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

Is free employment mediation really free if you have to wait for it?

The New Zealand Herald reported last month:

An employment lawyer is advising businesses to bypass the government’s free employment mediation service.

There was currently a seven-week waiting list to access the Ministry of Innovation, Business and Employment’s mediation service, which was supposed to be a way to avoid drawn-out disputes between employers and their employees.

“Don’t wait,” Rotorua employment lawyer Michelle Urquhart said, adding the cost of accessing private services was well worth it given the risks associated with leaving a dispute to fester.

MBIE advised availability was limited due to high demand and apologised for the inconvenience, though wait time was an improvement from the peak 11-week wait in February.

When the price of a good or service is zero (free), there is often a shortage (excess demand) for the good or service - there are more people wanting to access the good or service than there is available. This is illustrated in the diagram below. If the market for public mediation services operated at equilibrium, the market price would be P0, and the quantity of mediation services would be Q0. That quantity (Q0) is both the quantity of mediation demanded, and the quantity of mediation supplied (the number of mediation appointments available for businesses). We can say that the market clears, because quantity demanded is equal to quantity supplied (the market is in equilibrium).

However, the price is below equilibrium, at zero (free) [*]. At that zero price, the quantity of mediation demanded is QD, while the quantity of mediation supplied is QS. Since QD is greater than QS, there is excess demand (a shortage). That is what we are seeing, with long waits for mediation services.

That excess demand needs to be managed. Ordinarily, we would expect the price to rise when there is excess demand, but since the government has set the price at zero, that cannot happen. So, the alternative is that the excess demand is managed with a waiting list. When a business wants to access the free employment mediation service, it is added to the waiting list, and then needs to wait until the service is available.

Ironically, the operation of the waiting list means that the 'free' mediation service is no longer 'free'. It just has no monetary cost. There is a cost associated with waiting for the mediation, because in the meantime whatever employment dispute necessitated mediation is not being resolved (and festering, as the employment lawyer in the quote above notes). The costs of that unresolved situation might be much less than the cost of paying for private mediation services. The free public services are not really free at all. It should be little wonder that some businesses are opting for private mediation services instead.

Your matcha fix is going to cost you more

The New Zealand Herald reported last month:

At a minimalist Los Angeles matcha bar, powdered Japanese tea is prepared with precision, despite a global shortage driven by the bright green drink’s social media stardom.

Of the 25 types of matcha on the menu at Kettl Tea, which opened on Hollywood Boulevard this year, all but four were out of stock, the shop’s founder Zach Mangan told AFP.

“One of the things we struggle with is telling customers that, unfortunately, we don’t have” what they want, he said.

With its deep grassy aroma, intense colour and pick-me-up effects, the popularity of matcha “has grown just exponentially over the last decade, but much more so in the last two to three years”, the 40-year-old explained.

It is now “a cultural touchpoint in the Western world” - found everywhere from ice cream flavour boards to Starbucks.

This has caused matcha’s market to nearly double over a year, Mangan said.

“No matter what we try, there’s just not more to buy.”

Thousands of kilometres away in Sayama, northwest of Tokyo, Masahiro Okutomi - the 15th generation to run his family’s tea business - is overwhelmed by demand.

“I had to put on our website that we are not accepting any more matcha orders,” he said.

Producing the powder is an intensive process: the leaves, called “tencha”, are shaded for several weeks before harvest, to concentrate the taste and nutrients.

They are then carefully deveined by hand, dried and finely ground in a machine...

“It takes years of training” to make matcha properly, Okutomi said. “It’s a long-term endeavour requiring equipment, labour, and investment.”

What has happened in the market for matcha is explained in the diagram below. The market started at equilibrium, where the supply curve S0 met the demand curve D0. The equilibrium price of matcha was P0, and the quantity of matcha traded was Q0. Demand increases to D1. If prices don't adjust and remain at the original price of P0, then the quantity of matcha supplied remains at Q0, but the quantity of matcha demanded increases to QD. There will be a shortage of matcha.

However, when there is a shortage the market will eventually adjust, and the price will increase to the new equilibrium price of P1 (where the supply curve S0 meets the new demand curve D1), while the quantity of matcha traded increases to Q1. But notice that, even if the market adjusts to a new equilibrium, the quantity of matcha increases only slightly. That's because the supply curve is very inelastic (very steep). That's because the matcha producers cannot adjust quickly to the change in price by producing more - it takes a lot of time to add productive capacity in matcha.

Finally, the price of matcha drinks is also going to increase. To see why, consider the market for matcha drinks, shown below. The market was initially in equilibrium, where demand D0 meets supply S0, with a price of P0 and a quantity of matcha drinks traded of Q0. The cost of matcha increases, so tea sellers face higher costs of production. This decreases the supply of matcha drinks to S1. This increases the equilibrium price of matcha drinks to P1, and reduces the quantity of matcha drinks traded to Q1.

Be prepared to pay more for your favourite matcha drinks.

Avian flu and US egg prices

The New Zealand Herald reported earlier this month:

A resurgence of avian flu, which first struck the United States in 2022, is hitting chicken farms hard, sending egg prices soaring and rattling consumers accustomed to buying this dietary staple for only a few dollars.

In Washington and its suburbs, supermarket egg shelves are now often empty, or sparsely stocked. Some stores limit the number of cartons each client may buy. And everywhere, consumers are shocked by the high prices.

“They’re getting expensive,” 26-year-old student Samantha Lopez told AFP as she shopped in a supermarket in the US capital. “It’s kind of difficult ... My budget for food is already very tight.”...

More than 21 million egg-laying hens have been euthanised this year because of the disease, according to data published Friday by the US Agriculture Department. Most of them were in the states of Ohio, North Carolina and Missouri... 

The department reported the “depopulation” of a further 13.2 million in December.

Higher prices were the inevitable result, experts say.

“If there’s no birds to lay eggs ... then we have a supply shortage, and that leads to higher prices because of supply and demand dynamics,” said Jada Thompson, a poultry specialist at the University of Arkansas.

Let's consider the market for eggs, and how the shortage arose and why that means higher egg prices. This is all illustrated in the diagram below. Before avian flu, the market for eggs was in equilibrium, with a price of P0 and a quantity of eggs traded of Q0. The culling of chickens due to avian flu means that fewer eggs are produced. This is a decrease in the supply of eggs, shown by the supply curve shifting up and to the left, from S0 to S1. If egg prices were to remain at the original equilibrium price (P0), then the quantity of eggs demanded (Q0) would exceed the quantity of eggs supplied (QS) at that price, because egg producers are only willing to produce QS eggs at the price of P0, after the supply curve shifts. There would be a shortage of eggs, which is one of the things that we observe in the US egg market.

However, when there is a shortage, the market will tend to adjust. In this case, the market will adjust through the price of eggs increasing. How does that happen? Some buyers, who are willing to pay the market price (P0), are missing out on eggs. Some of them will find a willing seller, and offer the seller a little bit more, in order to avoid missing out. In other words, buyers bid up the price. The result is that the price increases, until the price is restored to equilibrium, at the new (higher) equilibrium price of P1. At the new equilibrium price of P1, the quantity of eggs demanded is exactly equal to the quantity of eggs supplied (both are equal to Q1). We can say that the market clears. There is no longer a shortage.

So, this model of supply and demand tells us that, because of avian flu, we should expect to see shortages of eggs (at least initially), and overall higher egg prices. Which is what we are observing.

Will New Zealand finally deal with excess demand for access to tourist destinations?

New Zealand has long had a problem with excess demand for access to tourist destinations. I've written about this before, using the Great Walks as an example (see here, and here). Because the price for access to these tourist destinations is too low, the demand for access far exceeds the supply. The consequence is a much-degraded experience for everyone.

The solution, as I have noted before, is to let the price increase. Charge more for access to the Great Walks, and other tourist destinations. And, finally, that may be about to happen. As the New Zealand Herald reported last week:

A $20 access fee for Cathedral Cove, the Tongariro Alpine Crossing, Franz Josef Glacier, Milford Sound, and Aoraki Mount Cook National Park?

The Government is floating the idea of charging visitors – including New Zealanders – as part of two discussion documents, released today, which Conservation Minister Tama Potaka calls the biggest potential changes in conservation in more than three decades...

Charging $20 per New Zealander and $30 per non-New Zealander for accessing those places would bring in an estimated $71 million a year. Charging only international visitors would yield about half that.

Charging for access to these tourist destinations would go some way towards dealing with the excess demand. I'm totally ok with the differential price for New Zealanders and overseas travellers as well (which is something I have noted before, again in the context of the Great Walks). My main concern though is that the price of $20 for New Zealanders and $30 for non-New Zealanders may be too low. However, others have a different view:

But it has triggered a strong reaction from Forest and Bird, which said: “Connection to te Taiao (nature) is a fundamental part of being a New Zealander. All New Zealanders should be guaranteed the ability to connect with our natural environment regardless of how much money they earn.”

How easily can New Zealanders connect with their natural environment when it is thronged with tourists all visiting for free? Charging a price for access limits the numbers of tourists (including other New Zealanders), and makes it more likely, not less likely, that New Zealanders can get genuine access to these places. There is a meaningful difference between accessing a tourist location when there are hundreds of other tourists swarming all over it, and when few people are around and a peaceful engagement with nature is possible.

Quite aside from this being a way for the government to fund the Department of Conservation's operational costs, this proposal to charge a fee for access to these tourist locations is a sensible way to manage demand. Maybe we will finally have a working solution to the excess demand problem in these places.

Read more:

• The Great Walks may be free, but they are not free
• Reducing excess demand at the Great Barrier Reef
• Excess demand for the Great Walks continues

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

The consequences of free drivers licence test resits

The New Zealand Herald reported this morning:

On October 1, at the Labour Government’s directive, NZ Transport Agency Waka Kotahi (NZTA) changed driver licence fees to an all-in-one fee for each stage of testing and the fees to resit a driver test, or to cancel or reschedule, were removed.

The intention was to help ease costs for people going through the driver licensing system. The Transport Minister at the time, Michael Wood, said the changes would save drivers on average $86 each and cumulatively save $5.5 million every year altogether.

But delays to practical test bookings have followed since the change. Average wait times for the week ending April 14 were 44 days for a full licence test throughout the country and 55 days for a restricted test.

The longest delays for a full test were 52 days in the Bay of Plenty, and 68 days in Wellington for a restricted test.

The issue is affecting all regions in New Zealand. As an example, at 10am on April 3 there were only 15 available spots nationwide for a full licence test and only 10 for a restricted licence test.

It should be no surprise that when you lower the price of something, without that price change being driven by a decrease in costs or a decrease in demand, you end up with a shortage. This can be seen in the diagram below. At the original market price for a driver licence test of P0, the quantity of driver licence tests is Q0. That quantity (Q0) is both the quantity of tests demanded, and the quantity of tests supplied (the number of tests available for drivers to take). We can say that the market clears, because quantity demanded is equal to quantity supplied (the market is in equilibrium).

With the market price below equilibrium, at P1, [*] the quantity of driver licence tests demanded is QD, while the quantity of driver licence tests supplied is QS. Since QD is greater than QS, there is excess demand (a shortage). That is what we are seeing, with long waits for driver licence tests.

There are other problems as well. From the same New Zealand Herald article:

[VTNZ’s national technical manager for vehicle testing, Craig] Basher said a large factor of the delays has been the amount of people not showing up to tests, with 2000 no-shows for booked practical tests in the last month.

He has also received feedback that more drivers are turning up unprepared and with unfit cars, making simple mistakes and trying to rebook straight away without further practice.

When a learner driver has to pay for another driving test when they miss an appointment, that creates an incentive to show up, and to show up prepared and with a good quality vehicle. When the learner driver doesn't have to pay, the incentive to show up is much less. In other words, the opportunity cost of missing a driving test is lower when learner drivers don't have to pay for the next appointment. When the opportunity cost of something decreases, people tend to do more of it. In this case, that means more missed driving test appointments.

None of this is surprising to an economist. And the solution is obvious:

[Minister of Transport, Simeon] Brown said he is talking with NZTA and the Ministry of Transport to deal with the issue, which he said could include reintroducing resitting fees.

Some may argue that increasing the number of test slots, and increasing the number of driving instructors, would decrease the shortage. However, that ignores that part of the problem is the number of missed appointments. Both the shortage and the excessive number of missed appointments could be alleviated if the price of repeat driving tests was allowed to increase. Learner drivers would have to pay a little more to get their licence, but they wouldn't have to wait as long, and would have a stronger incentive to show up for their driving test well-prepared.

*****

[*] Notice that the price doesn't fall all the way to zero, because the first drivers test is not free, only the resits. So, the average price of a drivers licence test is not zero.

Shortages in national telehealth services arise from low pay

It was a bit disheartening to read this article in the New Zealand Herald this morning:

The national telehealth service is struggling to recruit enough qualified clinical staff to operate 24/7 phone lines for triaging people with mental health problems, according to employees and union representatives.

They say the understaffing at Whakarongorau Aotearoa’s specialist mental health team, which provides triage lines for many of Health NZ’s public mental health services, as well as supporting police and ambulance services by handling some 111 calls, is causing distressed callers to wait longer and putting enormous strain on its workforce...

According to an internal document, Whakarongorau’s EMHR unit has a budget for 29 full-time clinicians but has “significant gaps” in its rosters because of staff turnover, sick leave, and recruitment challenges. In a recent four-week period, more than half the shifts were understaffed.

“We are expecting it to become even more difficult in the coming weeks and months until we can recruit more clinicians,” the document said. Hiring more qualified staff was challenging because of national workforce shortages and because Whakarongorau pays less than Health NZ.

That last sentence is really the driver of this situation. There is a shortage of workers for the mental health triage lines because they simply don't pay enough. Consider the market for mental health clinicians working in call centres (or similar), as shown in the diagram below. The market wage for these workers is W0, which is below the equilibrium wage of W1. At the market wage, the quantity of clinician hours demanded is QD, but the quantity of clinician hours supplies is only QS. The difference between QS and QD is the shortage of clinician hours.

If wages were more competitive with those offered by Health NZ, then more clinicians would agree to work in these services. In other words, if the wage were allowed to rise, that would increase the number of clinician hours supplied. The market would move up the supply curve. If wages increased to the equilibrium wage W1, then the quantity of clinician hours supplied would increase to Q1, which would then match the quantity of clinician hours demanded (which would decrease to Q1, moving up along the demand curve [*]). Since the quantity of clinician hours demanded would be equal to the quantity of clinician hours supplied, there would no longer be a shortage.

So, in order to resolve the shortage of clinicians here, the workers need to be paid more.

*****

[*] I've opted to show a downward-sloping demand curve here, which suggests that, as clinician wages increase, the quantity of hours demanded would decrease. Arguably, the number of clinician hours demanded doesn't depend on wages, in which case the demand curve should be vertical (perfectly inelastic). That wouldn't materially change any of the remaining points though, so I've gone with a conventional downward-sloping demand curve.

The clean energy transition is about to cost more

The Financial Times reported on the market for electricity cables (such as those that connect between countries) back in July (paywalled):

Demand for interconnectors and other energy infrastructure such as wind turbines is growing rapidly, putting unprecedented strain on supply chains for electricity cable and the converter stations needed for connection to the grid. 

Supplies of both are concentrated among relatively few companies, with high barriers to entry. The potential difficulty of securing raw materials such as copper, and a lack of skilled labour needed for factories, risk putting a brake on new supplies.

Manufacturing slots are booked up, and costs are climbing. “You’re in a dogfight”, says one senior wind industry executive, describing a scramble for converter stations.

Many countries are trying to increase their renewable energy generation, as well as interconnecting electricity infrastructure between countries. All of this requires high-capacity electricity cables and associated equipment. The effect of this increasing demand on the market for electricity cables is shown in the diagram below. The market started at equilibrium, where the supply curve S0 met the demand curve D0. The equilibrium price of electricity cables was P0, and the quantity of cables traded was Q0. With demand increasing to D1, then there are two possibilities. First, if prices are kept at the original price of P0, then the quantity of cables supplied remains at Q0, but the quantity of cables demanded increases to QD. There will be a shortage of electricity cables. Alternatively, the market adjusts, and the price increases to the new equilibrium price of P1 (where the supply curve S0 meets the new demand curve D1), while the quantity of cables traded increases to Q1. Of course, the electricity cable suppliers would prefer the price to rise, since that means higher profits for them.

These dynamics apply not just to the electricity cables, but also to the other equipment and infrastructure required for the clean energy transition. So, with increasing demand for electricity cables, it seems likely that the infrastructure required for clean energy transition is going to cost more.

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

Tornadoes and the markets for medicines

The New Zealand Herald reported last week:

The fallout from a Pfizer factory being damaged by a tornado could put even more pressure on already-strained drug supplies at US hospitals, experts say.

The tornado touched down near Rocky Mount, North Carolina, and ripped up the roof of a Pfizer factory that makes nearly 25 per cent of Pfizer’s sterile injectable medicines used in US hospitals, according to the drugmaker...

HOW WILL THIS AFFECT HOSPITAL DRUG SUPPLIES?

It will likely lead to some long-term shortages while Pfizer shifts production to other locations or rebuilds, said Erin Fox, senior pharmacy director at the University of Utah Health...

Hospitals also may switch to different forms of a drug by giving a patient an antibiotic pill instead of an IV if that person can handle it. If a larger vial size of a drug is more readily available, they may order that and then fill several syringes with smaller doses ready for use.

Since my ECONS102 class covered the model of supply and demand last week, this seems like a timely example to look at. First, let's consider the market for injectable medicines, as shown in the diagram below. Injectable medicine production has reduced due to the unavailability of the large Pfizer factory, so there has been a decrease in supply, shown by the supply curve shifting up and to the left, from S0 to S1. If injectable medicine prices were to remain at the original equilibrium price (P0), then the quantity of medicines demanded (Q0) would exceed the quantity of medicines supplied (QS) at that price, because injectable medicine producers are only willing to produce QS medicines at the price of P0, after the supply curve shifts. There would be a shortage of injectable medicines, as the article notes as a likely consequence.

However, the problem of the shortage could be solved, if the market was able to adjust. How would that work? Consider what happens when there is a shortage. Some buyers (hospitals, for example), who are willing to pay the market price (P0), are missing out on medicines. Some of them will find a willing seller, and offer the seller a little bit more, in order to avoid missing out. In other words, buyers bid up the price. The result is that the price increases, until the price is restored to equilibrium, at the new (higher) equilibrium price of P1. At the new equilibrium price of P1, the quantity of injectable medicines demanded is exactly equal to the quantity of injectable medicines supplied (both are equal to Q1). We can say that the market clears. There is no longer a shortage.

However, that's not the only solution. Perhaps there are substitute goods that buyers can switch to. The shortage of injectable medicines, or an increase in injectable medicines, both cause incentives for buyers to switch. The article mentions switching to antibiotic pills instead of IV antibiotics. The effect that will have on the antibiotic pill market is shown in the diagram below. The demand for antibiotic pills increases from DA to DB, the price increases from PA to PB, and the quantity traded increases from QA to QB.

It seems like there is no good solution here. Either injectable medicines increase in price, or they become less available (or both!), and/or substitute medicines become more expensive as well. In a public healthcare system (like New Zealand), it will be the government (taxpayers) that will foot the bill. In private healthcare systems (like the US), it will be patients (or insurers, which ultimately means patients through higher insurance premiums). that pay more. The only winners are likely to be the producers of substitute medicines, who might see an increase in profits from the increasing demand for their products.

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

Scalping Girl Scout cookies

Ticket scalping is a favourite and recurring theme in the media (for example, see this piece on Stuff from February this year). It is also one of the areas where economists and the general public most disagree (other possibilities for that title might include the gains from trade, and rent controls). The key difference is that the general public's view is that ticket scalping is unfair and exploitative, while the view of many economists is that ticket scalping simply represents an expected market activity when the initial price is set too low.

I've written in detail about ticket scalping before (see here), so I'm not going to repeat those points. Instead, I want to note that scalping is not an activity that is limited to tickets to concerts or sporting events. It can happen whenever the price is set too low, leading to a shortage. For example, I've written before about scalping of Ontario camping sites. And now we have the example of Girl Scout cookies. As reported in the New York Times last month:

Samoas, Trefoils and Thin Mints, move over. A new Girl Scout cookie flavor, Raspberry Rally, is in such high demand that, after swiftly selling out online, boxes are now being peddled for far higher prices on resale websites.

Single boxes of the cookies, which have a crispy raspberry-flavored center coated in chocolate, cost from $4 to $7, but they are selling for as much as five times the usual price on the secondary market.

Girl Scouts of the U.S.A. has expressed dismay over the situation. The organization said in a statement that most local Girl Scout troops had sold out of the “extremely popular” Raspberry Rally cookies for the season and emphasized that it was “disappointed” to see unauthorized resales of the flavor.

“While we are happy that there’s such a strong demand for our cookies year over year,” the Girl Scouts said, “we’re saddened that the platforms and the sellers are disregarding the core mission of the cookie program and are looking to make a profit off of the name without supporting our mission and the largest girl-led entrepreneurship program in the world.”

The third-party sellers have “deprived” troops of valuable experience and of proceeds that fund “critical programming,” the organization said. The organization encouraged people to support Girl Scout troops by purchasing one of the many other available flavors.

The Girl Scouts have this exactly wrong. The resellers are not depriving the Girl Scout troops of anything. The resellers bought the cookies from the Girl Scouts legitimately, at the price that the Girl Scouts set for their cookies. If anyone deprived Girl Scout troops of proceeds to fund critical programming, it is the Girl Scouts themselves. They should have set the price higher, and they would have made more profits from the cookies. The actions of the resellers of cookies demonstrates this clearly. If the Girl Scouts had set the price higher initially, at a price that equalised the quantity demanded with the number of cookies available, there would be no profit opportunity for the resellers to exploit.

To reiterate, scalping (including the scalping of Girl Scout cookies) represents an expected market response to a good that was initially priced too low. From the article:

For more than a century, the Girl Scouts have been holding annual cookie sales to raise money for troop activities while helping scouts learn skills like marketing, goal-setting and budgeting.

Maybe they should be helping the scouts to learn about pricing as well?

[HT: Marginal Revolution]

Read more:

• The Super Rugby final and ticket scalping
• Harry Potter and the chamber of scalpers
• The economics of ticket scalping
• Scalpers and the irrationality of Ontario Parks

Excess demand for the Great Walks continues

In an opinion piece in the New Zealand Herald today, Thomas Bywater wrote:

The annual “bun fight” for bunks on the Milford and Routeburn tracks has become something of a tradition. Thousands of hopefuls log-in on opening day to try and book one of the 120 bunks on the “finest walks” in the world. Since moving to the online booking system, it’s become a bit of a lottery...

Many put the blame squarely on DoC for ruining their tramping holiday. Particularly international walkers, who said they had stayed up into the small hours of the morning to try and secure a place.

Bywater's solution to the problem is to create more Great Walks:

The only way to increase the number of bunks on the Great Walk network is to increase the number of Great Walks.

It’s a solution that the Department has only recently reached, with the addition of the Paparoa in 2019. As the fourth most well-subscribed trail on the network the West Coast trail has been a huge success.

That is only one way, not the only way, to improve things. Another is to recognise that, when there are more people wanting to buy a good or service than there is capacity to provide it, that means that there is excess demand for the good or service. Excess demand arises when the price is below the equilibrium price (the price that would equate the quantity demanded and quantity supplied of the good or service). This situation is shown in the diagram below. At the current market price for the Great Walks of P0, the quantity of huts demanded is QD, while the quantity of huts supplied (available) is QS. Since QD is greater than QS, there is excess demand (a shortage).

How do you get rid of excess demand? You allow the price to increase. If the price was P1 instead of P0, then both the quantity of huts demanded and the quantity of huts supplied would be Q1. There would be no more excess demand. Every tramper who was willing to pay P1 for a hut would get one. This is a point that I have made before (in relation to the free pricing of the Great Walks, rather than the price of huts). There are no good options for managing excess demand - either the price needs to increase, or some people are going to miss out.

Building new Great Walks is a great idea in its own right. However, it will only impact demand for the Routeburn or Milford Tracks to the extent that the new Great Walk is a substitute. That the Paparoa Track quickly because the 'fourth most well-subscribed trail' and yet we still have serious excess demand for other Great Walks doesn't provide a strong endorsement of new tracks as a solution. Instead, it is more likely that the addition of new tracks simply adds new demand to the system as well as new supply.

On the plus side, I was happy to see this bit from Bywater's article:

For the first time since the pandemic, international visitors were able to vie for a place, albeit at a higher rate than domestic visitors. From those that were able to book a place on the Milford Track, last week, 35 per cent were from overseas.

Finally, we have price discrimination that favours domestic tourists over international tourists (as I have argued for before - see here and here). Now, we just need the prices (for both domestic and international trampers) to rise some more.

Read more:

• The Great Walks may be free, but they are not free
• Price discrimination and the Great Walks

Economic problems generated in the wake of disaster

At the end of last year, I quipped that 2022 had felt like the year of the shortage. It hasn't finished yet. In the wake of Cyclone Gabrielle, many parts of the North Island lost electricity service, increasing the demand for generators. As the New Zealand Herald reported this morning:

The cyclone has also seen Northlanders without power rushing to stores and buying generators to power their homes.

Donovans Trade Supplies manager Scotty Brown said his business sold 200 generators in four days, which was more than they would usually sell in a year.

“One person looked after only generators, and it was mental, really mental. And the person was me,” Brown said.

On Monday last week when the storm was in its early stages, Brown sent a truck and a driver down to a supply branch in Auckland to pick up 60 generators,

“We unloaded them out the back and by lunchtime Tuesday, they were all gone,” Brown said.

On Wednesday, the team went to Auckland again to pick up 120 generators and “within a day and a bit” they had sold them in Whangārei.

When demand increases, we would expect prices to increase, as shown in the diagram below. When demand increases from D0 to D1, the equilibrium price increases from P0 to P1, and the quantity of generators traded increases from Q0 to Q1.

Indeed, that appears to have happened in some cases:

Christchurch company All Trade also flew 50 to 60 generators up to Donovans Trade for Northlanders to purchase when the other supplier ran out.

Brown said customers were thankful to receive generators and get power to their homes back, and they have only 20 generators left in stock.

He said unlike Donovans Trade, he’d heard some places had been increasing the prices of generators due to the demand.

“We didn’t want to take advantage of the situation.”

That last point, that All Trade didn't want to take advantage of the situation, is surprisingly common among sellers. It is inconsistent with what we would expect from the demand and supply model shown above, but it is consistent with how consumers perceive price changes.

In a famous study (ungated), Nobel Prize winner Daniel Kahneman (along with fellow Nobel Prize winner Richard Thaler, and Jack Knetsch) found that when a hypothetical hardware store raised prices for snow shovels following a snowstorm, consumers felt strongly that the price increase was unfair. In contrast, it was perceived as fair for stores to raise prices when their costs increased. Raising prices to increase profits in the short run, taking advantage of market conditions like a snowstorm (or a cyclone), may actually be inconsistent with long run profitability. If a firm develops a reputation for price gouging, the negative image among consumers may actually harm the firm overall.

But keeping prices low creates a different problem - a shortage. In the diagram above, if firms kept the price at the original level of P0, the quantity of generators demanded would be QD, but there would still be only Q0 generators supplied. The difference between QD and Q0 is the shortage. More buyers want generators at the low price P0 than there are generators available. Some willing buyers will miss out on a generator.

The Northland sellers have solved this problem partly by increasing the supply of generators (by bringing in stocks of generators from elsewhere in the country). However, if the shortage is large enough, even that approach would not entirely solve the problem. Most likely the limited number of generators will go first to whoever is quickest to call a supplier, or to whoever knows a supplier personally. Everyone else will miss out.

So, we face an economic problem when disaster strikes. Either prices rise in the wake of the increased demand for generators, or there is a shortage of generators. It might be tempting to think that the government can provide a solution here that keeps prices low (for example, by passing laws against price gouging), while imposing a better way of allocating the limited number of generators. Maybe, instead of going to whoever knows a supplier personally, the government could allocate the generators to those most 'in need'. But, such a subjective approach is open to all sorts of abuse. That is why most economists favour letting the market solve the shortage, by allowing prices to rise. Generators would then be allocated to those that need them the most, without anyone having to decide who has the greatest need. That's because those with the greatest need should be willing to pay the most for a generator. So, when prices increase, the buyers who have the least need for a generator, will be the first to drop out of the market, leaving the generators for those with the greatest need.

There is one final problem here, which is that willingness-to-pay for a generator is not only determined by need. It is also determined by income, because those with highest incomes generally tend to be willing to pay more for goods. The final distribution of generators determined by the market would tend to result in generators going to higher income recipients in a way that many people would consider an unfair allocation. At least, that is if generators were being bought by households. The highest income buyers of generators, with the highest willingness-to-pay, are actually likely to be businesses, trying to keep the lights on and serve their customers. An allocation of generators, that sees them going to supermarkets and service stations first, is probably what most people would prefer.

So, there is no perfect solution to the problem that the cyclone generated (pun intended!). Prices can be kept low and there will not be enough generators for everyone who is willing to buy one. Key service businesses may miss out on generators that are snapped up by buyers who have a close relationship with the sellers. Alternatively, the market can allocate generators, which would result in higher prices but no shortage of generators (at least, at the higher market price that would result). And, it is more likely that key service businesses would end up with those generators. All without the government needing to intervene. You can probably see now why economists might prefer price gouging as a solution.

Bounded rationality, and international egg smuggling from Mexico

New Zealand has an egg shortage, but we are not alone. The US is also suffering an egg shortage, but for a different reason. In New Zealand, the shortage arose because of a ban on battery caged eggs, as well as supermarkets choosing to no longer sell colony caged eggs as well (see here). In the US, it's because of avian influenza killing egg-laying chickens.

The egg shortage has led to an interesting side effect in the US, as NPR reported last week:

As the price of eggs continues to rise, U.S. Customs and Border Protection officials are reporting a spike in people attempting to bring eggs into the country illegally from Mexico, where prices are lower...

A 30-count carton of eggs in Juárez, Mexico, according to Border Report, sells for $3.40. In some parts of the U.S., such as California, just a dozen eggs are now priced as high as $7.37.

Shoppers from El Paso, Texas, are buying eggs in Juárez because they are "significantly less expensive," CPB spokesperson Gerrelaine Alcordo told NPR in a statement.

In New Zealand, rational egg consumers have switched to buying their own chickens. In the US, they are becoming international egg smugglers. To see why, consider how a rational egg consumer would respond to the egg shortage.

Mexican eggs and US eggs are substitutes. When the price of one substitute increases, or one substitute becomes unavailable, some consumers will switch to the other. In this case, some rational consumers want to switch from US eggs to Mexican eggs. However, because Mexican eggs are banned from import to the US (more on that in a moment), the only way for egg consumers to get Mexican eggs is to smuggle them into the country. That comes with costs in the form of the risk of fines, if the smuggler is caught. However, if consumers aren't aware of the fines (and it appears from the story that many are not), then these boundedly rational consumers would not take those costs into account (we call these smugglers boundedly rational, because they lack full information so their rationality is bounded). These boundedly rational consumers would engage in more egg smuggling than they would if they took the costs of getting caught into account. That explains the huge increase in egg smuggling.

Now, the ironic thing about this whole situation, from the same NPR story:

Eggs from Mexico have been prohibited by USDA since 2012, "based on the diagnosis of highly pathogenic avian influenza in commercial poultry."

So, an egg shortage, caused by avian influenza in the US, cannot be alleviated by importing eggs from Mexico, because of a 2012 rule designed to keep avian influenza out of the US. Sometimes, the craziness of international trade rules is just too much to bear.

[HT: Marginal Revolution]

The egg shortage turns consumers to chickens

A couple of weeks ago, I blogged about the current egg shortage. When the quantity of eggs demanded by consumers is greater than the quantity of eggs suppliers by sellers at the current market price, there is a shortage. Some consumers, who would be willing and able to pay the market price, will miss out on eggs. How do consumers respond? In my earlier post, I argued that consumers would bid the price upwards, and the market price would rise. However, that is not the only consumer response. As the New Zealand Herald reported earlier this week:

Interest in online auctions for chickens has more than doubled amid a nationwide egg shortage.

Trade Me spokesperson Ruby Topzand said searches for chickens, coops and feed had risen to more than 21,400 in the past week - up from 9300, a 129 per cent increase...

Store-purchased eggs and home-laid eggs are substitutes. When the price of one substitute increases, some consumers will switch to the other. Switching to substitutes can also occur when one good has a shortage (which is the case for eggs at the moment). So, some consumers are switching from store-purchased eggs to home-laid eggs, by buying their own chickens.

Are home-laid eggs cheaper? Not necessarily. The monetary cost per egg may be lower, but the consumer needs to factor in both up-front costs (not just the cost of the chickens, but the cost of the coop for the chickens to live in) and ongoing costs of feed for the chickens. And then, there is also a surprising amount of labour involved in raising chickens (not least the time it takes to find eggs laid by the devious fowl). The time and effort, as well as the monetary cost, may make home-laid eggs a more expensive option for most consumers (as well as many consumers not having a property that is suitable for keeping chickens). That's why few consumers own their own chickens already.

However, even with the costs of home-laid eggs, the shortage has induced at least some consumers to make the switch. What will they do when the egg shortage is over?

Your eggs are going to cost you more next year

It really feels like 2022 has been the year of the shortage. Just in the last few months, I've posted about shortages of French mustard, CO2 for beer making, after-hours veterinarian services, dungeon masters, and Kobe beef croquettes (although this one was purposeful on the part of the seller). And now eggs, as reported by the New Zealand Herald earlier this week:

Supermarket shelves are bare of eggs while others are limiting the number of cartons customers can buy during a drop in supply...

A ban on battery-caged hens, announced in 2012, comes into effect on Saturday and over the past few years the deadline has caused turmoil in the industry.

Egg Producers Federation executive director Michael Brooks said more than 75 per cent of chicken farmers have had to change their farming methods or their career because of the ban.

“The supermarkets’ announcement to refuse colony cage eggs, the end of the cage system, plus Covid, plus the grain cost rising because of the Ukraine war have all come together,” he said.

“It’s led to a drop of about 600,000 or 700,000 hens in the commercial flock. That’s a lot of eggs that aren’t available.”...

Brooks predicted egg prices would also rise as it has cost farmers millions to change their practices.

When the Government announced the battery cage ban, it told farmers they would have to transition to colony, barn or free-range farming.

But in 2019, Foodstuffs said they would no longer accept colony eggs and aims to be fully cage-free by 2027 either, which Brooks described as a “bombshell”.

“That put real confusion into the industry. A number of people - in fact a third of the industry - had already gone to colony eggs. But to go free range, they’d have to buy a whole new farm and the barn system was one we hardly knew in New Zealand, so a lot of farmers were really thrown.”

The funny thing is, this is almost exactly as predicted in 2019, when the ban on cage eggs was announced. Let's reprise what I said would happen then, and how it applies again now, but with bans on both cage eggs and colony eggs.

Consider the market for eggs, as shown in the diagram below. Egg producers are facing increasing production costs, because of the need to move from cage egg production and colony egg production for free range egg production. When costs of production increase, that results in a decrease in supply, shown by the supply curve shifting up and to the left, from S0 to S1. If egg prices were to remain at the original equilibrium price (P0), then the quantity of eggs demanded (Q0) would exceed the quantity of eggs supplied (QS) at that price, because egg producers are only willing to produce QS eggs at the price of P0, after the supply curve shifts. There would be a shortage of eggs, as we are observing in the market.

Shortages don't tend to last forever though. At least, not if the market is allowed to adjust. How would the egg market adjust to the shortage? The price of eggs would increase. To see why, consider what happens when there is a shortage. Some buyers, who are willing to pay the market price (P0), are missing out on eggs. Some of them will find a willing seller, and offer the seller a little bit more, in order to avoid missing out. In other words, buyers bid up the price. The result is that the price increases, until the price is restored to equilibrium, at the new (higher) equilibrium price of P1. At the new equilibrium price of P1, the quantity of eggs demanded is exactly equal to the quantity of eggs supplied (both are equal to Q1). We can say that the market clears. There is no longer a shortage.

In the meantime though, there is a shortage of eggs. As many economists would tell you, the reason for the shortage of eggs is not that there is not enough eggs, but rather that the price of eggs has not yet adjusted sufficiently. Expect your eggs to cost you more in the future.