Two papers show the bad, and some good, of rent control in San Francisco

I have been talking with my ECONS101 class this week about rent controls, which is a topic that I have blogged about many times before (see the links at the end of this post). Economists really dislike rent controls, sometimes in deliberately hyperbolic terms. In one prominent case, the Swedish economist Assar Lindbeck was quoted as saying:

“Rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”

Lindbeck's statement is based on the evidence that shows the negative impacts of rent controls. One example is described in this 2025 article by Eilidh Geddes (University of Georgia) and Nicole Holz (Northwestern University), published in the Journal of Housing Economics (ungated earlier version here). They looked at the impact of a large-scale rent control expansion in San Francisco in 1994, which removed an exemption from rent control for small (less than five units) owner-occupied buildings built before 1980, on evictions.

Their data are the number of eviction notices, as well as wrongful eviction claims and 'owner move-in' eviction notices at the zip code level, from 1990 to 2010. They apply a continuous treatment difference-in-differences, which essentially compares the change in evictions (or other measure) between zip codes that were more affected by the removal of the exemption and those that were less affected. Their measure of exposure to the treatment is the number of housing units in the zip code that became exposed to rent control policies after the passage of the voter referendum in late 1994. In zip codes where more housing units were affected by the change, we would expect to see greater impacts than in zip codes where fewer housing units were affected. One limitation of this is the data source that Geddes and Holz use, which is based on building data from 1999, five years after the change was implemented. However, they show that three main sources of problems (demolition of buildings between 1994 and 1999, splitting of land parcels, and construction that changed the number of units in each building), do not have much impact on the estimated number of units affected (and so, don't have a large impact on the treatment variable).

In their main analysis, Geddes and Holz find:

...an 83% increase in eviction notices filed with the Rent Board and a 125% increase in the number of wrongful eviction claims for ZIP codes with the average level of new exposure to rent control...

These effects are large and economically significant. We find an annual effect of an increase of 20.07 eviction notices per 1000 treated units in a zip code. Over the six years in our post period (1995–2000), this translates roughly into 12% of newly rent controlled units receiving an eviction notice.

So, the expansion of rent control leads to an increase in evictions. Geddes and Holz also find that the effects:

...are concentrated in low-income areas. These areas are not necessarily those that saw the largest increases in aggregate rents during the 1990s, suggesting that landlords may be more willing to engage in eviction activity in places where there are fewer resources to fight that behavior.

Geddes and Holz caution against taking a broad interpretation of their results though, as the removal of the exemption in 1994 primarily affected small landlords, who are often 'mom and pop' landlords and are able to take advantage of 'owner move-in' eviction provisions that are not available to large corporate landlords. However, the results are consistent with the broader literature, which suggests that tenants may be negatively affected by rent controls.

But not in all ways, it appears. In a more recent article published in the Journal of Health Economics (open access), Geddes and Holz look at the impact of the same 1994 expansion of rent control in San Francisco on intimate partner violence (IPV). They first note that that the effect of rent control on IPV is theoretically ambiguous, and there are two competing models with different predictions:

In the financial strain model, lower housing costs will decrease financial stress, leading to lower levels of violence. The effect of housing policies will thus depend on whether they lower costs for couples. However, in a bargaining model, there is a crucial distinction between policies that shift housing costs overall and those that shift the relative costs of housing inside and outside of the relationship. Policies that decrease housing costs overall will change the amount of resources in the relationship to be bargained over, but will not shift the bargaining power in the relationship. However, policies that decrease housing costs inside the relationship relative to those outside of the relationship will change the attractiveness of the outside option, shifting bargaining power away from the woman.

The empirical setup in this research is the same as for their earlier research on evictions. The difference is that the outcome variable of interest is IPV, measured as:

...the number of hospitalisations resulting from assaults that comes from California’s Department of Health Care Access and Information (HCAI, formerly OSHPD) from 1990–2000.

In their main analysis, Geddes and Holz find that:

...for every one percent increase in exposure to rent control in a ZIP code, hospitalized assaults on women decline by 0.08 percent. In levels, this translates to an almost 10 percent decrease in violence against women for the average ZIP code.

They find no corresponding decrease in assaults on men, which suggests that their results are not driven by an overall decline in assaults (including non-IPV assaults). They also find no effect on reported accidents, which suggests that their results are not driven by changes in the propensity to report IPV. Interestingly, they also find:

...no evidence of changes in household size or composition, suggesting that our results are driven by changes in violence within relationships rather than changes in cohabitation or relationship dissolution.

Overall, their results are most consistent with the financial strain model of IPV. Based on that model, we interpret these results as showing that rent controls, by reducing housing costs (and it is worth noting that housing costs in San Francisco are, and have been for some time, very high), decrease conflict within intimate relationships, and decrease IPV.

So, at least there is some evidence for positive effects of rent control. These results also sit alongside earlier evidence from the same rent control expansion, which showed short-run gains for incumbent tenants, but long-run reductions in the supply of rental housing units, as well as an increase in inequality. However, few people are advocating for rent control policies in order to reduce intimate partner violence. And benefits in terms of reduced violence have to be weighed against all of the other negative consequences of rent control policies, many of which are outlined in the posts linked below.

Read more:

• Why rent controls have worse effects over longer time horizons
• The deadweight loss of rent control
• The deadly consequences of rent control in Mumbai
• Rent control and inequality in San Francisco
• Rent control and the redistribution of wealth
• Rent control and vacant properties in India
• Rent control according to Seinfeld
• There should be no debate at all about rent controls
• Rent controls make many tenants worse off in the Netherlands

Rent controls make many tenants worse off in the Netherlands

Rent controls have created shortages of housing, every time and in every place that they have been tried. In the latest futile attempt to create working rent controls, the Netherlands has worsened its housing shortage. As Bloomberg reported recently (paywalled, but try this alternative link):

Two years ago, Nine Moraal and her two children moved into a one-bedroom flat near the Dutch city of Utrecht, a comfortable spot close to family and friends. Although she had only a two-year lease, she expected to be able to extend it and stay until she could get one of the Netherlands’ many rent-controlled apartments.

But last spring, her landlord told her she’d have to move out in November, because renting the flat was no longer profitable. Despite “frantic efforts on social media, phone calls, visits to realtors and housing agencies,” the 33-year-old educator says she hasn’t found anything. “The cost isn’t the problem, but a real shortage of housing is.”

Moraal is among the growing number of Dutch people struggling to find a rental property after a new law designed to make homes more affordable ended up aggravating a housing shortage. Aiming to protect low-income tenants, the government in July imposed rent controls on thousands of homes, introducing a system of rating properties based on factors such as condition, size and energy efficiency. The Affordable Rent Act introduced rent controls on 300,000 units, moving them out of the unregulated market...

For the past year, Shahmy Wahabdeen has been renting a house in The Hague for €1,400 a month. After the new rules kicked in, his landlord decided to sell, leaving Wahabdeen scrambling to find new digs for his family of four. “I’m feeling completely hopeless and am seriously considering sending my family back home,” says the 34-year-old software engineer from Sri Lanka. “I don’t know what else to do.”

Coincidentally, I covered rent control with my ECONS101 class in the lecture today. I could see some sceptical faces around the class when I described the negative impacts of rent control on the market, and especially the negative impacts on tenants. However, there is lots of robust evidence on these negative effects, and the Netherlands example is just one more example of how rent controls often fail to help the very people that they are designed to help. A tenant who has nowhere to live isn't going to thank the government for cheap rent.

In fact, my most recent post on this topic was titled "There should be no debate at all about rent controls", and that's because any debate should be over before it begins. When it comes to bad policy, rent control ranks near the top. It certainly isn't a way of fixing the cost of housing. If a government is concerned about the cost of housing, they should build more housing.

[HT: Marginal Revolution]

Read more:

• Why rent controls have worse effects over longer time horizons
• The deadweight loss of rent control
• The deadly consequences of rent control in Mumbai
• Rent control and inequality in San Francisco
• Rent control and the redistribution of wealth
• Rent control and vacant properties in India
• Rent control according to Seinfeld
• There should be no debate at all about rent controls

There should be no debate at all about rent controls

Rent controls have a number of negative effects. They lead to excess demand for housing, which is worse in the long run than the short run. They create a deadweight loss (a loss of economic welfare overall). They reduce the quality of rental housing (to the extent that rent controls have deadly consequences), and increase the quantity of vacant housing. They may even increase inequality (see here and here). In fact, the Swedish economist Assar Lindbeck (who passed away in 2020) was quoted as saying:

“Rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”

And yet, despite the overwhelming evidence of the negative effects of rent controls, people still advocate for them. Or, they or argue that we need to re-examine them based on flimsy reasoning. For example, in this article in The Conversation, Tom Baker (University of Auckland) asks us to have an open mind about rent controls. An open mind couldn't fail to see that the evidence is strongly against rent controls as a way of helping low-income tenants. We don't need to rely on an economic model for this - the empirical evidence (in the posts linked above) supports it.

Fortunately, not everyone has starry-eyed views of rent controls and is unwilling to consider the weight of the evidence. This article in The Conversation by Ameeta Jain (Deakin University) concludes that:

While freezing rents would appear to be a simple method to increase rental housing affordability, the unintended consequences of any such move will have a long-term negative impact on the total availability of rental housing stock, reducing the quality of housing and increasing a black market in rental housing.

Global experience suggests that improving supply, by easing building restrictions and scrapping red tape for new developments, is likely to be a more effective policy tool in Australia.

As for helping low-income tenants, I said it best in this post in 2015:

This excess demand can have a range of negative effects, depending on how it is managed. Perhaps the excess demand is managed by waiting lists of various flavours (as in Stockholm or Copenhagen), which means that potential tenants have to wait years for a rent-controlled space to become available. Instead, perhaps landlords are left to manage the excess demand on their own, in which case the rent-controlled housing is more likely to be rented to higher income tenants. Why? The landlord has a lot of choice over tenants now (because of the excess demand). If they can choose to rent their house to the professional couple with two incomes, or the solo mother with no job and three young children, it doesn’t take an economics PhD to work out who is going to miss out. So in this case the rent control actually hurts the very people (low income tenants) that it was designed to help.

On top of that, landlords might be willing to accept side-payments (bribes) to ensure access to rental housing. Tenants are willing to pay the bribes to ensure they don't miss out on a place to live. This further stacks the rental market against low-income tenants.

The very tenants that rent controls are designed to help, end up being the tenants that are most hurt by the policy. If we are worried about low-income tenants, perhaps we should do something about their low income, or do something that raises supply of rental property (which would increase competition among landlords and reduce the equilibrium rent). Rent controls are a policy failure on so many dimensions and are best forgotten.

Read more:

• Why rent controls have worse effects over longer time horizons
• The deadweight loss of rent control
• The deadly consequences of rent control in Mumbai
• Rent control and inequality in San Francisco
• Rent control and the redistribution of wealth
• Rent control and vacant properties in India
• Rent control according to Seinfeld

The Madagascan vanilla crisis, part 2

In yesterday's post, I discussed the minimum price in the Madagascan market for vanilla, assuming that only the domestic market matters. It was based on this article from Le Monde. However, yesterday's analysis was a bit incomplete, because I ignored the role of international trade in vanilla. So, let's revisit the market and introduce international trade.

The market without a price control is shown in the diagram below. The domestic price of vanilla is P0, and if there was no international trade then Q0 vanilla would be traded. However, Madagascar has a comparative advantage in the production of vanilla. In the market diagram, that is represented by the world price for vanilla (PW) being higher than the domestic price (P0). If there is free trade in vanilla, domestic producers of vanilla have the choice between selling in the local market and receiving the price P0, or selling in the world market and receiving the price PW. It is no surprise that they will choose to sell in the world market. No domestic buyer is going to be able to buy vanilla unless they are willing to pay the world price. At the price PW, domestic consumers are only willing to buy Qd1 vanilla. Domestic sellers are willing to sell Qs1 vanilla - they well Qd1 of this to the domestic consumers, and the rest gets sold to the world market. The quantity of exports is equal to (Qd1-Qs1).

Now consider the areas of economic welfare (as we did in yesterday's post). If there was no international trade in vanilla, the consumer surplus (the difference between the consumers' willingness to pay and the price, or the consumer's economic rent) is the area AEP0. The producer surplus (the difference between the price and firms' marginal costs, or firms' profits or economic rent) is the area P0ED. Total welfare (the sum of consumer surplus and producer surplus) is the area AED. If there is free international trade in vanilla, then the consumer surplus decreases to the area AFPW. The producer surplus increases to the area PWGD. Total welfare increases to the area AFGD. Total welfare is greater with trade by the area FGE - this represents the value of the gains from international trade in vanilla.

Now, what happens when the government implements a minimum price in this market, where the minimum price is greater than the world price? That is shown in the diagram below. At the minimum price, PMIN, the quantity of vanilla demanded decreases to Qd2, while the quantity of vanilla supplied increases to Qs2. There is a surplus of vanilla equal to the difference between Qs2 and Qd2. Only Qd2 vanilla is traded in the market. This is the same outcome as yesterday. However, what happens to international trade? The quantity of vanilla exports falls to zero. International buyers of vanilla have the choice of buying vanilla from Madagascar and paying the regulated price of PMIN, or buying from the rest of the world market and paying the lower price PW. It should be no surprise that the export market for Madagascan vanilla collapses. The consumer surplus decreases to the area ABPMIN, while the producer surplus decreases to the area PMINBCD. Total welfare decreases to the area ABCD, and the lost welfare (the deadweight loss) is equal to the weirdly shaped area BFGC.

Now it becomes much clearer why Madagascan vanilla growers are unhappy. A binding domestic price control in an exporting country leads to a huge loss of producer surplus (grower profits), as well as a large deadweight loss.

One last point is worth noting. The demand and supply diagrams above assume that changes in the Madagascan vanilla market don't affect the world price. In fact, that is unlikely to be true, because as the Le Monde article notes, Madagascar produces 80% of the world's vanilla. A reduction of exports of Madagascan vanilla will almost certainly increase the world price of vanilla, so the gap between PMIN and PW should close. However, it is unlikely that it would close entirely. As the article notes:

Other producers such as Papua New Guinea and Uganda have also taken advantage of this to strengthen their position.

Madagascar is not the only producer of natural vanilla, and there are synthetic substitutes available as well. As I noted yesterday, price controls are almost always a bad idea. In a market where your country is an exporter, they are an even worse idea.

[HT: Marginal Revolution]

Read more:

• The Madagascan vanilla crisis

The Madagascan vanilla crisis

Le Monde reported last month:

Nothing has gone as planned: The scheme devised by Madagascar to guard against a sudden collapse of the vanilla market by imposing a minimum price of $250 per kilogram (€228) for the past three years has resulted in gridlock. While hundreds of tonnes of unsold pods are piling up in growers' fields and exporters' warehouses in Sava, in the north-east of the island, Andry Rajoelina admitted his failure, on Thursday, April 13, by opening the way to a "liberalization" of exports. Stakeholders called for the decision, which is supposed to calm the furor that has been rising in the region for several months...

The equation Rajoelina has to solve today is not entirely a surprise. Doubts were expressed by buyers as well as some exporters back in 2020 when the new regulations were announced. They entailed a minimum export price; the obligatory repatriation of all foreign currency earnings; and the creation of a national vanilla council, whose prerogatives included granting export approvals.

For buyers, the price tag is "not in line with market realities."

Price controls are almost always a bad idea. Let's put aside the export controls for now (I may come back to these in a future post - see here), and focus on the domestic market for vanilla as if there was no exporting. This is shown in the diagram below. Without the minimum price, the market was operating at equilibrium, with a price of P0, and Q0 vanilla was traded. To complete our analysis, let's also consider the areas of economic welfare. The consumer surplus (the difference between the consumers' willingness to pay and the price, or the consumer's economic rent) is the area AEP0. The producer surplus (the difference between the price and firms' marginal costs, or firms' profits or economic rent) is the area P0ED. Total welfare (the sum of consumer surplus and producer surplus) is the area AED.

Now, consider the situation where there is a binding minimum price of vanilla, PMIN, which is set above the equilibrium price. The quantity of vanilla demanded decreases to Qd, while the quantity of vanilla supplied increases to Qs. There is a surplus of vanilla equal to the difference between Qs and Qd. Only Qd vanilla is traded in the market. The consumer surplus decreases to the area ABPMIN, while the producer surplus increases to the area PMINBCD. Total welfare decreases to the area ABCD, and the lost welfare (the deadweight loss) is equal to the area BEC.

So, the minimum price of vanilla leads to a large surplus of vanilla. Not all the vanilla that is produced is able to be sold. Vanilla consumers are made worse off, and Madagascan society overall is worse off (because total welfare is lower). On the positive side, the higher price might make vanilla producers better off (as per the diagram above), but it could actually make the producers worse off if the minimum price is set too high. As the article notes:

"This year, we have sold almost nothing. Families are hungry. Some have been forced to sell their houses or fields to pay off their debts to the banks," said Mounirah Philibert, president of the Vohémar organic growers organization.

The surplus vanilla essentially just sits around unsold. The vanilla producers have to store the surplus vanilla, or waste it. The Madagascan government didn't necessarily have to set up their price control in that way. They could have followed a similar path to many Western countries did when they had agricultural price supports (or still do, in some cases). When New Zealand had agricultural price supports, the government essentially guaranteed the price by agreeing to buy any surplus that farmers produced at the regulated price. There was still a surplus, but it was held by the government (which then had to store it, leading to the famous butter mountain in Europe, or waste it). Agricultural price supports implemented in this way are essentially a form of subsidy.

That situation is shown in the diagram below. The producers produce Qs vanilla at the regulated price of PMIN, and the domestic consumers buy Qd vanilla, and the government buys the excess supply (the difference between Qs and Qd). The consumer surplus remains the area ABPMIN, but the producer surplus increases to the area PMINFD (because the producers can now sell all of the vanilla that they produce). The government buys the vanilla at the regulated price of PMIN, and eventually they have to sell that vanilla, but in order to sell it all they have to accept the low price of P1 (at this price, the quantity of vanilla demanded is equal to the quantity of vanilla the producers supplied at the regulated price of PMIN). In other words, the government makes a loss on its sales of vanilla. The area of government loss is equal to the area PMINFGP1 (which is the difference in price, PMIN-P1, multiplied the by quantity of vanilla the government sells, Qs). Total welfare is now the area of consumer surplus and producer surplus combined, minus the area of government loss. It takes a bit of thinking through, because of the overlapping areas, but the area of total welfare is now AED-EFG. Total welfare is smaller than without the price support and government purchases, by the area EFG. That is the deadweight loss of this government intervention.

Price controls are almost always a bad idea. They distort markets, and there are often simpler ways that governments can redistribute welfare than using price controls. As the Le Monde article notes, it seems the consumers, producers, and Madagascan society overall are all being made worse off by the price control policy. When that happens, it is clearly time to re-think the policy.

[HT: Marginal Revolution]

[Update: See the follow-up post here]

Rent control according to Seinfeld

My ECONS101 lecture today covered price controls, and as examples we discussed the minimum wage (as an example of a price floor) and rent control (as an example of a price ceiling). On the topic of rent control, I was really interested to read this new article by Shane Sanders (Syracuse University), Andrew Luccasen (Mississippi University for Women), and Abhinav Alakshendra (University of Florida), published in the American Journal of Economics and Sociology (open access). They outline a number of useful examples where the 1990s TV show Seinfeld can be used in teaching rent control from an economic perspective:

More than 30 years after its premiere, Seinfeld continues its run as a seminally popular television show. Set in New York City, where rent control laws have a long history, a recurring theme of the show concerns the trials of apartment living. In several episodes of the show, characters must deal with the difficulty of procuring an apartment in a city with rent control or rent stabilization policies (shortage, tastes for discrimination by seller, bribery, and search costs), as well as the difficulty of maintaining the quality of a rent-controlled apartment over time once one has been procured (quality degradation). Seinfeld also illustrates the informal process through which rent-controlled apartments are advertised, and that less advertising takes place under rent control induced shortages.

The specific episodes that Sanders et al. outline are The Robbery (Season 1, Episode 3), The Apartment (Season 2, Episode 5), The Shower Head (Season 7, Episode 16), and The Andrea Doria (Season 8, Episode 10). The cool thing about these episodes is that they illustrate many of the negative consequences of rent control. As Sanders et al. note:

In The Andrea Doria, we discuss seller discrimination and bribery as two potential consequences of a rent control policy. The Apartment revisits the theme of bribery and also discusses advertising in the case of underprovision. The episodes The Shower Head and The Robbery illustrate the negative effect of rent control upon housing quality.

As rent control leads to excess demand for apartments (a shortage), many would-be tenants miss out on apartments. That allows landlords to discriminate, because they have a lot of choice over who to rent their apartments to. In my class, I noted that low-income tenants would likely be among those to miss out on rent-controlled housing, because landlords would prefer to rent to high-income tenants instead. Rent controls also provide an incentive for tenants to use side payments (for example, bribes) to ensure that they can secure a rent-controlled apartment. Rent controls also change the incentives for landlords. Since there is no shortage of tenants looking for an apartment, landlords can afford to skimp on maintenance of their apartments, lowering the overall quality of housing. Landlords can also afford to avoid the cost advertising when they have an apartment available, because they can rely on word-of-mouth instead.

Sanders et al. have done a great job of collating these examples. The sad thing is that each example relies on multiple clips from the episode, and as far as I can see, those clips are not available on the official Seinfeld YouTube channel. I guess you could rely on this site (which streams Seinfeld episodes non-stop), but you'd need some way of recording them. Or, you have to buy the Seinfeld DVDs. Or watch Comedy Central, which has been spamming Seinfeld episodes in the evenings for the last couple of months.

On the plus side, they reminded me that there is a whole website devoted to the economics on Seinfeld (and a book!). If you love Seinfeld, there is a lot to learn about economics from this show.

Read more:

• Why rent controls have worse effects over longer time horizons
• The deadweight loss of rent control
• The deadly consequences of rent control in Mumbai
• Rent control and inequality in San Francisco
• Rent control and the redistribution of wealth
• Rent control and vacant properties in India

Fuel price controls vs. climate change

Sometimes, government policy just makes little sense. And sometimes, the economic model that you have in your head doesn't help. Take the example of fuel price controls, which Timothy Welch (University of Auckland) wrote about in this article in The Conversation last week:

The government announcement that the Commerce Commission will soon have the power to regulate wholesale petrol and diesel prices might be good news for cash-strapped motorists, but it’s arguably a retrograde step in the fight against climate change.

While there is some scepticism about whether the commission will ever act to enforce fuel price caps, any move to make carbon-emitting vehicles more affordable must come at the expense of efforts to encourage people out of cars and into more sustainable modes of transport...

Aside from being counter to other plans to mitigate climate change, there is plenty of evidence that price caps can often cause outcomes opposite to those intended. Sometimes, leaving it to the market can be the better option. 

Let's look at this. If the government puts a price control on a perfectly competitive market, we can illustrate its effect with the supply and demand model, as shown in the diagram below. The equilibrium price of petrol is equal to P0, and Q0 petrol is traded. The government thinks that price is too high, so (through the Commerce Commission) they implement a price ceiling (a legal maximum price) of PMAX, which is below P0. The consequence is that the quantity of petrol demanded increases to QD, but the quantity of petrol supplied decreases to QS. There is a shortage of petrol, and only QS petrol is traded.

So, with the price control, less petrol is traded than without the price control. That seems like a win-win for consumers and the climate, and would suggest that we should not be concerned. However, there are two problems here. First, many consumers would be missing out on petrol (there is a shortage at the price ceiling of PMAX). So, it doesn't make all consumers better off. However, the second problem is more fundamental. The market for petrol is not perfectly competitive. While I have argued before (for example, here) that the supply and demand model is usually robust to situations where the market is not perfectly competitive, government intervention in the market is an exception. The firms in the market for petrol have some market power, because they differentiate themselves (on the basis of branding, and the location of their outlets).

A more correct model is shown in the diagram below. The firm with market power operates at the profit maximising quantity, which is the quantity where marginal revenue is exactly equal to marginal cost. That is the quantity Q0, and in order to sell Q0, the firm charges a price of P0 (because with a price of P0, consumers will demand exactly Q0 units of petrol, which is the quantity that maximises profits). When the government implements its price control at PMAX in this market, the price falls, and the quantity of petrol traded increases to Q1. Unlike in the perfectly competitive market, a firm with market power is willing to satisfy the additional consumer demand at the lower price by selling more. So, if the market for petrol has some market power (which we know it does - it is an oligopoly), a binding price control would induce consumers to buy more, with greater impacts on the climate.

However, that isn't the end of the story. The government isn't proposing a price control on retail petrol, but instead on the wholesale price. The analysis above doesn't quite capture that. So, instead of a price control on a firm with market power, we should be showing what happens when a firm with market power has lower costs (because a lower wholesale price of petrol would lower the retail petrol outlet's costs). This is shown in the diagram below. Without the price control, the firm's costs are shown by the line MC0=AC0. The firm profit maximises with a price of P0, and sells Q0 petrol. After the price control is introduced, the firm's costs decrease to the line MC1=AC1. The new profit-maximising quantity is Q1, and the new profit-maximising price is P1. The firm with market power passes on some of the cost savings to consumers in the form of a lower price of petrol (which is what the government intends), and the consumers respond by buying more.

For a government that has stated that climate change is this generation's nuclear free moment, this seems like a very odd policy choice. However, understanding why relies on having the right economic model in mind. And that would be very important if Welch got his way and we had:

...some robust debate about whether the new Commerce Commission powers are necessary. That will involve asking whether making fossil fuels more affordable runs counter to our climate change goals, and whether we are trading planetary health for short-term economic relief.

Rent control and vacant properties in India

Across the street from my home is a vacant house. It's been vacant since at least mid-2019. In the middle of a housing crisis, the house remains vacant. Various people in the neighbourhood have wondered why the owner doesn't rent the property out. It made one of our neighbours incredibly angry. They wanted to buy a house (in 2019), but they couldn't find that was affordable. And yet, the house next to their rented home was vacant.

Why is the house vacant? Why won't the owner rent just it out? If you look at it, you realise that there are a lot of impediments to becoming a landlord. On 1 July 2019 (around about the time that the house was vacated by its owner), the government introduced new 'healthy homes' standards, that all rental properties would eventually need to meet. The house would need to be insulated, and meet heating and ventilation standards, along with some other conditions. If that would require expensive upgrading of the house (and that seems entirely plausible), then the landlord might have decided it would not be worth the hassle, and has since kept the property vacant. [*]

The healthy homes standards are not the worst policy the government could have enacted that would have led to vacant houses. Thankfully they have never followed through on early indications that they were considering rent controls. It is well known (to economists, at least) that rent controls lead to a worsening of the quality of rental housing (to the extent that rent controlled housing is literally killing people in Mumbai). But rent controls also increase the number of vacant houses.

A good examination of why vacancy rates are higher when rent controls are in place was provided by this recent article, by Sahil Gandhi (University of Manchester), Richard Green (University of Southern California), and Shaonlee Patranabis (London School of Economics), published in the Journal of Urban Economics (open access). Gandhi hypothesise that rent controls and lack of state capacity for legal enforcement of contracts both reduce the security of property rights, and that leads landlords to leave their properties vacant:

Two phenomena could create uncertainty in this allocation of rights of ownership between the landlord and the tenant. First, rent control, whose aim is to protect tenants from rent increases and evictions, alters the allocation of ownership in favor of the tenant. Second, if courts take long to resolve disputes, the ownership of the property could de-facto belong to the tenant for this duration and thus increase the risks for the landlord... The presence of either of these two conditions reduces ex-ante incentives for the landlord to engage in a rental contract. High vacancy rates are a natural consequence of reducing the benefits and raising the costs to a landlord of renting.

The problem of vacancies is particularly acute in India, where:

...the vacant stock of 11.1 million units could house almost 50 million people or around 13% of the urban Indian population.

Gandhi et al. use district-level data from the 2001 and 2011 Indian Censuses, essentially comparing the proportion of vacant properties between districts with and without rent controls. They also look at the relationship between vacant properties and state capacity for contract enforcement, measured as the number of judges per 1000 people. They have panel data for 456 districts across 24 states (for rent control) and cross-sectional data for 580 districts across 29 states (for state capacity). In their analyses, they find that:

...a pro-landlord policy move that relaxes rent revisions could potentially reduce housing vacancy by 2.8 to 3.1 percentage points and lead to a net welfare gain...

...a one to two standard deviation increase in judges per 1000 persons (urban) could reduce vacancy by 0.43 to 0.86 percentage points...

In other words, both rent controls and a lack of state capacity for contract enforcement lead landlords to leave properties vacant rather than renting them out. Gandhi et al. conclude that:

...rent control reform and judicial capacity are two areas in need of urgent attention from policymakers. The Model Tenancy Act, approved in June 2021 by the Government of India, aims to address both issues. It allows for setting rents at market rates and requires separate fast track courts to resolve disputes between tenants and landlords. If states adopt this Act then our findings suggest that vacant housing will decline.

Note that introducing rent control, and making it more difficult for landlords to evict bad tenants, would tend to shift things in the opposite direction. Both are policies that the current New Zealand government has actively considered. The consequences are clear.

[HT: Eric Crampton at Offsetting Behaviour]

*****

[*] In the last two years, things have gotten even worse for the house. A pipe burst in 2020 and flooded underneath the house. The owner didn't do anything. A large silk tree in the front yard rotted, then finally collapsed. Still no sign of the owner. The house is virtually abandoned at this point. I suspect it is not only un-rentable (given the healthy homes standards), but is probably unsaleable as well.

Read more:

• Why rent controls have worse effects over longer time horizons
• The deadweight loss of rent control
• The deadly consequences of rent control in Mumbai
• Rent control and inequality in San Francisco
• Rent control and the redistribution of wealth

Why price controls likely make things worse, not better

Phil Lewis wrote a good article on The Conversation today, about price controls:

Australian shoppers are facing a crisis in the fresh-food aisles.

Iceberg lettuces that cost $2.80 a year ago have doubled, or tripled, in price. Brussel sprouts that cost $4 to $6 a kilogram are now $7 to $14. Beans that cost $5 to $6 a kilogram are now more than double – and five times as much in remote areas...

The price hikes have led to calls for supermarkets to impose price caps to ensure shoppers can still afford to feed their families healthy food.

But price ceilings on goods or services rarely, if ever, work. Prices play an important role in allocating resources efficiently. They send a signal to both customers and suppliers. To arbitrarily reduce prices would only increase shortages – both now and in the longer term...

Higher prices provide a signal both to consumers and producers. They tell consumers to buy less and switch to alternatives. They provide an incentive for producers to grow more – though this process is fairly slow given the time needed to grow and harvest fruit and vegetables.

But eventually, if the market is left to its own devices, prices will eventually return to “normal”, consistent with historical prices.

Capping the price, on the other hand, will benefit those lucky enough to grab supplies when they available. But it will likely reduce supply even further, by affecting the decision of producers unwilling to supply at below-market prices.

It could also lead to a “black market”, with some customers sourcing supplies by other means at higher uncapped prices...

So generally price caps are to be avoided.

Now, if anything, Lewis understates the case against price controls (specifically, price ceilings - a legal maximum price which the market price is not allowed to exceed). Price ceilings are effective in lowering the price, but with a lower price, consumers want to buy more (this is the 'Law of Demand'). However, there isn't more to go around (if anything, the lower price reduces the incentive for sellers to supply the good. So, you have more consumers wanted to buy a restricted quantity of the good - it creates a shortage.

Shortages mean that the limited quantity available must be rationed in some way among the many consumers who want to buy at the low price. Usually, price is the main rationing mechanism in the market (only consumers who are willing and able to pay the market price will buy the good). However, when there is a price ceiling keeping the price artificially low, then some form of non-price rationing, is going to have to occur. Perhaps this rationing is based on who can get to the store first in the morning when the new stock is available, or is lucky enough to be at the store when shelves are re-stocked. Perhaps consumers have to queue in order to avoid missing out. Perhaps retailers have a lottery. Perhaps there is a rationing system where consumers are limited in the quantity they are allowed to buy. Perhaps interested consumers sign up and receive tickets that guarantee them a small amount of the good.

Notice how all of these non-price rationing alternatives do one of two things: (1) they impose a direct (non-monetary) cost on consumers (such as the time cost of queueing); or (2) they involve an element of luck. Higher non-monetary costs simply undo a lot of the good that the price ceiling was intended to create. Getting a good that you want only because you were lucky in a lottery, or happened to be in-store when shelves were re-stocked, is in my view not a particularly fair allocation system.

These non-price rationing schemes are also open to abuse, by consumers who are lucky (or who are happy to face the non-monetary cost) on-selling the goods to other consumers who are willing to pay more. This is the black market that Lewis refers to. And higher black market prices than the controlled price provide an incentive for unscrupulous sellers to ensure that their friends receive the goods in the lottery, or just happen to be in store at the right time. This sort of corruption is simply not worthwhile if there is no price ceiling in place.

For some graphic examples of how price ceilings can go wrong, look no further than rent controls (see some of my posts on that here, here, here, and here). The short version is that rent controls reduce economic welfare, they reduce the quality of housing available to rent, and they may even increase inequality. And, their effects get worse over time. In a famous quote, the Swedish economist Assar Lindbeck (who passed away in 2020) wrote that “Rent control appears to be the most efficient technique presently known to destroy a city - except for bombing.”

So, even though some consumers will certainly benefit from the lower prices that price controls create, we must never lose sight of the fact that they don't come with significant negative consequences as well. 

Rent control and the redistribution of wealth

Like removing GST from food, rent control is an idea that has popular appeal, but is almost universally hated by economists. In an extreme example of this dislike for rent control, the Swedish economist Assar Lindbeck wrote, in his 1972 book The Political Economy of the New Left, that "In many cases rent control appears to be the most efficient technique presently known to destroy a city - except for bombing". He may not have been wrong.

The textbook example of rent control does acknowledge that there is a redistribution from landlords to tenants (see my post on that point here). However, aside from the broad category of tenants gaining, and landlords losing, from rent control, the model is not specific about who within each group gains or loses the most. The textbook model is clear that, although tenants as a whole gain, many tenants miss out on those gains because of the excess demand for rental housing. We know from empirical experience that it tends to be low-income and minority tenants who miss out.

I recently read this interesting new working paper on the wealth redistribution of rent control, by Kenneth Ahern and Marco Giacoletti (both University of Southern California). They look changes in property values and the redistribution of wealth caused by the imposition of rent control in St. Paul, Minnesota, in November 2021. Interestingly, they note that:

St. Paul’s rent control law is particularly strict, covering all properties in the city and with no inflation-adjustment for yearly rental increases and no provision to allow rental prices to be reset to market prices upon vacancy. Annual rental growth, for all properties, is capped at 3% year-over-year.

That makes St. Paul's rent control one of the strictest around, far stricter than anything suggested here in New Zealand. Using data on nearly 150,000 property sales in St. Paul and five surrounding counties (excluding Minneapolis), Ahern and Giacoletti find that:

...the introduction of rent control caused an economically and statistically significant decline of 6–7% in the value of real estate in St. Paul.

What caused the decrease in house prices? Thinking about the standard supply and demand model, Ahern and Giacoletti find:

...a statistically significant and large increase in transaction volume in St. Paul following rent control, compared to the adjacent cities. This indicates that the decline in value was caused by a net increase of supply over demand.

In other words, property owners were selling properties at greater rates than before rent control was introduced - presumably because the returns on rental property ownership were now lower. As further evidence of this:

...we find that rental properties experienced an additional 6% decline in value compared to owner-occupied properties, for a total loss of about 12%.

Overall, Ahern and Giacoletti estimate an overall loss of over US$1.5 billion in property value in St. Paul as a result of rent control. So, clearly landlords are worse off. But so are owner-occupiers, because their houses have fallen in value as well.

Ahern and Giacoletti then turn to looking more specifically at the redistribution of wealth. They proxy the characteristics of tenants by the average characteristics of all people in the Census block group they live in (the average Census block group in St. Paul has about 400 households, and about 1100 people living in it). They then use some interesting forensic methods to identify the property owners' addresses, and if the address is residential, they take the characteristics of the property owner as the average characteristics of the Census block group of the address. Of course, this only tends to work for small-scale landlords, since large commercial landlords will have an address for service in a commercial building. They then split each sample (landlords and tenants) into high-income and low-income groups, and compare the change in property values for each combination of tenant and landlord income (high-high, high-low, low-high, and low-low). They focus most attention on what they term the 'high disparity' pairing of high-income landlords and low-income tenants, and the 'low disparity' pairing of low-income landlords and high-income tenants. They find that:

In contrast to the intended transfer from higher-income owners to lower-income renters... the value loss for the high disparity subsample is 0.89%, below the average value loss of 4%. This effect is statistically smaller than the effect for the other three subsamples. In contrast... the statistically largest effect of rent control, at 8.52%, occurs in the low disparity parts of the city where renters have higher incomes and owners have lower incomes. This implies that the impact of rent control is poorly targeted: the largest transfer of wealth is from relatively low income owners to relatively high income renters.

Ouch. However, it is fair to say that this redistribution analysis is based on some fairly heroic assumptions, such as that tenants and landlords have the average income of the area they live in, and that the landlords are correctly identified (as well as bearing in mind that the most affluent corporate landlords are excluded from the sample entirely). 

Rent controls are generally favoured because people believe that it results in a positive redistribution of wealth from landlords to tenants. However, to the extent that this paper provides us with some evidence of redistribution, it doesn't suggest that low-income tenants are strongly benefiting at the expense of high-income landlords.

[HT: Marginal Revolution]

Read more:

• Why rent controls have worse effects over longer time horizons
• The deadweight loss of rent control
• The deadly consequences of rent control in Mumbai
• Rent control and inequality in San Francisco

Simulation evidence that alcohol minimum pricing is better than increasing excise tax

If alcohol is too cheap (see this post), then the two main policy options that the government has is to increase alcohol excise tax (which would increase the price of all alcoholic drinks), or to introduce a minimum unit price (which would increase the price of cheap alcoholic drinks, but probably leave more expensive options unchanged in price). Which is better?

On that topic, I just read this 2010 article (open access) by Robin Purshouse (University of Sheffield) and colleagues, published in the prestigious median journal Lancet. They constructed a complex simulation model from cross-sectional consumption survey and alcohol purchase data (differentiating between on-premise and off-premise purchases, and type of beverage), as well as health data, for England. Importantly, they disaggregate the effects of changes in price on groups based on the level of drinking: moderate (including non-drinkers); hazardous; and harmful. This seems to me to be one of the most thorough exercises of this type that I have seen. The most obvious flaw is the use of cross-sectional data, where longitudinal data would provide better estimates of the own-price and cross-price elasticities of the various beverage types.

They investigate a wide range of pricing policies, with different levels of change in price. Their model allows them to estimate the effects on alcohol consumption (based on own-price and cross-price elasticities), and the effects on health care costs (based on health economic models) and health gains measured in Quality-Adjusted Life Years (QALYs; based on econometric models linking consumption to alcohol-attributable medical conditions). Their findings are most easily summarised in Figure 1 from the article:

Unsurprisingly, within any type of policy, larger increases in price have more positive effects. However, the more interesting result is comparing across different policies. Purshouse et al. find that:

...notable between-policy differences exist. For example, a £0·45 minimum price would be more effective overall than a 10% general price increase, but is achieved with a much lessened effect on moderate drinkers’ spend and larger increases in spend for harmful drinkers. This differential effect arose because minimum price policies target cheap alcohol products, which make up a higher proportion of the average selection of alcohol purchases for heavier drinkers than for moderate drinkers.

So, policies that have the same overall effect on alcohol consumption can have very different effects in terms of reducing alcohol-related harm. My takeaway from the results overall is that it appears that minimum unit prices work better than increasing prices across-the-board through excise tax increases. This would accord with other research, although it is not a reason to discard excise taxes entirely.

Understanding the effects of potential policy options is important. In Purshouse et al.'s discussion of their results, they make what seems to me to be a really important point:

For policy makers, a balance between reduction in health harms and increased consumer spending might be important for proportionality, and one implication of our study is that minimum pricing strategies might help achieve this balance. For example, a general 10% price rise is estimated to reduce consumption by 4·4% and alcohol-related harm by £3·5 billion over 10 years, but a minimum price of £0·45 could produce a similar overall consumption effect, while achieving greater reductions in harm and a rebalancing of spending effect away from moderate drinkers towards heavier drinkers.

So often, public health researchers ignore the trade-offs inherent in their policy recommendations, or lack any sense of the proportionality of those recommendations. The sort of simulation exercise that Purshouse et al. conducted allows for quite a deep exploration of various pricing policy options. They make the point that their modelling approach can be used as a template for other countries. It would be great to pull together something like this for New Zealand, which might provide the evidence to support minimum unit pricing here.

Read more:

• Alcohol minimum pricing, elasticity and profits
• Alcohol minimum pricing vs. taxes
• Is alcohol too cheap?

Is alcohol too cheap?

Alcohol Healthwatch was in the news this week, having released a report on alcohol prices in New Zealand. As the New Zealand Herald reported:

There are calls for the price of alcohol to increase after a new "Cheap Drinks" audit found it costs as little as 77 cents per standard drink to buy booze at some supermarkets and bottle stores.

While those standard drinks can't be bought per glass, it does mean that heavy drinkers can buy cask wine, cheap bottles of wine and large packs of beers for what is being described as "pocket money" prices.

The headline result in the report is the cheapest prices for each type of alcohol, where cask wine is found to be the cheapest way to get drunk. At 77 cents per standard drink, that rates it much cheaper than wine (85-88 cents), beer (98 cents), cider ($1.08), or RTDs ($1.14). The data in the report was collected from 22 off-licence outlets across Auckland (it says it's 'online data', so presumably was collected from store websites. In my experience (more on that a bit later), the in-store prices can actually be lower than those advertised on the store websites. And some independent stores will negotiate with you, offering an even lower price.

Is the price of alcohol too low though? That's pretty subjective, and the report doesn't link the low alcohol prices directly to alcohol consumption or to alcohol-related harm. We are left to infer that those links exist (and, to be fair, there is plenty of literature that does link alcohol consumption and harm).

Alcohol Healthwatch's preferred solution is (emphasis is theirs):

A combination of excise tax increases and minimum unit pricing is required to reduce consumption across the population. Whilst the latter specifically targets the cheapest alcohol in the market, the former is primarily aimed at increasing the overall price of alcohol so that population-level excessive alcohol use and alcohol-related harm is reduced. Across the board price increases will assist in the prevention of ‘moderate’ drinkers becoming heavy drinkers, and in heavy drinkers becoming dependent drinkers. Importantly, higher prices provide a supportive environment for the thousands of New Zealanders who indicate that they want to cut back their drinking.

I've discussed minimum unit prices and alcohol excise taxes before (see here). Raising the alcohol excise tax would increase the price paid by consumers, and reduce the quantity of alcohol demanded. Minimum unit pricing would also raise the price paid by consumers, and reduce the quantity of alcohol demanded.

Given that both policies appear to have the same effects, you could argue that we don't really need both. However, past research has shown that it may be optimal to have both an excise tax and minimum unit pricing simultaneously. In this post, I noted that:

As Paul Calcott (Victoria University of Wellington) showed in this 2019 article published in the Journal of Health Economics (sorry, I don't see an ungated version online), the combination of minimum unit pricing with an excise tax may be optimal:

...when relatively cheap forms of alcohol are undertaxed, and the quality and quantity of alcohol are substitutes.

Raising alcohol excise tax raises the price of all alcohol, and decreases alcohol consumption. However, some consumers will simply switch to lower quality (and lower priced) alcohol instead. At the bottom of the quality (and price) distribution, where consumption (and alcohol-related harm) might be the highest, then it makes sense also to have minimum unit prices.

The problem with this suggestion is that it is not well supported by the public. As I noted in this post, minimum unit pricing was the alcohol regulation that had the lowest support of all the seven options that were presented to survey participants. Only 33 percent of people supported minimum pricing, while 'having fewer places selling alcohol' had 54 percent support. Interestingly, having fewer places selling alcohol could have the effect of raising prices, if there is local price competition between stores.

However, the research evidence that there is such local price competition is scarce. I have been collecting a long-run dataset of alcohol pricing at all off-licences in South Auckland and Hamilton City for over ten years. The purpose of collecting that data is to test whether competition between outlets affects pricing (and opening hours). Local competition doesn't appear to have much effect in a cross-section, hence the need to collect some longitudinal data (where there is observed changes over time in local competition). I hope that post about that research sometime next year.

Read more:

• Alcohol minimum pricing, elasticity and profits
• Alcohol minimum pricing vs. taxes

Surprise! Non-drinkers support more restrictions on alcohol, but minimum unit pricing might be a hard sell

I've been meaning to read the results from the Alcohol Use in New Zealand study for some time, given that they were released near the start of the year. In particular, I was interested in this bit on public attitudes on policy interventions. The report is brief (four pages), and reports on results from a representative survey of over 4500 New Zealand adults undertaken last year (the methodology is described in a separate report).

Anyway, the results are interesting because they ask to what extent people support various interventions drawn from the WHO's SAFER initiative:

• (S) Strengthen restrictions on alcohol availability;
• (A) Advance and enforce drink driving countermeasures;
• (F) Facilitate access to screening, brief interventions and treatment;
• (E) Enforce bans or comprehensive restrictions on alcohol advertising, sponsorship, and promotion; and
• (R) Raise prices on alcohol through excise taxes and pricing policies.

In relation to the first intervention, they found that:

Four in five (83%) respondents supported tightening restrictions on drink driving by making the penalties harsher. Women... were more likely... to show support.

Those who didn’t drink in the last week... were also more likely to show support to this policy.

However, there was lower support (48%) for changing the blood alcohol limit when driving to zero. More likely to show support were women...

Non-drinkers... were also more likely to express support.

For the second intervention:

Three-quarters (76%) of respondents supported banning the promotion of alcohol from social media that under 18-year-olds use...

Women... were more likely to express support, along with non-drinkers...

Three in five (62%) respondents supported banning alcohol sponsorship at sporting, community and other events that under 18-year-olds go to...

More likely to show support were women... Non-drinkers... were also more likely to express support.

Are you beginning to see a pattern? For the other three interventions:

Three in five (60%) respondents supported requiring health professionals to regularly ask patients about their drinking.

Women... and non-drinkers were more likely to express support. 

Just over half (54%) of respondents supported having fewer places selling alcohol in the local community.

More likely to express support were women... and non-drinkers.

One in three (33%) respondents supported raising the minimum price of alcohol.

More likely to show support were women...

Non-drinkers... were also more likely to support the policy.

In fact, it appears that for every single policy intervention that people were asked about, non-drinkers were more likely to support those interventions (and so were women). In terms of non-drinkers, it's pretty easy to support a policy when you expect to face none of the costs of the policy once it's implemented. It would have been interesting to see how much support there was among drinkers for these policy interventions, although I expect that you then get exactly the opposite problem (since drinkers face all of the costs of the policy)!

Putting aside the difference in preferences between drinkers and non-drinkers (and men and women) for the moment, the relative ranking of the various interventions is interesting. I don't know whether the differences in ranking are statistically significant, but taking the headline results, the interventions can be ranked in terms of public preferences:

1. Stricter penalties for drink driving (83%)
2. Banning the promotion of alcohol from social media (76%)
3. Banning alcohol sponsorship at events (62%)
4. Requiring health professionals to ask about drinking (60%)
5. Having fewer places selling alcohol (54%)
6. Lowering the blood alcohol limit for driving to zero (48%)
7. Raising the minimum price of alcohol (33%)

I don't know about the feasibility of doing #2, but the others with more than 50% support are certainly feasible (as are the other two interventions with less than majority support). It would also be interesting to see if the relative ranking was the same for both drinkers and non-drinkers.

The distinct lack of support for raising the minimum price is interesting as well, given that it has been a policy favoured in some other countries, like Scotland. Wales implemented a minimum price last year, and the Republic of Ireland will introduce minimum pricing from 1 January 2022. Economists aren't typically in favour of price controls, but in this case minimum pricing may actually be more efficient. As Paul Calcott (Victoria University of Wellington) showed in this 2019 article published in the Journal of Health Economics (sorry, I don't see an ungated version online), the combination of minimum unit pricing with an excise tax may be optimal:

...when relatively cheap forms of alcohol are undertaxed, and the quality and quantity of alcohol are substitutes.

The numerical example that Calcott provides suggests that heavier drinkers may be undertaxed (while lighter drinkers might be undertaxed), because heavier drinkers pay no more per ounce of alcohol than lighter drinkers do. The article is quite mathematical, so not for the faint of heart. My takeaway from Calcott's article was that there was modest support for minimum unit pricing, since it would affect the heaviest drinkers the most. However, clearly there is little support from the public for this intervention.

The question now, is whether the government has any appetite to revise alcohol laws and implement any of the policy interventions that do appear to have majority support.

Rent control and inequality in San Francisco

Rent control is a staple in introductory economics courses. The idea that a policy that has popular support from the public nevertheless has negative impacts on the very tenants that it aims to help, is an important story to tell (see here and here and here for previous posts on rent controls). The negative impacts of rent controls are supported by a simple supply and demand model of the market for rental housing. However, it is also supported by empirical data.

A new article by Rebecca Diamond, Tim McQuade, and Franklin Qian (all Stanford), published in the journal American Economic Review (ungated earlier version here), provides support in the case of San Francisco. The authors looked at what happened to tenants and properties affected by a 1994 change in rent control laws:

Rent control in San Francisco began in 1979, when acting Mayor Dianne Feinstein signed San Francisco’s first rent control law... This law capped annual nominal rent increases to 7 percent and covered all rental units built before June 13, 1979 with one key exemption: owner-occupied buildings containing 4 units or less... These “mom and pop” landlords were cast as being less profit-driven than large-scale, corporate landlords, and more similar to the tenants being protected. These small multi-family structures made up about 44 percent of the rental housing stock in 1990, making this a large exemption to the rent control law.

While this exemption was intended to target “mom and pop” landlords, in practice small multi-families were increasingly purchased by larger businesses who would then sell a small share of the building to a live-in owner so as to satisfy the rent control law exemption. This became fuel for a new ballot initiative in 1994 to remove the small multi-family rent control exemption. This ballot initiative barely passed in November 1994. Suddenly, all multi-family structures with four units or less built in 1979 or earlier were now subject to rent control. These small multi-family structures built prior to 1980 remain rent-controlled today, while all of those built from 1980 or later are still not subject to rent control.

Diamond et al. essentially compare properties (and tenants living in properties) before and after the law change, comparing those that were (the treatment group) and were not (the control group) newly subjected to rent control. This 'difference-in-differences' analysis allows them to extract the impact of rent control. They find a number of interesting things, including that:

...on average, in the medium to long term the beneficiaries of rent control are between 10 and 20 percent more likely to remain at their 1994 address relative to the control group and, moreover, are more likely to remain in San Francisco. Further, we find the effects of rent control on tenants are stronger for racial minorities, suggesting rent control helped prevent minority displacement from San Francisco... On the other hand, individuals in areas with quickly rising house prices and with few years at their 1994 address are less likely to remain at their current address, consistent with the idea that landlords try to remove tenants when the reward is high, through either eviction or negotiated payments.

On the latter point, they note that there are a number of ways that landlords can subvert rent control, such as:

First, landlords could try to legally evict their tenants by, for example, moving into the properties themselves, known as owner move-in eviction. Alternatively, landlords could evict tenants according to the provisions of the Ellis Act, which allows evictions when an owner wants to remove units from the rental market: for instance, in order to convert the units into condos or a tenancy in common.18 Finally, landlords are legally allowed to negotiate with tenants over a monetary transfer convincing them to leave. In this way, tenants may “bring their rent control with them” in the form of a lump sum tenant buyout.

On top of all that, they also found that:

...landlords actively respond to the imposition of rent control by converting their properties to condos and TICs or by redeveloping the building in such as a way as to exempt it from the regulations. In sum, we find that impacted landlords reduced the supply of available rental housing by 15 percent. Further, we find that there was a 25 percent decline in the number of renters living in units protected by rent control, as many buildings were converted to new construction or condos that are exempt from rent control.

This is a point that I made in this earlier post. Diamond et al. also note that their results imply interesting effects of rent control on inequality:

In the short run, rent control prevents displacement of the initial 1994 tenants from San Francisco, especially among racial minorities. To the extent that these 1994 tenants are of lower income than those moving into San Francisco over the following years, rent control increases income inequality. However, this short-term effect decays over time. Eight years after the law change, 4.5 percent of the tenants treated by rent control were able to remain in San Francisco because of rent control. However, five years later, this effect had decayed to 3.7 percent, and will likely continue to decline in the future.

In the long run, on the other hand, landlords are able to respond to the rent control policy change by substituting toward types of housing exempt from rent control price caps, upgrading the housing stock, and lowering the supply of rent-controlled housing. Indeed, the prior section showed that as of 2015, the average property treated by rent control has higher income residents than similar market rate properties. The long-term landlord response thus offsets rent control’s initial effect of keeping lower income tenants in the city by replacing them with residents of above-average income. In this way, rent control works to increase income inequality in both the short run and in the long run, but through different means. Rent control’s short-term effects increases the left tail of the income distribution, while the long-term effects increase the right tail.

I'm not sure that this is what advocates of rent controls would be expecting. However, it serves as another cautionary point on the effects of rent controls.

[HT: Marginal Revolution]

Alcohol minimum pricing vs. taxes

Let's say that there was some good, where the government thought the market provided too much. Consumers consume too much of this product, compared to some socially efficient level. Economists call this a demerit good. The government might want to find some way of reducing consumption of the good. A tax seems like an obvious solution, and has the bonus effect of increasing government revenue - a double win!

But now let's consider a specific demerit good - alcohol. If the government taxes alcohol, the effects on the market are shown in the diagram below. The price that the consumers pay increases from P0 to PC, and the effective price that the producers receive (after paying the tax to the government) falls to PP. The quantity traded (and consumed) decreases from Q0 to Q1. Notice that the demand curve is quite steep (inelastic), so the tax doesn't reduce consumption by much. Notice also that, because the demand curve is steeper (more inelastic) than the supply curve, the price consumers pay goes up by a lot, while the effective price that producers receive falls by only a little. That means that consumers end up facing the burden of the tax. But, at least, the tax has reduced alcohol consumption, which was the aim.

But will the tax really reduce alcohol consumption? Maybe consumers notice the higher prices and simply switch from higher quality (and more expensive) alcohol to lower quality (and less expensive) alcohol. Then, they could continue to drink the same amount as before (but they would just be drinking lower quality beverages). This argument has been made by Eric Crampton (see here, for example).

If the government is concerned about consumers switching to lower quality alcohol, an alternative is to introduce minimum pricing (which I have discussed before, here). Indeed, that is what Northern Territory is about to do, as John Boffa noted in The Conversation this week:

From October 1, 2018, one standard drink in the Northern Territory will cost a minimum of A$1.30. This is known as floor price, which is used to calculate the minimum cost at which a product can be sold, depending on how many standard drinks the product contains...

 The implementation of the minimum floor price is the result of legislation, recently passed to minimise alcohol-related harms in the NT. From October, the NT will become one of the first places in the world to introduce a minimum price for alcohol.

What effect would minimum pricing have on the market? Here's what I wrote back in 2016 on the same topic (but I've updated the diagram to match the diagram above):

The effect is shown in the diagram below. Without minimum pricing, the market equilibrium price is P0, and the quantity of alcohol sold (and presumably consumed) is Q0. But with a binding minimum price (above the equilibrium price) of PC, the quantity of alcohol demanded falls to Q1. In other words, alcohol consumption falls.

Notice that the effect is to reduce alcohol consumption, which is what the government wants. Eyeballing the data in Boffa's article, it definitely shows an increase in price, and it seems that there is the decrease in quantity sold, but the decrease might not be statistically significant. Although Boffa notes:

As expected, the ban on cheap cask and fortified wine led some drinkers to turn to other types of alcohol. But while there was a 70% increase in the consumption of more expensive full-strength beer, the decline in the consumption of cheap alcohol more than offset this. This led to the overall 20% decline in consumption.

An added benefit of minimum pricing is that consumers can't switch between categories to essentially minimise the effect of the policy on their drinking, since a minimum price has a greater effect on low-quality (and therefore cheaper) drinks.

Now let's consider another good that some people would like to see the government act to reduce consumption (although it is arguable whether it is a demerit good) - sugar. A tax on sugar-sweetened beverages (which I've previously discussed here) would have similar effects to the tax on alcohol described above (although whether demand for sugar-sweetened beverages is as inelastic as alcohol is a separate issue). It would even induce consumers to switch to lower quality drinks, as Eric Crampton has argued (see here and here, for example). So, if the anti-sugar brigade want to reduce sugar consumption, wouldn't it be better for them to argue for a minimum sugar price instead?

Read more:

• Alcohol minimum pricing, elasticity and profits