A recent article in the Vancouver Sun makes us believe that Dr. Rajendra Kale went to the Hugo Chavez School of Economics (see our previous blog). Dr. Kale has proposed the abolition of parking fees at B.C. hospitals and care facilities. Like President Chavez’s implementation of rent controls, the reduction of parking fees will only result in a shortage of spaces. Where patients are now worried about having to feed the meter, at a zero price they will have to worry about finding a parking spot in the first place.
Any time that prices are set below the market equilibrium, a shortage will exist. When a shortage exists, potential buyers incur “search costs” – which is the value of the time they have to spend searching for something. Significant search costs only exist when there is a shortage. For example, we use Vancouver General’s parking rate of $7.50 per hour and a person that earns a wage of $15 per hour. If parking is “free” and it takes a half hour to find a parking space because there is a shortage, that person has spent $7.50 worth of their time looking for a “free” spot. Economists have a saying: “There’s no such thing as a free lunch”. It means that in every decision, something has to be given up.
For people with wage rates higher than $15 per hour, the opportunity cost of searching for a parking spot will exceed the $7.50 per hour that the hospital is currently charging. It is a nice idea to have volunteers do valet parking, but how much will it cost to do the criminal record checks? I doubt that I would just hand over my keys to someone that offers to park my car for me. We could always pay people to work as valets at hospitals, but the minimum wage is $10 (or soon will be) and no doubt the union will require a wage much higher than that. Perhaps that wage, and the $14 million lost parking revenue will come out of the doctors’ pay, though we doubt it.
There is no indication whether doctors are willing to give up their reserved parking stalls to provide patients with more access to free stalls. We doubt they will, and will argue that their time is too valuable to be looking for parking. Yet this is exactly the argument we are making above. Paying $7.50 to park is less than the time cost that would be incurred in searching.
We could argue this point forever, but since the Doctors are busy playing economist, we have to go prep to do some open heart surgery …. the instructions are on the web somewhere … aren’t they?
Wednesday, November 30, 2011
Monday, November 14, 2011
Chavezian Economics
It’s always nice when Hugo Chavez, President of Venezuela, or his allies introduce new economic policies. Not so nice for the citizens of Venezuela, but nice for us because they are easy to critique. This time around, it is the imposition of rent controls as reported by the Washington Post.
The new law would expand previous rent freezes to include direct pricing regulations by the government. In addition, any tenant that has been living in a home for 20 years would have the right to buy that home. According to President Chavez, this new program is for “the benefit of the majority”. (The whole issue of social welfare is a topic for an entirely different blog.)
Pick up any introductory microeconomics textbook, however, and you will get a different analysis of the effect of rent controls – a form of price ceilings. Ceilings are designed by politicians to prevent prices from rising and, for them to be effective, they must be below the market clearing price. At prices above the clearing price there will be a surplus and when there is a surplus, prices fall.
When prices are set below market clearing, the number of buyers exceeds the number of sellers. Adam Smith (1776) recognized that prices rise in his circumstance to clear the market. The number of units that people are willing and able to buy is equal to the number of units that others are willing and able to sell when price is allowed to adjust.
The problem with rent controls is that they do exactly the opposite of what they are intended to do. If landlords cannot earn a reasonable rate of return on their investments due to price controls, they will stop building new rental units. Landlords that are currently renting accommodations will find that their revenues are falling and will not be willing or able to properly maintain their rental units. The quantity and quality of rental units will fall.
At the same time, the cost of renting falls below the cost of ownership and more people choose to rent. Others, who were sharing accommodation, now seek units for themselves. This increase in people seeking units, coupled with landlords reducing the availability of units creates a shortage of affordable housing. This is exactly the opposite result that the government was trying to achieve.
The story gets a little worse however. Because there is a shortage of affordable housing it takes longer to actually find a suitable place. The time spent searching for living accommodation imposes an opportunity cost on renters and is a non-productive use of resources. Search costs reduce the total output of the economy.
President Chavez, and other politicians must realize that in the battle between the Invisible Hand and government policy, the Invisible Hand usually wins.
The new law would expand previous rent freezes to include direct pricing regulations by the government. In addition, any tenant that has been living in a home for 20 years would have the right to buy that home. According to President Chavez, this new program is for “the benefit of the majority”. (The whole issue of social welfare is a topic for an entirely different blog.)
Pick up any introductory microeconomics textbook, however, and you will get a different analysis of the effect of rent controls – a form of price ceilings. Ceilings are designed by politicians to prevent prices from rising and, for them to be effective, they must be below the market clearing price. At prices above the clearing price there will be a surplus and when there is a surplus, prices fall.
When prices are set below market clearing, the number of buyers exceeds the number of sellers. Adam Smith (1776) recognized that prices rise in his circumstance to clear the market. The number of units that people are willing and able to buy is equal to the number of units that others are willing and able to sell when price is allowed to adjust.
The problem with rent controls is that they do exactly the opposite of what they are intended to do. If landlords cannot earn a reasonable rate of return on their investments due to price controls, they will stop building new rental units. Landlords that are currently renting accommodations will find that their revenues are falling and will not be willing or able to properly maintain their rental units. The quantity and quality of rental units will fall.
At the same time, the cost of renting falls below the cost of ownership and more people choose to rent. Others, who were sharing accommodation, now seek units for themselves. This increase in people seeking units, coupled with landlords reducing the availability of units creates a shortage of affordable housing. This is exactly the opposite result that the government was trying to achieve.
The story gets a little worse however. Because there is a shortage of affordable housing it takes longer to actually find a suitable place. The time spent searching for living accommodation imposes an opportunity cost on renters and is a non-productive use of resources. Search costs reduce the total output of the economy.
President Chavez, and other politicians must realize that in the battle between the Invisible Hand and government policy, the Invisible Hand usually wins.
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