The Harborview Rent Ceiling
Harborview is a mid-sized city with a tight rental market. The current equilibrium rent for a two-bedroom apartment is $1,400 per month, and about 1,200 units are rented. A housing survey estimates that at $1,000 per month, landlords would offer 900 units for rent, while 1,500 households would want to rent. The city council is considering a $1,000 rent ceiling on all two-bedroom apartments. Supporters note that 40% of renters pay more than 30% of income on rent. Opponents note that 300 new apartments are under construction and that several landlords have said they would convert units to condos or short-term rentals. The city's vacancy rate is 2.5%. The council wants to know who gains and who loses in the short run and long run, and whether the policy will actually help the lowest-income renters. The city has no public housing authority and no rent subsidy program.
1. Using the survey numbers, predict the short-run shortage if the $1,000 ceiling is imposed. Show the arithmetic and explain why the shortage may be larger or smaller than your calculation.
Read the worked answer
At $1,000, landlords offer 900 units and 1,500 households seek them, so the measured shortage is 1,500 minus 900, or 600 units. That is a gap between quantity demanded and quantity supplied at the controlled price.
In practice the shortage could be larger because some of the 1,200 existing units may be withdrawn, converted to condos, or shifted to short-term rentals. It could be smaller if landlords accept the ceiling temporarily or if the 300 units under construction come online. The 2.5% vacancy rate means there is almost no slack to absorb the gap. The shortage will be allocated by waiting lists, discrimination, personal connections, or side payments, not by price.
2. Who gains and who loses in the short run? Be specific about existing tenants, renters searching for an apartment, and landlords.
Read the worked answer
Existing tenants who keep a two-bedroom unit gain because their rent falls from $1,400 to $1,000, a saving of $400 per month. Renters who are searching may lose because 600 more households want units than are offered, so many will not find one. Landlords lose rental income and may respond by reducing maintenance or converting units.
The lowest-income renters are not automatically the main winners: if they are currently searching or doubled up, they may face longer queues. The policy helps those already inside the controlled market most reliably. A tenant who pays 40% of income now may gain, but a family trying to move may be worse off.
3. What long-run effects should the council expect, and what alternative or complementary policy would you recommend? Explain using the concepts of elasticity and supply response.
Read the worked answer
In the long run, supply is more elastic. Developers can choose not to build, landlords can convert to condos or short-term rentals, and maintenance can decline. The 300 units under construction may still arrive, but future projects may be cancelled if the ceiling lowers expected returns. A $1,000 ceiling is 29% below the $1,400 equilibrium, a large gap, so shortages are likely to grow.
A better package would combine a targeted rent subsidy for low-income households with policies that expand supply, such as zoning reform or tax incentives. If the council keeps a ceiling, it should index it to inflation and allow exemptions for new construction to avoid choking supply.