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Consequences of the Government imposing a "rent ceiling" in the rental accommodation market

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Introduction

Consequences of the Government imposing a "rent ceiling" in the rental accommodation market. In most modern economies, governments take an active role in the economy. Governments around the world today intervene in different markets, sometimes to promote efficiency and in other circumstances to prevent efficiency. Government intervention can be justified on efficiency grounds when the four efficiency conditions are not met. The four main efficiency conditions are mainly: external cost, imperfect information, imperfect competition and external benefit. Rent control (government-mandated price controls), is a law placing a maximum price / rent ceiling on what landlords may charge tenants. (Block W, 2002) For rent control to have an effect, the rent level must be set at a rate below that which would otherwise have prevailed. If rents are established at less than their equilibrium levels, demand will exceed supply and rent control will lead to a shortage of dwelling spaces. Absent controls on prices, if the amount of a commodity or service demanded is larger that the amount supplied, prices rise to eliminate the shortage (by both bringing forth new supply and by reducing the amount demanded). ...read more.

Middle

A further consequence is in the deterioration of city revenues, as the value of the property base for taxes continues to diminish. Cities can go bankrupt or cannot continue to supply basic services. (Block W,2002) Inhibition of new construction is when rents are forced below the market price, rent control reduces profitability of rental housing and directs investment out of the market and into more profitable markets thus construction declines and existing rental housing is converted to other uses. Deterioration of existing housing: rent control can lead to a drop in the quality and quantity of existing rental stock, as providers faced with declining revenues maybe forced to substantially reduce maintenance and repair of existing housing. Reduced property tax revenues: rent control also reduces the market value of controlled rental property, both in absolute terms and relative to the increase in property values in unregulated markets. Implications of this reduction can be significant, as taxable assessed rental property values decline relative to unregulated property. ...read more.

Conclusion

In conclusion, the pressure for rent control comes from those who consider only its imagined short-run benefits to one group in the population. But when we consider its long-run effects on everybody, including the tenants themselves, we recognize that rent control is not only increasingly futile, but increasingly destructive the more severe it is, and the longer it remains in effect. Economists have long considered rent control a failed housing policy. As Dr. Anthony Downs, a leading economist and nationally-recognized expert on housing policy, concluded in a recent report on rent controls, other than during wartime, the economic and social costs of rent control "almost always outweigh any perceived short-term benefits they provide." He also found that rent controls are both "unfair to owners of rental units and damaging to some of the very low income renters they are supposed to protect." Given this fact, reliance on rent control as a solution to the problem of housing affordability cannot be justified. ...read more.

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