From hot water to cold air

My post on hot water (and followup here) is drawing more hot air than I expected. Daniel Davies over at Crooked Timber is often very good so I am frankly surprised that he gets this one very wrong. Davies thinks the argument falters if you assume the landlord has monopoly power.

Even if there is a slight oversupply of rental units for sale, time is almost always on the landlord’s side, because waiting is typically much more inconvenient for the party that has to wait without a house to do wait in [sic]. In general, when tenants and landlords are negotiating over the potential Pareto gain that could be made from renting the house, the landlord ends up capturing most or all of the surplus. The hot water and habitability laws are simply aimed at skewing things a bit in favour of the tenant and putting a floor on how bad a deal the tenant can end up accepting.

Wrong. Assume that a rapacious landlord owns the only apartment in the entire universe and you want it. The landlord is therefore going to extract all of your consumer surplus. Without the hot water the apartment is worth $500 a month to you – so that’s the rent. With the hot water it’s worth $550 – so that’s the rent. There is no skewing in favor of the tenant because the law doesn’t change the landlord’s bargaining power one iota. All it does is raise the landlord’s costs so that he may, in fact, quit the business making you worse off.

Daniel has not absorbed the lesson of my post, the rent will go up. He would have an argument if we added rent controls thereby squeezing the landlord from both ends. [Addendum: Glen Whitman gets the analysis exactly right.]

On a different note, many people have focused undue attention on hot water, something that most of us (in this country) really do want in an apartment. The principles involved, however, don’t change much with the good. If you like, think air conditioning instead. Eric Kilby kindly sends me an editorial from a few years ago in the Philadelphia Inquirer (registration required). Here’s what it says:

The zoning board under Thomas Kelly, president of Sheet Metal Workers Local 19, has required some developers of subsidized housing to install central air conditioning – a pricey, discouraging requirement for what are supposed to be low-cost projects. AC, in case you haven’t guessed, is installed by sheet-metal workers.


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