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Answer to Question #1

Posted By Don Boudreaux On May 15, 2011 @ 8:57 am In Housing,Prices,Reality Is Not Optional,Seen and Unseen | Comments Disabled

Here’s the answer to question #1 on Friday’s pop quiz [1]:

1. Which group of persons would most likely benefit from rent control imposed in the city of Washington, DC?
a. landlords in Washington, DC
b. persons seeking to rent apartments in Washington, DC
c. landlords in the DC suburbs without rent control
d. renters in the DC suburbs without rent control

Correct answer: C. Rent control in DC reduces the number of rental units supplied in DC – reducing this number from what it would be without rent control.  The result is that a greater number of persons who would would have rented in DC (if that city didn’t have rent controls) – but discovering themselves unable to find rental units there – will spill over into DC’s suburbs in search of rental units.  The resulting increase in the demand for rental units in DC’s suburbs will raise the prices that landlords in these suburbs will fetch for their rental units.

Answer A is incorrect for obvious reasons: the rent-control legislation reduces the prices that DC landlords can fetch for their units and, more generally, ties these landlords’ hands in dealing with tenants and potential tenants.

Answer B is incorrect because, by reducing the number of rental units available in DC (while simultaneously increasing the number of these units that are demanded by potential renters), DC’s rent-control statue creates a classic sellers’ market – albeit one (1) without higher prices serving as a means of rationing supply among potential buyers; and (2) without the rising prices that call forth a greater quantity supplied of rental units.  Many people seeking to rent apartments in rent-controlled DC will be frustrated in their attempts to find suitable apartments.  Some of these frustrated would-be DC tenants will spill over into DC’s ‘burbs and, in addition to having a longer commute and less-agreeable neighborhoods (according to their tastes) than they would have had had they been able to rent in DC, these tenants will pay higher prices for their suburban apartments than tenants in those apartments would have paid if DC had no rent control.

Finally, even those persons fortunate enough to succeed in finding rental units in rent-controlled DC will have to endure apartments in the District of lower quality (such as less square-footage, or fewer amenities)  than would be available without rent control.

Answer D is incorrect because DC rent control causes rents in surrounding jurisdictions to be higher than otherwise (see above).  So even persons who from the get-go wished to rent in DC’ ‘burbs will, because of DC’s rent-control policy, have to pay higher rents for their suburban apartments.

….

I’ll post answers to questions #2 and 3 later.

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