As domestic travel recovers from COVID-19 restrictions, initiatives to curb short-term rentals have been popping up across US cities. The proposals offer different rationales for restrictions. Some are outright bad, such as protecting the hotel industry from Airbnb-style competition or increasing the availability of long-term as opposed to short term rental units. But others are challenging even for libertarians, because they deal with externalities at the local level – like noise and congestion.

To begin, it is worth explaining why protecting local hotels, or trying to lower long-term rents by forcing landlords to move away from short-term ones, are not plausible justifications for state intervention. Both are (poorly targeted) transfers from landlords and short-term renters to hotels and permanent tenants. US evidence also suggests rent increases from Airbnb are small. In addition, they are inefficient – as transfers usually are. Some short-term renters may be unwilling to substitute for hotels and give up, and landlords may forego renting if short-term rentals are restricted.

Noise and congestion are different. A neighbor throwing a party next door may impose a cost higher than the benefits she gets from partying. In circumstances involving a few people, everybody could get together and work out a solution: you pay your neighbor to save you the trouble of a party next door. But in many cases, this solution is not feasible. Getting everyone affected to hash out an agreement could be prohibitively time consuming and costly – think of a large party hassling hundreds of neighbors.

So does this mean (local) governments should step in and restrict short-term rentals to avoid neighborhood nuisance? Probably not. First, short-term rentals are at best a proxy for these externalities. Not all short-term tenants throw parties or drive cars. Whenever possible, it is best to address the externalities at the source. If noise causes nuisance, city ordinances can levy fines on noise directly.

Second, nuisances are not in and of themselves bad. Put simply, a party may be worth it. A blanket ban or restriction could prevent partygoers from enjoying a party where benefits exceed costs to neighbors. If enacted, regulation should try to mimic as much as possible a bargain between parties: charging individuals for the negative externalities they cause and getting this money back to the people affected – maybe by returning fine revenue as a tax rebate for neighborhoods. The latter is important for political reasons: not only should people be compensated for the harm they suffer, but if compensation goes to the local government, constituents are likely to keep pushing politicians to ban activities that are socially productive.

Reality can be complicated, and some situations may warrant regulating short-term rentals. It can be hard to collect fines from short-term renters, or a different type of externality may be at play (some people may value long-term relationships with neighbors). But in any case, regulation should happen as locally as possible – even at the Homeowner Association level – and be flexible to allow for negotiations between parties.