Individual Assignment ECO 3363
The apartment rental industry is not one in perfect competition simply because it is not possible for a firm to enter and exit the business easily with minimum expenditure. It is not monopolistic because there are very many privately owned apartment complexes and no single one of them has control and say over the industry. There has to be made a careful choice between oligopoly and monopolistic competition. This is because both are characterized by a plural number of players.
Oligopoly would be characterized by firms simultaneously choosing the rate, which is not the case. At the same time, barriers to entry and exit are not present: as long as there is availability of capital, entry is easily possible.
Thus it would be safe to say that the apartment rental industry is in a state of monopolistic competition. This is because there are many providers (companies) and takers (renters) in the market at any time, with no business having a total control over the market and prices. There would be differences like location, square footage between the various apartments available at any given time in the market. Thus there are non-price differences available to consumers. Besides there are no barriers to entry and exit, and the companies can decide to rent the places of their own volition—depending on going real estate prices in the locality they are located in. In such a case, the apartment companies will maintain spare capacity unlike as in perfect competition (Samuelson and Marks, 2003).
If there is no interruption by a government body, the monopolistic competition turns into natural monopoly in the long run. However if there is such an interruption, of which rent control is a form, the market conditions may seem to resemble a government-approved or government granted monopoly.
Because of the market structure, the companies will still have considerable freedom to set their own prices. There will not be much consideration given to what the competitors have for prices. Thus each firm will end up acting in a monopolistic bubble of it’s own. There will not be any affect felt on the long term market demand by such an increase (Colander, 2008).
In the short run, tenants get a significant degree of financial protection. Rent control helps alleviate some of the inherent deficiencies in the housing market. For example, dishonest landlords may shirk away from cost of repairs, by threatening the tenants with an inordinate hike in rent toward the end of the lease period. Given the high cost of moving, the tenant is left without options. With provisions of rent control, the tenants may demand any defects be mended to comply with city code, without fear of having to bear a rent increase (Baar, 1983).
The second biggest benefit for tenants is tax wise.Rent control allows tax benefit trickling down to renters because the tax code allows deductions to be claimed on the basis of property depreciation – even while the rents are going up. This allows for a balance in the tax benefits (Downs, 1996).
Rent control also contributes to preserving standards of housing, because reassured tenants would be more willing to take care of their rented units. This is due to a reassurance of housing at the set prices they are renting at or near about the same prices. Many tenants are also open to putting their own money to renovate under these reassurances.
By stabilizing rents, tenants are avoided the hassle of moving frequently. If there are children involved, there is a loss of focus in their academic programs together with disorientation with every move. There is always a diminished sense of academic satisfaction and academic belonging in children within families that moved frequently.
Rent controls allow tenants to secure premises and contribute to the safety and well-being of a society. This in turn accords them with a nice and safe environment. Frequently moving contributes to instability in the locality, causing loss of rental incomes, allowing nuisance and increasing crime rates.Likewise rent paying tenants make for good tax payers contributing to a well oiled city or state machinery, that comes back and accords them the privilege of living in such a place. Whenever a locality or an area loses human capital to arbitrary financial upheavals, it is a loss to the region. On the other hand, measures such as rent control allowing affordable housing make a big difference in the lives of several such people. Of course, the measures also bounce back and help the society that received their contributions. Tenants are able to participate in the community, local youth groups and community organizations when they do not have to worry about moving. Likewise average income in renters stabilizes and seems to rise if the challenge of a frequent move is taken away. Tenants are able to build their personal lives around a place they can safely cause home, without a looming pain and expense of a move, or be hit by an inordinate raise in rent.
The biggest benefit is to the elderly and disabled or dependent tenants, whose lives can quickly unravel if they are caught in a circle of finding new housing and moving, because of associated difficulties.
Lastly rent control also safeguards what some have hailed as the right to housing of the tenants. Advocates contend that a tenant’s right to housing is equal to or more than the owner’s property rights. Rent control laws in California were developed out of a clearly stated goal of confiscation of private property without any compensation in return. The rent control provisions also protects people from being forced out arbitrarily if the property goes into foreclosure.
Long term affects of rent control do not play out as well for the renters. In the long term a cap on the money that may be made by renting will seriously hamper the quality and number of housing buildings available. Renters would be hard pressed to find units that are well maintained (Turner, 1990).
Besides rent control deters investment in housing market that leads to fewer jobs and renting prospects. There is always the long term fear of a slowdown in the real estate market altogether – even affecting the economy in general. This will have an indirect affect on renters as well.
This all also has a worse affect of ultimately decreasing the supply to the point that housing becomes less affordable. Money for maintenance would be sourced from rent hikes for new renters. Besides people will be less motivated to branch out and take up employment opportunities elsewhere, since the most severe forms of rent control almost always prevail in the most well off, populated and dense markets.
Rent control also destabilizes the power balance between the landlord and the tenant, so while the tenant may threaten long legal processes, costing the landlord, there would be harsher conditions for a new tenant looking for an accommodation.
Rent control also brings down the value of a property, which in turn puts the economy itself on the back foot. Effects due to this harm arefelt by everyone in the long run, including the tenants.
- Samuelson, W & Marks, S: 379. Managerial Economics 4th ed. Wiley 2003.
- Colander, David C. Microeconomics 7th ed. Page 283. McGraw-Hill 2008.
- Baar, Kenneth K. (1983). “Guidelines for Drafting Rent Control Laws: Lessons of a Decade.” Rutgers Law Review, Vol. 35 No. 4 (Summer 1983)
- Downs, Anthony (1996). A Reevaluation of Residential Rent Controls. Washington, D.C. : Urban Land Institute, ISBN 0874208017.
- Turner, Margery Austin (1990). Housing Market Impacts of Rent Control. Washington, D.C.: Urban Institute Press, ISBN 0877664439.