Price Controls: The Greatest Hits II
Economists thought price controls had been vanquished, but we live in a world where people are warming up to them. In this series, based on an article originally published at The Independent Institute, I'll revisit some of the craziest consequences of price controls.
Yoram Barzel also argued that gas stations with a greater number of non-price margins of adjustment were more likely to survive the price-control onslaught than those with fewer.
Bizarre behavior under price controls stems from buyers and sellers adjusting the non-price margins. Quality and wait times are two of the most common non-price margins subject to change.
In a nod to the classic “Roofs or Ceilings?” essay, economist Steven Cheung explored non-price margins under Hong Kong rent control in a paper titled “Roofs or Stars? The Stated Intents and Actual Effects of a Rents Ordinance.” Stuck with a rent-controlled price, landlords will seek side-payments from prospective tenants who are looking to hop the queue. To provide these would-be tenants with a room, landlords must find a way to kick out existing tenants who are paying rent-controlled prices. Eviction without a cause was not a legal option.
Thus, landlords sought ways to make the lives of existing tenants miserable, so that they would leave “voluntarily.” Once gone, they were replaced by a new tenant who paid both the official rent control price and the under-the-table side-payment. To achieve these results, landlords in rent-controlled Hong Kong of the 1920’s would kindly remove windows from apartment units—during monsoon season. In short, landlords adjusted quality.
Rent control also removes the incentive for landlords to maintain their apartments. With a long line of people seeking housing, owners are less responsive to tenant demands. In extreme cases, landlords abandon the building altogether. When this happens, the structure can collapse. Economist Assar Lindbeck famously concluded that “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.” For jarring visual evidence in support of this claim, see the classic 1981 book, “Rent Control: Myths and Realities.”