Rent control (gah I am a masochist), zoning, and oligopolies in location markets (Henry George, oh my!)

This should be much better proofed than it is, but I wanted to get something posted and OMG school is starting and I have other real work to do!! BOOOOOOOOO. Mea culpa.

My brilliant colleague Richard Green asked Twitter this morning:

Richard K Green on Twitter Has there ever been a time when a price ceiling has led to greater output of a good

It’s a very good question and the answers have been insightful, leading to a thought-provoking thread:

Richard K Green on Twitter Has there ever been a time when a price ceiling has led to greater output of a good

Now, none of these are what I would call price ceilings, but they are worthy answers because they bring up all sorts of nice things we should understand about land markets. Rent control really is a price ceiling–it’s externally set by a regulating body. However, these instances are insightful because they show that suppliers will also control prices as a market capturing and dominating strategy–and that can be really profitable. In particular, Nic Duquette’s (another one of my brilliant colleagues) example of miles driven is a very, very good one. Gasoline markets are oligarchic with abundant evidence of collusive behavior and resource-based, and that makes them rather similar to land markets in growing cities. Americans have gotten cheap gas largely because they were price-setters for decades in a global market with a few suppliers who profitably expanded the demand side of their revenue calculus rather than price increases (among other things, like tech changes.)

Rent control and zoning get a beating in YIMBY and market urbanist policy advocacy as market distortions. Richard is right; we have every reason to believe, both theoretically and empirically, that rent control act as disincentives in the production of rental units, prompting shortages and higher rents than we would have otherwise. Ditto with zoning, which is not a price control, but which has the same effect of limiting supply and prompting shortages as an explicit control over supply.

The reason I am not as hard on zoning and rent control as others in discussion are, however, is that I see them as politically derived compromises–in Econ terms, second-, third-best policy options–in attempts to correct the problems related to externalities (and make sure white people can hoard resources, but I’m getting there) and imperfect competition among land owners.

First of all, let’s be very honest in the way that I like being honest about scholarship: land economics is not a very well understood field; neither are housing markets, but they have much more research, particularly recently, than land markets. Henry George’s key insight many years ago was that urban land is a *special* kind of good where individual ownership creates a harmful monopoly–a monopoly over location.

So let’s think about things in those terms. Zoning then doesn’t just represent an intervention into markets from bad-old government; it’s instead a tool that small monopolists (parcel owners) can use for collusive behavior. So zoning is bad, right? Ok, but is it the root of the problem? We have evidence from urban land markets all over the world where US style Euclidean zoning is not in place that land owners can find other ways to collude through mafias, landownership agreements, etc. (Don’t get me wrong; they often make much nicer physical arrangements than what results in US cities, but they are still looking out for numero uno and keeping their assets increasing in value. Their conduct is way more like that of natural resource miners than competitive suppliers.)

Rent control enters this equation not, then, strictly as a price ceiling in a competitive market, but as a regulatory tool enacted in response to oligarchical control over location among landlords. Rent control may not be welfare-enhancing in the long-term, but it certainly could be in the short-term within noncompetitive markets for location.

I guess what I am getting at here is that root problem is private ownership of land, not zoning or rent control. Market urbanists love property rights, but to really get the holy grail–efficiency in housing markets–we have to have competition and that just doesn’t occur sufficiently among land owners in growing cities. (Developers are a different question). One thing that armchair econ people get wrong about property rights is the idea that they are an end in themselves, and everything falls correctly from there. No. If we want efficiency, we want to make sure that property rights are assigned optimally from the get-go. Zoning and rent control may compound the problems in various ways, but land markets themselves are noncompetitive before we even start.

So this makes this a lot harder. Sorry.

4 thoughts on “Rent control (gah I am a masochist), zoning, and oligopolies in location markets (Henry George, oh my!)

  1. Dear Prof. Schweitzer,
    Yes, I think your comments about land rent get to the heart of the issue. If rent control is designed so that it falls entirely on land rent, then, as Lee Friedman points out in Microeconomics for Public Policy Analysis (Chapter 13 is largely about rent control) it will not have negative effects. If price regulation falls entirely on pure economic rent, then it doesn’t hurt production. As I understand it, that is the point of public utility regulation, which is a quite successful form of price regulation. None of the people who complain that rent control “subsidizes” high income tenants ever complain that public utility regulation “subsidizes” high income homeowners. The point is that the utility receives the rate of return necessary to attract the capital investment necessary to provide electricity, gas, water, etc.

    There is a second aspect to rental housing market failure as well. New rental housing is mostly built for the higher rent sector of the market because it takes higher rents to cover the cost of new construction. That means a perpetual disconnect between the demand at the lower end of the rental market, from very low income tenants, and the supply, because it depends on a very iffy filtering down process. When the demand at the high end of the market is met, construction will slow, even if there is tremendous need for more housing for lower-income tenants. It seems to me that rent control, by enabling lower income tenants to resist displacement by the higher income tenants, should actually increase the market for new housing, since fewer higher income tenants will get their housing needs met by just pushing lower income tenants out and moving into renovated older apartments.

    Thank you also for getting beyond the usual assumption that private property rights are unproblematic rather than a complex bundle that needs careful design.

  2. Nice one.

    IMHO, rent controls are a crude firm of land value tax/citizens dividend. That rental value has to go to somebody, if landlords can’t get it, tenants will (or more likely, owner occupiers in lower prices).

    And that state imposed discount to full rent or full purchase price is a bit like a citizens dividend.

    Clearly, LVT/CD is better, but needs must….

  3. Hmm: Private land ownership is bad, because it can lead to a monopoly but zoning doesnt make it better. So why have zoning? Particularly zoning that favors land assembly and large land owners?

    What if the problem is the monopoly preventing competition. We know what is bad for other markets, maybe the way to ensure competition is to break up large land ownership like we break up large corporations with anti trust laws.

    (Obviously what constitutes ‘large’ would vary from place to place. 100 square miles of cornfield in Kansas might not be a monopoly, 100 acres of Manhattan would)

  4. I think you’re right that this is more complicated than folks want it to be. Those who are market-oriented as an ideology, or property-rights-oriented as an ideology, will say free the market and the good results will follow.

    But that’s clearly not 100% true– a market is a force rather than an ideology, and to get good outcomes for people we need to direct and regulate it.

    It’s one reason I’m broadly in favor of inclusionary zoning as an affordable housing generator. Yeah, it’s a tax on new housing, but it’s also a way of harnessing the profit motive to create socially positive outcomes. (Plus, doing it onsite creates mixed-income buildings, while public subsidized housing often creates income-segregation with its attendant socially negative outcomes).

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