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Utilities Included

Aug 17, 2010 • Demand, Supply, and Markets, Economic Thinkers, Environment, Households, Thinking Economically • 102 Views    No Comments

In NYC, there are 250,000 housing units that use more electricity than most others. The reason? Buildings without meters for each apartment have leases that say “utilities included”. So, whether tenants use more or less power, the rent is the same.  Consequently, they perceive that their electrical consumption is “free”.

What happens when we think something has little or no cost? We tend to use more of it.

Elinor Ostrom, winner of the Nobel Prize in economics wrote about how people abuse a good that appears free because it is owned by all of us. Called the tragedy of the commons, for a pasture, we overgraze our cows. For a workplace refrigerator, we create a mess. Factories tend to pollute more when there is no cost. Parking is tough to find when no one has to pay for a space. Dr. Ostrom believed though, that when people care about their common pasture or refrigerator or air, they can willingly formulate a solution together.

The Economic Lesson

With price as the y-axis and quantity as the x-axis, a demand curve is downward sloping. Lower prices make us willing and able to purchase more of an item. With a lower price, the item requires less sacrifice and we have more to spend elsewhere.

According to British economist Arthur Pigou (1877-1959), the tragedy of the commons can be solved with a fee or tax that makes an overused commodity more expensive. For those NYC overusers of electricity, individual meters that connect cost to usage would eliminate the extra expense to landlords and diminish the ease with which additional greenhouse gases can be created.

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