Matthew Yglesias: Whoa!

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Whoa!

Alex Tabarrok shatters my socialist dreams of getting hot water for free. Should have studied microeconomics. Now of course the example doesn't work as well if you can't simply assume a perfect equilibrium price arrived at courtesy of the perfect information and zero transaction costs that characterize the rental market in Economoville but not, say, Washington, DC. The theory that my current residence provides hot water, is, I think, a contestable one. I'll grand the landladies "warmish."

August 18, 2004 | Permalink

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» Reductio from Political Animal
REDUCTIO....Via Matt Yglesias, I see that libertarian economics professor Alex Tabarrok doesn't believe that landlords should be required to makes their habitats habitable:If tenants benefit from a law that says apartments must have hot water then sure... [Read More]

Tracked on Aug 18, 2004 3:58:23 PM

» Econ 101 from A Partially Examined Life
Via Matt Yglesias. Well, this is easily the worst example for proving a valid economic point that I've ever seen. The point is that government regulations that require suppliers to meet certain standards can make both suppliers and purchasers worse... [Read More]

Tracked on Aug 18, 2004 7:39:04 PM

» Hot water (again) from Marginal Revolution
I think my law students understood my first-class example about contracts, incentives and hot water. But Kevin Drum and Matt Yglesias are having some difficulties. No problem. I will make it simpler. Suppose we have a law that says that [Read More]

Tracked on Aug 19, 2004 12:10:53 AM

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» Reducing Their Brains... from Deinonychus antirrhopus
...to silly putty. Both Kevin Drum and Matthew Yglesias don't seem to understand Alex Tabarrok's point. Today, I begin teaching the Economic Foundations of Law in the GMU Law School. To illustrate the importance of economics for the study of law I begi... [Read More]

Tracked on Aug 19, 2004 12:27:59 AM

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» Law School Econ Prof Flunks Econ and Law from Republicans Anonymous
First reported by Matthew: Economics Professor Alex Tabarrok is apparently teaching a class called the "Economic Foundations of Law in the GMU Law School." His apparent purpose is to use misleading economic analyses to justify deregulation. His... [Read More]

Tracked on Aug 19, 2004 2:10:29 AM

» Minimum standards for dwelling and rent-control from Ashish's Niti
It will be interesting to know if those who support minimum standard for dwelling also support rent control. To me, simply economic common sense indicates that you cannot have both minimum standard for dwelling and rent control at the same time! I... [Read More]

Tracked on Aug 19, 2004 3:54:15 AM

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» Welcome To My World from Economics With A Face
Putting up with a flaky landlord is the price we pay. Ironically, while the debate over hot water was going on over the internet, the price I was paying was a few days of freezing cold showers. I hadn't thought much about the discussion above until yes... [Read More]

Tracked on Oct 21, 2004 5:42:13 PM

Comments

There's also a rational agent problem: being a philosopher, you'll probably want to spend the hot water money on booze and loose women. However, you'd actually be better off if you washed occasionally, to avoid contracting scabies and various other unpleasant conditions.

Posted by: john b | Aug 18, 2004 2:30:44 PM

Also, even loose women like a man who smells 'clean as a whistle'. (Cue faintly-Irish whistling).

Posted by: Spencer | Aug 18, 2004 2:42:57 PM

I'm in that class! Later in that same class (our very first one) he dismissed the notion that natural resources could run out, and a point about demand was illustrated by bashing Kerry for having multiple houses. Nice.

Posted by: GMU1L | Aug 18, 2004 4:35:35 PM

he dismissed the notion that natural resources could run out

In a purely theoretical sense, they can't run out. As the supply diminishes, scarcity drives up the price and reduces demand is how I bet the argument goes. When we're down to the last barrel of oil, it becomes so prohibitively expensive that substitutes are found or people just stay home and put on another sweater.

Of course, the perfesser is only dealing with economics and law, not politics or ethics. So he's not even discussing the morality of manipulating markets (see California electricity and Enron), the existence of cartels (see OPEC), or the societal imperatives for protecting the common good (see laws regarding the ownership of natural resources and depletion allowance tax policy).

I'm not saying he's ignorant of any of these things. His illustrative example is designed to make a specific point. Sheesh, don't try to make it more than it is.

Posted by: Quaker in a Basement | Aug 18, 2004 5:15:18 PM

Alex Tabarrok shatters my socialist dreams of getting hot water for free.

Move to Iceland.

Posted by: ahem | Aug 18, 2004 5:20:59 PM

I Emailed him my thoughts as to other "reasons" why regulations might make sense. see: http://wematter.blogspot.com/2004/08/regulations.html

. 1) Regularity -- There may be some situations where the "bother" of negotiating every Nit of a contract are not worth it.

. 2) Delayed danger -- It may be that a regulation is justified because it prevents a danger that is not evident or easily known.

. 3) Dis-Economies -- We all know this

. 4) Mass Production -- It may be that a regulation is justified because it leads to a cost effective solution where as individual cost/benefits don't

Posted by: Mike Liveright | Aug 18, 2004 5:27:54 PM

"In a purely theoretical sense, they can't run out. "

That's what they said on Easter Island about the trees...

Posted by: Jon H | Aug 18, 2004 5:28:32 PM

You should have studied microeconomics? Maybe AT should have studied it. He assumes a regulation requiring him to spend X to offer rental housing services increases the price by X, possibly pricing people who don't want to pay the extra X out of the market.

More likely, or at least possible, is that the regulation reduces the net value of the rental unit. If the tenant won't pay the entire X, I reduce my price to his own valuation of the additional benefit and eat the difference. Otherwise, what do I do? Not rent the unit and lose the entire value of it?

Sheesh.

A different argument would attach to the supply of new rental housing, but AT doesn't distinguish between old and new. This is not nit-picking. A basic problem in economic policy is the differential impacts of a policy on existing assets and the production of new ones.

I weep for the students of GMU. If they become judges, I weep for those who must appear in their courtrooms.

Posted by: Max B. Sawicky | Aug 18, 2004 5:38:59 PM

(H)e dismissed the notion that natural resources could run out

Cool - I didn't realize that Zeno's Paradox was a law of economics!

The problem with oil is that the size of its actual supply is and will always be an unknown quantity. This uncertainty can't help but monkey with the laws of supply and demand, and may actually be one non-malevolent force keeping serious alternative energy research off our national agenda.

But back to the main topic of MY's post - the professor in question seems to ignore a fundamental reason why many renters rent instead of own: they'd rather pay someone else to sweat the small stuff. If I own a house and my water boiler goes, that's my problem; if I've signed a lease with a landlord, it's his.

Just because I'm paying an all-inclusive rent doesn't mean I think that hot water and a working fridge are somehow "free", and unless you go trolling at your local Maoist bookstore I'd wager that no one who rents seriously believes that they are entitled to anything, except what's covered in the lease (and hence paid for, either directly or indirectly).

Posted by: oodja | Aug 18, 2004 6:05:36 PM

"More likely, or at least possible, is that the regulation reduces the net value of the rental unit. If the tenant won't pay the entire X, I reduce my price to his own valuation of the additional benefit and eat the difference. Otherwise, what do I do? Not rent the unit and lose the entire value of it?"

This is completely wrong. The value that the tenant places on the hot water is completely irrelevant because the tenant no longer has a choice between an apartment with hot water and an apartment without hot water. The choice is between an apartment with hot water or no apartment at all. It's very possible that the increase in rent caused by the regulation would be more than the hot water is worth to the tenant.

The risk isn't just that some people will be priced out of the market. It's that they will be forced to pay extra for something they don't want.

Posted by: Xavier | Aug 18, 2004 6:54:55 PM

Plus, washing makes it easier to attract the loose women that don't require cash-up-front; may even make it possible to get them to buy you booze.

Posted by: cmdicely | Aug 18, 2004 7:07:46 PM

There are, actually, all kinds of examples of natural resources (like, say, animal populations) where this is wrong. Animals hunted to extinction (or forests logged out of existence) are, in fact, depleted-to-nothing resources. In many cases, if you get rid of enough of a "resource" of this type, the rest will go away on their own.

Even minable resources probably don't act this way; the most difficult to extract barrel of oil on the planet probably doesn't have infinite extraction cost, so even draining the last barrel won't make the cost go to infinity.

Posted by: cmdicely | Aug 18, 2004 7:12:55 PM

I understand Tabarrok's point, but he used a really dumb example. He shouldn't have chosen something that is considered a necessity. I guess he would argue that the government shouldn't be in the position of deciding what constitutes a necessity. But lack of hot water, on a large scale, would soon become a health problem that would affect parties other than those in the contract. Libertarians often have a convenient blind spot when it comes to negative externalities.

Posted by: r.t. | Aug 18, 2004 7:30:12 PM

Xavier - but the cost of litigation is so much more than the average cost of rental that the landlord has next to no incentive to provide according to a contract. It's only when a tenant can immediately bring in the coercive power of the state that there is even the vaguest possibility of enforcement.

This puts aside the informational asymmetries, externalities associated with slum properties, etc. This guy is precisely why I decided to become an economist -- so I'd have the tools to shut down fools like him. Too much harm can result when experts are myopic and deluded.

Posted by: Kimmitt | Aug 18, 2004 7:43:10 PM

Litigation is not necessary to enforce habitability laws, often.

For instance, California's habitability law (Civil Code 1941 et seq) allows the tenant to withold rent, creates an obstacle to landlord actions for unlawful detainer, and allows the tenant to cure the defect and deduct the cost from rent owed to the landlord, or to quit the lease without further obligation, when the landlord fails to cure a habilitability defect.

This does not require litigation, nor does it require the tenant calling on the coercive power of the state; instead, mostly, it merely negates the power of the landlord to use the coercive power of the state to enforce or terminate the lease agreement (either to collect rent or to evict the tenant).

Posted by: cmdicely | Aug 18, 2004 7:52:10 PM

Kimmit,

Aack. You were talking about litigation of contract as an alternative to habitability laws and how hard that would be. Somehow I took that first paragraph as about how hard enforcement of habitability laws was, and that they required litigation. My bad.

Posted by: cmdicely | Aug 18, 2004 7:53:24 PM

An economist and his student are walking down the street and the student spies a $100 bill.

Espying the benjamin, the student asks the economist (let's call him "Alex") if he should pick it up.

Whereupon Alex tells him that the $100 bill can't possibly be there because if it were, someone would have picked it up already.

Posted by: praktike | Aug 18, 2004 8:28:08 PM

cmdicely - no worries.

Posted by: Kimmitt | Aug 18, 2004 8:38:05 PM

In a purely theoretical sense, they can't run out. As the supply diminishes, scarcity drives up the price and reduces demand is how I bet the argument goes.

Awesome, I guess I'll go cook up a dodo-egg omlet then.

Posted by: GMU1L | Aug 18, 2004 9:09:24 PM

He says "The landlord knows for certain that he can increase the rent by $100 because this will make the tenant just as well off as he was before, which by assumption was an equilibrium price."

That is hogwash and illustrates why economics is not science just mish mash of anecdotal pseudo-causality.

Posted by: chuck | Aug 18, 2004 10:07:00 PM

Max B. Sawicky wrote, More likely, or at least possible, is that the regulation reduces the net value of the rental unit. If the tenant won't pay the entire X, I reduce my price to his own valuation of the additional benefit and eat the difference.

I assume this is a reference to the question of the elasticities of supply and demand?

Posted by: liberal | Aug 19, 2004 6:52:53 AM

Of course, the big market distortions aren't forcing landlords to provide hot water, etc, but rather (a) excessing zoning regulations, and (b) allowing private parties (aka "landlords") to capture most of the Ricardian rent associated with a parcel of land (not to mention taxing improvements at the same or higher level than the land).

Posted by: liberal | Aug 19, 2004 7:00:00 AM

Xaviar -- no, the choice is between the apartment w/required hot water and a cheaper apt w/req hot water. Demand curves slope down in this case. Supply of existing housing stock could be vertical. (Maybe the landlord takes his unit off the market, but what else can you do with an apartment building?) If you want to get cute, the landlord could skimp on maintenance or unregulated amenities and get his hot water money back.

Generalizing, contrary to AT and X, as for taxation, a mandate can be borne partly or entirely by the seller of the services of some capital asset.

AT wants to worry the bone of the state attempting to ensure that poor people get some basic amenities. Maybe it backfires, he is saying. There is something creepy about this. He picked a bad example, and he implies his scenario is simpler and more likely than it really is, by a long shot.

Posted by: Max | Aug 19, 2004 2:17:10 PM

Chuck -- the theory is good, and one inevitable result of habitability laws will be an increase in rental prices, as people are simply willing to pay more for property if they know meets certain standards.

But the example is still just awful.

Posted by: Kimmitt | Aug 19, 2004 2:57:42 PM

Well, it increases the minimum price of a rental unit; of course, it also should decrease the minimum cost of a rental unit with hot water.

Posted by: cmdicely | Aug 19, 2004 5:07:15 PM

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