Monday, January 7, 2008

Does My Apartment Manager Understand Externalities?

I have been out of Texas for a couple of weeks and returned yesterday. Upon my return, I got a surprise notice from my apartment manager. Before I tell you what was in that notice, let me give you some background.

As noted before in this blog, I moved my family this past summer from Michigan to Texas. We moved into an apartment while we waited to sell our home in Michigan. Our home finally sold so now we are waiting out our one-year apartment lease and getting to know the area better. (I am also hopping the Nouriel Roubinis of the world are right when they say the housing recession has yet to hit bottom--I am ready to pick up a home at a bargain price this summer.) I am currently in a nice apartment complex that allows pets. The complex has pet waste collection stations place throughout the complex. There are also warning signs about being fined for not collecting and properly disposing of your pet's poop. Unfortunately, many pet owners are negligent in this area. As a result, most of the grassy areas in the complex are often not safe for walking. This development has become particularly frustrating for me since I have children who inevitably find their way into the grassy areas. The management has sent out many notices, but to no avail. Apparently, the marginal cost of collecting and disposing of pet waste exceeds any marginal benefit for many pet owners here.

In economics, the standard solution for correcting a negative externality like this is to somehow force the pet owners to internalize the cost they are imposing on me and other tenants. My solution for management was as follows:

(1) Every month, at some unannounced time, count the amount of poop. If it is too costly to go over the entire complex, then randomly pick representative locations throughout the complex.
(2) If the poop count exceeds a certain threshold--one must allow for the occasional pet pooping without the owner knowing--then all of the pet owners should be charged a higher rent. The greater the poop count the greater the excess rent.

I had been meaning to submit my idea to the complex, but never got around to it. The surprise notice I got upon my return, however, stated that going forward into 2008 pet owners will now be charged extra when there are excessive amounts of poop. The excess poop charge is probably not large enough, but management is on the right track and effectively forcing the pet owners to internalize the external costs they are creating. It is as if my apartment manager understood the concept of externalities.

A bigger point I take away from this experience is that best place to experience market failure is in your own backyard.

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