Question

Problem 4: Heat Included? Should landlords or tenants pay for heat? If landlords pay for heat, they pay $100 for heat and $600 in other costs. In this case, tenants get $1000 value from the apartment (minus rent).

If tenants pay for their own heat, they’d heat apartment less and get only $980 value and pay $60 for heat. The landlord now only pays the $600 in costs.

1. a) If the competitive price of rent with heat included is $850, what is the tenant’s net benefit from the apartment? What is the landlord’s net benefit from the apartment?

2. b) If the competitive price of rent with no heat included is $760, what is the tenant’s net benefit from such an apartment? What is the landlord’s net benefit from such an apartment?

3. c) Does a law requiring landlords to pay for heat improve efficiency?

4. d) If tenants and landlords were to vote on such a law, what would be the outcome? Does it matter if they vote “ex-ante” (before they know if they’re landlords or tenants) or “ex-post” (after they know)? Explain briefly.

Answer 1

a) When the competitive price of rent included with heat is $850, then the net benefit received by tenant is $150(=1000-850). And the net benefit received by landlord is $150(=850-100-600).

b) When the competitive price of the rent with no heat is $760, then the net benefit received by the tenant is $220(=980-760). And the net benefit received by the landlord is $160(=760-600).

c) The law requiring landlords to pay for heat does not improve efficiency as compared to the situation when landlords don't pay for the heat. This is shown in the graph below:

​​​​​When the landlord pays for heat, then the area of inefficiency is ACQ3Q1. When the tenant pays for heat, then the area of inefficiency is BCQ3Q2. This shows that when landlords pay for heat, the inefficiency is more in market as compared to when the tenants pay for the heat.

d) if tenants and landlords were to vote on such a law, then the tenants would have voted for paying for heat themselves but the landlords would have waited for paying the heat. The reason behind this is that the net benefits accrued by tenants is more when they pay for heat as compared to when the landlords pay for heat and vice versa.

Yes, it matters if they vote ex-ante or ex-post knowing whether he or she is a tenant or a landlord because the net benefit for both of them are different in different situations.