Comments on: Rents and Conditions http://crookedtimber.org/2004/08/19/rents-and-conditions/ Out of the crooked timber of humanity, no straight thing was ever made Sat, 26 May 2012 05:35:42 +0000 hourly 1 http://wordpress.org/?v=3.3.2 By: kevin quinn http://crookedtimber.org/2004/08/19/rents-and-conditions/comment-page-1/#comment-39212 kevin quinn Mon, 23 Aug 2004 05:00:23 +0000 http://crookedtimber.org/wp/?p=2051#comment-39212 Monopoly: Take a simple case where the monopolist landlord has an inverse demand curve that is linear: P =A - bQ, where A and b are parameters, P is the price (rent) and Q is the quantity of units rented. Suppose in addition that Marginal Costs are constant at C. Tabarrok's case is one where the value to the consumer of the amenity that is required is less than the cost of providing it. (In the opposite case, he argues, the amenity would be provided without any legal requirement.) So the intercept of the inverse demand curve shifts up by "delta A" and the cost curve by "delta C" and the latter exceeds the former. The monopolist's profit maximizing price for any A and C is the average in this case: A/2 + C/2 So it will increase, with the regulation, by the average of the change in A and the change in C, i.e., by more than the former and less than the latter. It follows that both tenant and landlord are worse off. Monopoly: Take a simple case where the monopolist landlord has an inverse demand curve that is linear: P =A – bQ, where A and b are parameters, P is the price (rent) and Q is the quantity of units rented. Suppose in addition that Marginal Costs are constant at C. Tabarrok’s case is one where the value to the consumer of the amenity that is required is less than the cost of providing it. (In the opposite case, he argues, the amenity would be provided without any legal requirement.) So the intercept of the inverse demand curve shifts up by “delta A” and the cost curve by “delta C” and the latter exceeds the former. The monopolist’s profit maximizing price for any A and C is the average in this case: A/2 + C/2 So it will increase, with the regulation, by the average of the change in A and the change in C, i.e., by more than the former and less than the latter. It follows that both tenant and landlord are worse off.

]]> By: Adam Stephanides http://crookedtimber.org/2004/08/19/rents-and-conditions/comment-page-1/#comment-39211 Adam Stephanides Sat, 21 Aug 2004 18:38:56 +0000 http://crookedtimber.org/wp/?p=2051#comment-39211 Actually Brian's anecdote tells against Daniel's assumption that landlords typically extract the "maximum price possible" (in the comments on the other thread). If landlords had been extracting the maximum price possible before 1993, then tenants would be unable or unwilling to pay the water rates on top of their pre-1993 rent, so landlords would be compelled to lower their rents to retain their tenants. To put it another way: say that before 1993 a tenant was paying $500 in rent, while after 1993 she was paying $500 in rent plus $25 for water. (I'm just making these figures up, obviously.) If she was willing and able to pay $525 in total to live in her apartment, why hadn't the landlord already been collecting this sum before 1993? Actually Brian’s anecdote tells against Daniel’s assumption that landlords typically extract the “maximum price possible” (in the comments on the other thread). If landlords had been extracting the maximum price possible before 1993, then tenants would be unable or unwilling to pay the water rates on top of their pre-1993 rent, so landlords would be compelled to lower their rents to retain their tenants. To put it another way: say that before 1993 a tenant was paying $500 in rent, while after 1993 she was paying $500 in rent plus $25 for water. (I’m just making these figures up, obviously.) If she was willing and able to pay $525 in total to live in her apartment, why hadn’t the landlord already been collecting this sum before 1993?

]]> By: r. clayton http://crookedtimber.org/2004/08/19/rents-and-conditions/comment-page-1/#comment-39210 r. clayton Fri, 20 Aug 2004 19:29:31 +0000 http://crookedtimber.org/wp/?p=2051#comment-39210 <blockquote> Now I can say for certain that when this rule change went through, my rent fell not a single penny. </blockquote> Ha! I was once as naive as you. Let me tell you how I became wise (at least in matters such as this). Jim Florio was elected governor of New Jersey based, in part, on a promise to reform auto insurance, which was (and is still) a mess. I renewed my insurance soon after reforms were pushed through the Legislature. My agent walked me through the changes and adjustments, and at the end my bill was about $150 more than the previous year's. I said to her "But I thought auto insurance was supposed to be better!" She looked at me and laughed, and then imparted to me this bit of wisdom, which I pass on to you: "Oh, but it is. Without the changes, the increase would have been much greater." So, you see, it wasn't that your rent failed to drop by <i>X</i> - oh, no - it was that your rent failed to go up by <i>X</i>, which, as our economist friends are undoubtedly eager to point out, is exactly the same thing. HTH
Now I can say for certain that when this rule change went through, my rent fell not a single penny.
Ha! I was once as naive as you. Let me tell you how I became wise (at least in matters such as this). Jim Florio was elected governor of New Jersey based, in part, on a promise to reform auto insurance, which was (and is still) a mess. I renewed my insurance soon after reforms were pushed through the Legislature. My agent walked me through the changes and adjustments, and at the end my bill was about $150 more than the previous year’s. I said to her “But I thought auto insurance was supposed to be better!” She looked at me and laughed, and then imparted to me this bit of wisdom, which I pass on to you: “Oh, but it is. Without the changes, the increase would have been much greater.” So, you see, it wasn’t that your rent failed to drop by X – oh, no – it was that your rent failed to go up by X, which, as our economist friends are undoubtedly eager to point out, is exactly the same thing. HTH

]]> By: David Margolies http://crookedtimber.org/2004/08/19/rents-and-conditions/comment-page-1/#comment-39209 David Margolies Fri, 20 Aug 2004 18:20:52 +0000 http://crookedtimber.org/wp/?p=2051#comment-39209 As to why many leases in America include utilities as part of the rent: my father looked into this. My parents owned a condominium in Washington DC: utilities (only electricity, no gas available) were included in the monthly maintenance cost. My father objected (feeling that he and my mother used less than others). He was first told the individual apratments could not be metered, but that argument collapsed when he pointed out the circuit breaker box in the apartment's hall closet. Then he was told that the building got a much better rate than any individual. An earlier poster suggested this and there is a cost (perhaps significant) to the utility to bill each resident and collect from late payers than to send a single bill to the building (or landlord). As to why many leases in America include utilities as part of the rent: my father looked into this. My parents owned a condominium in Washington DC: utilities (only electricity, no gas available) were included in the monthly maintenance cost. My father objected (feeling that he and my mother used less than others). He was first told the individual apratments could not be metered, but that argument collapsed when he pointed out the circuit breaker box in the apartment’s hall closet. Then he was told that the building got a much better rate than any individual. An earlier poster suggested this and there is a cost (perhaps significant) to the utility to bill each resident and collect from late payers than to send a single bill to the building (or landlord).

]]> By: Jack http://crookedtimber.org/2004/08/19/rents-and-conditions/comment-page-1/#comment-39208 Jack Fri, 20 Aug 2004 16:09:16 +0000 http://crookedtimber.org/wp/?p=2051#comment-39208 Constant, it is only that simple if the price of providing that service is a) the same whether or not there are regulations b) passed on to the savings on to the renters if the cost of providing the services were foregone. c) there is no external interest in making sure that these services be provided none of which appears to be obviously true. Prof. Tabarrok is therefore attempting to replace a possibly accurate intuition with an oversimplification. The model at the very least fails to include the capital value of the property. It is well known that the welfare effects of a wealth tax are different from those of an income tax and there are reasons to suppose that building regulations may behave more like the former than the latter. Constant, it is only that simple if the price of providing that service is a) the same whether or not there are regulations b) passed on to the savings on to the renters if the cost of providing the services were foregone. c) there is no external interest in making sure that these services be provided none of which appears to be obviously true. Prof. Tabarrok is therefore attempting to replace a possibly accurate intuition with an oversimplification. The model at the very least fails to include the capital value of the property. It is well known that the welfare effects of a wealth tax are different from those of an income tax and there are reasons to suppose that building regulations may behave more like the former than the latter.

]]> By: Jeff http://crookedtimber.org/2004/08/19/rents-and-conditions/comment-page-1/#comment-39207 Jeff Fri, 20 Aug 2004 03:23:17 +0000 http://crookedtimber.org/wp/?p=2051#comment-39207 As long as I've rented properties I don't ever recall my rent going down. I worked for a while in property management and I don't think we ever lowered rent. Rea and Buffalo Gal have it about right. In the one building that we had installed seperate heat and hot water for 14 units, we had all kinds of pains in the rear. Thank goodness I was the "lightbulb guy" As long as I’ve rented properties I don’t ever recall my rent going down. I worked for a while in property management and I don’t think we ever lowered rent. Rea and Buffalo Gal have it about right. In the one building that we had installed seperate heat and hot water for 14 units, we had all kinds of pains in the rear. Thank goodness I was the “lightbulb guy”

]]> By: Kimmitt http://crookedtimber.org/2004/08/19/rents-and-conditions/comment-page-1/#comment-39206 Kimmitt Fri, 20 Aug 2004 02:26:52 +0000 http://crookedtimber.org/wp/?p=2051#comment-39206 Again, I'm not arguing that the economic principle underlying the example is false. I'm arguing that it's a lousy example with too many real-world attachments that, in my opinion, would confuse instead of enlighten students. Again, I’m not arguing that the economic principle underlying the example is false. I’m arguing that it’s a lousy example with too many real-world attachments that, in my opinion, would confuse instead of enlighten students.

]]> By: constant http://crookedtimber.org/2004/08/19/rents-and-conditions/comment-page-1/#comment-39205 constant Fri, 20 Aug 2004 01:19:59 +0000 http://crookedtimber.org/wp/?p=2051#comment-39205 <i>The cost of the hot water is more than its value to the tenant.</i> <i>No. It is conceivable that the cost of the hot water might be more than its value to the tenant, but it has hardly been shown to be the case.</i> You're losing track of the argument. The cost is either more than, or else less-than-or-equal-to. So there are two cases. Both cases are addressed. The first is addressed in the article, the second is left as an easy exercise for the reader, i.e.: "a) Suppose the tenant values the hot water at $150 and it cost the landlord $100. Does the regulation benefit the tenant and landlord now?." So there's no assumption being made. The situation has been divided into two cases and each is addresed separately. The whole thing is easy, obvious, unproblematic, as straightforward an example of economics as one can devise that is not utterly boring, and yet I predict that there will be infinite resistance to the simplest lesson. I can only imagine how frustrated Alex Tabarrok is getting at this point. He's now replied a second time to critics who just don't get the point. I'm pulling my hair out in frustration and I'm just reading this stuff. The cost of the hot water is more than its value to the tenant. No. It is conceivable that the cost of the hot water might be more than its value to the tenant, but it has hardly been shown to be the case. You’re losing track of the argument. The cost is either more than, or else less-than-or-equal-to. So there are two cases. Both cases are addressed. The first is addressed in the article, the second is left as an easy exercise for the reader, i.e.: “a) Suppose the tenant values the hot water at $150 and it cost the landlord $100. Does the regulation benefit the tenant and landlord now?.” So there’s no assumption being made. The situation has been divided into two cases and each is addresed separately. The whole thing is easy, obvious, unproblematic, as straightforward an example of economics as one can devise that is not utterly boring, and yet I predict that there will be infinite resistance to the simplest lesson. I can only imagine how frustrated Alex Tabarrok is getting at this point. He’s now replied a second time to critics who just don’t get the point. I’m pulling my hair out in frustration and I’m just reading this stuff.

]]> By: dsquared http://crookedtimber.org/2004/08/19/rents-and-conditions/comment-page-1/#comment-39204 dsquared Thu, 19 Aug 2004 23:54:26 +0000 http://crookedtimber.org/wp/?p=2051#comment-39204 <i>The cost of the hot water is more than its value to the tenant. </i> Does it not worry you that this assumption would have the implication that nobody who owned their own house would take a bath? The cost of the hot water is more than its value to the tenant. Does it not worry you that this assumption would have the implication that nobody who owned their own house would take a bath?

]]> By: Kimmitt http://crookedtimber.org/2004/08/19/rents-and-conditions/comment-page-1/#comment-39203 Kimmitt Thu, 19 Aug 2004 23:39:46 +0000 http://crookedtimber.org/wp/?p=2051#comment-39203 <i>The cost of the hot water is more than its value to the tenant. </i> No. It is conceivable that the cost of the hot water might be more than its value to the tenant, but it has hardly been shown to be the case. A moment's reflection (not to mention a modicum of common sense) will show that the cost of hot water to the landlord is far less than the value of said hot water to the tenant in the vast, vast majority of cases. We could assume it "for the sake of argument," but assuming things which contradict common sense is the stuff of crappy examples that confuse students. The cost of the hot water is more than its value to the tenant. No. It is conceivable that the cost of the hot water might be more than its value to the tenant, but it has hardly been shown to be the case. A moment’s reflection (not to mention a modicum of common sense) will show that the cost of hot water to the landlord is far less than the value of said hot water to the tenant in the vast, vast majority of cases. We could assume it “for the sake of argument,” but assuming things which contradict common sense is the stuff of crappy examples that confuse students.

]]> By: Nat http://crookedtimber.org/2004/08/19/rents-and-conditions/comment-page-1/#comment-39202 Nat Thu, 19 Aug 2004 23:30:43 +0000 http://crookedtimber.org/wp/?p=2051#comment-39202 I think you all are making this more complicated than it really is. It doesn't matter how competitive the housing market is; it doesn't matter whether the landlord or the tenant has more bargaining power; it doesn't matter who ends up paying. The cost of the hot water is more than its value to the tenant. Therefore, providing the hot water is a waste of resources. Whether the cost is assumed by the tenant, the landlord, or Oxfam, paying for hot water is not the best use of that money. Now it is true that there are real-world factors outside the model. Primarily, I think, the costs of having this regulation (in the case of something that almost everyone wants, like hot water) may be less than the costs of enforcing contracts. That is, this protects against landlords who promise hot water to someone who values it, and then don't deliver. Also there might be externalities, as some have suggested, meaning there are some un-accounted benefits to society (improving community health, say), so that the tenant's valuation is not the right one to use in determining a social optimization. If your objective is to transfer wealth from rich landlords to poor tenants, there should be better ways to do that. I think you all are making this more complicated than it really is. It doesn’t matter how competitive the housing market is; it doesn’t matter whether the landlord or the tenant has more bargaining power; it doesn’t matter who ends up paying. The cost of the hot water is more than its value to the tenant. Therefore, providing the hot water is a waste of resources. Whether the cost is assumed by the tenant, the landlord, or Oxfam, paying for hot water is not the best use of that money. Now it is true that there are real-world factors outside the model. Primarily, I think, the costs of having this regulation (in the case of something that almost everyone wants, like hot water) may be less than the costs of enforcing contracts. That is, this protects against landlords who promise hot water to someone who values it, and then don’t deliver. Also there might be externalities, as some have suggested, meaning there are some un-accounted benefits to society (improving community health, say), so that the tenant’s valuation is not the right one to use in determining a social optimization. If your objective is to transfer wealth from rich landlords to poor tenants, there should be better ways to do that.

]]> By: Brad http://crookedtimber.org/2004/08/19/rents-and-conditions/comment-page-1/#comment-39201 Brad Thu, 19 Aug 2004 23:15:29 +0000 http://crookedtimber.org/wp/?p=2051#comment-39201 <i> think it’s remarkable how many American rental contracts come with utilities included. It seems to me this is bad for landlords and for the environment, because renters will, and in my experience do, use more heating when they are not paying for it than when it is included in the contract.</i> The other side of this coin, re: environmental and resource efficiency, is that when tenants are responsible for heating, the landlords have no economic incentive to make sure that the house is well-insulated, the furnace efficient, etc., except in as much as renters can and are able to distinguish this and use it as a criterion in the selection process. The cost to the tenant to do this evaluation can be quite high, and energy efficiency capital improvements that will pay off over the life of the tenancy are very limited. think it’s remarkable how many American rental contracts come with utilities included. It seems to me this is bad for landlords and for the environment, because renters will, and in my experience do, use more heating when they are not paying for it than when it is included in the contract. The other side of this coin, re: environmental and resource efficiency, is that when tenants are responsible for heating, the landlords have no economic incentive to make sure that the house is well-insulated, the furnace efficient, etc., except in as much as renters can and are able to distinguish this and use it as a criterion in the selection process. The cost to the tenant to do this evaluation can be quite high, and energy efficiency capital improvements that will pay off over the life of the tenancy are very limited.

]]> By: Matt Weiner http://crookedtimber.org/2004/08/19/rents-and-conditions/comment-page-1/#comment-39200 Matt Weiner Thu, 19 Aug 2004 23:01:36 +0000 http://crookedtimber.org/wp/?p=2051#comment-39200 About included utilities; the last two apartments I lived in had me pay for gas, which was used only for cooking (heat was some other way). This irritated me, because I wound up paying about $12/month for having gas service and about $0.50/month for the actual gas I used; I thought that if the landlord paid one $12/month charge for the whole building they could pass along a $5-$10/month rent increase and still come out ahead on the deal, even if the availability of free gas caused the tenants to cook more. (OTOH, this may just reflect how infrequently I'm cooking.) <br />Er, in three words: Economies of scale. About included utilities; the last two apartments I lived in had me pay for gas, which was used only for cooking (heat was some other way). This irritated me, because I wound up paying about $12/month for having gas service and about $0.50/month for the actual gas I used; I thought that if the landlord paid one $12/month charge for the whole building they could pass along a $5-$10/month rent increase and still come out ahead on the deal, even if the availability of free gas caused the tenants to cook more. (OTOH, this may just reflect how infrequently I’m cooking.)
Er, in three words: Economies of scale.

]]> By: Kimmitt http://crookedtimber.org/2004/08/19/rents-and-conditions/comment-page-1/#comment-39199 Kimmitt Thu, 19 Aug 2004 22:17:12 +0000 http://crookedtimber.org/wp/?p=2051#comment-39199 I wouldn't expect rents to fall; there are a lot of reasons why they'd be sticky downwards. What I would expect is that rents would fail to rise for a period of time, and/or that non-rent bonuses for signing leases (free months, lower security deposits, et cetera) would increase. I wouldn’t expect rents to fall; there are a lot of reasons why they’d be sticky downwards. What I would expect is that rents would fail to rise for a period of time, and/or that non-rent bonuses for signing leases (free months, lower security deposits, et cetera) would increase.

]]> By: dsquared http://crookedtimber.org/2004/08/19/rents-and-conditions/comment-page-1/#comment-39198 dsquared Thu, 19 Aug 2004 22:01:37 +0000 http://crookedtimber.org/wp/?p=2051#comment-39198 Actually, no, you are right and I was talking out my arse. Council tax is paid by the occupier, not the owner; I've just come across a council tax book with my name on it that dates back to when I did rent a house. Jesus, was the end of the poll tax really ten years ago?!?!? Actually, no, you are right and I was talking out my arse. Council tax is paid by the occupier, not the owner; I’ve just come across a council tax book with my name on it that dates back to when I did rent a house. Jesus, was the end of the poll tax really ten years ago??

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