Rent Control and Imperfect Matching
https://www.trulia.com/blog/trends/rent-control-sf-nyc/
We all know that rent in many major US cities is astronomical. Be it scarcity, gentrification, or a byproduct of the tech boom, sky high rents are a serious problem for soon-to-be graduates like me. It’s stressful enough trying to get a job, let alone worrying about making enough to pay for a place to live. This article discusses the means by which NYC and San Francisco try to keep their rents at a reasonable level. At face value, this seems like a great idea. Keeping rent down helps people afford a place to live, leading to more disposable income and a better economy. However, in reality, artificially controlling rent was more implications that can be counter-intuitive.
As we learned in class, in order for a set of buyers and sellers to be market clearing, each seller has to be preferred by at least one buyer without a constricting set. With as many people as there are in these major cities, this happens naturally. There are people willing to spend tens of thousands per month and there are people that want to stay below one thousand. Sellers are able to adjust their prices accordingly to create a situation where everyone is happy. This is a problem when rent control is introduced. When there is a limit on the prices, buyers’ net values are different. More buyers will prefer the houses that would usually be more expensive. This creates more constricting sets, where buyers are left without a seller because they are limited in how much they can spend.
Another application of this is the idea of a Dutch auction. The seller names a price and hopes someone buys their product. If they don’t, the price falls. The problem comes when there is a cap on how high the initial bid can be made. If the initial price is too low, the seller will get more bids than items for sale. This means there has to be an arbitrary decision to distribute the items. This leads to discrimination and overall dissatisfaction by many parties in this scenario. As a whole, rent control raises many problems that wouldn’t otherwise exist.