Rent Ceiling

The highest price landlords can charge renters.

And yes, in some places, rent ceilings happen. There are government mandates that Thou Shalt Not Charge some price above some set figure per square foot. Or, based on whatever was charged last year and/or the year before, charges can't rise above the Federal level inlfation rates, which in the recent era hover around 2-3% per year.

So why would you even have such a thing? Like...why would the government have to step in and force pricing on a private building rented to citizens?

Well, in a few areas in the world, the urban population grew so fast, and so wealthy 'n' powerful, that there was no room for the people who service the wealthy (doormen to street sweepers to waiters), i.e. the poor, to live. Yes, their salaries went up, but not at a rate nearly proximate to the increase in housing costs to cover the spread. So rent ceilings were enacted, and landlords who thought that they'd made a great investment in real estate 20 years ago ended up making some money...but not all that much.

All kinds of ethical issues come into play here as to what our laws should be in a capitalist society. And they get more complex when it turns out that so many of the people living in rent-controlled buildings in New York are actually multi-millionaires who got that way living in these cheap buildings, saving their money, and just investing the spread in the stock market.

Tough situation. Adam Smith is chuckling. And then crying.

Related or Semi-related Video

Econ: What are Price and Quantity Contro...3 Views

00:00

and finance Allah shmoop what our price and quantity controls

00:08

All right people while the invisible hand does a lot

00:11

of good bringing consumer demand to producer supply at equilibrium

00:16

But sometimes the invisible hand can't work its magic For

00:19

instance in cases of monopoly on Olonga pally firms are

00:23

incentivized to produce less quantity at higher prices you know

00:27

than they would if they had some competition Well in

00:30

cases like these the government can step in to try

00:33

to correct the market making it more efficient by setting

00:36

price and quantity controls In other cases the government may

00:39

set price and quantity controls in response to social issues

00:43

and actually creating market distortion rather than a correcting one

00:48

So how do price and quantity controls work If you

00:52

look at your typical supply and demand graph like this

00:54

take a look at the axes on the X axis

00:56

We've got quantity on the Y axis We've got price

00:59

Since the X axis and a Y axis are price

01:01

and quantity on the graph well those are the two

01:04

things the government has to play with to affect the

01:06

markets No excess demand or supply means we're at equilibrium

01:11

where supply and demand cross like right there This means

01:13

the supply a good or service is sold at matches

01:17

the same supply demand it all for an agreed upon

01:20

price by buyers and sellers What market inefficiencies produce what's

01:24

called a dead weight loss which we can see on

01:27

the graph right there representing the cost of inefficiency When

01:31

there's either excess supply or excess demand while we Khun

01:33

see dead weight loss the larger the deadweight loss triangle

01:37

on the graph while the farther away from equilibrium The

01:40

market is when there's excess demand That means there's a

01:43

shortage of supply when lots of people want a limited

01:46

quantity of stuff while prices skyrocket On the flip side

01:50

when there's excess supply demand shrinks When there's an abundance

01:53

of something compared to you know how much of it

01:56

people want Well prices fall sometimes Government price in quantity

02:00

controls are designed to reduce deadweight loss and other times

02:02

these controls create deadweight loss First up price controls A

02:07

government can set a price control basically setting price limitations

02:12

on firms in a certain market Well there's two main

02:15

types of price controls Price ceilings and price floors Well

02:18

price ceilings mean there's an upper limit on how much

02:21

affirm Khun Selig odor service for For instance a government

02:24

might set a price ceiling on something that everyone needs

02:27

to keep you know affordable like food for natural monopolies

02:30

that affect a lot of society like utilities Internet service

02:34

providers and buses that buses Will governments oftentimes set a

02:38

price ceiling Will these air all natural monopolies since their

02:42

monopolies that happened spontaneously from very high fixed startup costs

02:46

Price ceilings on natural monopolies like these insure businesses aren't

02:51

taking too much advantage of their monopoly status and overcharging

02:55

consumers on those evil business is rent controlled areas are

02:58

another example of price ceilings However rent controlled areas are

03:02

more likely creating a dead weight loss Ten Getting rid

03:05

of one but artificially lowering the cost of housing that

03:08

creates excess demand Rent control Lower supply to since that

03:14

means landlords and rent controlled areas will be feeling the

03:17

squeeze of the price ceiling Why be a landlord in

03:20

an area where prices are kept artificially low Hello rent

03:24

control when you could be a landlord in an unregulated

03:27

red state area with much higher rent prices in therefore

03:31

profits These landlords and rent controlled areas who are making

03:34

less money because of government intervention are then incentivized to

03:37

provide housing with you know worst quality Another reason government

03:41

might set a price ceiling is to prevent hyper inflation

03:45

which history has told us happens often during war time

03:48

Right Well price floors are the opposite you know when

03:51

a government sets a lower bound on price for firms

03:54

While price ceilings often help consumers price floors often help

03:58

producers For instance governments sometimes help farmers out by setting

04:03

price floors on things like milk By setting the price

04:06

artificially high though this can create reduced a man and

04:10

excess supply usually does well In the case of farmers

04:12

governments usually set price floors along with the promise of

04:16

buying up any excess supply from farmers Well why does

04:19

the government bother helping out these farmers and keeping him

04:21

around Technology made farming go from meeting a ton of

04:25

people needing very few people for the same output of

04:28

food producing on mass farming equipment fancy fertilizers and pesticides

04:32

Ball radically transformed the farming industry Some governments have used

04:35

price floor simply to reduce consumer demand for a good

04:39

for instance making alcohol or tobacco more expensive would ideally

04:43

drive demand for alcohol and tobacco down well in the

04:46

labor market Minimum wages a price floor Here the suppliers

04:49

are workers not the firms Firms are demanding labor and

04:53

workers are supplying it to remember when the price of

04:56

something rises It's usually followed by a drop in demand

05:00

Okay so what about quantity controls Well a quantity control

05:04

is usually referred to as a quota and it limits

05:07

the quantity of a good quotas work well in cases

05:10

when controlling the quantity is easier or more important than

05:14

controlling the cost For instance a government may set a

05:17

quota for nuclear power plants since there's a potentially high

05:20

social cost If you know something went awry and the

05:24

international markets it's common for countries to set import quotas

05:28

So this quota restricts a supply of a certain good

05:30

from international markets so that gives the domestic country a

05:34

leg up against them Foreign competitors like another example of

05:37

quota on imported steel would mean that domestic steel firms

05:41

would get an advantage over imported steel while international quotas

05:45

benefits some domestic firms This comes at the cost of

05:48

everyone buying the goods meaning a steel quota in the

05:51

US would mean higher steel prices from domestic steel producers

05:54

then from cheaper foreign producers in an unregulated market A

05:58

limited number of hunting and fishing licenses and tags are

06:01

another example of quotas in order to keep hunting and

06:04

fishing populations you know in existence the young ones have

06:07

to be given time to be born grow up and

06:09

reproduce right Well oftentimes A combination of quotas and price

06:13

floors in the form of high price licenses and tags

06:16

are used to keep hunted and fished populations at sustainable

06:19

levels Setting a quota a quantity limit has similar effects

06:23

as a price floor Artificially restricting quantity sold means higher

06:26

prices and lower demand compared to free market equilibrium Well

06:30

if you were wondering it's not too common when a

06:33

capitalistic government sets a quantity minimum or floor But if

06:36

they did in theory it'd create a surplus of supply

06:38

compared to equilibrium levels and potentially would need to be

06:41

supported by the government like price floors on agriculture to

06:45

make up for the lack of demand Well for instance

06:47

let's say in the future the government created an enforceable

06:49

law on the labor market making firms hire a minimum

06:52

number of people in response to shrinking jobs Yes Hello

06:56

Robots They're coming for our jobs Firms would then be

06:58

forced to hire people when they wouldn't want or need

07:01

thio creating forced oversupply of workers on two firms Well

07:06

all this government regulation can breathe rebellion rebellion in the

07:09

form of the underground economy the market free of any

07:12

government regulations And yes black market milk is a thing 00:07:15.992 --> [endTime] just like black market booze Hey

Find other enlightening terms in Shmoop Finance Genius Bar(f)