The Negative Effects of price Controls What happens when prices are not allowed to fluctuate freely according

to supply and demand, but instead their fluctuations are fixed within limits set by law under various kinds of price controls? Typically price controls are used to keep prices low, not allowing prices to rise to the levels they normally would reach in response to supply and demand. To understand the effects of price controls you must first understand how prices rise and fall in the free market. A shortage, or a case in which prices rise, happens because the amount demanded exceeds the amount supplied at existing prices. A surplus, or a case in which prices fall, exist when the amount supplied exceeds the amount demanded at existing prices. When there is a shortage of a product, there is not necessarily any less of it, either absolutely or relative to the number of consumers. To give you an example of how this may happen we can analyze how a shortage in housing supply was created during and immediately after World War II, not because there were not enough houses for people to live in, but because prices were kept artificially low. There was a serious shortage in the United States, even though the countrys population and its housing supply both increased by the same 10% amount from their prewar level. Americans looking for an apartment during this period would spend weeks or months in search of living space while also resulting to bribery to be placed on top of waiting lists and doubling up with relatives or sleeping in garages until something became available. During this time existing prices were artificially lower than they would have been because of rent control laws that were passed during the war, so although there was no less housing space per person than before the war, there was still a very real and painful shortage. How is this possible that artificially lowering housing prices actually have the inverse effect of what was actually intended? At these artificially low prices, demand increased, with more people looking for more housing space than before the rent control laws were enacted. This is a consequence of a very simple economic principle that the quantity demanded varies according to how high or how low the price is. When people were able to start using more housing than usual, other people found less housing available. For example, young adults who would normally be staying with their parents still, or elderly people living with their relatives, were now able to move out into their own apartments. At the same time these low prices also caused others to seek larger apartments than they would have ordinarily required, while others chose to live alone where they once had a room-mate. More tenants seeking both more apartments and larger apartments created a shortage, even though there was not a greater physical scarcity of housing relative to the total population. In other words, it wasnt as if the resources werent available to house these people, but there was a shortage nonetheless because of artificially low rent prices created by government regulation. When rent control policies ended after the war, the housing shortage quickly dissipated as both supply and demand took their natural course. Childless couples living in lavish fourbedroom apartments decided they could live in a two-bedroom apartment. The young adults and

elderly that once lived on their own, now decided to move back in with relatives now that rent was no longer cheap. This enabled more space to open up and allowed families to find the proper housing now that rent controls were no longer keeping these places occupied by people with much less urgent requirements. Just as price fluctuations allocate resources which have alternative uses, price controls which limit those fluctuations reduce the incentives for individuals to limit their own use of scarce resources desired by others. For example, in 2001 49% of San Franciscos rent-controlled apartments had only a single occupant which created a housing shortage in which caused thousands of people to have to make long commutes to work everyday. Peoples demand for housing space fluctuate over the course of their lives as they go from single, to married, to married with children, to having their children move out, and lastly becoming widowed. In each of these stages of life, individuals have different budgets and place more value where it is most necessary at that particular part of their lives. For example, a couple with three children would absolutely bid more for housing than a widow, even if that means consuming less consumer goods.This creates a sharing and circulation of housing among individuals in society, but this sharing does not take place due to the cooperation of these individuals, but because of prices. When rent control suppresses the role of prices in this process, it leaves people with little incentive to move on and disrupts this most necessary circulation of housing in society. In New York City the annual rate of turnover of apartments is less than half the national average and the proportion of tenants who have lived in the same apartments for 20 years or more is over double the national average. Rent control has its effects on supply as well as demand. As we have already seen, it increases demand, but at the same time it will lead to a lower supply. Due to rent control laws in Melbourne, Australia, nine years after World War II ended, not a single new building had been built. Why? Rent controls made buildings unprofitable. After rent control was instituted in Santa Monica, California in 1979, building permits declined to less than one-tenth of what they were just five years prior. In San Francisco, a study showed that three-quarters of its rent-controlled housing was more than half a century old and 44% of it was more than 70 years old. Since rent control laws often do not apply to industrial or commercial buildings, despite sever housing shortages in all the places mentioned above, in 2003 the vacancy rate in buildings used by business and industry was the highest in two decades at 12%. This shows that there are obviously ample resources to build housing for these shortages, but rent controls have kept those resources from being used to construct new apartment buildings and have diverted them into constructing office buildings, industrial plants and other commercial properties. Not only the supply in new housing declines but also in existing housing. Since housing shortages reduces the incentive to maintain appearance to attract tenants, landlords provide less maintenance and repair which than leads to more rapid deterioration. As time goes on under rental control scarcity becomes more intense as rental units deteriorate more rapidly while not enough new units are being built to replace them as they wear out since new privately built housing has been made unprofitable under these government regulations.

On top of all this, a study done on rent control in various countries concluded: New investment in private unsubsidized rented housing is essentially nonexistent in all the European countries surveyed, except for luxury housing. So a policy intended to make housing affordable for the poor has had the net effect of shifting resources toward the building of housing that is only affordable for the rich, since luxury housing is usually exempt from rent control. This is why economic policies should be analyzed in terms of the incentives they create, rather than the hopes that inspired them. Good intentions doe not always lead to favorable consequences, which is apparently made clear in the case of all price controls as they keep resources from being allocated to places where they are most needed, or in highest demand. If prices cant fluctuate, suppliers will have no incentive to move their goods around because no matter where they sell them they will receive the same price nonetheless. So when shortages do arise, supply and demand has always been the best solution, whereas price controls has left people without homes, food, etc. all over the world wherever it has been instituted. In New York, in many cases where rent control was applied, the point was reached where whole buildings became sufficiently unprofitable and were abandoned. Consequently these buildings are than taken over by the government, and the number of abandoned buildings taken over by the government in New York City over the years has numbered in the thousands. It has been estimated that there are four times as many abandoned buildings in New York than there are homeless people living on the streets. This homelessness is due not by physical scarcity, but a price-related shortage brought on by poor governmental policy. This is why homelessness tends to be greatest in cities with rent control, with New York and San Francisco being prime examples. The process of rent control is often justified by liberals with no sense of economics as a way to keep greedy rich landlords from taking advantage of the poor with unfairly high rents. In reality the return on investments in housing are very modest and are seldom higher than other alternative investments. Also, landlords tend to be people of very modest means. So the kind of housing likely to be rented by the poor often have owners who are by no means rich at all, completely nullifying their justification for this process to begin with. As I mentioned above, the housing of the poor suffers the most due to rent control because construction of new housing and the maintenance of existing housing is no longer profitable, thus diverting all construction resources towards building for businesses and luxury apartments. After the passage of time, this unfairness only gets worse when it becomes clear that no new housing is likely to be built unless it is exempted from rent control. When this happens the result is new modest apartments may rent for far more than older, far more luxurious apartments that are still under rent control. Here is an example printed in the Wall Street Journal: Les Katz, a 27-year old acting student and doorman, rents a small studio apartment on Manhattans Upper West side for $1,200- with two room-mates. Two sleep in separate beds in a loft built atop the kitchen, the third on a mattress in the main room. Across town on Park Avenue, Paul Haberman, a private investor, and his wife life in a spacious, two-bedroom apartment with a solarium and two terraces. The apartment in

an elegant building on the prestigious avenue is worth at least $5,000 a month, realestate professionals say. The couple pay around $350, according to rent records.

The biggest difference between prices under New Yorks rent control law and the free-market prices is in luxury apartments. Therefore a policy intended to benefit the poor consequently did more for the rich and affluent while making matters worse for the poor, who are invoked to justify this law, and the rest of the population. A study published in 2001 showed that more than one-forth of the occupants of rentcontrolled apartments in San Francisco had household incomes of more than $100,000 a year. This was the first study done since the rent control was established in 1979, leaving more than two decades of enforcing these laws with no serious attempt made to gauge their economic and social consequences. The usual function of prices in directing goods and resources to where they are in most demand no longer operates under price controls. During the American gasoline crisis of 197374, when oil prices were kept artificially low by the federal government, there were long lines of automobiles waiting on lines across America, but there was in fact more gasoline sold in 1973 and 1974 than there was in any previous year. When prices are frozen in all places, as it was during this crisis, there was little or no incentive to move the gasoline from one are to another, as would normally happen automatically with free market prices responding to supply and demand. Gasoline can be sold for more where it is in higher demand, thus incentivizing the fast and efficient transportation of it to the consumer. When price controls cause shortages by artificially low prices,, the seller no longer has to please the buyer. Gas stations during the crisis that were once opened for 110 hours a week would now only stay open for 27 hours a week. No doubt people who had to spend hours of their time and money driving around looking for an open gas station would have gladly paid a little more so they could avoid this major inconvenience In a free market supply and demand cause prices to rise where goods are in short supply and fall where they are abundant, providing incentives to move things from regions where there is a surplus to one with a shortage. But when price levels are fixed these incentives are removed, causing havoc. The free market should be applied to any and all economic situations. It has proven to be the most effective means of allocating resources from places where they are least needed and productive to places where they are most needed and productive.