The Regulatory Roach Motel

Thursday, March 31st, 2005

The Regulatory Roach Motel present an excellent analogy:

Imagine that our country had a strange law under which foreign citizens were entitled to rent homes here at bargain prices. For a while, our housing market operates relatively well despite this law. While foreign citizens take advantage of it, their numbers are small compared to the masses of Americans who continue to pay market rates, and those rates are high enough to encourage the construction of needed new housing.

But suddenly there’s a new development. A quirk is discovered in the law that allows foreigners to sublet their rent-controlled units to Americans. In fact, they can rent and sublet limitless numbers of units in this manner. As these bargains become publicized over the Internet, more and more Americans get their housing by subletting from foreigners. Soon this form of renting takes over the entire rental housing market. At first it seems like a great deal for American tenants, but eventually it does what all price controls do — it destroys the incentive to produce more goods. Housing stocks deteriorate as existing housing falls into disrepair and no new units are constructed. As one economist has pointed out, “rent control appears to be the most efficient technique presently known to destroy a city — except for bombing.”

The drive to legalize drug reimportation is surprisingly similar to the imposition of rent control after World War II. There are currently several proposals to legalize the growing consumer practice of purchasing drugs from abroad at lower prices that what they sell for here. These cheaper prices do not result from lower production costs or economies of scale. They result from the fact that most foreign countries impose price controls on these drugs, and those controls are often backed up by the threat of breaking the drug’s patent if its manufacturer objects.

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