If tenants benefit from a law that says apartments must have hot water then surely a law that says tenants must have hot water and a dishwasher benefits them even more, right? What about a law that says tenants must have hot water, a dishwasher and cable tv? By now the students have cottoned on to the idea that the rent will increase. Once you realize that the law causes the rent to increase it's no longer obvious if tenants benefit or if landlords are harmed.As Alex observes in a follow-up post, it seems some smart people are having difficulty with this fairly simple point.
Kevin Drum, in particular, offers a strikingly unperceptive response:
No kidding. And increasing the size of the military by one division must be bad because, you know, increasing it by a thousand divisions would definitely be bad. So one division must be bad too. I sure wish I could get paid for standing in front of a blackboard and cranking out insights like this.Drum completely misunderstands Alex’s point. If he were saying, “It’s absurd to require dishwashers, therefore it’s absurd to require hot water,” that would have been a reductio. If he were saying, “If they require hot water, next thing you know they’ll be requiring dishwashers,” that would have been a slippery slope argument (as some of Drum’s commenters claim). But Alex’s point was much simpler: any added amenity, whether hot water or dishwashers, increases the landlord’s cost of providing housing, and therefore the price will tend to rise. That is neither a reductio nor a slippery slope. Drum’s response is pure red herring by way of a straw man.
Reductio ad absurdum is a childish game. The fact that a minimum wage of $100/hour is ridiculous doesn't mean that a minimum wage of $7/hour is ridiculous.
Nonetheless, Drum’s commenters (with a few gratifying exceptions) celebrate his post with a carnival of economic illiteracy. Interestingly, Alex’s critics fall into two categories: those who say he should have proceeded to a more complex and intricate level of economic analysis, and those who clearly don’t even grasp Alex’s elementary point. Alex is dead-on when he says, “[U]nderstanding the basic analysis is the first-step on the path to wisdom, it is not the end of the path. But you have to understand the first step if you are going to reach the final destination.”
Interestingly, those who criticize Alex for not delving deep enough commit that very mistake themselves. They blithely assume that introducing complexities like monopoly power and asymmetric information will necessarily vitiate Alex’s conclusion that renters (may) end up worse off. This is a common phenomenon in the anti-market left: whenever they identify any conceivable source of market failure, they figure they’ve won the debate.
But in fact, it turns out Alex’s conclusion is robust to at least some degree of market imperfection. Suppose, for instance, that the housing market is a monopoly (which it’s not, of course, but there’s surely some degree of pricing power). If the monopolist’s customers value some additional amenity by more than the monopolist’s added cost of providing it, the monopolist has every incentive to go ahead and provide it in return for a price increment somewhere between the added cost and added benefit. So let’s focus on cases where the added cost is greater than the added benefit. That means it’s inefficient to provide the amenities – but let’s suppose that’s okay, because the government wishes to transfer wealth from the monopolist to his customers. Does it work? Do the customers get better off?
Not necessarily. Indeed, probably not, according to my calculations. There are two effects at work. First, some of the increase in cost is passed through to the consumer in the form of a higher price. Second, the added value of the amenity also causes the price to rise, because the monopolist can charge more for a more valuable product. If the total price increase from both effects exceeds just the added value of the amenity to the consumer, the consumer gets worse off.
And it turns out that, in a wide range of cases, that’s exactly what happens if (as assumed earlier) the added cost exceeds the added benefit. The math’s a little complex, but here’s the intuition. As a limiting case, suppose the added benefit is zero. Then the price will rise by some fraction of the added cost, even though the consumer does not value the amenity at all. As far as the consumer is concerned, he ends up paying more but not getting more. (Also, some consumers will be priced out of the market.) Now, if the amenity has a positive benefit, then the consumer does get something more – but then there’s another jump in the price to account for the increased value.
Just to be clear, I’m not claiming there are no circumstances under which habitability mandates could increase consumer welfare. I’m saying it’s not as easy as the interventionists seem to think. Pointing to the existence of monopoly power or some other market imperfection doesn’t do the job – you need a lot more information to be sure the mandate will actually do what it’s supposed to. Now, does anyone seriously entertain the idea that governments and courts did the research necessary to justify the mandates before implementing them? My bet is they did about as much research as Drum and his parade of commenters.
UPDATE: Alex has even more. He observes that someone's doing economic calculations to justify the mandates after all. Who? The contractors who install the relevant amenities, of course.