Big Government Cheese

As I was catching up on some of my favorite podcasts this weekend, I learned of the time when President Jimmy Carter decided to help American dairy farmers by buying lots and lots of cheese. The podcast from Planet Money, called Big Government Cheese, details the story of how the government, in order to raise the price of milk, bought tons and tons of storable dairy products like butter and cheese. By offering to buy any amount of cheese at a certain price, the government created a price floor which increased the demand for cheese and, resultantly, the demand for and price of milk. This program, clearly inefficient, cost taxpayers over $2 billion and created a huge problem for the government in terms of storage. Since the government had a huge surplus of stored cheese, they had the equivalent of 2 pounds for every American stored in caves in Kansas, they began giving it to food banks to avoid flooding the market. As a result, millions of Americans began eating “government cheese.”

This story reminded me of many things we’ve talked about in class, but most specifically of externalities. By artificially setting the price for milk through buying cheese, the government manipulated the dairy market and crowded out potential milk drinkers because the price was too high. When the government realized they had created this problem, they paid farmers to stop producing milk to decrease supply and started marketing campaigns like “got milk” to increase demand.  For this reason, the government created a positive consumption externality because the purchasing(consumption) of all this cheese led to the creation of public health campaigns to increase milk consumption which is beneficial to public health.

Stadiums as Public Goods

It is very common for professional sports stadiums to be at least partially funded by taxpayers and the local government.The proponents of this funding argue that stadiums generate jobs as well as income for the area by attracting fans for sporting events and concerts who will in turn support local businesses around the stadiums. Is the decision by local governments to treat these stadiums as public goods  a reasonable choice?

Looking at the two basic characteristics of a public good, it is easy to see that stadiums are definitely not purely public. Every event I have ever been to at a stadium has required a ticket in order to enter the stadium. If you don't have a ticket there is no easy way to get in. This clearly shows that stadiums are excludable. When it comes to whether or not stadiums are non rivalrous it is a little bit trickier. Generally one extra fan watching a game or concert with me does not affect my experience. As the number of other people consuming the event with me increases, however, at some point it starts to negatively affect me when I can no longer see or get a seat. In addition to not satisfying either the non-excludability or the non-rivalry requirements to be deemed a public good, I believe the other arguments for public funding of stadiums are also overstated. Many of the jobs they generate are jobs such as ushers and concession workers at events. These jobs work far less than 40 hours a week and are rarely enough to support someone by themselves. The other benefits that these events bring are largely given directly to the sports team or owners of the stadium and not redirected into the local economy. Fans often spend their money on concessions and at the team store, not in local restaurants and shops as the proponents of the funding would have you believe. The events at the stadium also almost always require increased spending on police for traffic and crowd control as well as increased public transportation. These costs further decrease the benefit of the stadium to the local economy and add even more reasons why I don't believe these stadiums should be treated as a public good.

Confessions of a Rent Seeker

This summer, I worked for the Office of Economic Research in the Small Business Administration’s Office of Advocacy. Whenever other federal agencies create a new regulation, they have to (by law) take the effect on small business into account, and the Office of Advocacy represents those interests in Washington. Coming from a small town brimming with small businesses, I thought my work to promote smart, small-business friendly regulations was noble--that is, until Mr. Coppock’s lecture on rent-seeking a few weeks ago. The Office of Advocacy works to promote regulations that benefit small businesses. In some ways, this is an example of rent-seeking. Rent-seeking is when resources are spent to obtain rents which derive from socially wasteful activities.

This summer, the FCC considered a petition from US Telecom to change a 1996 regulation concerning copper wires. I won’t get into the details here, but we can say that big firms wanted the regulation to change and small firms wanted the regulation to stay the same. At one particular meeting, we had 12 different representatives from 12 different small telecommunications companies present. I imagine that each of those companies flew those representatives out from across the country, put them up in hotels, paid for their meals, etc. On the other side, US Telecom commissioned a study to investigate the effects of the regulation change. I’m sure this study cost thousands of dollars. In short, all the companies involved in this issue spent money that did not create any value. After all those socially wasteful activities, the FCC decided not to change the rule after all. In the future, I hope the Office of Advocacy will focus on creating a healthy, competitive environment, one into which small businesses can freely enter. These kinds of regulations, rather than ones which merely transfer rents from one group to another, will optimize social welfare.

One Coase-y Wednesday Night in the ER...

I am in debt to Economics for many reasons, but this week I’m especially grateful. From Tuesday to Friday, I battled an aggressive virus due to which I ended up in the hospital and student health a total of three times, was hooked up to an IV to receive intravenous fluids twice, and was given lots of pain meds. On Wednesday night, my roommates drove me to the emergency room. I was severely dehydrated and in serious pain, but the ER was crowded, so after briefly seeing the doctor, I was left on a hospital bed behind a curtain and told to wait with an IV that wasn’t connected to fluids or pain meds. As the pain and dehydration worsened and the minutes ticked by for a half hour, I called to the nurses through the curtain, but was always told that the medication was coming...in a minute. I was starting to give up hope, as I had heard horror stories of waiting hours in emergency rooms, which seemed to be perpetually overcrowded and understaffed. 

When my moans of pain prompted a nurse to remind me to press the call button and be mindful of my noise level out of respect to the other patients, I was mortified that these involuntary expressions of pain were affecting other patients...but then the economist inside me realized that I had leverage. I thought back to Coase and realized that these moans of pain were a negative externality—an involuntary expression of my sickly status. 

The situation was virtually economically ideal, as the assumptions of the Coase theorem were nearly completely satisfied. We had almost perfect information (although we didn’t know exactly how quickly or how effectively I, and therefore the moans of pain, would respond to the medication), and property rights were also clearly delineated, as the doctors were clearly the ones possessing the medication and as a patient, I had a right to stay in that bed until I received care. I knew that the key to Coase’s theorem was that regardless of whether or not I was at fault for the externality (could I be blamed for my aggressive virus?), if the social marginal cost of my moans was less than my social marginal benefit as a producer (this isn't a perfect example, but as a patient in an ER, I was producing nothing other than my own human life that the doctors had determined was worth preserving), then we would come to an agreement to remedy the externality through a bargain that presumably would involve the pain medicine entering my IV.

Without any further bargaining, I was given a dose of medication, and after a few more minutes of suffering was sweetly and silently asleep. Thanks to Coase and his solution for coping with externalities, I was able to get through the night—and even slept through a screaming patient with a broken leg next to me whose screams, I was later told, were a negative externality much more concerning. 

Everything's Different in Texas, Even Liquor Prices

I thought I’d have some fun with my last blog post and discuss one of my favorite topic genres: differences between Texas and Virginia. During last Monday’s class, we discussed how the state of Virginia has set prices for every alcohol sold in its stores. The state imposes this price floor in the name of public interest and benefits from the tax and sales revenue. The liquor manufacturers benefit from the barriers to entry imposed and decreased competition. Do Virginia’s laws make liquor more expensive than in other states? I happen to know that I can buy a 1.75L handle of Tito’s vodka for as low as $28 in Texas when it often costs about $40 in Virginia, and I want to know why these prices differ so drastically.

According to a 2013 study, liquor prices in state-operated stores, where the state has a monopoly, tend to be $2 higher on average than in states where liquor stores are licensed. Virginia has state-operated stores, while Texas has licensed stores, so this difference could account for around $2 of the spread in prices. Further, out of all 13 state-operated states, Virginia has the 2nd highest average mean and median prices, but this still does not explain the $12 Tito's price spread.

The map below illustrates the State Spirits Excise Tax Rates in dollars per gallon in 2013. While Texas imposes a tax of $2.40 per gallon, Virginia's tax is $20.56 per gallon, which is the 3rd highest state liquor tax rate in the country. I would think the law of one price and the no-arbitrage principle would necessitate that liquor prices, and taxes, at least be more closely aligned, but this is clearly not the case. In fact, most of the states with the highest taxes also have state-controlled liquor stores, which again makes sense, but I still do not understand this $18 difference in taxes.

After accounting for transportation costs, the fact that Tito’s is made in Austin, and that Texas generally has more lax laws regarding alcohol than Virginia, I now have a better understanding of why Tito’s specifically, and all liquor in general, is more expensive in Virginia. Virginia’s liquor laws were imposed after prohibition, so the laws are supported by temperance groups and groups like MADD. Not only does the state bring in at least $230M in revenue from ABC stores, it also has the support of interest groups that see liquor as a public bad, which allows the state to impose both higher prices and higher taxes on liquor. 

Flappy Golf Coasian Solution

During this past cross-country season, one of my teammates went back in his iCloud archive, and he came across a game by the name of Flappy Golf. He brought the game back to life, and soon enough, the whole team had Flappy Golf syndrome. Well, most of us at least. I for one was not a huge fan of the game for a couple of reasons. I think the game is extremely boring and super repetitive, but worst of all, everyone plays the game whenever we van out to a location to run. Whenever we van out, there are two options to choose from: a Mercedes van and an inferior Ford van (this will be important later). We generally leave fairly early in the morning meaning sometime around 6:30 or so. I am not awake at this point, but this game somehow gets the morning going for everyone else. Everyone that does play the game does so in the Mercedes van which happens to be the same van I like driving in the most. Due to the competitive nature of the team, there is a lot of yelling when people win, lose and talk trash. Waking up is hard enough and adding this to my morning makes it even harder to cope. I expressed my concerns, but my efforts were to no avail. I was in need of a Coasian solution in order to correct for the negative consumption externality.

The first step in doing so, I needed to figure out who exactly was liable. I took it up with my coach the next morning, and I thought for sure that he’d felt the same way about the game as me. I was very much wrong. He enjoyed the competitive nature of the game, and he enjoyed how everyone was so competitive with the game. Plus, at this point, he generally wakes up at 5 am every single morning meaning he is already wide awake. It had turned out that I was the one liable. There were only two things that I could do. I could have either figured out a way to get everyone on the team to stop through some sort of payment, or I needed to go to the inferior van. After asking around, I had learned that if I were to pay them, I would’ve need about 1 million dollars. I know this was exaggeration, but this was also them saying “we are not going to stop playing”. Since the marginal cost out-weighed the social marginal benefit, the Ford was the best option for me. Though I got away from the game, it came at the cost of riding in luxury. There is always next year.

Please Silence Your Cellphones

Recently, I went to the movies with a friend. Right before the movie started, there was a video asking everyone to turn off their phones and to be respectful to others in the theater by not talking during the movie. This video is pretty standard protocol for most theaters. It's an attempt to reduce the negative consumption externality that others experience when a movie goer won't stop using their phones. The Atlantic articulates the extent of the effects of cellphone use in the movie theater quite well. They explain that cellphone use "doesn't just distracts someone's seat-mates; the annoyance of a screen lighting up is unavoidable to anyone in the rows behind the phone user as well." Many complain that the actions of others in a movie theater ruin the movie experience because it takes them right out of the story.

Personally, phone light in the movies does not bother me that much, but I have a friend who refuses to see movies in theaters because of cellphones. She always says that she doesn't want to pay $13 to watch someone scroll through Facebook; she is not the only one that feels this way. Many people opt to stay in and watch something on Netflix or another streaming service instead of going to the movies. In order to compete with streaming services, theaters need to reduce the cost of going to the movies. The previews asking movie goers to silence their cellphones is one attempt to lower the negative consumption externality, but is it enough? My friend certainly doesn't think so. Movie theaters will have to try something else since many are unsatisfied with their attempts thus far. Some possibilities include decreasing the price of movie tickets or beginning to strictly enforce their no cellphone rule. As things currently are, movies are being overproduced since marginal social benefit is less than private marginal benefit. It is possible that a Coasian solution could be employed here as well. If my friend really wanted to enjoy a movie without people using their phones, she could offer to pay others to not use them. However, I'm pretty sure my friend would have some complaints if I suggested she pay the very people in the movie theater that upset her the most...

The Prisoner's Dilemma of Thanksgiving Political Debates

As I prepare to leave Charlottesville for Thanksgiving this coming week, I look forward to spending time with family as well as reconnecting with hometown friends. However, with Thanksgiving comes perhaps the most unsavory holiday externality this side of being single on Valentine’s Day: political debate at the dinner table. I’m not quite sure what about turkey, stuffing, and being thankful for stuff provokes heated ideological debate between opinionated family members; perhaps it is proximity to election time, or the tendency of the holiday to bring together family members from far-away branches of the family tree, even more so than Christmas. Either way, it’s such a well-recognized phenomenon that many publications make it a tradition to prepare debate guides, from CNN, to Bloomberg, to… Barstool Sports?

               This tradition has indeed become such a fixture in Thanksgiving proceedings that a prisoner’s dilemma has been created, forcing family members to participate in political debate. I believe this is because there is a significant advantage to instigating political debate, and dragging others into it: if one family member engages and one does not, the person choosing to engage is able to take moral high ground, establishing their political views as uncontested and taking jabs at the opposing party without opposition. This becomes a nuisance for members of a party that chooses not to engage. However, if both parties engage, other discussions are consumed with political hostilities, and the quintessential American magic of a thankful family coming together to share a meal is disrupted as arguments proceed.

Republican family members\Democrat family members	Don’t engage in political debate	Engage in political debate
Don’t engage in political debate	3 \ 3	1 \ 4
Engage in political debate	4 \ 1	2 \ 2

              

Despite this prisoner’s dilemma, other family members often act as the government that forces a pareto efficient move. By forcing particularly opinionated family members to “not bring up politics again this year” a collective effort is made by the rest of the family to ensure civilized discourse.