Short notes: floor price; rent control in the short run and the long run

(i) Floor price

Meaning. A floor price (price floor) is a minimum price fixed by the government, below which a good is not to be bought or sold. To have any effect it must be set above the market equilibrium price, and in practice it normally is. It is used to protect the incomes of producers, especially farmers, and of workers: agricultural price support programmes and minimum wage laws are the best-known examples.

Effects. Price is on the vertical axis and quantity on the horizontal axis.

Diagram. Demand D and supply S cross at E (equilibrium price OP₀, quantity OQ₀). A floor price OPf is drawn above OP₀. At OPf buyers want only OQd while sellers offer OQs: there is a surplus (excess supply) of QdQs.

1. Surplus: the quantity supplied exceeds the quantity demanded at the floor price.
2. Government purchases and stocks (agricultural price support): to keep a support price effective, the government buys the surplus at the fixed price (there is no such purchase under a minimum wage); holding those stocks needs storage and adds to the government's costs.
3. Higher prices for consumers and lower quantity bought compared with equilibrium.
4. Resource misallocation: a high floor encourages over-production of the supported crop at the expense of crops without such support, and can lead to waste in storage.
5. Black market or illegal sales below the floor if enforcement is weak.

A floor price set below equilibrium has no effect.

(ii) Rent control in the short run and the long run

Meaning. Rent control is a price ceiling: a legal maximum rent set below the market rent, meant to keep housing affordable for tenants.

Short run. The supply of rental housing is almost fixed in the short run, since buildings cannot be added or withdrawn quickly, and demand responds little within a short time. Both curves are steep (inelastic).

Diagram (short run). Steep demand Dₛ and steep supply Sₛ cross at the market rent OR₀. A ceiling OR_c below OR₀ creates only a small shortage: the gap between quantity demanded and quantity supplied at OR_c is narrow. Existing tenants gain from the lower rent.

Long run. Given time, both sides respond more:

• landlords stop building new rental housing, convert flats to other uses or let them deteriorate, so supply falls (supply is elastic in the long run);
• more households seek rental homes at the low rent (people move out of shared housing, families split), so demand is more elastic.

Diagram (long run). Flatter demand D_L and supply S_L through the same market rent OR₀. The same ceiling OR_c now creates a much larger shortage.

Long-run consequences.

1. Severe shortage of rental housing and long queues.
2. Poor maintenance, since landlords cannot raise rent to cover repairs.
3. Black markets: under-the-table payments, key money or large deposits.
4. Tenants who already have controlled flats stay on, so housing is not allocated to those who need it most, and labour mobility falls.
5. Less new investment in rental housing.

Conclusion of the note. Rent control helps tenants in the short run at little cost, because supply is inelastic, but in the long run supply and demand adjust, the shortage widens and the quality and quantity of rental housing fall.