California, given the 55 electoral votes that come with it, would seem to play an important role in determining who becomes President. Earning 270 electoral votes constitutes a simple majority and a seat in the Oval Office. Thus, the offhand intuition might seem to be that a vote in California is particularly important because winning California's votes alone places one just over a fifth of the way to 270 electoral votes. However, the notion that voting takes on greater importance in a large state such as California is untrue. As can be visualized in the picture (a screenshot I took during the 2012 Presidential election), the results of the state of California were called before a single vote had been counted, which represents that the probability of one's vote affecting the outcome is essentially zero. According to the theory of rational abstention, residing in a large state actually makes choosing not to vote even more reasonable. The expected marginal benefit decreases significantly in a large state because the utility differential from having one candidate elected over the other remains constant (it is a result of the candidate's anticipated policies and revenue-expenditures), but the probability of casting the deciding vote decreases significantly as population increases.

Moreover, as Johnson writes, "the probability that a single vote will affect the outcome is determined by ... the individual voter's expectations about the distribution of votes." In California, the probability that one's vote determines the outcome is infinitesimally small not only due to the state's large population, but also because it is not a contested state (if the vote is not tied, one has no chance to serve as a tiebreaker). The last election in which a Republican candidate for President won the state of California was 1988. Since then, the smallest margin by which the Democratic candidate has won the state is 10%. One might predict, therefore, that social pressure and the pleasure derived purely from the act of voting must be quite high in California in order to explain the votes that are cast in California despite the apparent irrationality of doing so. An interesting alternative, though perhaps unrealistic, is that the elections for the House of Representatives, which occur concurrently, are driving the turnout for the Presidential election rather than the other way around. Though the differential utility is lower than for the Presidential election, the value of P is far higher because the voting pool is minuscule compared to that of the entire state of California, which might result in a higher expected marginal benefit from voting in the election of the local Congressman than from voting in the election of the President.

Taxis vs. Uber - What Would Friedman Say?

In his paper, “The Role of Government in a Free Society,” Friedman argues that monopolies restrict output and voluntary exchange. Friedman reasons that by limiting the availability of alternatives, monopolies inhibit freedom of exchange as well as stigmatize innovation. Friedman’s point is a salient issue today in regards to recent debate about whether or not the popular app “Uber” should be allowed to exist in cities such as D.C. that have pre existing regulations which essentially monopolize the taxi industry. In many cities, there is a ceiling imposed that limits the number of cabs allowed on the roads. This causes taxi licenses, or medallions, to trade for up to $600,000. The high price tag can be justifiable given the fact that the number of cabs is set, and barriers to entry are very high due to this essentially government-created monopoly. The industry has recently been challenged by technology as competitors such as “Uber” have infiltrated the market. Uber allows its users to book a driver and pay for the fare all with the use of their smartphone app as well as allows the consumer to choose the type of car and driver based on ratings. This causes Uber drivers to compete with each other, which ultimately benefits the end-consumer. Nonetheless, the DC Taxicab Commission is doing everything in its power to keep Uber out of the district. Many of its arguments against the popular app stem from the high price of a license that existing taxicab drivers and corporations have paid. Ironically, this high cost is a direct result of the very same government regulators that use it as an arguing point against Uber.

Friedman’s insights we discussed in class are clearly applicable to the issue, as the taxicab industry in many cities is as close to a government-created monopoly as you can get. Freidman would reason that by preventing alternatives to exist, legislation to uphold the existing monopoly would disadvantage consumers by inhibiting voluntary exchange and preventing innovation. It is clear that this is exactly what has happened within the industry up until this point- the existing industry does not give the consumer much freedom of choice and it lacks technological updates and options in a world that is becoming increasingly digital. Friedman would maintain that this industry is insensitive to the dynamic world because it is a publicly regulated monopoly and therefore there is little incentive to innovate to changing demand. It is for these reasons and the fact that this monopoly is not natural that Friedman would view the issue as one that should be settled in the market place, not one in which the government should play a role. Allowing Uber to enter the marketplace would be healthy for consumers who would benefit from competition, promote innovation within the industry, and allow voluntary exchange to flourish.

Split or Steal? Game Theory in Action

In the third round of the British game show "Golden Balls," two contestants face off with a pot of winnings between them. They are each given two golden balls with the word "split" or "steal" written inside each (giving them each two options for the behavior regarding the money). The rules are simple: if they both choose split, the pot of winnings is split equally between them. If either chooses steal while the other chooses split, the "stealer" receives all of the winnings. If they both choose steal, neither receives any money. This situation is structured very similarly to the classic "Prisoner's Dilemma," which we studied in class, but with one key difference: in the classic example, if one player defects, the other player is better off defecting as well (rather than cooperating)—and therefore the dominant strategy for both players is to defect, so there is a single Nash equilibrium of defect/defect. However, in the Golden Balls situation, if one player steals, the other player gains nothing by stealing also; no matter what he does, he receives nothing. Thus, there is the weakly dominant strategy of stealing, and the three Nash equilibria are the configurations where at least one person steals. In other words, both players have an incentive to steal, but no incentive to split the pot.

In this clip from the show, something pretty remarkable happens. One of the players convinces the other that "no matter what," he is going to choose to steal. He asks his partner to choose to split the pot, giving the "stealer" all the winnings, and then trust him that after the show he will give him half his winnings. Through this tactic, he essentially narrows the options facing his opponent to just two: either split, and hope that his opponent is kind enough to give him money after the show, or steal, and they both get nothing. Although there is nothing binding here (so the strict payoff matrix would not change), through the introduction of psychological manipulation and new incentives one opponent induces the other to choose to "split," as the lesser of two evils. As you will see, this strategy works: the man on the left chooses to split, knowing that this is his only chance of getting any money at all, and his opponent does an about-face and chooses to split as well, so they both split the money. His strategy all along was to find a way to force his opponent to choose to split not out of altruism and fair-mindedness (as is usually necessary, and usually fails), but because of the economic incentives at play.

The purpose of this long post, which I hope was worth the read, is that game theory oftentimes works on the premise that the two sides cannot communicate—or, at the very least, they cannot change the incentives of the payoff matrix, so it's difficult to escape the inexorable pull of the dominant strategy and subsequently end up in a Nash equilibrium. This show illustrates that actors in the game can at times use communication, persuasion, and personal trust to influence the incentives in the payoff matrix and reach the "unstable" strategy of cooperating together. I'm not sure what implications this might have for the field of economics, if any, but it's at least interesting to contemplate.

Be Wary of the Negative Externality

The clamor behind green energy continues to spread as a cleaner alternative to fossil fuel. However, I wish to extend a simple recommendation to such advocate: be wary of the negative externality.

Paradoxically, the so-called "clean energy" creates several negative production externalities. A Chicago based firm, McCann Appraisal LLC, found that wind turbine noise frequently causes sleep disturbances and other health concerns. In addition, numerous studies measure losses in property value ranging from 20% to 60% in communities worldwide. In fact, Denmark passed a law in 2008 with a clause mandating compensation for a loss of value in real property caused by the construction of wind turbines.

What is the role of government in this scenario? Lets return to the Danish law from above. The government intervened and enforced compensation for damage inflicted on society. But out of the five hundred and fifty one claims from people living near wind turbines, the average complainant received $8,478, a value not even near the actual amount of damage incurred on property owners.

What if the Danish government used a Coasian solution to internalize this externality? Ronald Coase contends that a market solution will lead to an allocatively efficient outcome if property rights are established and there are no transaction costs. In this example, the Danish government could simply grant property rights to homeowners rather than the energy company. Therefore, if businesses wanted to pursue the construction of wind turbines, they would have to receive permission from nearby homeowners, who would likely require some sort of compensation for the damages they would incur. This compensation would reflect a market value, and it would perhaps be more just towards the property owners than a government dictated amount. The Coasian approach may encounter the fee rider  and holdout problems in some larger communities, but it may be the best solution for many of the smaller, country communities being hurt by the wind turbines.