My Nobel Prize Winning Blog Post

Last week, the 2018 Nobel Prize in Economics was awarded to William Nordhaus and Paul Romer, both of whom have studied how governments can use policy to address climate change. Nordhaus, an economist at Yale, has spent a majority of his time over the past decades trying to convince governments to combat climate change by imposing a tax on carbon emissions. Romer, of NYU, has written about how government policy plays a key role in technological innovation. Both of these economists have done fantastic work in their research on climate change and have deservedly been recognized. Their research also has a clear and obvious relationship to our class, so it would feel like a missed opportunity to not discuss their work on this blog.

Carbon emissions create a negative production externality, and therefore the social marginal costs are greater than the private marginal costs. Thus, firms overproduce goods that create carbon emissions. Nordhaus argues that taxation is the best way to combat this market failure. Coase’s market solution would not work in solving this issue due to two reasons. Firstly, property rights would be difficult to define. How does one divide the air into different properties? Secondly, even if property rights could be defined correctly, Coase’s solution would still encounter the free rider problem. There are a large number of firms that are liable for air pollution, so firms would be reluctant to commit to reducing emissions. Because of these two reasons, there is not an adequate market solution, and the government must impose taxes such that the private marginal cost of production equals the social marginal cost.

Taxation on carbon emission is a form of government policy that incentivizes technological innovation. As firms are taxed for their pollution levels, they are incentivized to invest in the research and development of technology that decreases pollution, which should decrease marginal costs and increase marginal utility. This, theoretically, should lead to a decrease in future pollution. Therefore, the effects of a tax on pollution have two major effects- a social equilibrium in the present, and an improvement in future technology. Hopefully, Nordhaus and Romer’s recognition as Nobel Prize winners will bring publicity to their economic research, and convince governments to use public choice theory to save our environment.

*This is obviously a very simplified summary of their Nobel Prize winning work. I recommend reading more Nordhaus’s climate change solutions and Romer’s growth theory online.

Collins and Manchin's (Prisoner's) Dilemma

Last weekend, the Senate voted to confirm Brett Kavanaugh to the Supreme Court despite multiple sexual assault allegations against him. Susan Collins, a moderate Republican from Maine who occasionally crosses party lines, announced her decision to vote yes on Friday afternoon. Minutes later, Joe Manchin, a Democrat from West Virginia up for reelection, announced that he would also be voting yes on the confirmation. If they had both voted no, Kavanaugh would not have been confirmed. However, if one of them had voted no and the other had voted yes, Kavanaugh would have still been confirmed with Mike Pence breaking the tie. Their similarly-timed decisions to vote yes seemed like the "inefficient" resolution to a prisoner’s dilemma in which both parties chose their dominant strategies, resulting in the dominant-strategy equilibrium but a Pareto-inefficient outcome.

Let's assume that most Democrats wanted Collins and Manchin to vote no, while most Republicans wanted them to vote yes. If Collins had joined her Republican colleague Lisa Murkowski in voting no but Manchin had voted yes, Kavanaugh would have still been confirmed, yet Collins would have lost support from Republicans while Manchin would have benefited from being the deciding yes vote. Similarly, if Manchin had voted no while Collins had voted yes, Kavanaugh would have still been confirmed, with Manchin suffering electorally in his red state and Collins gaining support from Maine Republicans by being the deciding yes vote. Collins and Manchin thus pursued their dominant strategies of voting yes, likely leading to some positive electoral outcomes for both of them, although less positive than in the former two scenarios of being the deciding yes vote. Once Manchin knew that Collins was voting yes, his best choice from the remaining options was to also vote yes, rather than voting no and suffering electorally for Kavanaugh to still be confirmed.

However, I believe that both Collins and Manchin voting no might have been the more "efficient" outcome for their respective electoral interests. First, Collins has been a senator of Maine for over 20 years now. Although many of her supporters favored Kavanaugh, most of her state did not. Furthermore, the Maine People's Alliance had raised $1.8 million to fund Collins' future Democratic opponent if she voted yes (and gained $1 million more just after she announced her decision). Therefore, although Collins consolidated Republican support by voting yes, I believe that she had less to lose ($2.8 million to her opponent less, to be exact) by cooperatively voting no. Although Manchin's situation was different as a Democrat, he also might have benefited more by cooperatively voting no than by cooperatively voting yes. While West Virginia is a largely Republican state, West Virginians tend to support Manchin as their former governor and a strong proponent of healthcare. Manchin also had a 12-point lead in his Senate race going into the vote. While he would have lost some of this lead by voting no, I believe that cooperatively voting no might have been less detrimental than voting no alone, and in fact more "efficient" than cooperatively voting yes. Manchin also had more to lose by voting yes, less so from his constituents than from his party. In defecting from the Democratic party on this key vote, Manchin risked losing DNC funding and Democratic leadership positions within the Senate, as well as increased his chances of facing a Democratic primary opponent in his next election, a primary he would likely lose as a moderate Democrat. In my opinion, while the Republican support they would have galvanized by being the deciding yes vote would have counteracted the consequences of voting yes I just explained, collectively voting yes (resulting in the aforementioned consequences and less energized Republican support) was less efficient than collectively voting no.

The Rationality of the 2016 Republican Primary

This week in my Civic Leadership class our Professor briefly touched on Condorcet’s Paradox. After getting extremely excited because I knew what she was talking about, I looked up the article she referenced in class. Last Monday we spoke of Condorcet’s Paradox with respect to policy results; this article was interesting in that it spoke of Condorcet’s Paradox with respect to election results. Written in May of 2016, the article struggles to understand how, in of a field of 17 qualified candidates, the two most unfavorably rated ones, Donald Trump and Ted Cruz, were the frontrunners for the Republican nomination. It tries to think of the Republican Party as an alliance of conservatives, moderates, and populists, and uses Condorcet’s Paradox as an explanation for why individually rational preferences can manifest as collectively irrational.

	Conservatives	Moderates	Populists
1st	Conservative	Moderate	Populist
2nd	Moderate	Populist	Conservative
3rd	Populist	Conservative	Moderate

The article cleverly uses Condorcet’s Paradox to explain how Donald Trump and Ted Cruz became the Republican front runners, but it makes a few problematic assumptions and ignores quite a few important factors. I’ve written the table as the preferences were explained in the article, where moderates prefer a populist to a conservative, populists prefer a conservative to a moderate, and conservatives prefer moderates to populists. Given the unique personalities in this past election, I believe this assumption, not backed by data, simplifies the process by which members of each group (conservatives, moderates, and populists) ranked republican candidates, and that it is very likely preferences were not homogenous within the voting blocks. By this logic, only the order in which the candidates were presented should have affected the outcome, and I think it is rather obvious that there were many other factors that propelled Donald Trump to the GOP nomination. After trying to understand how this situation could be an example of Condorcet’s paradox when there was no clear order of candidate presentation that favored the Trump/Cruz outcome, I realized that it’s possible this is not an example of Condorcet’s Paradox at all. I think the fundamental assumption of this article, the polls that described Trump and Cruz as the most unfavorable Republican candidates, might not tell the full story. Opinion polls can be extremely unreliable, and in this past election we learned that they do not always accurately reflect the sentiment of the voting population. I think it is very possible that what some considered to be the irrational rise of Trump and Cruz might have just been the rational result of voters expressing their preferences.

Recognizing the effects of Tiebout in the Commonwealth

Bill Stanley, a Republican state senator from Franklin County, is leading a subcommittee that will look into modernizing Virginia’s public schools. Many of Virginia’s public schools are so old they’re crumbling: in 2016, for instance, a five-pound piece of ceiling tile fell on the head of a fifth grader at George Washington Carver Elementary School. While 52 percent of Virginia’s schools are more than 50 years old, many are brand new. In Arlington, Washington-Lee High School’s newest building is less than a decade old, complete with an aquatics center and sprawling sports fields. Why do we see such startling differences in the quality of school buildings across localities?

These differences reflect the insights of Charles Tiebout’s 1956 model: localities compete for consumer-voters, offering different bundles of public goods and taxes. This competition leads to more efficient matching of localities and consumer-voters than a centralized system could provide. Of course, Tiebout’s model relies on many assumptions that just don’t hold up in the “real world.” People can’t move where ever they want, they can’t do so at no cost, they don’t have perfection information, et cetera. In other words, there’s friction. But there is some strong evidence to suggest that “Tiebout sorting,” or  “the sorting of households into neighborhoods and communities according to their willingness and ability to pay for local public goods,” does occur. In a 1999 paper, Sandra Black compared homes on the boundaries of school districts and found that parents are willing to pay 2.5 percent more for a 5 percent increase in test scores. Maybe the differences in Virginia schools are efficient—imagine two families of equal incomes, but Family A values school quality very little and Family B values school quality a lot. Family A chooses to live in GWC's school district, and Family B chooses to live in Arlington. If Tiebout sorting leads to an efficient distribution of public goods, then efforts to reduce inequality across school districts may reduce efficiency, and could result in other negative effects, as well. For instance, a school finance reform effort in Texas “reduced the spending gap between Texas' property-poor and property-rich districts by $500 per pupil, [but it also] destroyed about $27,000 per pupil in property wealth.” Tiebout teaches us that we must strike a delicate balance between equity and efficiency; as Bill Stanley and the Virginia legislature work to improve schools, they would do well to remember Tiebout’s model and its real-world implications.

Mandatory Voting in Ecuador

Voting in Ecuador is mandatory for citizens between 18 and 65 years old. This is enforced through fines and legal restrictions. As a consequence it is rational for an Ecuadorian citizen to vote since the costs of not voting are higher than those of voting on Election Day. The reasoning behind mandatory voting is that voting is considered a civil duty more than a right, strengthens the country’s democratic foundation, and according to representatives of the National Electoral Council, Ecuador’s democratic and civic values are not solid enough to hold voluntary voting. Additionally, mandatory voting allows for minorities and marginalized communities to participate in public decisions. 

Given Ecuador’s political instability, I believe Johnson’s argument of rational ignorance does not hold for the entire population.  For the high and middle class, I believe that the country’s political instability and limitless authority of the government is an incentive for voters to gather all the information possible before casting their votes. In addition, geographical and societal proximity to the economical and political niches decrease the cost of being informed. However, it is different for lower income and rural voters. Their expected benefits from a specific candidate’s victory are small while their cost of being informed are very high due to the lack of education, technology and other factors such as distance. These voters are easy to convince and influence, and represent a large percentage of the voting population. As a result, in Ecuador’s election process Johnson’s idea of a poor quality of issue related information holds. Candidates have an incentive to distort and limit the information presented to voters, especially those in the lower income brackets, with less education and knowledge about politics.

Mandatory voting does not necessarily help Ecuador’s democracy as politicians can keep away information from voters because they can target low-income voters who choose to be ignorant. A solution to this problem would be to improve education across all socioeconomic classes so that voters are better equipped to make a political decision.

Subscribe to Spotify Premium? More Like the Spotify Club

The other day, I was living my (relatively) simple life, balling in the fine institution better known as Memorial Gymnasium, when a voice interrupted my lovely music, informing me of the new Spotify Premium for Students, now coming packaged with Hulu AND Showtime. At the fine low price of $0.99 a month for the first three months, followed by only $5 a month afterwards, I certainly thought of signing up, especially since I am not part of the 2% of free users who modify their accounts to avoid ads altogether. While this certainly got me thinking about the economics of bundling, in material more interesting and relevant to the economics of public choice, it also got me thinking of Spotify Free and Spotify Premium as a public good.

A public good is is a good which is non-excludable and non-rivalrous. Non-excludable means you cannot deny someone from using the good and non-rivalrous means one person's consumption of a good does not affect another's consumption of a good. Free Spotify accounts are non-rivalrous, as my consumption music streaming does not affect yours, and they are largely non-excludable, for as long as you have a computer of some sort with an internet connection, you can create an account and stream music. While Spotify's is broadly non-excludable, features such as unlimited skips, no ads, and the ability to listen to any song you want on mobile phones, are locked behind the paid subscription service of Spotify Premium. The reason this exists is because of the free rider problem which plagues public goods. In the context of Spotify, different individuals gain different amounts of marginal utility from every "unit" of music streaming. Working under the assumption that every unit of music streaming has the same marginal cost, there is an allocatively efficient point where the social marginal benefit of music streaming is equivalent to the social marginal cost of music streaming. Without some form of cooperation, a group will default to an allocatively inefficient output where the social marginal cost is equal to the personal marginal benefit of one of the individuals who has a relatively higher marginal utility per unit of music streaming, thus resulting in an underproduction of music streaming. 

While having ads on the "free" version of Spotify helps overcome some of the costs of the free rider problem, the best way to overcome all of these costs is to create a "club" out of the fully-fledged version of the service. Per Buchanan's theory of clubs, such arrangements are able to better provide public goods nearer to the allocatively efficient outcome by adding an element of exclusivity. Goods are not simply either "public" or "private", but instead fall along a continuum of "publicness" based on exclusvity. As such, "free" Spotify with ads is more "public" and therefore less "exclusive" than Spotify Premium, which, in being behind a paywall, is closer to the allocatively efficient outcome through avoiding the free riders who do not want to pay for all the services that come with Spotify Premium. In a perfect world, Spotify would be able to charge users according to how much they would be willing to pay based the point of allocative efficiency, but because of the difficulties that come with preference revelation, the compromise of between the very public "free" Spotify and the exclusive club-like nature of Spotify Premium is a great way to prune out free riders who would otherwise take advantage of the many features available in the "complete" version of Spotify.

Could Millenials "Kill" American Politics? Or Is It Already Dead?

We live today in what may be one of the most polarizing times in American Politics. What if Millennials "killed" this polarization? Millenials could kill American politics, but only "if they cared to", according to a new article by CNN Article. American politics are dead and need to be revived into something of greater integrity. So, how should Millenials kill American Politics? The Millenials have started this process by not voting in great numbers. This may make Millenials the most rational generation yet! They know how low that little p value is, and they don't value either candidate at a great difference. Even +D is low! This group doesn't get much utility from voting, doesn't feel it is their civic duty, they estimate little p correctly, and guess what, they are very rationally ignorant. The marginal costs of knowing so much about so many political issues is so high, with all the marginal benefits of them being so low. This group cares about their student debts, high rental prices, and expensive insurance because knowing about these things provides them with great marginal benefits.

While this lack of voting by Millenials is rational, we must make voting rational in order to return to a more stable society. We must increase +D with expressive utility. This is something that the Millenials will react to, considering their heavy use of social media platforms. Assuming that this will cause a great voting increase in millenials, and considering the Baby Boomers die off, it is predicted that by 2020 Millenials will be the greatest proportion of America's population, and therefore have a great amount of voters and vast influence. This has policy implications that are drawn out below.

A and B are the Republican and Democratic parties right now, respectively. The X_1 axis represents liberal policy whereas the X_2 axis represents conservative policy. S_o is the status quo, which moves onto the contract curve between A and B, which is nothing new. I predict that the Republican party will become more centrist, maybe even slightly more liberal, than they are now once a spike in Millenial voting happens because the Millenials generally care more about social insurance, the environment, health care, ect, which is represented by the move from A to A'. As for the Democratic party, they will take a less drastic move up to B', showing a more centrist approach to liberal politics because in general, Millenials do not trust the government or respect traditional institutions as much as their preceding generations, shown by their low amount of people married and their low amount of people involved in religious practice. During this change, policy S will slowly move to S', which is not drastic. However, since the centers of the two circles are less far apart from A' to B' in comparison fro A to B, the two parties have greater utility, leading to the end goal of less political polarization and greater utility for both parties. This leads me to believe that minimizing the area within the two circles around the two party points at a tangent point between the two circles is essential to repair the American social fabric.

Article

Free Riding Away From the Voting Booths

After the confirmation of controversial Supreme Court nominee Brett Kavanaugh, my Twitter timeline was full of fired up people ready for a Democrat takeover in the upcoming midterm elections. One of my friends tweeted: "VOTE. Don't say "oh someone else will do it" because they won't." I take her point to be that change will not come unless we all get out and vote.

As we learned in class, Johnson has a big problem with this belief. He showed us that the chance of our individual vote affecting the outcome of an election is basically zero. If that's the case, why is my friend so convinced that change won't come unless everyone votes? One of the big dangers of high expectations of voter participation is the free rider effect. Because voting costs are so high compared to expected benefits, the safer one feels in their candidate's victory, the less likely one is to actually show up to vote. Current polls show that 72% of Democrats are "very motivated" to vote, and that Democrats "maintain a slight edge in the generic ballot" on the POLITICO/Morning Consult poll.

Now, let's assume I am someone who is extremely passionate about the election, but the cost of voting is very high for me. I go on Twitter and see many of my followers enthusiastically proclaiming their commitment to vote in November. I take a look at opinion polls, and see that Democrats are predicted to take control of the House and the Senate. Given all these factors, I decide not to vote because I assume everyone else will show up, and my vote is not needed. While it is true that my individual vote will almost certainly make no difference in the election outcome, if many Democrats come to the same conclusion about voting, the outcome will not be what I expected. Voting is subject to the same dangers of free riding as the market is. Because it is anonymous and no one can confirm whether someone voted or not, those who feel their absence will not be noticed or make a difference will not show up. If a large number of people attempt to free ride, just like in the market, the outcome will be affected and differ from what it should be. Republican voters on the other hand, will most likely not be subject to free rider effects. Their incentive to free ride is much smaller because the polls show them trailing behind. When losing, "every vote counts" is extremely convincing even though it is not technically true. While I'm pretty sure my friend wasn't thinking about Economics while crafting her tweet, her point is valid considering the dangers that arise from free riding.

The Flopper's Dilemma

While watching football this weekend, my roommate and I got into a discussion about which professional sport is our favorite to watch on TV.  While I prefer the NFL and NHL myself, my roommate is an avid NBA fan. The conversation eventually got around to one of my biggest complaints about the NBA; the flopping. It's gotten to the point where even the most minimal contact between two players ends with arms flailing and someone falling down, hoping to draw a call from the referees. This got me thinking about why flopping has become so widespread in sports like basketball and soccer and I believe it is an example of the prisoner's dilemma.

When two players (A and B) come into contact with each other they each have two options: to flop or not to flop. The table above shows these choices and the respective benefits to each player. If neither player flops, the play will continue on with no interruption and neither player better off than the other (0,0). If player A doesn't flop, then player B has an incentive to flop in order to get player A called for a foul and gain an advantage for his own team by shooting free throws(-2,1). The same is true for player A when player B does not flop(1,-2). This leads to a dominant strategy of flopping for both players. When both players follow their dominant strategy and flop, they end up both being laughed at on countless TV programs the following day as well as hurting their reputations as respectable players(-1,-1). In this case, the dominant strategies lead to an equilibrium where both players attempt to flop and end up worse off than if they had both decided to play fair and not flop.

As the ruling body or "government" in this situation, the NBA has decided to impose fines on those players who are caught flopping in an effort to move towards the preferred outcome with no flops. Despite these fines, sometimes players still decide to both flop, resulting in one of my favorite sports phenomena, the double flop: