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Sunday, November 27, 2005

LA Rent Control Made Simple

About 5 years ago I use to work for a gentleman who owned apartments in LA County. One of his apartment complexes was in an area that was under rent control while the others were not. I never really thought about the very wealthy families that stayed in the rent-controlled apartments, who always paid in cash and never complained about anything. I didn’t realize, until taking economic classes, why these tenants were so easy going with the owner. They didn’t want to lose their apartments because they were paying below market rates. The apartments were below market even after the amount they were paying under the table. However, now that I’ve been taking economics it’s very surprising to me that rent controls still exist in the US.

We learn in basic microeconomics that price ceilings result in shortages and negate the positive effects they are meant to provide. In fact they often end up hurting some of the people they are intended to help. “Ironically, some of those who do find apartments may actually end up paying more than they would have paid in the absence of rent control. And many of the people that the rent controls do help (primarily current occupants, regardless of their income, and those lucky enough to find apartments) are not those they are intended to help (the poor)” (Libby Rittenberg 93). The situation I saw 5 years ago is a good example. It’s surprising to me that it can be proven over and over again that rent controls do not work and yet so many large cities still have them.

The link I have attached to this entry is a brief explanation of the rent control laws in LA. They seem pretty complicated and I can only image the amount of time and taxpayers money that is spent in trying to enforce these laws. From an efficiency standpoint, we learn in introductory micro that price ceilings are inefficient. Apartments are not public goods, there is no externality (that I can come up with), and there certainly is no monopoly over apartments. Therefore, it would seem there is no need for government intervention.

I also can’t find any reason for government intervention from a liberty perspective. In liberty, the job of the government is to enforce contracts. It seems to me that landlords and tenants should be able to come up with a pretty complete and explicit contract without the use of the government, unless of course one of them breaches the contract. However, rent control was designed to help the poor, a welfare responsibility. It’s government using its coercive power to force property owners to give some of their profits away to those that the government sees fit. It sure seems to me that this reduces the incentive to be a property owner in LA.

The only normative framework I could see justifying rent control would be a social justice framework that encourages equality. However, even under this framework the desired effects are never realized. Rent controls reduce the supply, causing a shortage; no matter what framework you come from, this is the fact. So, while it sounds warm and fuzzy to provide cheap apartments for people who cannot afford them, it just doesn’t work that way.
Cities should get rid of rent controls, allow the market to “work it’s magic” and come to a natural supply and demand and stop wasting taxpayer monies to enforce and write these laws that don't even work for what they are intented to work for.

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