REAL ESTATE INDUSTRY ARTICLE DISCUSSION
In their Oct 2003 article, Can free entry be inefficient' Fixed commissionsand social waste in the real estate industry Chang-Tai Hsieh, EnricoMoretti (2003) argue against removal of entry barriers in real estateindustry as they notice inefficiency prevailing in the cities where numberof real estate agents in relatively higher. In other words, they argueagainst the commonly held belief that there should be no barriers to entry.The author maintain that even though barriers to entry sound like a scaryterm to most economists, it must be borne in mind that free entry orrelatively easy entry into any industry can lead to inefficiency and lossof productivity. This is most pronounced in the case of real estateindustry where presence of higher number of real estate agents almostalways leads to inefficient distribution of income. To understand thisproblem, we must first take into account the definition of economics orwhat is the real purpose of this science. Lionel Robbins gave us the mostfamous definition of economics when he said that, "Economics is the sciencewhich studies human behavior as a relationship between ends and scarcemeans that have alternative uses" (quoted in Stigler (1984, 301) This means
Any disparity between the two cancause problems and price of the good or service suffers. However if we study the impact of too many playersin a market due to lack of these barriers, we notice that non-existence ofbarriers can also lead to inefficiency because then the output of theindustry is too thinly divided among vast number of agents. Most of these agents do not have enough work and could havebeen more productively engaged in other industries. "In their research, the authors noticed lesser efficiency and productivityin the real estate industry specifically in those cities where number ofreal estate agents was too high. "This means that absence of entry barriers coupled with fixed commission wasleading to inefficient distribution of output or income in the real estateindustry. conomics is all about distribution of resources in such a manner thatoptimum output is produced. However due to absenceof barriers, Boston's real estate agency was witnessing negative growth. Entry to barriers are mostly erected to maximize profits and to maintaincertain monopoly over prices and supply of goods and services. Thisvisible inefficiency of real estate market in Boston is due to the factthat there are twice as many real estate agents in Boston than inMinneapolis. The net gain from market entry thus depends on whether the pricecompetition effect outweighs the business-stealing effect. The higher commissions inBoston are simply dissipated, wasted through the entry of real estateagents seeking to earn these higher commissions, agents who could beprofitably engaged in other activities. The two main characteristics of the industry that accounted for lackof efficiency in real estate industry in more dynamic cities are: "First,there appear to be few barriers to entry in the industry. For a more efficient market, supply of a good or service must beproportionate to the demand for the same. "The tragedy of this outcome is that despite the fact that home sellers inBoston pay twice as much to real estate agents as in Minneapolis, realestate agents in Boston are no better off than in Minneapolis, nor are theybetter off than their counterparts in 1980.
Common topics in this essay:
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,
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