Factors of rent control

            Based on this article, http://topics.nytimes.com/top/reference/timestopics/subjects/r/rent_control_and_stabilization/index.html  what I can conclude is American was facing high rent problem although government have taken action against this such as rent stabilization.  In my opinion, I would like to include some related topic about this article. There are housing shortages, increased search activity, black market, and inefficiency of a rent ceiling.

Rent ceiling also known as rent control is defined as laws or ordinances that set price controls on the renting of residential housing. It functions as a price ceiling. Rent control exists in approximately 40 countries around the world. Rent control laws vary from one country to another, and may vary from one jurisdiction to another within some countries. Although the political debate over rent control is far-reaching, as described below, the purposes and provisions of such laws are intended to be limited in scope. They define which rental units are affected, and may have only larger or older rental complexes covered by the law. The frequency and degree of rent increases are limited, usually to the rate of inflation defined by the Consumer Price Index or to a fraction thereof.

            First of all is housing shortage. At the equilibrium price, the quantity demanded equals the quantity supplied. In a housing market, when the rent is at the equilibrium level, the quantity of housing supplied equals the quantity of housing demanded and there is neither a shortage nor a surplus of housing. But at a rent set below the equilibrium rent, the quantity of a housing demanded exceeds the quantity of housing supplied-there is a shortage. So if a rent ceiling is set below the equilibrium rent, there will be a shortage of housing. When there is a shortage, the quantity available is the quantity supplied and somehow, this quantity must be allocated among the frustrated demanders. One way in which this allocation occurs is through increased search activity.

            Next is increased search activity. The time spent looking for someone with who to do business is called search activity. We spend some time in search activity almost every time we make a purchase. When you’re looking for apartment for rent, and you know which apartment is acceptable, how do you find which apartment has the best deal? You spend a few minutes on the Internet, checking out the various prices. In some markets, such as the housing market, people spend a lot of time checking the alternatives available before making a choice.

            When a price is regulated and there is a shortage, search activity increases. In the case of a rent-controlled house market, frustrated would be renters scan the newspapers, not only for housing ads but also for death notices. Any information about newly available housing is useful, and apartment seekers race to be first on the scene when news of a possible supplier breaks.

            The opportunity cost of a good is equal not only to its price but also to the value of the search time spent finding the good. So the opportunity cost of housing is equal to the rent plus the time and others resources spent searching for the restricted quantity available. Search activity is costly. It uses time and other resource, such as phone calls, automobiles, and gasoline that could have been used in other productive ways. A rent ceiling controls only the rent portion of the cost of housing. The cost of increased search activity might end up making the full cost of housing higher than it would be without a rent ceiling.                                                                                                    

            Moreover, a black market or underground economy is a market in goods or services which operates outside the formal one(s) supported by established state power. Typically the totality of such activity is referred to with the definite article as a complement to the official economies, by market for such goods and services. The literature on the black market has avoided a common usage and has instead offered a plethora of appellations including: subterranean; hidden; grey; shadow; informal; clandestine; illegal; unobserved; unreported; unrecorded; second; parallel and black. This profusion of vague labels attests to the confusion of a literature attempting to explore a largely uncharted area of economic activity. There is no single underground economy; there are many. These underground economies are omnipresent, existing in market oriented as well as in centrally planned nations, be they developed or developing. Those engaged in underground activities circumvent, escape or are excluded from the institutional system of rules, rights, regulations and enforcement penalties that govern formal agents engaged in production and exchange. Different types of underground activities are distinguished according to the particular institutional rules that they violate. Graph below shows the black market.

            Goods acquired illegally take one of two price levels; they may be cheaper than legal market prices. The supplier does not have to pay for production costs or taxes. This is usually the case in the underground economy. Criminals steal goods and sell them below the legal market price, but there is no receipt, guarantee, and so forth. They may be more expensive than legal market prices. The product is difficult to acquire or produce, dangerous to handle or not easily available legally, if at all. If goods are illegal, such as some drugs, their prices can be vastly inflated over the costs of production. Black markets can form part of border trade near the borders of neighbouring jurisdictions with little or no border control if there are substantially different tax rates, or where goods are legal on one side of the border but not on the other. However, not all border trade is illegal.

            Last but not least, inefficiency of a rent ceiling. A rent ceiling set below the equilibrium rent results in an inefficient underproduction of housing services. The marginal social benefit of housing exceeds its marginal social cost and a deadweight loss shrinks the producer surplus and consumer surplus. Because the quantity of housing supplied is less than the efficient quantity, there is a deadweight loss. 

            To conclude this, rent ceiling in USA still a major concern although government try to help this off.