Monday, August 01, 2005

Final payer

This first Slate article argues that zoning is responsible for the current rise in house prices. This is false. Zoning does (and has) increased the price of housing, but this increase is reflected in higher purchase prices and higher rents. The current bubble features flat to declining rents and dramatically rising prices, all with no change in zoning laws.

This second Slate article argues that DVDs are killing the movie theatre, and movie execs cannot prop up the cinema because of anti-trust concerns. This I doubt, because the entire reason movie theaters are in trouble is because of competition with close substitutes (DVD and pay-per-view, as detailed in the article), the presence of which should exempt that industry from anti-trust attention.

One common theme between the two articles is the question of who pays (and who benefits) from a taxes and subsidies. At Chicago, we believe that the holder of the asset which cannot run away from the tax pays the tax in full the moment the tax is levied -- everyone else just keeps passing the buck. So, if a new zoning regulation reduced the value of your house, that cost would be born by you (the homeowner) in full the moment that regulation was passed -- all subsequent sales and purchases would have completely factored in the change in value that came as a result of the new law. It is in this way that an increase in property tax is paid, in full, by current property owners the moment the tax is introduced even though the tax is assessed annually.

With movies, the entity that owns the asset is the movie company, and today also certain headline stars. All other players in the system are substitutable and therefore in competition. This means that all the profits from the movies will aggregate to the companies (and some stars) leaving cinema managers scrabbling for popcorn. The article seems to argue that movie openings have positive externalities, spillover benefits that help the subsequent DVD sales and PPV showings that are now killing their business. In this case, I would expect movie companies to cross subsidize theater owners from profits made elsewhere to keep those positive benefits. But not before cinemas themselves are pushed to the very edge of viability.


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