Monday’s tragic apartment fire in St. Paul highlights an ongoing debate about what government should regulate. The fire started in a house subdivided into five apartments. Seven people out of the 20 or more people living in the house were injured, five critically.
News reports emphasized a number of violations of local law. An attic apartment had been constructed illegally. Seven people lived in the 250-square-foot apartment where the fire started, though local code permits only two in a unit that size. Smoke alarms were not operating. The house had a history of code violations.
Most people accept the idea that laws regulating rental properties are necessary. But some economists — including very famous ones — oppose such rules.
Their argument is a libertarian one. You make people worse off when you prohibit them from making voluntary deals that affect no one else. If some seven-member family is willing to live in 250 square feet for a given rent, you make them worse off by banning that option, those economists say. If you force them into a larger unit that costs more, they have to give up meeting other needs.
They may experience discomfort or danger in living in such confined space. But they are in the best position to judge the benefits and possible costs of their decision. Let them pay their money and make their choice.
While this is a hypothetical argument, Milton Friedman and several fellow Nobel laureates have reasoned along these lines.
Economists who support regulating private agreements, such as those between landlords and renters, argue that the two parties have unequal information and bargaining power. Potential renters don’t have enough information to properly assess the risks of renting a particular apartment. They may misjudge potential costs and benefits and reach a different decision than they would if they knew all the facts.
In the same way that health departments inspect restaurant kitchens because diners cannot know whether unsanitary conditions make their food risky, they say housing codes should ensure that at least the most dangerous and least visible defects — for example, bad wiring — don’t exist in any rental property. Those of us who have contracted hepatitis working in developing countries give some heed to this reasoning.
Non-economists who favor regulation tend to view things in moral terms rather than in terms of efficient use of resources. It is wrong to sell a dangerous product. Doing so should be outlawed and punished. Landlords ought to offer safe, adequate units at reasonable prices.
The argument goes back more than a century. The pro-regulation camp dominated a half-century ago. It still enjoys more public support, although Libertarian views seem to be growing in popularity.
Both sides have valid points. Information is often scarce. Power is unequal. However, setting rental housing standards increases costs and reduces availability even as the shortage of affordable housing continues.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.