JF AAS Oct 2, 95

Schelling's Main Theme Illustrated with East Lansing Housing Conflicts

Schelling's main theme is most clear when he asks us to imagine that case when all parties have the same preferences (for gender, race, student-family mix, etc.). Thus his phrase, "mixing and sorting." The tragedy is that individual piecemeal (market) choice will not obtain the aggregate result that most (all) want. The following parallels his dorm eating hall case of whom to associate with. He observes that the market does a good job of matching preferences with apartment type but not so well supplying the desired mix of neighbors. Consider the conflict in the area close to MSU between students and families.

So he might begin the analysis by conceiving of sets of 4-5 students who can pay as much as a family for a house (though some students cannot at prevailing prices). Begin with families dominating a geographic zone. Students move in and approach the 50-50 split desired by both students and families. Not knowing how many other students are about to move in, a number of students make the move and 60-40 results. Now some group of both students and families move out. But since the number can't be known, equilibrium at 50-50 is unlikely.

The problem is compounded when the 60-40 split causes land values to decline and this attracts students who couldn't afford the sites before. So more students move in who also prefer 50-50, but will give it up to get affordable close-in housing.

The equilibrium is likely to be 100 % students even though neither students nor families want it. Once reached, no family will move in though if enough families were somehow coerced into doing so and enough students were also coerced to move out, all would be happier (except those who prefer lower priced close-in location to the 50-50 mix).

What is different about satisfying preferences for housing type and preferences for neighbors? The housing type is not a dynamic result of the consumer's behavior. If the price for a particular type is greater than cost of production, the supply can increase in an orderly and predictable manner. Neither consumer nor producer need predict supply and demand. The producer can adjust supply incrementally. In contrast, the consumer is both supplier and demander of neighborhood. The act of location produces the supply of a particular set of neighbors and this makes the non-marginal problem much greater. A non-marginal consumption decision in the aggregate has immediately a non-marginal effect on supply.

Can this phenomenon also exist for ordinary goods in markets? A block of suppliers (builders) might also overproduce and where a non-marginal block of supply is likely, the ordinary goods markets has the same problem as the mixing and sorting case. The large number of bankruptcies in new small businesses may be evidence of this phenomenon because each is responding to a profit opportunity without being able to predict how many others are also responding. Thus oversupply is common. We usually describe this competitive process as a weeding out of the inefficient. But, all could be equally well managed and try though they might, many will go bankrupt. This sounds like Schelling's case of musical chairs.

Case inspired by Doug Jester, former 810 student and mayor of East Lansing.