The Online Library of Liberty

A project of Liberty Fund, Inc.

• Editorial Staff
• Associate Editors
• Editorial
• Bibliographical Essay: Kingsley Widmer, Utopia and Liberty: Some Contemporary Issues Within Their Intellectual Traditions
• I: Economics and the Free Society
• The Compatibility of Justice & the Market
• Is Capitalism Free and Just?
• Is Free Enterprise Coercive?
• Private Enterprise Vs. Central Planning
• Vicious Motivations & Commercial Society
• Economic Policy: Free Trade and Values
• Violence, the State & the Rise of Capitalism
• Braudel's Ideological Theory of Capitalism
• Cognition, Choice, and Entrepreneurship
• Federal Expenditures ‘crowd Out’ Private Investment
• The Mirage of Economic Efficiency
• Private Property and Energy Resources
• Rent Control Vs. Economic Reasoning
• II: Law, Liberty, and Political Thought
• Restitution Vs. Punishment & Crime Prevention
• Criminology & Rationales For Punishment
• Defending Freedom of Contract
• Privatizing Public Parks
• Law and the American Economy
• Sumner, Social Darwinism & Property
• Lagos and Colonial Property Rights
• Price Controls, Legal Regulation & Inflation
• Discrimination and Affirmative Action
• The First Amendment and Pornography
• The Right to Leave Any Country
• The Evolving Notions of Individual and Society

Rent Control vs. Economic Reasoning

Michael A. Walker

• Director of the Fraser Institute, Vancouver, B.C.

A common myth holds the following: “Rent control is a form of tenant protection adopted because housing is a basic need like sunshine and fresh air and its provision ought not to be left to the vagaries of the marketplace.” The author challenges this claim from the economist's point of view and maintains the following: “Rent control is a form of price fixing that increases the shortage of housing and ultimately reduces the ability of tenants to choose where and under what conditions they live. In the course of exploring this criticism of rent control, the author examines: What is the economic behavior of people as regards housing?; How are rents determined?; What are price controls and what effects do they have in the short term and in the long term?

The author's summary of the economic analysis of rent control includes the four following observations:

(1)The demand for housing services is determined by the wants for social standing and recreation as well as by the need for elementary shelter. Accordingly, family income and the price of housing relative to the price for other things have a substantial impact on the housing demanded.

(2)The supply of housing services arises principally from the relatively fixed number of houses or apartments in existence at a particular point in time. However, new construction, renovations (such as basement suites), and a reduction in the average time that apartments stand vacant provide substantial flexibility in the supply of services, even in the shortterm. The principal determinant of the supply of housing services is the expected rate of return on investment in housing relative to the expected rate of return on comparable investments. Rents are a principal determinant of the rate of return on housing.

(3) The notions of “surplus” and “shortage” have economic meaning only with respect to inappropriate prices. A surplus exists because the price (or rent) is too high; a shortage exists because the price is too low. The concept of shortage is sometimes confused with the notion of “scarcity.” Everything is scarce, but there are shortages of very few things.

(4) Price control produces shortages because, if the price is kept below the market price, the control becomes, in effect, a tax on the supplier. The amount of the tax is the difference between the market price and the control price. The only way the supplier can avoid this tax is by not supplying the commodity or service. Since the proceeds of the tax are, in effect, given to the consumer, the consumer is encouraged to demand more. Thus, since price control taxes suppliers and gives the proceeds to consumers, it leads inevitably to a widening gap between the amount demanded and the amount supplied—that is, a shortage.

In sum, rent control never lives up to its expected claims of cheap and plentiful housing. It guarantees that the opposite will occur. Additional scholarship on the economic disadvantages of rent control may be found in the author's book, Rent Control— A Popular Paradox (1965) as well as in Professor Charles W. Baird's Rent Control: The Perennial Folly (1980).

II

Law, Liberty, and Political Thought

Literature of Liberty continues to report on the interconnections of law, liberty, and individual rights (cf. our Autumn 1981 issue, pp. 82 ff.). The two opening summaries scrutinize the various rationales for legal punishment. Then follows a group of five studies on the importance of free contract and private property in social analysis. The next group turns to the consequences of legal regulation on different human activities. A theme running through the concluding summaries is the significance of individual freedom in defining the contours of a humane society. Apropos to Kingsley Widmer's bibliographical essay, “Utopia and Liberty,” several of the following legal and political topics urge an openness to implementing ideal moral values and visions in the areas of criminology, contract, property rights, industrial freedom, nondiscrimination, and travel.