But some economists sure like to make it difficult where it doesn’t need to be.
I was reminded of this when I saw Tyler Cowen puzzling over the following question:
Why are not all buildings in a city block of the same height, given that their owners presumably face common costs and returns?
Some suggested answers are regulation, non-convex building costs, and diversity of demand. Other things equal, I can see how those would affect the size of buildings.
But it seems to me that there is a much more obvious explanation, and that is that buildings are put up by entrepreneurs.
Entrepreneurs can only make educated guesses as to what their returns will be. Each entrepreneur has to decide a great many things about his building, including the number of floors, how each floor will be laid out, what the building will look like from the outside, which street will have the main entrance, and countless other factors.
Of course various entrepreneurs are going to have different ideas about what will be most profitable to them. It would be remarkably strange if it were otherwise.
One of Cowen’s readers says this ostensible puzzle might keep him awake tonight. I suppose if I relied upon Chicago and neoclassical economic models to make sense of the world, I’d have some sleepless nights, too.
