I basically agree with everything “Daniel”:https://www.crookedtimber.org/archives/002359.html and “Atrios”:http://atrios.blogspot.com/2004_08_15_atrios_archive.html#109286835802888918 said about “Alex Tabarrok’s post on renting”:http://www.marginalrevolution.com/marginalrevolution/2004/08/economic_founda.html, but I just wanted to add one anecdote to support Daniel’s side of the story.
A core premise of Alex’s post is that adding minimum conditions to rental agreements will push up the rental cost by roundabout the amount of installing and maintaining equipment to satisfy those conditions. Now I don’t know of any real-life cases where this has been tested, but I do know of (because I lived through) a case where the reverse was tested. The following is a short story about what happens when you decrease the minimum conditions on rental agreements.
Between (I think) 1985 and 1993 it was a requirement in Victorian tenancy laws that the landlord paid the water rates. Now this was a fairly silly rule for many reasns, it’s good environmental policy to have water users be responsible for the cost of water for instance, but there were enough members of the Victorian parliament living in rented accommodation that it got passed.
In 1993, not coincidentally after a number of landlords got elected to the Parliament, the rule was changed so that now tenants paid their own water bills. It’s quite easy to quantify how much this added to the cost of renting a house, because it’s right there on the bill. In a perfect market, everyone’s rents would fall by the (expected) cost of the water bill. Now I can say for certain that when this rule change went through, my rent fell not a single penny. And I can say with reasonable confidence that no one I knew saw their rent fall either. The rental market in Melbourne then was not too bad for buyer’s, as rental markets go, but still the effect of this change in regulations was a direct transfer of welfare from tenants to landlords.
Maybe when regulations change in the other direction things are different, but I’d like to see the empirical proof of this. It seems to me that acknowledging that the facts on the ground are at least some of the time like I described is a pretty important thing to do before we start getting too far into the formal modelling.
(As an aside, 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. It would be very tempting as a legislator to ban these agreements, but I don’t know why the market generates them in the first place.)
{ 27 comments }
dsquared 08.19.04 at 8:26 pm
Good one Brian. Now that you mention it, I remember that in the UK we’ve moved from rates (paid by the property owner) to poll tax (paid by the resident) to council tax (paid by the owner), with no obvious change in rent levels accompanying either change.
rea 08.19.04 at 8:40 pm
“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”
Speaking as a ex-landlord . . .
The reason why we rented the units in our two-unit and three-unit houses with heat included is that otherwise, we would have had to install multiple furnaces . . .
Shelby 08.19.04 at 8:41 pm
I suspect utilities would prefer to have the landlord, rather than the tenant, responsible for paying the bills. That way the responsible party is less likely to skip out on a bill at the end of a tenancy. It’s also easier in the case of multiple units with a single service point. (For example, the duplex I rent has one heating system for both units; the gas co. bills the owner, and the tenants split the bill to reimburse the owner.)
Most likely the Victorian rents you mention didn’t fall because tenants didn’t think it was worth the hassle of renegotiating the rent. Or, rents might have risen in the absence of the change, but instead stayed the same. Just guessing.
Dirk Jenter 08.19.04 at 8:43 pm
Given the high cost of moving house, once a rental contract is in place the landlord has a lot of bargaining power, and the finding that the landlord does not pass the savings on is not surprising. The savings should be reflected in new rental agreements though, which is the right place to look when testing Alex’s little model.
Errol 08.19.04 at 8:44 pm
It used to be common for landlords in NZ to pay ‘rates’. Historically, often this included the cost of supplying water as part of the general rates (especially in Cities and Boroughs, where everyone was ‘on water’). In many cases there was a metered charge, which was fairly small as the cost of water supply was cross-subsidised from the general rates. Often this metered charge was paid by the tenant (and the rental agreement often said the tenant paid ‘water rates’ or ‘metered water’).
Then local body reform came along, and everyone started explicitly charging approximately correct costs to users. The way it often worked was that the fixed cost of providing the reticulation system was recovered through a standing charge per meter (or some such measure), and the cost of treatment was recovered on a usage basis. Overall, the amount paid as items labelled ‘water rates’ increased a lot.
As can be imagined, this caused many disputes about just who was paying what. The various other changes to the NZ economy at the time made working out the actual impact of this rather difficult.
dm 08.19.04 at 8:44 pm
I imagine that rental agreements in the US include utilities like heat and water because the installed systems make it hard to measure the use made by an individual apartment. Where the utility is easy to measure separately (electricity, say), then it’s unlikely to be included in the agreement.
Errol 08.19.04 at 8:45 pm
It used to be common for landlords in NZ to pay ‘rates’. Historically, often this included the cost of supplying water as part of the general rates (especially in Cities and Boroughs, where everyone was ‘on water’). In many cases there was a metered charge, which was fairly small as the cost of water supply was cross-subsidised from the general rates. Often this metered charge was paid by the tenant (and the rental agreement often said the tenant paid ‘water rates’ or ‘metered water’).
Then local body reform came along, and everyone started explicitly charging approximately correct costs to users. The way it often worked was that the fixed cost of providing the reticulation system was recovered through a standing charge per meter (or some such measure), and the cost of treatment was recovered on a usage basis. Overall, the amount paid as items labelled ‘water rates’ increased a lot.
As can be imagined, this caused many disputes about just who was paying what. The various other changes to the NZ economy at the time made working out the actual impact of this rather difficult.
Buffalo Gal 08.19.04 at 9:05 pm
My experience is as a long-time renter and more recent condo owner in Boston. Most apartment buildings have only one meter for water; larger buildings often only have one heating plant and sometimes one central electric meter for the building. The tenant does not receive a separate bill for the utilities, and the law forbids a landlord from charging tenants extra for the utilities in these cases. The expectation is that the landlord will figure in the costs of utilities when setting rents.
Otherwise, the only way to get the tenants to pay for their own utilities would be to tack a surcharge on the rent, which would be an open invitation to gouge the tenants. You’d need another set of laws requiring that the landlord divide the payment among the tenants in some equitable way, requiring some kind of proof that it was fair, etc.
In smaller buildings, such as the typical three-decker, there are separate furnaces and electric meters, and tenants usually pay for their own heat and light on their own bills. I understand newer condo developments are putting in separate water meters.
The rental market here is so tight that tenants need strong protections.
Kip Manley 08.19.04 at 9:10 pm
As far as I know, it’s a truism that any time the property tax is cut or rebated–or stagnates–rental rates are not significantly impacted in a downward direction. The savings are always passed on to the landlord’s pocket.
dave 08.19.04 at 9:22 pm
It seems that the crucial factor in any sort of hypothetical on this topic is the competitiveness of the rental market. If there is relatively little price competition between various rental agencies then it is quite likely that the cost of required improvements or additions will be passed on to the lease holder.
Similarly, depending on the elasticity of demand in the short-run (presumably supply, in the short run, will be infinitely inelastic) the burden will fall differently on the renter and the lease holder.
This exchange is quite similar to discussions on the effects of the minimum wage. Right-wingers can’t imagine anything other than a downward sloping demand curve (completely ignoring the case of monoposonists), while lefties bleat on about social justice and such. Always amusing. And always the truth is a bit of both.
However, I think that this tangent obscures Alex’s original (and I think fundamental) point, that regulating interactions can often harm those it aims to help and even make both parties worse off in some instances.
Ronald Coase is due for a rereading.
Chris Lightfoot 08.19.04 at 9:56 pm
“… in the UK we’ve moved from rates (paid by the property owner) to poll tax (paid by the resident) to council tax (paid by the owner), with no obvious change in rent levels accompanying either change.”
I’ve never had a landlord who didn’t expect me to pay any council tax due on the property! It may be assessed on the value of the property (or, at least, the value of the property in 1986 or something) but it’s usually paid by the occupant, whether renting or not….
dsquared 08.19.04 at 9:59 pm
You may be right actually; I gt out of the renting game at about that time. But have you ever tried negotiating a rent rebate from the landlord on the basis that you are all students, thus decreasing the council tax bill?
dsquared 08.19.04 at 10:01 pm
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?!?!?
Kimmitt 08.19.04 at 10:17 pm
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.
Matt Weiner 08.19.04 at 11:01 pm
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.
Brad 08.19.04 at 11:15 pm
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.
Nat 08.19.04 at 11:30 pm
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.
Kimmitt 08.19.04 at 11:39 pm
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.
dsquared 08.19.04 at 11:54 pm
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?
constant 08.20.04 at 1:19 am
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.
Kimmitt 08.20.04 at 2:26 am
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.
Jeff 08.20.04 at 3:23 am
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”
Jack 08.20.04 at 4:09 pm
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.
David Margolies 08.20.04 at 6:20 pm
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).
r. clayton 08.20.04 at 7:29 pm
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
Adam Stephanides 08.21.04 at 6:38 pm
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?
kevin quinn 08.23.04 at 5:00 am
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.
Comments on this entry are closed.