Wednesday, April 22, 2009

Broken windows and sunk costs

According to the Economist blog, the city of Flint Michigan is buying up and bulldozing vacant homes to help clear the market. Most of the commentators think it's a poor economic decision--you are, after all, destroying wealth. Many of the them, though they don't say it explicitly, are arguing that this is the broken window fallacy in action.

I think the government is actually make a rational business decision. They're not destroying wealth, they're ignoring sunk costs. The houses they're buying have already been built. Nothing is going to undo that fact. What remains is to pursue the most advantageous course of action despite what has been done before. If the most advantageous course is to bulldoze, then by all means they should bulldoze. My gut reaction is that it isn't, but it is at least within the realm of possibility.

1 Comments:

Blogger Noumenon said...

The game SimCity certainly encourages you to bulldoze when profitable (or when you're bored).

They could be doing it to lessen the looting and blight you see (fires, unpaid water bills). Or to subsidize their local real estate developers for votes.

12:34 PM  

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