Sunday, 6 March 2011
PERFECTLY COMPETITIVE MARKETS
DEMAND, SUPPLY, AND WHERE THEY MEET
|Figure 3: Number of rental units supplied at each price of rent. The higher the rate of rent, the more landlords are willing to supply. Numbers are not based on empirical studies, for demonstrative purposes only.|
Image Source: Created by The Analyst
|Figure 4: In a perfectly competitive market, charging less than the equilibrium price causes shortages, as not as many landlords will supply as many units as there are tenants demanding.|
The model employed was simple. Housing units cost the same but differ in idiosyncratic characteristics; similarly, households are identical except for idiosyncratic differences in tastes. As a consequence, a household will like some units more than others, and the longer and the more effectively it searches the more likely it is to find a unit that suits its tastes well. ..However, they urged caution and pleaded that people look at local conditions (as Hugh Grant did) before applying any given model.
Because search is costly and housing match quality is idiosyncratic, landlords have market power which they exploit by pricing above cost. The vacancy rate adjusts so that zero (expected) profits are made in long-run equilibrium. The uncontrolled equilibrium vacancy rate is inefficiently high. Thus, a reduction in rent below its uncontrolled equilibrium level is welfare-improving; mild rent control is beneficial...