Professional sports: Non-rival (and non-excludable)

This year, the soccer club DC United moved into a brand new stadium. Among the controversies surrounding this move was the role of public funds, by some estimates accounting for half the cost. While the merits of this funding scheme are grounds for debate elsewhere, it did get me interested in the placement of professional sports teams more broadly on the “public-private spectrum.” On the one hand, the stadium experience is on the private end of the spectrum. It is rival (we can’t both sit in the same seat) and excludable (if you don’t have a ticket, you will get turned away at the front gate). However, the more abstract act of “consuming” the “fandom experience” shares neither of these qualities. My being a  fan does not affect your ability to be a fan, and there is no reasonable way to exclude anyone else from being a fan. Assuming that one derives benefit from their fandom regardless of one’s level of financial support for the team, it seems to have the makings of a public good. To support this analysis, assume professional sports operate in a free market (which given the earlier DC United example, we know is not the case).

Extending the idea, if you apply Buchanan’s intuition from A Theory of Clubs to professional sports, the good’s “publicness” is revealed even further. Nobody wants to be the only person cheering for their team. As such, the optimal “N” of people to share a fandom for a professional sports team is high. This high optimum “N” combines with the cost saving features of collective membership to motivate a possible public provision of the good.

Public provision could help address the market failure associated with pro sports fandom. To illustrate this point, suppose there are two fans of the Detroit Lions, each representative of a different sector of the fandom: Lee and Matthew. Lee is a die-hard fan: he holds season tickets and has a den decked out with Lions merch. Matthew is also a fan of the Lions, he derives a lot of benefit when they do well. Unlike Lee, however, Matthew only occasionally watches Lions games at his local sports bar, keeps up with scores on his local news channel, and doesn’t own any merchandise. Though both fans derive similar benefit from their fandom, Lee alone is bearing the cost, an example of a free-rider problem. Because the team management relies in part on revenue from ticket and merchandise sales to pursue top talent (athletic and administrative), this could lead to an underproduction of the good. Given this market failure and our previous assumptions, public provision might better approximate the allocatively efficient outcome.

WiFi and the Free Rider Problem

I live in my sorority house with 25 other girls and one single WiFi modem that lives on the first floor. As you may guess, my third floor room receives little to no WiFi access at any point during the day- a fact that causes me (and my 7 other third floor roommates) several issues.

Determined to rid our floor of this problem, a few of my roommates proposed that someone should go buy an additional router that would resolve the issue and bring the gift of WiFi into our suite. If we start with the assumption that WiFi would act as a sort of public good, we assume that WiFi would be a non-rivalrous, non-excludable good for all of the girls living on the top floor. When we proposed the logistics of adding the additional router into our suite and imposing an equal cost on all 8 members of the suite, two of our roommates disagreed and we knew we would eventually run into a serious free rider problem, leading us to the decision to not buy the router.

This is the perfect example of a market failure because of the free rider problem. Our suite underproduced the public good of WiFi at an inefficient level because of the lack of cooperation from everyone and the assumption that those who did not pay would still probably use the WiFi network. One way that we could rid our suite of our free rider roommates and produce WiFi at an efficient level is if the sorority house itself provided the WiFi as a private, excludable good in which we had to pay a monthly fee in order to receive the password giving us access to the network. This solution would allow our suite to produce the WiFi at the optimal amount for those who are willing to pay and would save me from writing this post by using a hot spot and wrecking my family's data plan.

Wait.. so who had the property rights?

“Who authorized the construction of an industrial park within a community? At the same time, who authorized the construction of a school located near the industrial park? These are simple questions that do not have concrete answers” expressed a concerned woman from Quinteros, a Chilean community suffering from intoxication due to toxic hydrocarbon fumes since early August 2018. According to BioBio Chile News, Quinteros is one of Chile’s largest industrial parks with 17 industries which has polluted nearby communities causing the suspension of 31 schools. Since this area is known as the “sacrifice zone,” community members have begun a series of pacifist protests against the polluters resulting from the decrease in quality of life. Due to the large concentration of factories and power plants, there is no clear census of who the real culprit is.  For this reason, this event has been named as a national crisis, where the community of Quinteros is demanding serious action from the government to clean up the toxic fumes.

According to Coasian Theory, both parties impose a cost on each other, yet a bargain with zero transaction costs and well defined property rights is an idealistic and quite unrealistic scenario. Currently, there is a cap on the amount of toxic fumes that factories are supposed to emit and if ever surpassed the firms must pay a substantial fine. The fine however, which would be the compensation from the firms to the community of Quinteros gets lost in the grand scheme of transactions. The money directly goes from the firm to the government, but then there is a lack of transparency as to where the money ends up. The contradiction then becomes: the government designated the area as an industrial park, yet now the government has defined property rights making the firms liable for the damage. In no way that means that I am arguing that the burning of coal is worth more than the lives of the people of Quinteros, instead I want to point out how the factories comply with the norms and regulations, but it’s not enough for the community members to continue with their daily lives.  

Through this chaos, there is a clear market failure resulting from the negative externality of production caused by the 17 industrial plants on the community. The industries impose a cost on the civilians, which means that if we were to visualize the situation on a price and quantity graph, the negative externality of production would depict a higher social marginal cost (SMC) curve and a lower social private cost (SPC) curve, thus creating a dead weight lost (DWL) triangle between the two parallel SMC and SPC curves. This results in a disagreement between the quantity that represents allocation efficiency and the quantity that gets produced (Q*).  The community is willing to lighten the protests and allow the continuation of production if and only if the “government closes the Codelco foundry, regulates arsenic norms, improves emission standards and increases tests fun on children.” In order for the industries to keep producing they must provide these non-monetary compensations to the community. In other words, the industries’ Private Marginal Cost (PMC) plus these previously mentioned costs become the new SMC which must be less than the Social Marginal Benefit (SMB). It is essential that the government keeps an eye out for free riders, especially since the factories tend to produce similar fumes which then makes it difficult to distinguish the source of the problem. At this point, all the industries are liable for the problem imposed on the families, where regardless of who owned the original property rights, it looks like the community of Quinteros now has the final say in how the problem will get solved.  Does that mean that the ideal bargain between the industrial plants and the community should be done directly without the government as the intermediate party?

An Uber Theory of Clubs

Last week while I was reading "An Economic Theory of Clubs," I found myself largely agreeing with the distinctions that Buchanan made from Samuelson on the notion of public goods. Then I saw the graph on the second to last page and felt the magnetic pull that all Econ nerds feel when they see cost curves. Normally, I get the intuition behind the graphs that I see, but this time it was different.  This benefit curve sloped up at first and that made no sense to me. Buchanan was saying that it is possible for an individual's benefit to increase from sharing a good with another person and he used this to discuss the degrees of publicness that a good could have.

Feeling assured by the quickly approaching final page of the paper, and my unearned arrogance, I hastily scribbled on my copy "Why would it increase at all?" I felt just as assured of this when I entered class and still assured after I left it. "Who would want to share a pool when they don't have to?" I kept asking myself that question, because I would certainly rather have a pool or probably anything to myself rather than split with someone else. Having accepted the fact that I was right and the paper wrong, my thoughts turned to my plans for the evening and how one friend would have to Uber over to a restaurant where we were meeting. The only problem was that she refuses to take Ubers alone.

Then it hit me, I should have known not to think I'd outsmarted a Nobel laureate, it was entirely possible that for some people, my friend included, Uber functions as a club the way Buchanan described.  For my friend, there is almost no benefit to riding an Uber by herself.  She can back up this belief with a poor record of safety for women in Ubers. Her benefit from an Uber increases dramatically with the addition of another person and then falls as the car gets too crowded and hot. Further, the cost curve of an Uber reflects the same fixed cost that gets spread over more and more people that Buchanan illustrated. So, while I still believe strongly that a swimming pool does not follow the curves of Buchanan's clubs, I will admit that, for some, an Uber pool just might.

Taking Matters Into Their Own Hands

When I visited South Korea, my friend made sure to take me to Ihwa Mural Village. A once poor neighborhood, Ihwa Mural Village was transformed back in 2006 by the Ministry of Culture, Sports and Tourism. The village is now covered in beautiful murals done by local artists. The revitalization of the village worked and Ihwa Mural Village is now a popular tourist attraction, especially after becoming the backdrop of popular Korean Dramas. Local store owners have greatly benefited from the influx of customers and artists get a chance to utilize their talents to benefit their community. Seems like a win for everyone. So, what's the fatal flaw that created a negative consumption externality? Noise.

What used to be one of Ihwa's main attractions

Sign asking visitors to be quiet

Villagers, while appreciative of the increase in business, became fed up with all the noise that tourists were making. One shop owner stated that it got so bad that he has "chosen only to work [there] and to live far away from [the] area." Signs are now all over the village urging tourists to be mindful of village residents, but some villagers decided that signs were not enough. One night, three village residents decided they were going to fix the negative consumption externality on their own. They took buckets of gray paint and covered up one of the village's most famous murals. This sent a strong message to tourists that these villagers no longer intended to bear the costs of their visits.

What the stairs looked like when I visited

After visiting Ihwa Mural Village myself a couple of summers ago, I believe the villagers' problems are far from over. Even after the destruction of one of the most famous murals, it was still crowded and loud. In order to mitigate the negative consumption externality, I believe fees must be put into place. Currently, there is no fee upon entry to the village. As a result, tourists can come and go as they please, leaving the villagers to shoulder the entire cost of their stay. The addition of a fee would help fix the current over-consumption that is taking place, bringing the village closer to allocative efficiency. If nothing is done, Ihwa Mural Village runs the risk of being destroyed by angry villagers which would in turn greatly harm local store owners. In order to remedy the negative consumption externality, fees upon entry should be implemented.