Should the government set the hotel room rents?

Should the government set the hotel room rents?

Rashid Ullah Khan

Laissez-faire economic theory argues that the government intervention in the economic activities makes an inequitable allocation of resources. The sentiments of some of the people of Gilgit-Baltistan, I feel, aren’t about having a better tourism policy, rather about being more welcoming. Yes, we should be hospitable, but we shouldn’t expect the businesses to sell goods cheaper to prove their hospitality. Some people say that renting out the rooms on “unjustifiable prices” makes the region less attractive. It seems logical to assume that by fixing the room rents the government of Gilgit-Baltistan either wants to make the region attractive for the or it wants to make it easier for shehri people to have a better experience in Gilgit-Baltistan.

We should understand that the supply and demand justify the price charged for a good. For example, the prices of greengroceries fluctuate weekly. Ever wondered that why doesn’t the government issue the rate list for the prices of greengroceries every week? That’s because of the unpredictable fluctuations in the prices of greengroceries. Thus, if the prices of greengroceries, with a relatively smooth trend line, aren’t predictable. How can be the hotel room rents then? The rent, a hotel owner charges, depends on the demand for the hotel rooms. For example, If the demand for hotel rooms on a certain day was less then the rent would have been less, and if it was high on a subsequent day the rent would have been high. And the rent he charges is associated with a certain level of risk. If some of the rooms remain empty in the hotel for charging higher price than the market clearing price, then he loses money that otherwise he would have earned.

Economists teach that higher profits attract high investments. Fixing the room rents, arguably, lessens the profits, therefore makes the investors invest less. If the reason for fixing them is to make the tourism industry of Gilgit-Baltistan attractive, then the economists would call it a government failure. Hotel room rents remain high in Gilgit-Baltistan because of the less number of hotels. Thus, they will not decrease in the future. Therefore, fixing them will not solve the issue in a more natural and acceptable way, but incentivizing the investors to invest in hotel business will.

The contributor is an undergraduate student at IBA-Karachi. 

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