Question

Question 1: In the October 26th, 2011, edition of The Villager, Joanne Routzahn wrote a letter to the editor titled “Extend student rental moratorium.” Ms. Routzahn is referring to a one-year moratorium on student-rental housing in a designated area surrounding the St. Thomas campus. A particular excerpt from her letter: Macalester-Groveland is known for its stability with houses and families, children and older adults who take pride in their properties. We have respect for our neighbors and do not disfigure houses to make money. Converting small one-story homes into rental properties with absentee landlords does not add value to our neighborhood. It devalues and detracts from not only that house but the houses next door and the neighborhood in general.

(a) What is the specific market (good or service) that this moratorium is aimed at? Who are the “consumers” in this market? Who are the “producers” in this market?

(b) According to Ms. Routzahn, does this market exhibit a positive or negative externality? Briefly explain. How are the effects of this externality monetized?

(c) Would the private market over or under produce this good / service, relative to the efficient quantity? Briefly explain how you know.

(d) What is a government policy we learned about in class that could correct (“fix”) this problem? Briefly explain how the policy would work.

Answer 1

a. The moratorium is aimed at student rental housing in the area. The consumers in the market are the students of the St. Thomas and producers are the landlords or the owner of property who are renting their property to the students.

b. As stated in the letter that it devalues the neighborhood around, it exhibits negative externality because it is a cost suffered by third party due to an economic transaction and thus lead to negative externality.The effects of this externality can be monetized by computing the marginal damage caused to the third party as a result of renting out property to students.

c. Since, the service is causing negative externality to the society, the private market will over produce this good/ service relative to the efficient quantity. A private market always over produce the negative externality and under produce a positive externality.

d. The government should impose Pigouvian Taxes on the landlords to increase their marginal cost of production of converting homes into rental properties which will reduce the number of houses converted into rental properties. The amount of tax imposed should be equal to marginal damage imposed on the society. This will move the equilibrium to the efficient level.