentive for them to minimize space wastage by sharing it with willing buyers. This means that such a scarce resource is inefficiently allocated and new entrepreneurs interested in offering rental houses will be discouraged to do so as they may not get a return on their investments. In the end, this necessitates a need for more and extreme rent controls thus perpetuating a vicious cycle. (Friedman and Sigler, 1946)

Rent controls also represent a wrong pathway in dealing with the problem of housing shortages. In this regard, such an approach is merely dealing with a symptom of the larger problem of inflation. Rent controls represent a haphazard and misguided way of curbing this difficulty. Instead a better solution would be dealing with unequal wealth and income. The government has three alternatives that would eliminate this problem and they are; taxation, stock money controls and governmental economics. (Friedman and Sigler, 1946)

Results of an immediate removal of rent control based on supply and demand laws

If rent controls were immediately removed, then it is likely that rent prices for new tenants would go up. However, existing tenants are unlikely to be affected by these increases as most of them are protected by leases. This rise would be observed in the short term but with time more houses will be on offer for rent and this will reduce their costs. (Gillespie, 2007)

Removal of rent control is also likely to cause people to be economical with the spaces they have. This is because they will realize the real value of the property that they are currently residing in. Those persons who find that they have excessive space will have an economic incentive to double up with other individuals if they can earn an extra source of income. It should be noted here that the immediate repercussion will be felt by more people than with rent controls but the truth remains that it will spread such a burden evenly throughout the entire US populations. The method will therefore go a long way in promoting equality in housing. While rent controls would only protect existing tenants, a free market sector would ensure that new and existing tenants both have equal chances of getting housing.

Effects of minimum wage in the market

Minimum wage is the opposite of rent controls because while the latter imposes a maximum price, the minimum wage imposes a minimum price that employers can pay their workers. Therefore, minimum wage is a price floor and is defined as the mandatory minimum price that companies can pay either their part time or full workers once they are recruited into the firm. When analyzing effects of minimum wage, one can look at labor as a commodity. Minimum wage causes the quantity supplied to be higher. This is because more people will be encouraged to look for jobs when they are assured of a certain minimum price. However, this set price is a disincentive to employers because the cost of employing workers is likely to increase their overall production costs. Consequently, the quantity demanded falls short of the quantity supplied. In the end, more US producers will resort to other techniques that will lessen the need for more employees and this undermines their competiveness. In the end, unemployment levels will continue rising and this will reduce the standard of living within the country. Another complication that arises out of minimum wage is inequality. Strong evidence illustrates that this price floor tends to boost the quality of income for middle class households as more jobs are available to them while single parent homes, minority groups, the elderly and other underprivileged groups are perpetuated into a cycle of unemployment. This drastically increases poverty levels in the country. (Smith & Ehrenberg, 2005)

Why rent control remains in place even when economists show their negative effects

Some people still continue to support rent controls because they believe that this is a method of protecting tenants from exploitation by landlords. They affirm that if rent controls are eliminated then landlords will be free to dispose off certain tenants as they wish. It is quite easy to see the controversy in such a statement; most of the groups arguing about tenant rights forget that rent arrangements form part of the property rights within this country. Here, it is stated that persons have an equal right to exchange property so long as this does not impede others from doing the same. Imposing an involuntary condition through fixed rent controls contravenes these rights and is therefore controversial. In the end, scarce resources are not efficiently located because a landlord cannot freely select the right tenants for his business when the value of his property is beyond the price ceiling. (Batemarco, 1997)

Rent control advocates also claim that certain Cities in the country would be too expensive to live in without rent controls and that it is therefore necessary to impose such sanctions. The problem with this belief is that it causes some tenants to occupy properties that they have not qualified for. In a free market economy, parties must consume only what their standard of living accords them. In other words, if they wish to live in an affluent City, then they must increase their output (by getting better jobs or working hard in their current ones) so as to manage the expense of a more affluent living standard. However, rent controls prevent people from doing this as it makes them think that they can consume more without producing more; a true deterrent to allocation and distribution of scarce resources. (Batemarco, 1997)

An alternative policy measure for fair housing is the use of higher rents. The logic behind such an argument is that if something is already scarce, then demand for the product is much higher than anticipated. Consequently, its prices will go up because of the need for this commodity. When this occurs, people will be discouraged from excessively consuming that product and those who have it will be encouraged to use it economically. As is the case with housing, persons will be encouraged to double up spaces to house seekers. Also, these high prices will be an incentive for housing suppliers who will then be encouraged to offer more houses for rent and in the end; it will solve housing shortages or inequalities. (Friedman and Sigler, 1946)

Conclusion

Price controls are ineffective against achieving the objectives for which they had been set. In other words, one price control leads to more price controls and more drastic effects on the economy. A free market would be the best solution to dealing with inconsistencies in various markets and any other problems with inequality should be handled by macroeconomic initiatives such as heavy taxation and controlling liquid resources.

References

Batemarco, R. (1997). Three fallacies of rent control. The Freeman. Web.

Friedman, M. and Sigler, G. (1946). Roofs or Ceilings? The Current Housing Problem. Web.

Gillespie, A. (2007). Foundations of economics. Oxford: OUP.

Smith, R. & Ehrenberg, J. (2005). Modern labor economics. NY: Harper Collins.

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