> Markets do very well at allocating goods like coffee or gasoline or clothes > in the short term because of their flexibility in response to short term > preferences. They don't do well in things like supplying housing in proper > configurations and locations because housing is a durable good that once > sold is relatively permanent (30-100 years or more).
It is a common misconception that myopia among economic actors leads to market failure. Why would any rational individual run a house into the ground, when they plan to live ther for the short run? I assume since most individuals have 30 year mortgages that they would like to maximize the sale price. (This is true even without the mortagage argument) In this instance economic incentives are exactly correct for allocating resources in the short and long term. Keep the house nice and it will raise the resale value. The reason individuals buy shoddy houses it the prefences for cheap and crappy over expensive and quality. The incentives faced by the individual once the house is purchased is not the reason for this. A complaint about "ugly" houses is about personal tastes. > Related to this is the famous prisoner's dilemma. Consider the landlords of > a declining neighborhood who must decide whether they will improve their > property or invest their money elsewhere. If one landlord improves her > property and none of the others do, the others reap short term windfall > gains when rents uptick slightly and then go back into decline. But she > could also free ride and let everyone else invest and reap the benefits. In > reality, nobody invests and the neighborhood continues its downward spiral. The externality issue is why private communities have grown so popular. For instance, I live in a house where the land (10,000 sq. acres) is leased from a single landlord. Anyone wishing to paint thier house pink must get permission. This in tern raises the value of all the individual leases on the property. The externality is internalized. Zoning can somewhat mirror this, but then you have to get into public choice issues.
