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406 CHAPTER 10 COMPETITIVE MARKETS: APPLICATIONS

lines to purchase those foods that were available. so that they could raise prices. The government then
Food companies have complained that the regulated responded by imposing production quotas on many
prices are below their average costs, so that they are food producers to force them to produce more of
in danger of going out of business. For example, the foods with price ceilings. Rice companies are now re-
price of rice in 2009 was set at 2.15 bolivares per kilo- quired to have 80 percent of their production sold as
gram, while rice companies claim that their cost per white rice. However, there were still shortages as
S
kilogram is about 4.41 bolivares. food companies limited total production (to Q in
In an attempt to avoid the price ceilings, food Figure 10.8). In 2009, the government seized control
companies have attempted to alter their products to of several food processing factories to force increases
versions that are not regulated. For example, the in production, including a rice processing plant and
price of white rice is regulated, but the price of fla- several coffee plants. The government is also con-
vored rice is not. Rice companies altered their product tending with increased smuggling of low-priced food
lines, moving away from white rice toward flavored, across the border into Colombia.

Before leaving rent controls, we note that government attempts to regulate the
price of a commodity rarely work in a straightforward fashion. For example, when a
shortage develops in the rental market for housing, some landlords may demand key
money, or a fee—that is, an extra payment from a prospective renter—before agreeing
to lease an apartment. Although such payments are illegal, they are difficult to moni-
tor, and renters who are willing to pay more than the rent-controlled price may will-
ingly (though not happily) pay the key money. Landlords may also recognize that with
excess demand, they will be able to find renters even if they allow the quality of the
apartments to deteriorate. Rent control laws often attempt to specify that the quality
should be maintained, but it is quite difficult to write the laws to enforce this intent
effectively. Further, landlords may recognize that they would be better off in the long
run if they can convert apartments under rent control to other uses not subject to
price controls, such as condominiums or even parking lots. Critics of rent controls
often observe that the amounts of housing available have been reduced over time as
owners of controlled housing convert to alternative uses of land. 8
We must remember that there are limitations in a partial equilibrium analysis of
the effect of a price ceiling, such as the one in Figure 10.7. If a rent control is imposed
in the market for studio apartments, people who cannot find a studio apartment will
seek another type of housing, such as a larger apartment, a condominium, or even a
house. This will affect the demand for other types of housing and thus the equilibrium
prices in those markets. As the prices of other types of housing change, the demand
for studio apartments may shift, with additional effects on the size of the shortage of
studio apartments, as well as on consumer and producer surplus and deadweight loss.
Calculating these additional effects is beyond the scope of a simple partial equilibrium
analysis, but you should recognize that they may be important.
The unintended consequences of price ceilings are present in many markets other
than housing. For example, in an effort to fight inflation in the 1970s, the Nixon ad-
ministration imposed price ceilings on domestic suppliers of oil, creating a shortage
of domestic oil. The excess demand for oil led to increased imports of oil. When the
price controls were imposed in 1971, imports constituted only 25 percent of the nation’s

8 See, for example, Denton Marks, “The Effects of Partial-Coverage Rent Control on the Price and
Quantity of Rental Housing,” Journal of Urban Economics 16 (1984): 360–369.