analyticsbox | Jul 07, 2021
Price and Rent Controls -
Sounds Great. They Don’t Work!
A Swedish socialist economist, Assar Lindbeck concluded,
‘in many cases, rent control appears to be the most efficient way presently known to destroy a city – except for bombing’.
Price controls and rent controls may sound good and can be politically expedient, BUT they do not work. They usually give you the opposite effect to what is intended.
When we are looking for solutions to problems, we often go looking in the wrong places, some things may sound good to the public, and may be politically appealing, but THEY DO NOT WORK! Inflation in goods, services or rent is a problem, especially for those with lower incomes. In today’s environment with housing shortages in many areas and escalating rents, the temptation in some localities is to slap on rent controls.
So, what happens when you try to solve that problem by putting a limit on rents? The supply of housing will slow or stop growing altogether, ending up with shortages. Why? Think about supply and demand curves in a market economy. It is the price of the item that signals to the market to produce or not produce it. The price is set in the open market between buyers and sellers. If a controlled price is set below the market price, less will be supplied, and if it is set below cost, it will not be supplied at all (this could lead to Black Markets for goods/services where the market price is illegally restored by true supply and demand factors).
Objective economists almost universally agree on this (there is never unanimous agreement among economists!). Rent controls will lead to shortages over time and reduce the quality of housing. Blatant examples of price control failures abound everywhere they have been tried. If you don’t believe this, then take a look at the real-world examples, they have never worked.
The Bottom Line
When we have an inflation issue, we must listen to the objective economists and get to the root of the problem. Price controls are a band-aid, which, over time, do not work and usually end with the opposite effect of that intended.