Salmon on the Columbia River

This week, I read The Organic Machine by Richard White. White traces the history of human activity on the Columbia River—from societies and space structured around fishing for salmon to the political and social impact of dams and hydroelectricity. These dams imposed a negative production externality on salmon fishermen (groups of commercial fishers, sportsmen, and Native Americans) by changing currents and water temperature and disrupting the fish’s patterns. With well-defined property rights along the river, the Coase Theorem predicts negotiations that internalize this externality.

However, White argues that the salmon were not just of monetary value, but were of great cultural value. He writes that the fishermen catch salmon because it “defines who they are and the lives they wish to lead” (White 91). However, this is nearly impossible to quantify, so the damage to salmon fishermen would be undervalued in a negotiation.  Gruber calls this the “assignment problem,” one real-life obstacle to a Coasian outcome. He writes that the fishing society was in an “economic contest it could never win” (White 93). The assignment problem prevents an allocatively efficient solution to the externality.

Sitting/Standing at Sporting Events as a Prisoner's Dilemma

I was at the UVa football game on Saturday sitting with some friends on the hill. At one point during the first quarter the people sitting in front of us stood up, obstructing our view. It occurred to me this might be a prisoners' dilemma type situation. The necessary assumption to make is that the Pareto optimal equilibrium would be everyone sitting. The logic behind this assumption is that there are two things people should want at a football game: a view of the field and a general comfort when viewing. Based on what we know about people at sporting events this may not be true, some people may prefer to stand, and others insist it is "a necessary part of the experience." I like to stand when something exciting happens or a tense situation is about to take place, but let's make our equilibrium refer to "normal time" in the game, for example when people are standing on 2nd and 8 and there's little chance for a score. From what we know about people generally (see also: in church), people seem to prefer sitting to standing when given the choice.  

Despite everyone sitting being the Pareto optimal equilibrium, individuals can maximize their own utility by improving their view by standing, assuming the benefits from an improved view outweigh the costs of decreased comfort. This act imposes negative externalities, as others' views will be obstructed. To respond, those others will have to stand to restore their view. The first individual who stands starts a domino effect which results in everyone standing. At this equilibrium nobody's view is better than when they started out seated, assuming identical height among individuals, but everyone is less comfortable.

Path to a Pigouvian Tax?

Congressional Republicans are in the midst of trying to enact major tax reform, a staple of President Trump and Treasury Secretary Mnuchin’s economic plan. This could tie into the class in a wide variety of ways, including whether taxes on the wealthy (the ones this overhaul would target) are simply effective means of providing insurance against poverty, or providing redistribution as a sort of public good which would be inefficient to do privately. However, it is one of the Democratic Party's responses to this tax reform that immediately struck me as tied into what we were learning in class. 

2 Democratic Senators view this as an opportunity to pass a Carbon Tax, a Pigouvian tax that many climate advocates have long believed will help solve overpollution by internalizing the externalities in emitting carbon (a prominent greenhouse gas). By adding a tax equal to the marginal damage of pollution (the damage not accounted for by Private Marginal cost), which they calculate at $49 per metric ton, they can raise private marginal cost to private social cost. This would mean there are no negative production externalities, as producers bare the entire social cost, and would then produce where social marginal benefit (no difference from private) equals social marginal cost, the efficient level of pollution. While other measures, such as tradable permits or the Coase theorem were discussed in class, these are difficult to implement because of concerns over how to determine optimal quantity without markets and how to distribute permits, and free rider and negotiation cost problems, respectively. The primary obstacle to a carbon tax has always been political feasibility, and if Democrats can use the tax reform to make it a political reality, it would mark a significant step in removing a major market failure.

What is wrong with Connecticut?

I come from the utterly uninteresting and lackluster state of Connecticut. When I graduated, I was thrilled at the opportunity to live outside its borders. Much to my parents' dismay, I don't ever plan on living there permanently again. Now, it seems many others have joined me, based on our falling population and an influx of articles titled similarly to this one from the Atlantic, What On Earth Is Wrong with Connecticut? Answer? A lot, but much of it to relevant to Tiebout's article on revenue-expenditure bundles.

Connecticut used to be, and still is to a large extent, a refuge for the bankers who did not want to live in New York City. The downside, however, of decreasing crime in the city is that companies and individuals have stopped flocking to Connecticut like they used to. That explains a great deal of why people are moving to Boston and New York City, which also have high tax rates and high costs of living. Connecticut is now not much cheaper, not much safer, and way less convenient than nearby cities. On the other end, people are moving out of the Northeast as a whole to escape the cold weather and the high level of taxes and regulations. Many state elected officials are now desperately trying to find ways to change Connecticut's revenue-expenditure bundle to make it more attractive relative to other states, and to return to the optimal size population so our housing prices stop falling.

Fortunately for Connecticut, we do not live in Tiebout's world of perfect mobility and no job constraints, forcing many to stay put -- not out of desire, but out of convenience and necessity.

Fire, Fury and the Prisoner’s Dilemma

The prisoner’s dilemma describes a situation where it is in your best interest, given uncertainty over how the other player in the game will act, to betray the other participant. This is known as a dominant strategy. This strategy, however, is Pareto inefficient as there exits a Pareto efficient move for both players, or an action that helps at least one without harming any.

North Korea and the US are on the verge of a prisoner’s dilemma scenario. The situation is plagued on both sides with uncertainty and misinformation regarding the other’s intended actions. North Korea does not yet have the full nuclear capability to engage in a proper prisoner’s dilemma. However, if our worst fears are realized, North Korea and the US may find themselves in a situation where, faced with the uncertainty of the other’s actions, nuclear threats may be triggered. Of course the Pareto-efficient equilibrium would be one in which both countries commit to nuclear non-proliferation. Without intervention, however, this seems unlikely. In Mueller’s eyes, the prisoner’s dilemma presents the rationale for the formation of government, which has the ability to move a Pareto-inefficient allocation to a Pareto-efficient allocation. In the case of today’s nuclear threat with North Korea, according to Mueller, a 3^rd party enforcer is the only option to keep both countries from defecting as predicted by their dominant strategy. In the absence of cooperation between the governments of North Korea and the United States, an international body to enforce nuclear disarmament is essential.

300% Tax Not Stopping Anyone

When thinking of polluted cities the list generally includes: Mumbai, Beijing, and other large cities. But joining that list is Kathmandu, Nepal. In 2016, Yale University's EPI rated air pollution in the country as the fourth-worst in the world. A large part of this is due to the increase in automobile sales within the last several years. Just in the 2015-16 fiscal year there was a 109% increase in registered vehicles. Along with that, banks were, until this past year, offering auto loans for just 10% down. This helped many people get into the car market which they otherwise would have been priced out of.

This increase in cars has created a negative consumption externality, where the private marginal benefit is greater than the marginal social benefit. By people buying cars that contribute to increased pollution and decreased air quality, there is a negative effect to others in society that cannot be compensated for. While the government has tried to deter people from owning cars for more than a decade with a corrective tax that now stands at 300% on car sales, the low downpayment percentage along with around 6% interest rate does not help the tax restrict quantity to the allocative efficient output. 

Visas and Tiebout's Preference Revelation

EB-5 visa is an employment based fifth preference visa, better known as the investor visa. Eligible immigrants can become permanent lawful residents, and eventually citizens, upon investing $1 million in a US business that employs at least 10 American workers. In FY2016, China, Vietnam and South Korea comprised the three largest nationality categories for EB-5s. The most popular settlement states were CA, NJ, NY and PA. Taken in the most extreme case, EB-5 visas may represent a modern day Tiebout preference revelation for the wealthy. 

Tiebout’s model of local expenditures attempts to solve the problem of preference revelation. He argues that consumer voters move to the localities that best match their preferences towards the optimal bundle of public goods. Could the same idea be applied to investor visas? It may sound like a stretch, but these visas provide a vehicle for the extension of market principles into public goods provision. Immigrants essentially “purchase” permanent residency, and in doing so "shop" around in pursuit of the optimal public goods provision. The state that they move to from their home country represents that which provides the most desired bundle of public goods.  Of course in this case, moving is not costless. However, if we ignore this violation of Tiebout’s assumption – the basic model could still apply. So strong is the desire of these investors to move to a locale with a more desirable provision of public goods, that their expression of preferences is unmistakable and expensive.

Plastic Pollution

Plastic water bottles are cheap, convenient, and also probably in your tap water. Researchers from the State University of New York and the University of Minnesota, Orb just tested 159 different tap water faucets for pollutants, including ones from the US Capitol building and the Trump Grill in New York. 83% of those samples contained microscopic plastic fibers from products such as synthetic clothing and plastic water bottles. The effects of ingesting plastic fibers are not yet completely know, but studies involving animals point to some negative health effects. 

"There's no way the plastic fibers I may be drinking are mine, right?" you might say. "How is that fair?" you might ask. Well, I don't know if it's fair or not, but it's definitely a negative consumption externality. When someone consumes a product that contains plastic and doesn't dispose of it correctly, it goes into the environment and can eventually end up in the water that others drink, possibly negatively affecting their health. As of now in the United States, this externality is not accounted for. The European Union requires member states to ensure drinking water is free of contaminants– the United States does not. Ronald Coase would argue that individuals and firms can reach the efficient output of plastic materials, correcting for negative externalities, without government intervention. The European Union, though, may be onto something with their water standards.

The Great Barrier Reef and Externalities

The Great Barrier Reef is one of the world's great wonders; however, it is facing serious threats due to pollution from coal and farming industries and climate change, which is raising the water temperature. As no one owns the Great Barrier Reef, there are no defined property rights, making it difficult to reach a private market solution to this misallocation of resources.

The farming and coal industries are producing a quantity that is above allocative efficiency due to their negative production externality. The industries are producing pollution that directly destroys the reef and are also contributing to causes of climate change. To make these industries internalize the external costs of their production, a Pigouvian tax by the amount of the external cost would shift the Private Marginal Cost curve to the Social Marginal Cost curve, resulting in the allocatively efficient output. The Australian government, however, is not looking at ways to make the industries internalize the costs of the externality, but is instead pursuing ways to increase water quality and reliance on renewable energy in an effort to save the reef.

Hurricane Irma Hits Florida Hard

Southern Florida experienced a category 5 hurricane as Irma reached its coasts. With predictions of incredible wind speeds and storm surge, millions of Floridians were urged to evacuate. 31,000 people alone evacuated the Florida Keys last Wednesday on U.S. Route 1, a public good maintained by the Florida Department of Transportation. Normally, the highway has no rival risk since the presence of additional drivers does not usually affect the utility of consumption for another driver. U.S. Route 1 is also a non-excludable good since anyone may use the road, and there are not tolls on the road in the Florida Keys which would create a monetary barrier to consumption.

Last Wednesday was not a normal day of driving consumption in the Florida Keys. The high volumes of traffic caused by the evacuation created a rival risk for the highway. As more people entered the highway to evacuate, the utilities of other drivers lowered. The thousands of drivers on U.S. Route 1 brought traffic to a standstill, hindering the evacuation of each person. The optimal number of people to share the road in a single day was exceeded, and this all displayed Buchanan’s theory that there is no such thing as a purely public good. U.S. Route 1 is subject to great rival risk and indeed has an optimal number of drivers for the road to be shared with, especially in the State of Emergency Hurricane Irma caused.