Don Boudreaux over at Cafe Hayek does a nice piece a few weeks ago, outlining the inefficiency of rent control. As his comments on the subject were part of a larger discussion, I have summarized his points below. If you want to go back to the original, you can go here.
Brian,
Boudreaux notes that “the assumption of a perfectly inelastic supply of rental housing is not realistic.” But at the same time, he wagers it is incorrect to say that, were this assumption to hold in reality, rent control would create no deadweight loss.
In what Deirdre McCloskey calls “the first act” there is indeed, unlike with an upward-sloping supply curve of rental housing, no deadweight loss. It’s all transfer from landlords to tenants. But unless we assume also a perfectly inelastic demand for rental housing, rent control will in the second act cause current and prospective renters to waste resources as each competes to increase his or her chances of securing one of the rent-controlled apartments. Losses – ones in every relevant way comparable to conventional deadweight losses – ensue.
Picture a standard supply-and-demand graph, but one in which the supply curve is perfectly vertical. With the demand curve shaped as it usually is – namely, sloping downward to the right – rent control will still cause a shortage of rental housing. Tenants will therefore compete more vigorously – now using only non-price means of competition – to secure these rental units. The use of resources in such non-price competition – for example, wining and dining landlords, racing or keeping constant vigilance to sign up for newly vacated rental units, whatever – is a waste of resources from society’s perspective.
It’s true that these wastes are conventionally called “rent-seeking wastes” rather than “deadweight losses.” But Boudreaux takes Gordon Tullock’s point to be that rent-seeking-‘rectangle’ losses are no less real or important losses than are deadweight-loss (or Harberger) ‘triangle’ losses: both losses act as deadweights on society. Valuable goods and services that would otherwise have been produced remain unproduced because of the interventions that cause these losses. Both losses emerge because government interventions render uses of resources that were once profitable now unprofitable. Both losses ‘measure’ the reduction in valuable output. Both losses ‘measure’ the reduction in the size of the economic pie.
Boudreaux doesn’t wish to defend too strongly his claim that rent-seeking losses should be called and classified as “deadweight losses” (although I do believe that that claim is defensible). But he does wish to insist that the absence of conventionally defined deadweight losses does not mean that an intervention, such as rent control, effects only a transfer and, therefore, causes no real losses. The resulting non-price competition among potential renters results in losses.
Note too that he mentions neither rent-seeking efforts by tenants to secure rent-control regulation from government nor rent-‘protecting’* efforts by landlords to fight rent control. These rent-seeking and rent-‘protecting’ efforts only increase the social losses from rent control beyond the losses that Boudreaux identifies above.