Here is a figure that shows the long-run equilibrium in the previous example from a somewhat different viewpoint.
In the figure, we see that 500 units of apartment services are supplied, and the rent is limited to $25; but each unit of apartment services is worth $40 to the renter. The difference, $15 per unit of apartment service, is a benefit the renter can get only as long as she or he can live in a rent-controlled apartment. But, in this example, there are roughly twice as many renters as apartments. Thus, those who are looking for apartments would be willing to pay something over the nominal rent to get in. Bribes become commonplace. Sometimes the bribe is disguised as a "key fee" -- it could cost a few thousand dollars to have a key made!
On the other hand, if a person is living in a rent-controlled apartment and wants to move, the benefit becomes a barrier. Will she or he be able to get another rent-controlled apartment? If not, or if the former tenant wants to move into a house in the suburbs, the $15 difference between the market value and rent paid will be lost. If the law permits or can be evaded, it will be profitable to the tenant to sublet the apartment. Rent-controlled apartments tend to be occupied by the same people for very long periods.
The figure shows us something else: the long run equilibrium with rent control is inefficient. We can use the Consumers' Surplus method to estimate the net benefits from the price-controlled apartment market, with a twist. Remember, the triangular area above the price line and below the demand curve is the Consumers' Surplus, an estimate of the net benefit to consumers. What about the triangle above the supply curve and below the price line? In this case, it is the total amount of rent paid, over and above the cost of building and maintaining the apartments. That's the net benefit to landlords. We could call it a "producers' surplus." So the net benefit to society as a whole -- summing net benefits to landlords and tenants -- is the area between the demand and supply curve and between the vertical axis and the amount sold. The net benefits realized under regulation are indicated by the light blue, stippled area between the demand curve and the supply curve and between outputs of 0 and 500 units of apartment services. If the supply of apartment services were expanded to 1000 -- as it would be at a rental of $30 per unit of apartment services -- there would be an additional consumers and producers' surplus. The additional surplus is shown by the triangular area with diagonal pink shading.
Conversely, the triangular pink area is the cost that society pays for regulating rents below the market equilibrium. It is a sacrifice of efficiency, a loss of net benefits that could be realized if the rent were high enough to give builders an incentive to expand the supply.
Summary on Rent Controls
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