Rent cap in a tight city rental market
Cork City's private rental market is in equilibrium at €2,000 per month with 30,000 tenancies. The city council introduces a legally binding rent cap of €1,600. At the cap, estate agents estimate demand would be 36,000 tenancies while landlords would offer 26,000. Landlord costs-insurance, maintenance and mortgage interest-have risen 12% in two years, and small landlords are exiting. The council argues the cap protects tenants from displacement; developer groups say it will worsen supply. A local charity reports that 4,000 households are already on a housing waiting list and that average rent takes 42% of a low-income tenant's net income. The council must decide whether to keep, tighten or remove the cap after one year, and whether to use a subsidy instead. Enforcement is weak: an estimated 15% of tenancies are informal.
1. Explain the effect of the €1,600 cap using demand and supply. Calculate the shortage and the monthly transfer from landlords to tenants who keep a tenancy.
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The cap is a binding price ceiling because it is below the equilibrium rent of €2,000. At €1,600, quantity demanded is 36,000 and quantity supplied is 26,000. The shortage is 36,000 − 26,000 = 10,000 tenancies.
Only 26,000 tenancies are actually rented. Each of those tenants pays €400 less per month than the equilibrium rent: transfer = 26,000 × €400 = €10.4 million per month from landlords to sitting tenants. The other 10,000 demanders cannot find a tenancy at the legal price; they must queue, bid informally, pay key money or accept lower quality. Landlords may also reduce maintenance or convert to short-term letting.
The transfer is not the same as a net social gain. There is deadweight loss from tenancies that would have been supplied between 26,000 and 30,000 but are no longer offered, plus search costs and enforcement costs. The 15% informal market means the measured shortage understates the true rationing problem.
2. Calculate the price elasticity of supply and demand between €1,600 and €2,000 using the midpoint formula. Interpret both values for the council.
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Midpoint formula: elasticity = (ΔQ / average Q) ÷ (ΔP / average P).
Supply: quantity rises from 26,000 to 30,000, so ΔQ = 4,000 and average Q = 28,000. ΔP = €400 and average P = €1,800. Es = (4,000 / 28,000) ÷ (400 / 1,800) = 0.1429 ÷ 0.2222 ≈ 0.64. Supply is inelastic: a 1% rise in rent calls forth only about 0.64% more tenancies.
Demand: quantity falls from 36,000 to 30,000 when price rises from €1,600 to €2,000, so ΔQ = −6,000 and average Q = 33,000. ΔP = €400 and average P = €1,800. Ed = (−6,000 / 33,000) ÷ (400 / 1,800) = −0.1818 ÷ 0.2222 ≈ −0.82. Demand is also inelastic.
Because both curves are inelastic, the cap creates a large proportional shortage for a modest price change. In the long run supply may be more elastic as landlords exit or build, making the shortage worse. The council cannot assume that a rent cap mainly transfers income; it also reduces quantity.
3. Evaluate whether the cap is good policy for low-income tenants. Recommend one alternative and explain its likely market effect.
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The cap helps low-income tenants who already hold a tenancy: each pays €400 less per month, a substantial gain given that rent is 42% of net income. But low-income newcomers are likely harmed because 10,000 fewer tenancies are available than at equilibrium, and informal payments may exclude the poorest. Reduced maintenance and landlord exit can lower quality. With inelastic supply, the quantity response is small in the short run but larger over time as investment falls.
One alternative is a targeted rent subsidy for low-income tenants. It preserves the price signal but raises demand; with inelastic supply, much of the subsidy may be capitalised into higher rents, benefiting landlords. A supply-side alternative is public housing or tax incentives for long-term rental construction. This adds to supply and reduces the shortage, although it is slower and costly. A vacant-property tax could bring existing stock into use.
A balanced judgement: keep short-term support for sitting tenants, but pair it with supply measures and enforcement. A permanent cap without supply expansion is likely to ration tenancies and reduce quality, especially for the households the charity is trying to protect.