Alternative Energy, A Solution to Negative Consumption Externalities

Pollution is one of the most explicit examples of a negative consumption externality. In The West Wing Season 6, Episode 5, the Whitehouse Deputy Chief of Staff Josh Lyman, while test driving an SUV, totals a Prius. The authors of the show set up this episode to discuss the problem of negative consumption externalities. Negative externalities are produced when people drive cars that emit large numbers of fossil fuels. Gruber discussed three: environmental externalities, increased damage to roads, and safety externalities. In this scenario, the private marginal cost equals the social marginal cost but the private marginal benefit is higher than the social marginal benefit. This is because the drivers who consume the cars that produce negative externalities do not have to pay for the damage done to those around them. The amount of damage done to other people is the marginal damage.

In this clip, the Deputy Chief of Staff is discussing possible energy alternatives with experts. He is given this project after the media writes a story about his running into the Prius. The government is seeking ways to deal with negative consumption externalities, specifically the  environmental impact of fossil fuel emissions. The goal of the government is to have firms provide to consumers goods that produce less negative externalities. The experts that Josh meets with in this clip work to create solutions that close the gap between the private marginal benefit and the social marginal benefit.  With government incentives, firms are more likely to produce goods that are more environmentally friendly as opposed to those goods that produce negative externalities. As a result, when consumers use these goods, the marginal damage will be less because the products will produce fewer negative externalities.

Argentina's Holdout Problem

A little background to the issue: in the end of the 1990s and early 2000s, Argentina’s economy was facing severe difficulties and the government was unable to make interest payments on sovereign debt issued in 1994. In 2005 and 2010 Argentina restructured its debt, ultimately negotiating the value of their bonds down 70%. Approximately 93% on bondholders accepted the Argentinean offer. 7% of bonds were not renegotiated, however. Most of these bonds were owned by hedge funds that purchased the debt while it was very distressed i.e. following the default but before the restructuring. These same hedge funds have been fighting Argentina for full payment since then and have gained a lot of press lately as "holdout creditors" or Vulture Funds (as Argentina prefers).

The holdout problem is one of the main critiques with Coasian solutions. The idea behind it is that if one party must negotiate with many actors in the opposite side in order to gain some right or benefit, the last actor to participate in negotiations (the holdout) gains tremendous leverage over the other party because he single handedly controls the overall success or failure of the negotiation. However, it may be difficult to understand how Argentina's holdout creditors have so much leverage, given that for well over 10 years they didn't receive any payments. The catalyst for this holdout problem was not the initial debt renegotiation, since that went on despite the holdouts' objections. Instead, holdouts gained their leverage in 2013 with a ruling over pari passu clauses on the bond offering, in which US Judge Grieza declared that Argentina could not pay its restructured bond holders unless it also paid its non-restructured (holdout) bonds as well. As a consequence, the hedge funds were able to setup a scenario where either Argentina paid them, or it would default in its restructured debt - that incredible leverage is what created a de facto holdout problem, something very different from the de jure issue that had been going on for more than a decade.

Interestingly, however, the fact that Argentina has a) defaulted, b) remained a "stable" society and c) continuously tried financial maneuvers to skirt US rulings, show the difficulty of actually using leverage as a holdout if there is no strong entity that can enforce the consequences of non-negotiation. Ultimately a holdout's leverage becomes meaningless if the costs associated with its demands are higher than the cost of non-negotiation, and when it comes to international law, those costs are rarely materialized, unfortunately.

Washington Redskins Jerseys

The consumption, or donning, of sports jerseys allow fans to demonstrate their support of a team. When they are worn in the geographic area closer to the team being supported to than any other, wearing jerseys allows identification with fellow fans and increases fan morale and team support in general. Jerseys are officially licensed and thus used as a vital source of revenue for sport leagues. In 2009, sales of merchandise in the National Football League, comprised of 32 teams, totaled $2.5 billion. NFL jerseys are purely private goods, as their use is both excludable and rivalrous. However, wearing a Washington Redskins jersey results in a negative consumption externality, just like Cain the Great Pyrenees dog; due to potentially racist connotations that could offend others around the person wearing the jersey, the private marginal benefit of the good, which is the utility derived from wearing the jersey, overstates the social marginal benefit. Consequently, there is a market failure because a quantity greater than the allocatively efficient output is consumed.

The outrage has grown throughout the summer: "Whether or not the name is intended to offend, it does.  The usages of the name and logo transcend cultural appropriation to the ranks of explicit racial disrespect." If we assume that the liability falls on someone wearing clothes to avoid offending others, then the Coasian solution would be to have the person wearing a Redskins jersey pay all offended parties. However, due to the extremely large number of affected people, a Coasian solution would prove difficult to implement; in particular, the holdout problem (the last person possesses all bargaining power and can request an exorbitantly high fee) would be difficult to overcome. Contrary to popular perception and despite vociferous calls for people to boycott the consumption of goods bearing the name Redskins, it is important to remember that, as is the case in the pollution example, the optimal quantity of production and consumption of something "bad" remain nonzero. 

The Anti-Vaccination Movement

Vaccines have been proven to protect from many diseases and infections. However, not all parents choose to have their children vaccinated due to personal beliefs regarding the potential side effects. But even the children who do not receive vaccinations benefit from the results, because the majority of their peers have been vaccinated and create a “barrier” against the infections.Vaccinations are thus a positive consumption externality. This results in a private marginal benefit curve that is below the social marginal benefit curve. As we have learned in class, the main issue which externalities cause is a misallocation of resources; in the case of a positive consumption externality, the market allocation is less than the output of allocative efficiency.

In some California schools, more and more parents are choosing not to vaccinate their children. This causes the difference between the market allocation and the socially efficient allocation to continue to increase. This has prompted school officials to seek a solution: “They produced handouts emphasizing the importance of immunizations and asked parents seeking belief exemptions to get counseling from a healthcare practitioner. A state law that went into effect this year makes this a requirement.” However, the number of those opting out has still continued to climb. Coase's solutions fail in regard to this issue because there is a large amount of people on both sides of the argument, making it hard to reach an agreement. Also, parents are likely to free-ride once the necessary threshold for immunity reaches 92%.