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IAI Actuarial Core Principles · Business Economics · Government intervention in a market

A city caps residential rents below the market level. Over several years, which long-run effect is most consistent with economic analysis of rent controls?

Rent controls typically reduce the quantity and quality of rental housing over time. With rents capped below market level, landlords earn lower returns, so they spend less on maintenance and may withdraw properties from the rental market. Shortages persist and uncontrolled segments usually see higher rents.

  1. ARental housing supply and maintenance quality tend to fall as landlords lose incentives to investCorrect
  2. BThe supply of rental housing rises because tenants gain security
  3. CRents in the uncontrolled segment fall because demand shifts away
  4. DLandlords' profits rise as vacancy rates drop to zero
  5. The cap becomes non-binding because supply is perfectly elastic

Explanation

Supply is more elastic in the long run, so a binding cap reduces returns to landlords. They under-maintain, convert properties or withdraw them from rental use. Controlled-sector shortages typically push demand into uncontrolled segments, raising rents there rather than lowering them.

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