For example might be that if the prices in Manhattan,
where $3,500 a month,
the city council might say,
"Well, for this building,
it's going to be $800 a month."
They control these prices.
It's not exactly how it works.
Typically, they don't announce a price,
they'll announce a time and say this building is rent
controlled and they'll quote the price at the current price,
and then as going forward as the demand continues to grow,
the clearing price would be going above what that is.
That's an out of equilibrium situation.
We'll do well with this picture to understand how
that out of equilibrium situation looks.
When you get to a situation where the amount that consumers wish to purchase,
we'll call this X,
the amount of apartments actually in the market, we'll call Y.
Well, you say, "Wait a minute Larry,
the apartments were there, how could this happen?"
Well, what happens over time is that the landlord is willing
in fact to put Q_0 units out if it can get this rent.
But if the rent is some capped level lower,
the landlord just doesn't,
sometimes they just don't repair certain units.
If the plumbing goes out,
or the unit has electricity problems or
the unit has some structural problem, they just won't repair it.
So, what happens over time is that there's just less of these units
available because no one's putting the effort into it anymore given this lower price.
So, as a result,
you get this situation where there's a lot of people who want the product,
We'll call that X and not very many of the units are available.
Maybe you're even just given part of your apartments to your relatives,
and say, "Well, at this price,
if I can get anything more for it,
at least I'll let my son or daughter or live here or something like that."
Anyway, you'll look at it. This is an out of equilibrium situation,
there's too much of quantity demanded and not enough quantity supply.
So, how do we go about solving this problem?
Well, it's a difficult issue.
The market is not allowed to decide who gets what.
We started our entire adventure in
thinking about economics by thinking about the fact that there's scarcity.
Two, there's just not enough to go around.
In this case, the price ceiling has created an artificial scarcity.
People want a lot more of the apartments than there are apartments to go around.
Normally, price would float up to that P_0 and the market will be cleared.
In this case, it's not allowed for that to happen.
So, you see that there's not going to be very many units put on the market.
At this amount, the landlords could actually if they could get away with it,
charge a really high price, okay?
At that amount, enough people would be willing to pay this amount,
but they can't because they can't get any price higher than the price ceiling.
So, how does this process work?
Who makes the allocation decision?
Well, unfortunately the allocation decision is made by essentially non-market forces.
So, it's not uncommon in some cities in
America to drive by a long line of people out on the sidewalk in the morning,
and you ask what's happening here?
Your friend who you're staying for
a few days with somebody in say San Francisco and they'll say,
"Well, that's a rent controlled neighborhood,
somebody must have died."
The idea is that now there's going to
be a lot of people who are going to interview for this particular apartment,
and you can imagine those interview process.
Those people would say, "Look,
if I can get this apartment for only $600 a month rent,
whereas the market clearing price is $3,000,
I'll make sure I'll call the landlord up and say
hey how about if I put hardwood floors in?
Or how about if I put a granite counter-top in?"
The landlord isn't going to do it because
he or she is now subject to this binding constraint that is lower priced.
But, the landlord picks the tenant correctly,
which may be someone who has a lot of wealth to begin with.
They can actually end up subsidizing these people and then people will
put a lot of their own cash into making sure
the apartment stays up to code and in fact it,
is better than code with granite and hardwoods
instead of that which you wouldn't have had otherwise.
Again, it defeats the purpose of what the city was all about to begin with.
The city's goal was to make
the apartment cheap enough that people of all sorts of income levels,
that a great diversity and population could come into this area.
But the end result is,
by driving down the availability of the units,
you let someone else make the allocation decision,
and that allocation decision based on economics would be, "Well,
I'm going to put people in there who have
the most ability to actually fix the apartment up and take care of it."
Probably not the same outcome to what the city wanted.
This is a tough problem.
People always try to figure out how to handle this problem that prices are too high.
Many cities try different approaches.
Some cities, they go out by just building lots of
housing units for people who have a certain level of incomes below a level,
where you can live in these housing areas.
Turns out those are not the most successful.
Those are not the most successful outcome.
It's a way to try to attack the problem but
the government instead of just trying to restrict price,
they might try to grow the supply.
But without letting the market intervene so
that we can get some movement in and out of these populations.
The outcome is usually not very good.