Tag: Price controls

Rent Control in Europe

Image generated by GTP-4o of “an apartment building in Amersterdam.”

Recent articles in the media discussed the effects of rent control on the market for apartments in the Netherlands and in Stockholm, the capital of Sweden. The articles describe a situation that is consistent with the analysis in Chapter 4, Section 4.3. Figure 4.10 shows the expected results from the imposition of a rent control law. Some renters gain by living in apartments at below the equilibirum market rent, but the shortage of apartments resulting from the price ceiling means that some renters are unable to find apartments. As with other price controls, rent ceilings impose a deadweight loss on the economy, shown in the figure as the areas B + C.

An article on bloomberg.com discusses the effect on the market for apartments in the Netherlands of the passage in June of the Affordable Rent Act. The act raised the fraction of apartments covered by rent control from about 80 percent to 96 percent. The expansion of rent control appears to have led to an increased shortage of apartments. The article quotes one teacher who has been unable to find an apartment for her family as saying: “The cost isn’t the problem, but a real shortage of housing is.”

The article indicates that some landlords who doubt they can earn a profit under the new law are selling their buildings. If the buildings are converted to other uses, the shortage of apartments will be increased. The article mentions another unintended change to the apartment market from the provision of the new law that requires leases to be open-ended. Some landlords fear that as a result they may find themselves unable to evict tenants, however troublesome the tenants may be. In response, these landlords are giving priority to foreigners, who they believe are likely to move more often.

An article in the Economist looks at another aspect of rent control. The following figure is reproduced from Solved Problem 4.3. It shows that because rent control leads to a shortage of apartments it creates an incentive for tenants and landlords to agree to a rent that is higher than the legal rent ceiling. In this example, renters who are unable to find an apartment at the rent control ceiling of $1,500 may bid up the rent to $3,500—which in this example is $1,000 higher than the market equilibrium rent in the absence of rent control—rather than not be able to rent an apartment. Clearly, renters paying this illegal rent are worse off than they would be if there were no rent control law.

According to the article in the Economist, the average time on a waiting list for a rent controlled apartment is 20 years. Not surprisingly, “Young Swedes often have to put up with expensive sublets agreed to under the table,” for which they typically pay rents above both the rent control ceiling and the market equilibrium rent. Most economists agree that expanding the quantity of available housing by making it easier to build homes and apartments is a better way of reducing housing costs than is imposing rent controls.

Macroeconomics or Microeconomics? Is a Lack of Competition in Some Industries Behind the Increase in Inflation?

Photo from the Wall Street Journal

In January 2022, the Bureau of Labor Statistics (BLS) announced that inflation, measured as the percentage change in the consumer price index (CPI) from December 2020 to December 2021, was 7 percent. That was the highest rate since June 1982, which was near the end of the Great Inflation that lasted from 1968 to 1982. The following figure shows the inflation rate since the beginning of 1948. 

What explains the surge in inflation? Most economists believe that it is the result of the interaction of increases in aggregate demand resulting from very expansionary monetary and fiscal policy and disruptions to supply in some industries as a result of the Covid-19 pandemic. (We discuss movements in aggregate demand and aggregate supply during the pandemic in the updated editions of Economics, Chapter 23, Section 23.3 and Macroeconomics, Chapter 13, Section, 13.3.)

But President Joe Biden has suggested that mergers and acquisitions in some industries—he singled out meatpacking—have reduced competition and contributed to recent price increases. Massachusetts Senator Elizabeth Warren has made a broader claim about reduced competition being responsible for the surge in inflation: “Market concentration has allowed giant corporations to hide behind claims of increased costs to fatten their profit margins. [Corporations] are raising prices because they can.” And “Corporations are exploiting the pandemic to gouge consumers with higher prices on everyday essentials, from milk to gasoline.”

Do many economists agree that reduced competition explains inflation? The Booth School of Business at the University of Chicago periodically surveys a panel of more than 40 well-known academic economists for their opinions on significant policy issues. Recently, the panel was asked whether they agreed with these statements:

  1. A significant factor behind today’s higher US inflation is dominant corporations in uncompetitive markets taking advantage of their market power to raise prices in order to increase their profit margins.
  2. Antitrust interventions could successfully reduce US inflation over the next 12 months.
  3. Price controls as deployed in the 1970s could successfully reduce US inflation over the next 12 months.

Large majorities of the panel disagreed with statements 1. and 2.—that is, they don’t believe that a lack of competition explains the surge in inflation or that antitrust actions by the federal government would be likely to reduce inflation in the coming year. A smaller majority disagreed with statement 3., although even some of those who agreed that price controls would reduce inflation stated that they believed price controls were an undesirable policy. For instance, while he agreed with statement 3., Oliver Hart of Harvard noted that: “They could reduce inflation but the consequence would be shortages and rationing.”

One way to characterize the panel’s responses is that they agreed that the recent inflation was primarily a macroeconomic issue—involving movements in aggregate demand and aggregate supply—rather than a microeconomic issue—involving the extent of concentration in individual industries. 

The panels responses can be found here. 

Sources for Biden and Warren quotes: Greg Ip, “Is Inflation a Microeconomic Problem? That’s What Biden’s Competition Push Is Betting,” Wall Street Journal, January 12, 2022; and Patrick Thomas and Catherine Lucey, “Biden Promotes Plan Aimed at Tackling Meat Prices,” Wall Street Journal, January 3, 2022; and https://twitter.com/SenWarren/status/1464353269610954759?s=20