This month the Washington, D.C. Council voted unanimously in favor of preliminary approval of a bill that has the potential to substantially restrict Airbnb and other short-term rentals in the District. The bill, which must pass a final vote before being officially approved, creates new licensing requirements and imposes new limits on who can rent out their spare rooms or homes and for how long. Most significantly, the legislation would only permit hosts to offer short-term rentals at their primary residence and to rent out their property for a maximum of 90 days a year while not present at their home.

The bill attempts to walk a fine line between fulfilling the promises of Airbnb and similar short-term rental companies and addressing the concerns of a coalition of community activists, hotel lobbyists, and hotel-worker unions. On the one hand, Airbnb—like Uber and some other “disruptors”—allows the middle-class to turn previously underutilized consumer durables and assets into sources of extra income. On the other hand, the groups calling for increased restrictions complain that Airbnb reduces the housing supply for long-term tenants and thus raises housing prices, has allowed commercial hotel operators to skirt regulations and taxes, and disrupts communities and neighborhoods with an influx of noisy strangers.

The benefits of Airbnb to some homeowners are clear, but the complaints of the bill’s proponents aren’t entirely baseless. Community activists argue that Airbnb exacerbates housing affordability issues. As I recounted in my working paper review in the winter 2017–2018 issue of Regulation, economists Kyle Barron, Edward Kung, and Davide Proserpio examined the impact of short-term rentals on housing prices and rent and found that, though the effect is not zero, it is small: a 1 percent increase in Airbnb listings causes a 0.018 percent increase in rents and a 0.026 percent increase in house prices.

Hotels contend that Airbnb, despite cultivating an image of middle-class owners earning extra income from renting out a spare bedroom, has allowed commercial operators to circumvent taxes and health and safety regulations. They back up this claim by citing that the vast majority of Airbnb revenue comes from entire home rentals and argue that regulations are needed to level the playing field. Browse through some of the postings on Airbnb and it is clear that these commercial operators aren’t fictitious (see this host, for example, whose description overtly describes themselves as a “full-service relocation management agency” and, with 79 available units in D.C., is the largest host in the city).

But a close look at the same hotel-lobby funded research used to justify the regulations shows that commercial operators are not as widespread as they portray: over 90 percent of entire home rentals in D.C. are offered by hosts with only one listing. That number also discounts middle-class D.C. residents who may rent out a starter home on Airbnb along with their new home, and thus technically offer two units for short-term rentals but can hardly be considered commercial operators.

Finally, some District residents complain about Airbnb and the strangers it brings into their neighborhoods and apartment buildings. These residents’ concerns about congestion, noise, and safety are probably overstated, but not unfounded. (In one egregious case, for example, one homeowner in the affluent Dupont Circle neighborhood of D.C. was renting his house out for large parties, including a concert with rapper Ja Rule.)

These issues are what is at the core of the short-term rental bill and zoning rules more generally: managing urban externalities. Unlike in rural areas, where neighbors can more easily ignore each other, in an urban environment what people do and how they live affects their neighbors because of proximity and density. Parking, noise, and land-use ordinances and regulations are attempts to create public expectations about behavior such that like-minded people become proximate to each other.

The expectations that are created are both on and off the books. While the norms in Dupont Circle create a quiet and peaceful neighborhood—and a premium for that peace and quiet—someone moving into fraternity row at George Washington University should expect a different decibel level and neighborhood flavor. As long as everyone is aware of these norms before they move in, and as long as everyone follows the norms while they live there, there are no issues.

The problems arise when people want to be different. Hosting a Ja Rule concert in Dupont violates both zoning laws and, more importantly, the established norms of the neighborhood. As it stands, someone who wants to be different can either break the rules and hope they are ignored, or lobby for change at city hall and hope for preferential treatment. But I propose a third option: buy the right to be different.

People who live next door to the concert, or even just a typical Airbnb, may not like the noise and strangers, but what if they got paid? Currently, a discontented neighbor’s only option to address their complaints is to ask the city government, through the police or enforcement of zoning laws, to use force. Instead, create a platform for rights exchange, which, as long as a price can be agreed upon, would give homeowners the right to rent their house on Airbnb providing they appropriately reimburse their neighbors for any disruption or inconvenience. 

What this platform would look like is unknown, and many questions, such as how it would handle holdouts, need to be addressed, but this sort of rights exchange is not unheard of. In the D.C. area, for example, rising home prices and demand for housing over the past 30 years created the need for denser housing developments. In Northern Virginia, which was once dominated by single-family homes, for 15 years between the late 1980s and early 2000s developers bought up neighborhoods for redevelopment, often paying homeowners more than double the listed price of their houses. Even more strikingly, a polluting coal power plant bought an entire town in Ohio for $20 million.

In both cases, the opportunity for exchange allowed the land to be used most efficiently while compensating those who had initial property rights. Though short-term rentals are on a smaller scale, the principles remain the same. Whether someone wants to rent their house on Airbnb or host a Ja Rule concert they should have the right to do so as long as they properly reimburse their neighbors for the externalities they create.

Written with research assistance from David Kemp.