Economics and Rent Regulation: A Call for a New Perspective

Introduction

During periods of rapidly escalating rents, housing activists often urge the adoption or extension of measures to regulate rents and to strengthen security of tenure. Their proposals, generally lumped under the heading of rent control, are soon met by an outpouring of economic analyses purporting to demonstrate that rent controls are at best misguided and, more likely, a program for unmitigated disaster. Among the most important claims is that rent regulation inevitably leads to undermaintenance, reduction of rental housing construction, housing abandonment, and misallocation of housing resources. These arguments are so universally shared by members of the economics profession that they are often used by textbook writers to educate introductory students to the “evils” of government interference with competitively determined market prices.

Economic literature is rich with arguments and counterarguments regarding other areas of government interference in market pricing such as minimum wages, agricultural price supports, fixed exchange rates, and tariffs. Yet there is virtual unanimity among economists that rent controls are “bad” and have no place in housing policy.

This paper explores the logic of the conventional economic analysis of rent regulation and discusses some of its deficiencies. It argues that the basic supply and demand model is inadequate for an understanding of the residential rental housing market and that there is little empirical data to support many of the economic criticisms made about the new generation of rent regulations. It also argues that policy makers need to consider contemporary rent regulation as more complex, sophisticated, and purposeful than a simple price ceiling in a competitive market.

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