After presenting the concept of concurrent supply and demand shifts last week in my ECON 201 discussion section, I asked for a volunteer to draw up on the board what might happen to the market for uber rides on New Years. (Answer: demand increases and supply decreases causing price to skyrocket.) I was met with silence and wide eyes. My students were extremely hesitant to give a wrong answer. I began to wonder why that might be. Clearly, giving a wrong answer in class has a high psychological cost, embarrassment, which, for most students, greatly outweighs the individual benefits. However, given our discussion of externalities last Monday, it seemed like there might be more to the story.
Providing a wrong answer in class has a positive production externality, meaning, its production provides a benefit to an independent party which is not felt by the producer, leading to an allocatively inefficient output. When a student supplies a wrong answer in class, she helps other students by giving the instructor an opportunity to explain why her answer was wrong, often clarifying the logical path to the correct answer. Cunningham’s Law calls attention to this phenomenon in less explicitly economic terms by pointing out that the best way to get a right answer to is give a wrong one. Because individuals do not properly account for the additional social benefit of giving an incorrect response, wrong answers are underproduced.
Even more interesting are the possible solutions to this particular market failure. Under Coasian theory, the class could strike up a bargain with the mistaken answerer, providing her with an incentive, typically monetary, to increase production. (While the mistaken student could also pay the class for the harm done to them by not answering incorrectly, it appears that the property rights have been naturally assigned to to the speaker here). This solution, however, falls prey to both of the major flaws in Coasian theory, the holdout problem and the free rider problem. Presumably, the class has more than two students, providing the last student who pays with an incentive to pay less or not at all. Similarly, the paying students have an incentive to free ride on the compensation of their peers, showing reluctance to contribute to the purchase of the good (the wrong answer) which produces social benefits. Both these problems might lead to a collapse of the solution in the private market. In this case the government (the instructor), would have to step in to subsidize the provision of incorrect answers in order to achieve the allocatively efficient output.
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Over this past weekend, as I’ve been catching up on the ongoings of Judge Kavanaugh’s Senate hearings, I couldn’t help but draw connections to Julia’s post. Just to provide a bit of background: Dr. Christine Blase Ford was a high school classmate of Trump’s Supreme Court nominee Brett Kavanaugh who is now accusing him and his friend of sexually assaulting her at a party while intoxicated. She was called to testify before the Senate Judiciary Committee on Thursday.
Regardless of where you stand politically, there exists a rather evident positive production externality stemming from Dr. Ford’s testimony. To clarify my connection to Julia’s post, I am not implying that Dr. Ford’s decision to testify is synonymous to an incorrect answer. Instead, the parallel I saw was that her decision to testify now results in a positive production externality. Similar to the class and instructor, as a society and government we are now able to determine how we wish to answer to the importance of holding people accountable for sexual harassment accusations. In addition to this, Dr. Ford’s actions have also given other victims of sexual assault the courage to seek help (similar to how a bad answer allows other students to ask questions), and calls to sexual assault helplines doubled on Thursday.
Dr. Ford, akin to a student willing to brave the costs of answering incorrectly, has provided a benefit to an independent party (other victims of sexual misconduct) that she won’t experience. Economically speaking, her actions will also result in an allocatively inefficient outcome: there now exists an underproduction of such testimonies given that the societal marginal benefit (SMB) exceeds her private marginal benefit (PMB) meaning Q*<QAE.
There obviously exists profound incentives for trauma victims to not come forward and instead behave as “free riders.” Unlike in Julia’s example, a monetary incentive may not be a viable solution in this case due to society’s negative perceptions of money. Coasian theory, however, is still very much applicable. In such circumstances, it would behoove society to engage in a dialogue with victims to determine a fair means of compensation for their testimonies, with the testifiers inherently assuming property rights. This compensation may take the shape of free counseling or support groups. Finally, the potential for the holdout problem where certain people or institutions may not feel the need to pay/offer such support must be required to do so through law or governmental oversight, so as to circumvent a potential market failure. Dr. Ford’s testimony has provided our country with an opportunity to answer to our values and learn from our past. The only question that remains is whether we will take the necessary steps to achieve an allocatively efficient output in the future.
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