College Athletes SHOULD Be Paid... by the Government

Imagine you are the newly elected governor of Virginia. A key part of your platform was to help the state economy by improving the quantity and quality of the educated labor force in the state. As all politicians have clearly illustrated over the years, it is much easier to say you are going to improve the economy than it is to actually do it. Thus, you know the importance of coming up with a unique yet impactful solution to this problem.

A couple months into your term, you are at a UVA football game, rooting on your alma-mater. Shortly after a last-second, game winning touchdown throw, you are happily leaving the game when a young boy decked out in full blue and orange catches your attention. He looks up to his parents and says, "I'm definitely coming to UVA when I'm older!" That's when it hits you! Prospective students are drawn to schools with great athletics programs. In fact, the "Flutie Effect" notes that a college football team going from mediocre to great has the same effect on the quantity of applications as a 3.8% decrease in tuition. Thus, the key to improving the state economy is to improve UVA football.

I know this may sound like a bit of a stretch so let me break it down. A better football team at UVA means more applications. More applications mean that UVA admits more students and/or more qualified students (assuming that increased athletic success does not change the composition of the application pool by deterring academically-successful students from applying). This means that there will be more qualified graduates coming out of UVA. Since businesses in the DMV recruit heavily from UVA, this means the overall quantity and quality of the educated labor force in the state will improve. This makes your constituents happy, it improves the overall standard of living in the state, and also leads to increased production for the businesses that hire these students.

This is a classic example of a positive production externality. The production of high-quality collegiate football leads to an increased educated labor force in the state. The SMC is lower than the PMC, and thus high-quality collegiate football is underproduced (a concept that UVA students are all too familiar with). Therefore, I argue that college athletes should be paid. Not by the NCAA. Not by the school. But by the state. Paying athletes will attract better athletes, and the athletes will train harder if their is a monetary incentive. This leads to a better athletics program, and, as mentioned above, a better state economy. You implement your solution, and it works! It works so well, in fact, that Amazon chooses Northern Virginia to be the site of its HQ2, which has several positive externalities on the state (but that's a blog post for another day).

Economic Analysis of Social Media

The introduction and growth of new technologies for communications has affected the world in an exponential manner, pertaining to business and the economy, and considering new pathways of marketing products. As we know, aggregate supply has been shifting positively since the 90s due to the increase in complicated technologies, with the internet arguably having the greatest growth magnitude in human history. I am here to discuss the costs of a particular subset of new internet technology, social media.

The Financial Times displays a new and costly view on the introduction of social media to the developed world (here). We have any piece of information that we want to know in our pocket; it can be accessed with a few taps of our thumbs. As we can provide through anecdotal evidence, such simplicity regarding access to information is immensely distracting. Right now I could completely neglect this assignment and decide to watch random Youtube videos, a guilty pleasure that is most harmful to an imperative aspect of modern life, which is productivity. As displayed in the article, it is shown that when global smartphone shipments sharply increased, productivity growth in advanced economies measured in percentage points sharply declined. Although we must keep in mind that correlation does not equal causation, this is an interesting point. Advertising strategies today are near subliminal levels, which bridges to the next point of the article; this attention capturing strategy potentially correlates negatively with a persons true underlying preferences. The "click bait" strategy of the internet age simply does what it is designed for and what the name implies. Since a consumer's utility function is dependent on the goods that a consumer consumes and is maximized with that consumer's budget, this creates an inaccurate demand curve. It seems clear that there are some problems with the way that the modern citizen of a developed country operates due to these theories.

The decrease in productivity growth caused by social media is a negative consumption externality. When an individual engages with social media during work or during a situation in which that person is supposed to be doing something productive, that person's lack of production causes the company or the people around them to bear the cost of their lack of production. That person's coworker's or peers has to make up for their lack of production to cover the dead weight loss or they just bear the cost. Considering this void in the market for productivity, it is unclear who should bear the cost of this externality to reach allocative efficiency. Should that person pay for the value of the production lost due to their social media usage? Should the social media company pay this cost for distracting the worker? If it is assumed that this extenality is happening on a large scale and the the worker is not liable for damages, there is a holdout problem. I imagine, for example, a company blocking websites on their internet network, then the workers becoming fed up with the controlling nature of the company, saying they don't get paid enough to be worked so hard with so few breaks, and finally, those workers taking action and causing more damage to the company. Many companies may say that these workers are lazy and unproductive, but they may neglect the very root of the problem with the unproductive modern worker. This article argues that the "click bait" advertising done on the internet causes people to be less mindful in their decisions, caring less, and in turn making people less empathetic. If we assume that empathy is a desired social characteristic, then we can say that social media is creating a negative production externality in the market for empathy by decreasing the mindfulness of people. This, which is such an abstraction, I find to be most interesting. There is great cost to be paid when on a large scale people are not empathetic; discriminatory laws are passed, businesses act without regard for their people, financial crises happen, greed runs rampant, crimes are committed..., and many others. Considering that this cost is at this point immeasurable, who should bear it? The person who lacks empathy? The causer of this person's lack of empathy? What problems does this new social norm entail?

Wine&Beer Fest

Back in Guayaquil, EC the building where I live is located right in front of the local theater. The theater hosts different types of events that range from music and food festivals to children entertainment on weekends. These events take place in the open parking lot, which implies that noise cannot be contained and cars have to park on the streets surrounding the theater, blocking the way for regular transit. Residents in my building are affected by the noise that goes on until late hours in the evening, and by the overflow of cars in the streets that often block the entrance to the building. These two effects are negative production externalities. They impose a cost to the residents that is not accounted for by the producers, leading to a MSC that is above the PMC and therefore results in an overproduction of the good (events in the theater parking lot).

Last week all residents in my building received a letter from the representatives of the “Wine & Beer Fest” that is scheduled to take place in the theater parking lot in October. Their permission to have the festival was denied by the mayor due to repetitive noise and traffic complaints by the building’s residents. This letter is a clear example of a Coasian solution for a negative externality. In the letter, the representatives of the festivals request the residents to cooperate with them in order to reach a “favorable” solution. They mention various arrangements they would be willing to make for the residents to withdraw their complaints. These include: rescheduling the event to an earlier time in the evening, request the presence of more transit officers to ensure the clearing of roads, providing VIP tickets to all residents of the building and any other suggestion or request.

This situation shows not only a negative production externality problem but also the role of government, and a possible solution. The negative production externality created by the festival would be the noise and traffic that residents in the area have to endure when these event takes place. The role of government is clear; they assigned property rights to the residents when denying the permit to the festival. But, as proposed by Coase, the government does not impede the negotiation between the two parties involved. The producers are trying to negotiate a solution with the residents by modifying their production. By doing so, they are internalizing the externality by accounting for these costs. For example, all the VIP passes given out for free are added to the company’s costs. This internalization of the externality raises the PMC to the SMC solving the externality problem. Residents agreed to these terms and tickets for the festival are now on sale! 

Weaknesses of "Not a Public Good" Arguments Against Higher Education Funding

In arguments about public education, many people debate whether or not education is a public good in which the government should invest. Strong proponents of public education (like UVA’s own Thomas Jefferson) often define education as a public good, while others (like economists) remind us that goods with positive externalities are not necessarily public goods. It is true that education is not a pure public good; education is neither non-rivalrous nor non-excludable. Education policy researcher Preston Cooper emphasizes this point in his Forbes piece arguing for students bearing “some or most of the cost” of higher education because it is not a pure public good. Although there are definite costs and benefits to relative levels of government funding of higher education, the argument against government provision of higher education because it is not a pure public good is not completely sound.

In Externalities: Problems and Solutions, Gruber explains that “most of the goods we think of as public goods are really impure public goods, which satisfy these two conditions to some extent, but not fully” (170). For example, cable TV and private parks are excludable, but not rival. Although higher education is excludable, higher education is a lesser degree of rival than are other goods that the government provides. While college classrooms have maximum capacities and different types of courses have different optimal numbers of students, college class sizes are typically larger than those of primary and secondary schools. For example, more than 450 UVA students attend introductory micro and macroeconomics lectures at the same time without negatively affecting each others' learning. There is a point at which higher education becomes rival, but higher education falls closer to a public good on the continuum we discussed today than public education currently provided by the government. While the government provides many services with positive externalities that are not public goods and higher education being a purer public good than primary and secondary education does not necessarily mean that it should also be free, analyzing the extent to which higher education is non-rivalrous addresses arguments like Cooper’s that since higher education is “unambiguously not a public good,” it should not be publicly provided.

When Nobody Takes Out the Trash

I currently live in a house with 15 other people. A major issue within the house right now is that nobody except for a select few (such as myself) ever take out the trash. In this post, I will use Ronald Coase’s framework to try to find a solution. 

Firstly, we must determine what kind of externality we are dealing with. This situation is slightly more complicated than the basic “Confectioner vs. Doctor” example. In my house, there are 15 people, each of whom acts as both a “Producer of Trash” and a “Consumer of Cleanliness”. In this case, we have a negative production externality, where the allocatively efficient output would be less trash produced at a higher price. When individuals produce more trash than the allocatively efficient quantity (where Q = Trash Thrown Away – Trash Taken Out), then it damages the utility of the consumers of cleanliness. It may seem that this should not be an issue, because in this example the consumers are the same individuals as the producers, but different preferences between individuals create a market inefficiency. For ease of explanation, let’s say there are two groups of people. Group 1 has no preference between a clean house and a dirty house, so their marginal cost of producing trash is zero. Group 2 does prefer a clean house to a dirty house, has a high marginal cost of producing trash, and therefore takes out the trash frequently to decrease their overall production. In the market with an externality, Group 1’s actions as producers harm Group 2’s utility as consumers, because the individuals in Group 2 incur a cost by living in the dirty house.

Coase’s theorem would suggest that the best way for me to deal with this problem as a member of Group 2 is to pay the members of Group 1 a negotiated amount so that they take out the trash. This would produce the allocatively efficient outcome because this payment would shift Group 1’s production cost curve up, and they would produce less trash. Group 1 would never pay more than the value of damages that the externality causes them. Therefore, Coase’s strategy should work and solve our house’s trash problem. However, while this solution should theoretically work, I do not think it will happen, even if that means I am acting economically irrational- I just cannot stomach the idea of actually paying my friends to do what is expected of them and take out the trash.  In this example, the cost of violating my moral principles serves as a transaction cost, which violates the assumptions of Coase's theorem and explains why this solution may not actually work in practice.

Make the Subway Grate Again

Last winter, I was walking around the blustery streets of New York in the middle of December. It was relatively warm in the morning, but by sunset the temperature dropped precipitously and I was significantly underdressed. Walking down the street, shivering, I noticed that some of the subway ventilation grates on the sidewalk released gusts of warm air. Once I realized this, I began leapfrogging from grate to grate, spending a few moments at each to warm up before darting to the next one. I was not a party to the transaction, yet I certainly benefited from the fact that the subway cars below me were running and producing heat. Clearly, the heat coming up from the grates constitutes a positive production externality.

This summer, while walking to lunch under the sweltering sun I again passed over one of these vents and my opinion of them shifted dramatically. Whereas in the winter these vents provide a much needed respite from the cold, in the summer they make the already stifling sidewalk that much more unbearable. Instead of a positive production externality, the heat coming out of the grate was a negative production externality.

This complicates the situation significantly. The implications of internalizing the externality would depend on the time of year (or even the day-to-day weather conditions). Aside from the fact that it would be practically impossible to charge or credit whoever walks near one of the grates, the party being compensated would change periodically regardless of who’s assigned liability by the law.

It turns out that the MTA has decided to do away with the grates altogether in their new projects, removing their associated positive and negative production externalities (Note that there were other negative production externalities that accompanied these grates, such as the tendency to collect dropped jewelry and break women’s high heels, which I have not accounted for in this analysis). On the newer lines (such as the second avenue subway), hot air is instead vented out of mechanical ventilation towers.

Should Students Give More Wrong Answers?

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.

x