CHAPTER: SUPPLY, DEMAND, AND GOVERNMENT POLICIES



CHAPTER: SUPPLY, DEMAND, AND GOVERNMENT POLICIES

At this point, you have read a number of chapters in your textbook. With supply and demand now in your intellectual toolbox, you are probably starting to “think like an economist.” One student who did asks this question: Why do governments support policies such as rent control, when free markets work best in most situations? Don’t lawmakers understand that these policies are not in the public’s best interest?

Policies like rent control often result from a combination of good intentions and bad economics. Rent control is motivated by the worthy goal of making housing more affordable. Advocates of rent control claim it is one way to help the least fortunate members of our society. This is a goal that everyone can sympathize with.

Yet these intentions fail to match up with the reality. As you know from reading the chapter, keeping rents below the equilibrium level leads to a shortage of housing, especially in the long run. Rents are lower, but one cost of lower rents is a fall in the quality and quantity of housing available. And studies have found that the benefits of rent control are not even well targeted at the poor.

Of course, not everyone loses from rent control. Almost all economic policies create winners and losers. Some people are lucky enough, or well connected enough, to get great apartments at cheap prices. These tenants can become a powerful special interest group, and they lobby vigorously to keep rent control in place. Of course, just because a few people benefit from a policy does not mean it is worth keeping.

Rent control is a poorly designed public policy, but you shouldn’t conclude from this example that an economy can function well without any government at all. Remember Principle #7: governments can sometimes improve market outcomes. As your study of economics progresses, you’ll see many examples of how well-designed public policies can make society better off. The trick for policymakers is to know when to intervene and when to leave the market to its own devices.

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