Yesterday I linked to a New York Times article about rising rents nationwide. The key issue to consider is how policies can be changed, if they can, to make more affordable housing available instead of having most new construction being for luxury housing. It’s a difficult issue, because housing isn’t like a lot of other markets, especially commodity markets. Here’s a very thoughtful, well-reasonable article on the topic.
This, ostenibly, is why we have things like zoning codes. The welfare-maximising population of San Francisco may be higher (and possibly much, much higher) than the population which maximises the welfare of those already living in San Francisco. So the city devises a set of regulations that effectively make current residents monopolists, able to artificially limit supply and raise price. Society as a whole is slightly worse off; San Franciscans are slightly better off.
But in fact, the structure of local politics tends to magnify rent-seeking, generating enormous social costs. The benefits and costs of population growth occur in a way that practically guarantees highly restrictive building rules. The (large) potential benefits to would-be San Franciscans accrue to people who have no political power within San Francisco. The gains to San Franciscans from population growth are distributed very broadly; when a new building project allows more people to live in San Francisco, everyone in the city derives a small benefit from that growth—from the larger market size, greater opportunities for professional networking and knowledge spillovers, and so on. But the congestion costs associated with that new project are highly concentrated on the people living in the immediate vicinity of the new construction. There is a population level at which new growth entails net costs for all San Franciscans. But residents of San Francisco will limit new growth long before it reaches that level, because there will always be a strong constituency to block projects.
We therefore get highly restrictive building regulations.