Today, President Obama praised an international deal to phase out emissions of hydroflourocarbons beginning in 2019. Roughly 200 countries signed the agreement, including the US, which carries legal force and which aims to cut such emissions by 80% by 2047. Hydroflourocarbons are a type of pollutant emitted by air conditioners and refrigerators, and as the middle class burgeons in large countries such as China and India, statisticians predict that without this treaty, the widespread adoption of such consumer goods may balloon HFC emissions by 15% per year.
This article naturally reminded me of our discussion of the Prisoner's Dilemma and the "thug" rationale for government, but on the international stage. Without legally-binding emissions treaties, individuals and corporations alike have little incentive to singlehandedly curb their consumption of hydroflourocarbon-heavy air conditioners and refrigerators, because such behavior would carry high switching costs without any guarantee of unilateral behavior among other individuals and firms.* In other words, keeping one's current cooling systems is a dominant strategy, and one that does not lead to a socially optimal outcome. This clear example of the Prisoner's Dilemma provides a rational basis for a legally-binding international treaty, and President Obama's praise is well-deserved.
*It is interesting to note, however, that--contrary to what we might predict--a few US corporations have already switched to more expensive, greener cooling systems. Why? Likely to reap the marketing benefits of appearing as a progressive company. After all, now that the treaty has been signed, the lion's share of companies will merely conform to legal standards by switching, and can no longer market such a choice as "green" or "progressive."
Saturday, October 15, 2016
Will Alternative Voting Systems Function As We Want in the Real World?
In class we discussed how alternative voting systems such as Hare, Coombs, and Borda count all can lead to high Condorcet efficiency and resolve some of the issues of simple majority. Still, politically, these systems have gained little traction. Is there a rational answer for this, or are the lawmakers standing by plurality simply failing to heed the advice of economists once again?
One explanation could be that simple majority benefits the two major parties in control. Many journalists this election have been emphasizing the importance of not voting for a third party candidate, which may make us consider if the current voting system helps keep these arguably less than ideal parties in control.
Another explanation could be the feasibility of the multiple rounds of voting some of these systems require. Primary runoffs had an average reduction of turnout of 35.3% according to one report. Not only this, the reduction was biased with regards to demographics. This is likely not ideal for a more widespread election system.
Lastly, strategic voting may erode much of the benefit of these alternative voting systems. To clarify, strategic voting is "when voters cast an insincere ballot in order to increase their expected value for an election outcome." As seen in the graphic below, the group satisfaction when people vote strategically can decrease significantly when using these alternative systems. Still, the group satisfaction is likely to be higher than when using plurality. Overall, while these explanations at least provide some reasoning for the prevalence of plurality, it may be time to reexamine if alternative systems could perform better in various scenarios.
One explanation could be that simple majority benefits the two major parties in control. Many journalists this election have been emphasizing the importance of not voting for a third party candidate, which may make us consider if the current voting system helps keep these arguably less than ideal parties in control.
Another explanation could be the feasibility of the multiple rounds of voting some of these systems require. Primary runoffs had an average reduction of turnout of 35.3% according to one report. Not only this, the reduction was biased with regards to demographics. This is likely not ideal for a more widespread election system.
Lastly, strategic voting may erode much of the benefit of these alternative voting systems. To clarify, strategic voting is "when voters cast an insincere ballot in order to increase their expected value for an election outcome." As seen in the graphic below, the group satisfaction when people vote strategically can decrease significantly when using these alternative systems. Still, the group satisfaction is likely to be higher than when using plurality. Overall, while these explanations at least provide some reasoning for the prevalence of plurality, it may be time to reexamine if alternative systems could perform better in various scenarios.
Sunday, October 09, 2016
U.S. Tax Evasion: A Major Free Rider Problem
We have discussed the basics of public goods and externalities in Samuelson's paper "The Pure Theory of Public Expenditure", which detail the function of public goods and its two notable characteristics of being non-rivalrous and non-excludable. It is important to note that the free rider problem stems from its non-excludability, meaning that that certain good cannot be excluded and will be difficult to restrict access to the good based on price.
The question begs to be asked if America is slowly becoming a nation of "Free Riders" with tax evaders. The argument holds that those who evade in taxes are labeled as free riders because it "creates horizontal inequalities, since equally well off people share different tax burdens." This is because the government is deprived of revenues from tax evasion that could have been set aside for the production of public goods. There's a huge irony here. We have learned (and the author mentions this as well) that the free rider problem generally arises in common property resources or even in the provision of private goods. So, it would "be necessary to use enforcement mechanisms of taxes and/or user charges with the force of the law." The tax system that was meant to solve the free rider problem in the first place has its OWN free-rider problem!
But this is where it ties in to Samuelson's argument. The author states that "tax evasion, if pervasive due to lack of monitoring and enforcement, may necessitate higher tax rates, thus causing further evasion and loss of productivity and income." Samuelson would argue that individuals are rational and base their decisions on what is in their best economic self-interest. The reality, whether we like it or not, is that these tax-evading individuals are acting economical and according to their self interest, as they have realized that there is a much higher Marginal Benefit to avoiding taxes legally than their Marginal Cost (in this case, the financial cost of paying taxes that will be allocated to the government for public goods if they didn't decide to tax evade). Why pay taxes if you can free-ride off the public goods provided to you if it's not excludable?
The question begs to be asked if America is slowly becoming a nation of "Free Riders" with tax evaders. The argument holds that those who evade in taxes are labeled as free riders because it "creates horizontal inequalities, since equally well off people share different tax burdens." This is because the government is deprived of revenues from tax evasion that could have been set aside for the production of public goods. There's a huge irony here. We have learned (and the author mentions this as well) that the free rider problem generally arises in common property resources or even in the provision of private goods. So, it would "be necessary to use enforcement mechanisms of taxes and/or user charges with the force of the law." The tax system that was meant to solve the free rider problem in the first place has its OWN free-rider problem!
But this is where it ties in to Samuelson's argument. The author states that "tax evasion, if pervasive due to lack of monitoring and enforcement, may necessitate higher tax rates, thus causing further evasion and loss of productivity and income." Samuelson would argue that individuals are rational and base their decisions on what is in their best economic self-interest. The reality, whether we like it or not, is that these tax-evading individuals are acting economical and according to their self interest, as they have realized that there is a much higher Marginal Benefit to avoiding taxes legally than their Marginal Cost (in this case, the financial cost of paying taxes that will be allocated to the government for public goods if they didn't decide to tax evade). Why pay taxes if you can free-ride off the public goods provided to you if it's not excludable?
GE Relocates to Boston
Approximately 6 weeks ago, General Electric officially relocated its headquaters to Boston, Massachusetts. Fairfield, Connecticut had been the home of GE's headquarters for nearly 35 years; which begs the question - why relocate now? The answer is simple - tax incentives. Mayor of Boston, Martin J. Walsh, has been working hard over the past several years to rid his city of its"taxachusetts" nickname. The main tool Mayor Walsh has been utilizing is tax breaks for businesses.
GE had been threatening to leave Fairfield for a number of years but it wasn't until January, 2016 that GE announced they intended to follow through on their promise. GE ultimately decided to transition to Boston, rather than Providence, RI or Austin, TX (other cities vying for GE's business) because of Boston's generous 25M city property tax incentives and another 120M in state subsidies towards infrastructure development (roads and parking facilities). In a press conference, GE executives cited these tax incentives, as well as Boston's emphasis on small business startup, as the main reasons for their relocation.
This is an obvious application of Tiebout's essay on public goods, local expenditures and the problem of preference revelation. In this paper, Tiebout criticizes Samuelson's reliance on national government to provide public goods. Instead, Tiebout argues that localities can take the role of producers with revenue expenditure patterns as their product. Then individuals could buy/vote with their feet by moving to the locality that best suits them. In this example, we see the differing revenue expenditure patterns of Fairfield and Boston creating trade offs for individuals and corporations. In the end, this example proves that, due to heterogeneity of individuals, it is often more efficient to create a market for public goods and let individuals / corporations vote with their feet.
GE had been threatening to leave Fairfield for a number of years but it wasn't until January, 2016 that GE announced they intended to follow through on their promise. GE ultimately decided to transition to Boston, rather than Providence, RI or Austin, TX (other cities vying for GE's business) because of Boston's generous 25M city property tax incentives and another 120M in state subsidies towards infrastructure development (roads and parking facilities). In a press conference, GE executives cited these tax incentives, as well as Boston's emphasis on small business startup, as the main reasons for their relocation.
This is an obvious application of Tiebout's essay on public goods, local expenditures and the problem of preference revelation. In this paper, Tiebout criticizes Samuelson's reliance on national government to provide public goods. Instead, Tiebout argues that localities can take the role of producers with revenue expenditure patterns as their product. Then individuals could buy/vote with their feet by moving to the locality that best suits them. In this example, we see the differing revenue expenditure patterns of Fairfield and Boston creating trade offs for individuals and corporations. In the end, this example proves that, due to heterogeneity of individuals, it is often more efficient to create a market for public goods and let individuals / corporations vote with their feet.
Using the STV to End Gerrymandering
Though gerrymandering is widely disliked by both the Republican and Democratic general public, solutions to gerrymandering have not been very forthcoming. Independent commissions are often independent in name only, and fair redistricting is a harder problem for computers to solve than most would expect. But ranked-choice, instant-runoff voting, often called the Single Transferable Vote (STV) is a possible solution.
As this study outlines, movement to multi-member districts with STV voting could effectively end the gerrymandering problem. The STV allows for the most widely-supported candidate to win. However, STV alone won’t solve gerrymandering, since that widely-supported candidate would still likely be the candidate from the party for which the lines were drawn to protect. Thus, the need for multi-member districts.
Large multi-member districts bring their own problems, though, which the STV would remedy. Specifically, large distracts would hinder the ability to create majority-minority districts, which are imperative to the Voting Rights Act. If a state has just a few large districts, they may not have a large enough minority population to make one of those districts majority-minority. And therefore, state legislatures could use this as an excuse when drawing district lines to dilute the minority vote by dividing them among separate districts. Therefore, some minority groups may not even be able to elect one representative, bringing us back to the state-of-affairs before the Voting Rights Act. The STV, therefore, is required to ensure that there is some acknowledgement of the minority viewpoint. STV could, as Supreme Court Justice Thomas said, “produce proportional results without requiring division of the electorate into racially segregated districts.” In addition, STV makes election more competitive and difficult to predict, and therefore make manipulation of district lines more difficult to successfully implement.
Unfortunately, STV’s political feasibility is iffy. As we’ve discussed, candidates support policies that get them reelected. And, gerrymandering is a very effective “policy” that gets incumbents reelected. So, efforts to curb gerrymandering are bound to face significant political hurdles.
As a final note, Arrow’s Impossibility Theorem tells us that no voting system is perfect. A multi-member district with STV will not solve all of our problems. Still, it will probably leave us better off than before.
As this study outlines, movement to multi-member districts with STV voting could effectively end the gerrymandering problem. The STV allows for the most widely-supported candidate to win. However, STV alone won’t solve gerrymandering, since that widely-supported candidate would still likely be the candidate from the party for which the lines were drawn to protect. Thus, the need for multi-member districts.
Large multi-member districts bring their own problems, though, which the STV would remedy. Specifically, large distracts would hinder the ability to create majority-minority districts, which are imperative to the Voting Rights Act. If a state has just a few large districts, they may not have a large enough minority population to make one of those districts majority-minority. And therefore, state legislatures could use this as an excuse when drawing district lines to dilute the minority vote by dividing them among separate districts. Therefore, some minority groups may not even be able to elect one representative, bringing us back to the state-of-affairs before the Voting Rights Act. The STV, therefore, is required to ensure that there is some acknowledgement of the minority viewpoint. STV could, as Supreme Court Justice Thomas said, “produce proportional results without requiring division of the electorate into racially segregated districts.” In addition, STV makes election more competitive and difficult to predict, and therefore make manipulation of district lines more difficult to successfully implement.
Unfortunately, STV’s political feasibility is iffy. As we’ve discussed, candidates support policies that get them reelected. And, gerrymandering is a very effective “policy” that gets incumbents reelected. So, efforts to curb gerrymandering are bound to face significant political hurdles.
As a final note, Arrow’s Impossibility Theorem tells us that no voting system is perfect. A multi-member district with STV will not solve all of our problems. Still, it will probably leave us better off than before.
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