Herding or wisdom of the crowd? Controlling efficiency in ...
Markets and efficiency Today: Why controlling the market is often bad for efficiency.
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Transcript of Markets and efficiency Today: Why controlling the market is often bad for efficiency.
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Markets and efficiency
Today: Why controlling the market is often bad for
efficiency
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Rent control in Isla Vista
Who thinks it is a good idea? Why? Who thinks it is a bad idea? Why?
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Rent control in Isla Vista
Suppose that rent control was implemented in Isla Vista, at $1200 per month for a 2-bedroom apartment
Who currently lives in I.V.? Who would want to live in I.V. if
rent control was passed?
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Outcome
More people want to live in I.V. than apartments are available
This, by itself, will lead to a shortage of apartments in I.V.
Some of you will be very unhappy that you cannot live in the home of first choice
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What will managers do? Apartment managers
will know that a flood of applications will come in for leases starting in June and September
They will be able to pick and choose who lives in their apartments
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What will managers do?
Other methods can be used to choose tenants Increased credit requirements Increased deposits Increased application fees Reduced amenities (low quality carpet,
infrequent painting and maintenance) (Illegally) accept bribes
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What will happen over time? Nobody will want to build new
apartments for rent, lowering the long-run supply
Some apartments may convert to vacation condos if short-term rentals are not included in rent-control law
More grad students, post-docs, faculty, and staff will likely live in I.V.
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But wait!
Don’t I have a right to live in I.V.? No
Unless the government steps in once again, rent control will lead to a sizable excess demand
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Long-run consequences of rent control Suppose that the
long-run equilibrium of apartments in I.V. is $2,400 per month rent, and 2000 units rented
With rent control of $1,200/month, we see excess demand
($100s)
(100s units)
12
24excess demand
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Long-run consequences of rent control Notice that
supplied apartments for rent are cut in half in the long run with rent control
Only 1/3 of the people that want apartments will get them
($100s)
100s units
12
24excess demand
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Let’s survey the class again
Rent control in Isla Vista Who thinks it is a good idea? Why? Who thinks it is a bad idea? Why?
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Rent control summary
Who wins? People renting in I.V. w/rent control
(maybe) Who loses?
People who want to live in I.V. w/o rent control but are unable to find an apartment
Apartment owners and managers Some people currently renting in I.V.
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Elasticity and price control How does
elasticity play a role in price controls?
We need to look at elasticity on both the supply and demand sides
($100s)
100s units
12
24excess demand
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Elasticity and price control Demand
Q, 20 30 (↑50%) P, 24 12 (↓50%) ε = %ΔQ / %ΔP = 1
Supply Q, 20 10 (↓50%) P, 24 12 (↓50%) ε = %ΔQ / %ΔP = 1
($100s)
100s units
12
24excess demand
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Elasticity and price control When both price
elasticity of supply and demand are 1, a price control 50% below the equilibrium price leads to an excess demand equal to the initial equilibrium quantity
($100s)
100s units
12
24excess demand
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Elasticity and price control What if each elasticity is smaller
than in my example? What if excess demand in I.V
apartments is only 200 units instead of 2000 units?
None of the arguments change, although the severity may decrease some
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Price control and surplus
With lower consumption, total economic surplus goes down
One side of the market may make gains, however
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Price control and surplus Equilibrium without
price controls Price: B Quantity: Q1 Consumer surplus:
ΔABC Producer surplus:
ΔBCD Total surplus: ΔACD
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Price ceiling at G Quantity supplied:
Q2 Excess demand:
Q3 – Q2 Consumer
surplus: Trapezoid AEFG (at most)
Producer surplus: ΔDFG
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Price ceiling at G Total surplus is
trapezoid ADFE (at most)
ΔCEF is potential surplus that is never gained
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Price ceiling at G Are consumers
better off with price controls?
Gain Rectangle BGFH
Losses ΔCEH Queuing costs
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Price ceiling at G Suppliers are
worse off Producer surplus
falls to ΔDFG
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Summary/Other ideas A price ceiling, such as rent control,
is an ineffective means of providing low-cost rent to those that want it
Maybe there is another way of achieving a goal of low rent
Two possible ways of doing this Subsidies to students that rent First-come, first-served policy