September 5, 2023
Now You See it, Now You Don’t
A useful way to think about price controls is that they destroy mutually beneficial, Coasean bargains.
By a “Coasean bargain,” I mean an offer that takes the following form: “I’ll pay you to reduce this harm” or “I’ll compensate you for bearing this harm.”
Consider minimum wage as an example of the former instance.
Imagine factory workers on a hot summer day, making $7.25/hour. In a free market, they (could) strike the following deal with their employer: “We’ll go down to $7/hour if you install AC.” Assuming that AC is sufficiently cheap, it’s a win-win. Workers get the AC which they value more than 25 cents/hour and the employer saves more on his wage bill than he expends on his AC bill. In essence, the workers are saying: “We’ll pay you to remove this harm.”
Except, the minimum wage prevents wages from falling to seven dollars. A mutually beneficial exchange fails to materialize.
Now, envision a price ceiling. Here, the Coasean bargain takes the form of: “I’ll compensate you for bearing this harm.” Imagine a landlord who hates the sight of brown-haired folk (such as myself).
A brown-haired person could say: “I know the going rate for this apartment is a thousand bucks/month. But I’ll pay you $1,200/month since I know how you disdain the brown-haired.” In other words: “I’ll pay you to bear this harm.”
In a free market it’s a win-win. The brown-haired buyer gets an apartment he values more than $1,200/month. The bigoted tenant is willing to accept $200—just enough to overcome his prejudice.
Except, rent control prevents buyers from paying more than $1,000/month. A mutually beneficial exchange fails to materialize.
“Reverse” Coasean Bargains
Price controls also introduce new conflict situations that didn’t exist before.
As I emphasize above, employers can respond to the minimum wage by yanking non-money components of workers’ compensation. One of those non-money perks is the ability to shirk / consume leisure on the job / enjoy freedom from micromanagement. It’s the ability to pursue your own goals during some of the time you’re “on the clock.” Depending on what’s cost-effective, employers can respond to the minimum wage by implementing more stringent monitoring of their employees. Shorter breaks. Break times that they actually enforce. Patrolling to make sure employees aren’t on social media or their phones.
All this raises the possibility of conflict between employer and employee compared to the “live-and-let-live” status quo that may have prevailed on a free labor market.
Now, consider “rent stabilization” schemes that take various forms. One variation is for a law to stipulate the following: “Every time a landlord gets a new tenant, he may increase the rent on that unit by X%.”
Economics isn’t rocket science. And it doesn’t take a genius to think through the incentives this provides. Landlords now seek to increase their turnover rate in order to bring their rental rates closer to market rates. One way is to skimp on maintenance.
A more creative way is to pay one set of tenants to antagonize another set of tenants. The landlord could pay the occupant of Room 201 to learn the drums at two in the morning—every morning. Think of it as a “reverse Coasean bargain”—a deal struck in order to introduce a new conflict situation. It’s a free “concert” for the lucky tenants in Rooms 101 and 301. Before long, they’re packing their bags for greener pastures and 201’s commission check is in the mail.
Mission accomplished.