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Chapter 4: Problem 11

The competitive equilibrium rent in the city of Lowell is currently \(\$ 1,000\) per month. The government decides to enact rent control and establish a price ceiling of \(\$ 750\) per month for apartments. Briefly explain whether rent control is likely to make each of the following people better or worse off. a. Someone currently renting an apartment in Lowell b. Someone who will be moving to Lowell next year and who intends to rent an apartment c. A landlord who intends to abide by the rent control law d. A landlord who intends to ignore the law and illegally charge the highest rent possible for his apartments

Short Answer

Expert verified
In conclusion, assuming no change in the quality of service, the current tenant might be better off due to reduced rent. The prospective tenant might be worse off, facing increased competition for apartments. The law-abiding landlord is likely to be worse off due to reduced profit while the non-law-abiding landlord's outcome would depend on whether they face legal consequences or not.

Step by step solution

01

Analyzing the Impact on the Current Tenant

The current tenant, who is already renting an apartment, experiences a decrease in rent from \$1,000 to \$750. This reduces their expenditure if the quality of the apartment remains the same. However, rent control could potentially lead to lesser maintenance and quality of service from the landlords as they are lowering their revenues. Hence, the current tenant could be better or worse depending on whether the reduced cost outweighs the potential decrease in service quality.
02

Analyzing the Impact on the Prospective Tenant

The prospective tenant, who intends to rent an apartment in the future, faces a lower price for rent. However, due to the decline in price, the demand for apartments would increase while the supply might stay constant or decrease (as landlords might not be willing to rent at the reduced price), potentially making it harder for them to find an apartment. Moreover, if landlords reduce their service quality as a response to reduced revenues, the prospective tenant could also potentially face lower living standards. Thus, the rental control could have negative effects for the prospective tenant.
03

Analyzing the Impact on the Law-Abiding Landlord

Landlords complying with rent control face reduced rents and revenues and might therefore earn less profit than before. Furthermore, with reduced revenue, they might cut back on maintenance and service, potentially hurting their reputation or reducing the demand for their apartments. They are likely to be worse off with rent control.
04

Analyzing the Impact on the Non-Law-Abiding Landlord

Landlords who choose to ignore the law might still be able to charge their old rents and maintain their revenues and service levels. However, they run the risk of facing legal consequences if detected. Thus, they might or might not be worse off depending on the chance of getting caught and potential penalties.

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