so this is 1 million Square feet 2 million Square feet 3 million square feet and so on and
Like we've done in the last few videos when we've been talking about consumer and producer surplus
I want to view the demand curve right over here
I want to view that as a marginal
Benefit curve, so for this first the very first view square feet right here
How much benefit is it for the renters the consumers well It's a huge benefit for them. It's worth over $4 per square foot
That's not necessarily what they're going to pay for it
but that's what it's worth to them, and I'm going to view these the supply curve as a
Marginal cost curve or the opportunity cost for producing that extra incremental unit so right down here when we have very few square feet
[maybe] the land is cheap or all the cheapest land is available
you just start or the land that's most suitable for building and so the cost the
Opportunity cost for the suppliers of that those first few square feet are very low
And so it makes sense that they will supply it because they'll produce it their cost of producing
It is very low the benefit to the consumers is very high so if the price if the price is anywhere between these two things
The consumer will get some surplus of the prices let's say there that this consumer will get some surplus and the producer
Will get some surplus right over there?
And so the market as a whole will be getting a ton of surplus depending on how it is divided now
We haven't talked about where that price is just yet although
I think you see where this is going, [so]
[the] Producers will keep producing more [and] more units as long as the marginal benefit [is] higher than the marginal cost there is this
Surplus there that can be divvied up between the consumers and and the suppliers depending on where the price is
Marginal benefit higher than Marginal cost marginal benefit higher than marginal cost [all] the way up to that point
All the way until [we] get to all the way until we get to three million square feet per month
After that, it doesn't make [sense] if so, there's some builder that says hey
Let me add some more square feet to the market. This is what it cost them
It's going to cost them over three dollars like well people aren't [even] going to get three dollars of benefit from those
Incremental square feet so no one's going to get it
So there's no reason [for] anyone to build
Beyond that point and so that's why this ends up being the equilibrium quantity and the price at which that happens
the price at which that happens
[and] I rigged this so we get nice clean numbers is three dollars per square foot per month
Now three dollars per square foot per month is a pretty pricey rent if you have a thousand square foot apartment a thousand square foot
That's my old apartment. That's like a two-bedroom two-bath
Apartment, that's Roughly a three thousand dollars a month for that apartment. So that's pretty pricey
this is the type of rent that you would see in someplace like San Francisco and let's say that the
[Mayor] does not like this is this is unaffordable people aren't able to live in our city
And so they they they institute rent control?
Rent control, which is essentially a price ceiling they say that the rent per square foot cannot be above a certain amount?
That's not normally how rent control is instituted, but just for the sake of our model
Let's view it that way normally they [say] you can't increase rent beyond a certain amount, but let's say that they say rent control
they essentially put a price ceiling on what rent can be charged, so [they] put a price ceiling a
price ceiling or a rent ceiling a price ceiling at
[$2] per square foot per month
[$2] per square foot
Square foot
per month
So let's [think] about what's going to happen and also let's think about what's happening to the total surplus the producer and the consumer surplus
So before well actually before we even think about the rent control
Let's think about what the total surplus is you had the consumer surplus?
So if this is the price right over here you had a consumer surplus of this area right over here
[and] I don't know if this if this right over here
Let's call this four and [a] half if this is four point five
Then this side of the triangle right over here is going to be one point five
That is one point five and this right over here is three million?
[three] times 1.5 is four point five
four point five
Million and then we divide by [two] that if you just multiply these year the area of the whole rectangle you divide by two
You get two point two five million is [that] right?
Yes 1.5, or times one half of three that gives you two point two five million
million Dollars
So in the equilibrium if you just let the [market] be before the rent control and this
Equilibrium price and equilibrium quantity the consumer surplus is two point two five million dollars
That's how much more benefit the consumers are getting collectively versus what they have to pay [for]
Living in that living in those houses and then the producer surplus
The producer Surplus is this entire area right over here, and if we assume let's say that this right [over] here
And it doesn't look [like] it, but to make the math easy let's say that that is
$0.50
Let's say that is [$0.50] so this whole side right [over] here is going to be two dollars [fifty]
So this is going to be two point five right over here this length right over here is still three so it's going to be
two point five times three times 1/2
two point five times three would give you the area of the whole rectangle
You have to multiply by half to get the area of that triangle, so two times [three] so let me just write this down
So it's two point five times
Three is that is seven point five 25 times 3 is 75 and then 75
75 divided by two
75 divided by two gets you what it's Thirty Seven Thirty seven point five
So this is going to be three point seven three point seven five so this the producer surplus is
3.7
3.75 and since this is in Millions. It's three point Seven five million
dollars and so that's the total value that the
producers are getting above and beyond their costs of production and so the total surplus the total benefit that the market as a whole if
you add the
Consumers and the [producers] is [2.25]
Plus three point seven five so that gets us to what that gets us [to] six million dollars of total surplus
So there are six million dollars six million total
total surplus, so that's good because it's we're at an efficient price efficient clear equilibrium price and
Production we're able to produce all this total surplus now. Let's go back to the rent control situation. We're instituting
Instituting a price ceiling of [$2] per square foot
So the price is by government mandate being set at $2 per square foot
$2 per square foot right over there now if the price is set for $2 per square foot
What is the quantity going to be how much rent is going to supply if they can only get $2 per square foot?
Maybe some of the landlord's say you know
I'll just break [down] this wall and expand my [own] apartment
Or I'm not going to rent these out as much or maybe people who are renting out spare bedrooms say oh
I'm not going to rent out those pair of bedrooms anymore
I'm just going [to] keep them as a guestroom [so] the total quantity goes down the total quantity
Goes down to 2 million Square feet a month now
this is an interesting situation because it 2 million square feet a month at
2 million Square feet of month the Marginal Benefit the Marginal Benefit is
much higher than the marginal cost the marginal benefit of an extra unit is
over $3 [the] marginal cost of an extra unit is
Right around $2 so in a in an open market and efficient market in an unfettered market people say well
I'll just build more [units] because people are going to get benefit from them and we can have a price in between and we'll both
Be able to experience some surplus, but now you won't even though. There's this benefit
That's in excess of $3 because the price can't be higher than $2
There's no incentive for any of these people to either
build more units or maybe offer the units that they have off
Up for sale and actually maybe we shouldn't talk about building this more long run, but even the units that are there
I won't want to rent my [guestroom] out because I'm like oh, it's [too] much of [that]. You know
I'm not going to get my I'm not going to get my marginal cost my marginal cost here is
Over $2 and all I'm allowed [to] get is $2 so I don't want to offer that extra unit
So what happens in this situation?
when the price is set right over here when the price is said right over here, the
Consumers who happen to be able to rent at this price? Who are able to get these first two million square feet per month?
they get an even larger [for]
Those those at least for those two million square feet [their] consumer surplus is this thing right over here is
This thing right [over] there and the producer surplus
Unambiguously shrinks the producer surplus is this stuff right over here?
But you see that the total surplus is now smaller than the total surplus was when we had an unfettered market
We no longer are able to access this part right over here of the surplus
So this right over [here] you could view this as lost lost benefit to society benefit above the cost
This is lost surplus, and we call this in economic terms. We call this right over here the deadweight loss the deadweight
weight Loss
this is benefit to the market that could have gone to either the consumers or the
Producers that somehow was taken away from this market because this market was made less efficient by [this]
Artificial price ceiling right over here, and you [can] measure the Deadweight Loss once again
It's only it's the area of this triangle right over here, [and] so if you say if you say this right over here
So this this length right over here is clearly [just] [1] that's [1] and if we say that this height
This height right over here. It looks like it is this is about [1] and [1/2]
This is about 1 and 1/2
Then the area of this triangle this white triangle right over here the deadweight loss let me write over here the deadweight loss is going
To be equal to 1 times 1.5 times 1.5
Times 1/2 right 1 point 1 Time 1 times 1.5
Is double the area of the triangle you multiply times 1/2 to get the area so that becomes 1/2 times?
1.5, which is 0.75 so that gives us a [dead] [lot], but it's point 7 5 million so it's
[750,000] dollars, [so] this area right over here
$750,000 which is lost to the market so now the total surplus is going to be
750,000 dollars less than the 6 million dollars so because of that rent control it'll now go down to five hundred
Five point two five million, I took
750,000 out of this so it might have benefited the renters who happened to who are able to get apartments?
[it] won't be a benefit the renters who now that they're not going to be able find an apartment it
unambiguously reduced the Producer Surplus and
It reduced the total surplus the total amount of benefit that the market as a whole was getting