Last video we looked at well, what we're doing right now is we're thinking about government intervention. We know that there's a couple types of government intervention that can actually impact prices. And one of them is this idea of direct government price controls, and, Last time we looked at something called a price floor, which is a price that the government sets where price could never go below that, okay. And we used as an example milk where in understanding that there were lots of markets, where there's agricultural stuff like that. And in fact many countries, even though the United States has basically taken away that floor in the dairy market. There are many countries across the planet where they still have strict price floors in the area of many commodities most notably milk today. Today we want to think about the other example of direct price, and that's called a price ceiling. A price ceiling is, [COUGH] like it says it's just a price that it's just an announcement that a price, Can't go, Higher, Than some ceiling level. So a ceiling is like when you hit something you can't go up above it. So a price ceiling says, okay, Prices in this range are no longer permitted, price has to be at Max this amount, it could be lower. If the market says it just has to be lower, but it can't be above that level. So let's see what happens when you put that in place, and the example we'll use is one that is common in many metropolitan areas in the United States, and that's called rent control, so let's think about a market. And we'll have, The banker, And we'll have a supply curve. And we label these axis as price on the vertical axis quantity on the horizontal axis. This is the original demand and this is the original supply. Now the equilibrium in this market, If it was to allow the market to freely go to the market clearing price, that's the price that's equilibrium. And you did that proof way back in the first module when did the proof by contradiction that we showed. That's the price that a free market would support, the price that makes the amount people want to buy exactly equal to the amount firms are willing to sell. Now suppose we put a price ceiling on, okay, so the price ceiling to be binding, okay a price ceiling, That's what I smell. A price ceiling Pc is less than the market clearing price, so they announce price can never go above this level. Now at this amount firms are only willing to sell alpha consumers want to buy beta. This example, if you think about rent control, rent control is exactly what this happens. If you take a take a look at what the rent is right if you were to, Okay we start again. If you were to do a little research you find out that rents in Midtown Manhattan are extremely high, okay. The one-bedroom apartment and by the way one bedroom apartments are pretty small in Midtown Manhattan. But a one-bedroom apartment is going to be averaging rent anywhere from 4102 $4,300 a month, that's a lot of money, okay. For what for a one-bedroom place, but that's because Midtown Manhattan is very dense, very crowded place and everybody wants to be living there, okay. Now, what happens is that city fathers felt like this is just not right. There's just so many people who cannot enjoy the quality of lifestyle in Manhattan here because it's so expensive. And so what they did, and they did this out of the goodness of their, I think it was all well-intentioned. They said, the problem here is that there's not a lot of diversity in this area. Essentially it's mostly a white professional crowd because it's very, very expensive. And so what we want to do is we want to increase the opportunity for people to move into this area. So we're going to say that from now on, certain buildings have rent of let's say $900 a month, the city's we'll just decides. Now it turns out if you were to look at a map of rent control buildings every now and then the New York Times will come up. I have a little black and white picture of Manhattan and on it'll be one of those one like Mosaic and the Mosaics are different blocks. And on those blocks they'll actually have put little pins to say, this is a rent-controlled building. And so what you can find is that a certain block, there could be four, five brownstone apartments there and one of those is rent-controlled and the other four or five are all free market, okay. So there's no real method to it, they just pick a different areas and it's bad luck if you're the landlord of that, because now you've been told your rent can't go above this amount. So how's this work? Well, they do is they just make the announcement that it's essentially it's against the law to go above this price. So now you have lots of people would love to live in this apartment, not very very many of those apartments are available, how does that happen? Well, a lot of them just get taken off the market, the landlord says, if, I used to get $4,200 a month and now I could only get $900 a month. Well, I'm just going to invite my brother from New Jersey to move in, and he can live here other family members. Also the general quality of housing stock falls because the landlord's just don't repair it, okay. And the some of those apartments just become unlivable relatively quickly because landmarks is, Not worth it. And so what happens here is you have this extra amount of people who want these apartments, and so this is a housing shortage, okay. And that housing shortage is because there's just too many people want this product and there's just not enough available. Now, I'll tell you a story about this, once I was out in California visiting a friend this is earlier in my career. I was visiting a friend and giving a talk at one of the universities out there, and he was driving me to the airport the next morning to get back to Champagne. So if you're going to get back to Champagne from California, you gotta take an early flight. Otherwise it's got to be really early on California time because really early on California time is already two hours ahead here in the Midwest. Then you have to have four or five hour flight, with layovers and it'll hair all these sorts of things. So, I had a real early flight, so we're driving out to the airport like 4:32 morning. He's taking me there, and we've gone down this block and the block is just got like there's hundreds of people on the sidewalk. And I said what's happening here? And my friend Johnson somebody died. And I said, wow, this guy must be really popular if there's many people standing out here for the visitation at 4:30 in the morning. He said, no, no, no, this is a rent-controlled block, so these people are all lining up to interview for that apartment, okay. Because in this particular area that apartment is going to be selling for like, the rent back in those days was going to be something on the order of a couple hundred dollars a month. Whereas the market clearing rent was going to be $1,300 a month, okay. And so he said, these people are all going to interview. Well, imagine how that process works, the first person who comes in to talk to the landlord is a person who let's say a single mom, three kids trying to make a better life for the family. And says, I could really like to live in this area, it's dangerous where I'm living right now, the landlord said, okay, all right, I'll take it down. I'll take care of raising, who's next? Next person comes in, it's a husband-wife, they're both making minimum wage, they got four kids. They're trying to figure out how to get their kids into a safer neighborhood, and the landlord says, okay, I'll take the information down. The next one comes in its dual income, no children young professionals, they both work for a financial house in San Francisco. And they're doing really well for themselves and they come in and they say, I want this apartment and the landlord shakes his hand and said, hope you enjoy your new apartment. Now the question here is what what's happening, is there's some sort of discrimination? Is the landlord choosing these people because he likes to color their skin and they don't have kids or what's happening? Well, probably that could be there's no way economists can ascertain if that's true or not. But one thing we can figure out is that what happens in situational landlord does that because, first of all that person is going to be guaranteed to pay their rent. Secondly the very first thing those couples do when they get there as they say, I'm getting an apartment for $200 a month that everybody else, all my friends are paying $1,400 a month. They call down the landlord said hey, we were thinking about putting a granite countertop in, landlord says knock yourself out. And we're thinking about maybe redoing the kitchen to a professional stove, landlord says, great. Okay, because there have this big gap and discrepancy and they have all these extra money to spend now compared to what it would be if they had to go in a none price controlled market. And so what ends up happening in situations like this is that very tip very people you are hoping to protect, by offering a rent price the city offering a rent price. The city offer your rent price that you could actually afford even if you're working on minimum wage, and trying to get a bunch of kids to school, they end up not getting in those places very often. So you see in these places that that, The profile doesn't look exactly the way you want. These, City fathers, let's start again. This city council did because they thought they were helping people out, but in fact, that's really not. What they really need to do is have some income-based restrictions that say, that you could only get into these apartments. If in fact most of these areas now have, The story I'm talking to you is back in the 80s, and most of these places now have put on means tests. So the only way you can get in some of these rent controlled buildings is to have a demonstrated effects you really need that type of support.
