Question

Why is it in the interest of new homebuyers and builders of new homes to have government building codes and building inspectors?

Short answer

The building inspectors and codes will protect the new homebuyers from adverse selection problems.

Step-by-step solution

Step 1. Adverse selection problem in the real estate industry

Adverse selection can create information gaps for the buyers and sellers of properties. This results in buying and selling of buildings or apartments that are not worth the charge. The market price does not reflect the hidden information, which results in an improper allocation of resources.

For example, a new buyer who buys land to construct a commercial building does not know that the land is meant for agricultural purposes. He will have to give up his land once the information is revealed. The wastage of resources in buying that land is the cost of lack of information.

Step 2. Role of government building codes and building inspectors in filling information gap for the new buyers and builders

It is in the interest of new buyers and builders of new homes to refer to government building codes and building inspectors to avoid the problem of adverse selection.

The new homebuyers and builders do not have the appropriate knowledge about the property they want to buy. This might lead to improper decisions where buyers buy an overpriced property or a property that doesn’t adhere to standard safety requirements. Government building codes and building inspectors help provide the standard requirement and rating of the property that helps the buyers make the right decision.

For example, if a woman checks that the building she is interested in buying does not comply with the building codes, she can easily decide not to buy that property. This prevents the future costs of adverse selection.