Subletting a rent-controlled apartment: pros and cons
"The Big City: A Room and a View (Libertarian)," New York Times, June 15,2001
In New York City, rent control is still in effect as long as the original tenants occupy the rent-controlled apartments. The rent control policy began several decades ago, and the rent has been almost frozen at the original level. The intent of rent control is to provide affordable dwellings to low income people. However, since the rent is so low, it has not encouraged a new supply of rental apartments. New buildings are designated mainly for condominiums without rent control, and there is a shortage of reasonably-priced rental apartments for middle- and low-income families in New York City. Any apartments not subject to rent control carry exorbitant rents. As a consequence, the rent control achieved two opposite results. It benefited those people who already occupied the rent-controlled apartments, yet harmed new apartment seekers. In addition, the control favored renters at the cost of the landlords. Despite some societal bias against landlords, they, like renters, are also part of the economy.
Any social policy which benefits one person or group without harming another person or group is called Pareto optimum. The following anecdote illustrates this principle. There was a very popular professor at a university. At the beginning of each class, he announces that all his students in the class will get A's, because good students deserve A's, and bad students need A's. Because good students receive what they deserve, and the bad ones receive more than they deserve, are all students happy? And is this and example of Pareto optimum? The answer to both questions is definitely no. Because everyone receives an A, the A's that the good students receive now have less importance and meaning, and they feel a strong sense of injustice and unfairness.
However, if a new factory is built, and 100 currently unemployed workers are hired, this can be viewed as Pareto optimum. The new workers are better off without making the already employed workers worse off. In fact, the society's total income the society has a positive increase, and everybody in the society is better off.
Since rent control affects two groups of people with opposite results, the control is not Pareto optimum, and many cities abolished it on equity grounds. Another example related to rent control in New York City, illustrates the absurdity of this policy. A 70-year-old lady, whose house in Connecticut was valued at $500,000 rented it out for an annual rent of $33,000. At the same time she occupied a two-bedroom, rent-controlled apartment in New York City and paid a monthly rent of $1,848, well under the market rate without the control of $10,000 per month rent. Since she needed only one bedroom, she rented out the other bedroom for $2,200 per month. Her landlord sued to evict her on the grounds that she sublet her apartment.
She counter-argued that since her landlord is getting the same rent as before the sublet, the landlord is not any worse off than before, whereas she is now getting the net income of the sublet. Therefore, she is better off without making her landlord worse off than before, and the sublet is Pareto optimum. She bitterly accuses her landlord's greediness, forgetting her annual rental income of $33,000 plus $26,400 from the sublet.
Of course, this is a rather extreme case of the absurdity that can result from rent control. However, the example illustrates an important lesson. Before a community adopts a new regulation, it must clearly analyze its potential overall benefit and harms. Either the policy is Pareto optimum so that everybody benefits, which is very rare, or the gainers significantly overcompensate the losers, so that the losers can be made at least as well off as before. If neither condition is met, then the policy is not desirable on equity grounds. Other political considerations, such as appealing to a larger group of voters, can then dictate the outcome of the policy.