The Theory of Market Mechanism

Due to a fall in the rental, the supply of flats also declines, however, the quantity demanded of flats increases. This follows from the law of demand and supply. As a result, there is a gap between demand and supply or in other words, there arises a shortage in the market for dwelling spaces. This shortage is not a natural outcome but created by the suppliers or the landlords which result in an excess demand situation. This shortage generates scope for black marketing of flats at a higher rental.
From the land lord’s point of view, the creation of shortage is quite justifiable because the cost of maintenance and electricity has remained the same. In the process of black marketing, the flats are rented out at market clearing rental or even more. Since dwelling place is a necessary item for any consumer, the tenants are ready to pay the excess amount above the ceiling price. Thus there is discrimination because some are getting the flats at the Government determined rental whereas some have to pay out a huge amount. Thus there is a reverse effect of what the Government intended. Here the concept of economic rent also comes into play. Because of the price ceiling, a number of landlords are not willing to rent out their space, they are restricted from entering the market in fear of loss. Now suppose the Government decides to remove the ceiling and the rental price is determined by market mechanism, there will be huge opposition from both landlords and tenants because those who were getting the flats at lower rent will oppose and again the landlords who were operating in the black market will passively support the tenants who were opposing. This is because the landlords are better off in a black market where they extract huge profit. The lobbying cost, lawyer fees, public relation costs are substantial.