In this edition: the weekly article about building a Missing Middle Housing, Book Notes on information asymmetry and lemons among lawyers, and thinking about the evils of regulation.
Building a Missing Middle Housing
As the world is on the verge of a global housing crisis, the lack of a missing middle limit the number of options households have while choosing the right house.
To read the full article, click on the link below.
Naked Economics: Undressing the Dismal Science by Charles Wheelan
“An economist was arguing before a group that admission to the bar should be less restrictive. Allowing more lawyers to practice, including those who might not be the sharpest knives in the drawer, would lower the cost of legal services, he argued. After all, some legal procedures, such as basic wills and real estate closings, do not require the services of a brilliant Constitutional scholar. He argued by analogy that it would be absurd for the government to require that all automobiles be Cadillacs. At that point, a lawyer in the audience rose and said, “The country cannot afford anything but Cadillac lawyers!”
In fact, demanding only “Cadillac lawyers” completely misses all that economics seeks to teach us about trade-offs (for reasons that have nothing to do with the fact that General Motors is a basket case). In a world with only Cadillacs, most people would not be able to afford any transportation at all. Sometimes there is nothing wrong with allowing people to drive Toyota Corollas.”
This excerpt makes an interesting point that the market ought to have lemons - unreliable or defective goods - as well. However, lemons cause information asymmetry, as George Akerlof's 1970 Nobel-Prize-winning paper, "The Market for Lemons," explained long ago.
In a market where lemons exist with plums - reliable and high-quality products, at least one party involved in the transaction always has more or even near complete information about the product. Usually, it is the seller, and the best case study for such markets is that of second-hand cars.
Another feature of such markets is the existence of a price differential. The seller sets different prices for plums and lemons, a higher and a lower price, respectively. The buyer, who is unwilling to pay a higher sum as he knows that there is a probability that the seller is keeping information from him, offers a lower buying price. With such a mechanism in place, clearing plums from the market is hard, and most buyers end up with lemons. As a solution to such situations, assurance of the product's quality comes as warranties and guarantees.
The same concept works a bit differently in the above example - it is related to trade-offs rather than information asymmetry. "Lemon" lawyers distinguish from "Cadillac lawyers" in the kind of service they provide and their affordability. Though, underlying reasons might be low quality of services, in turn, due to not performing well at law schools. On the demand side, some legal services cost less due to their simplicity, as known to buyers.
What are we Thinking?
Today's article lays out yet another case of regulations that do not work in the public interest.
That said, only regulation and political will can solve the leakages in housing markets. Governments and policymakers need to differentiate the ordinances that inhibit from the ones that expand the possibilities for housing developers to construct affordable housing or, in some cases, the missing middle housing.
To read my previous blogs, visit my website, What-if Economics.
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