Chapter 7 In the short run, with a rent ceiling in place, an increase in demand creates a shortage of housing units. Is the shortage remedied as time passes? To answer this question, we must explore the incentives to produce more housing. Start with the case we initially explored, when rents were not controlled. When rents are free to rise, the short-run increase in the level of rents is modified in the future because the higher rents create an incentive to build more housing. However, with a rent ceiling in effect, rents do not rise in the short run. Hence, there is no incentive to build more housing. As a result, the shortage of housing created by the rent ceiling can persist indefinitely. The figure illustrates these conclusions. Demand has increased to D1 and with the rent ceiling, rents have remained at $400 a month. At $400 a month, there is no incentive to increase the supply of housing. With no incentive to build more housing, the supply curve remains at S0. So, even though there is a shortage of 20,000 units of housing (70,000 units demanded minus 50,000 units supplied, equal to the length of the light arrow in the figure) the shortage continues. Thus a rent ceiling can create not only a shortage of housing in the short run but also a shortage that can persist indefinitely. With this shortage, black markets are likely to arise as renters, desperate to find housing, decide to take the law into their own hands. You can read about black markets and rent ceilings in practice on pages 130-131 of the textbook. It is almost impossible to study the supply and demand too much. Both the Economics in Action software and the Study Guide to accompany the text offer lots of practice, help, and instruction. The Economics in Action covers price floors, price ceilings, taxes, subsidies, and quotas and a lot of multiple choice questions dealing with these policies. The Study Guide has several Helpful Hints that will prove helpful (!). It also has many True/False/Uncertain, Multiple Choice, and Short Answer Problems for you to practice upon and be sure that you thoroughly understand this important chapter. Would you like to study another chapter?