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Thursday, September 19, 2019
The Positive Externalities of Running with Pres. Jim Ryan (plus free Bodos)
Story time, so earlier today I decided to get up out of bed at 6:15 a.m. Why would I do this given I mostly stay up until midnight on weeknights? (I promise I am usually studying) Well, it turned out President Jim Ryan (who definitely did not steal Professor Coppock's idea) was hosting one of his morning runs at Madison Hall with the CIO #HoosGotYourBack at 7 a.m. Though at first my grogginess from awaking so early appeared to, in economic terms, reduce my utility, the free Bodo's, free coffee, and a free #HoosGotYourBack t-shirt made it all worth it, at least for me. After getting back to my apartment, I noticed that there was a positive production externality deriving from the free goods I consumed. However, one of the most important foundational lessons in economics as a discipline is that nothing is technically "free" given the scarcity of materials and factors of production. Even though I did not have to pay anything for the "free" coffee, bagels, and t-shirt, I still derived utility from my consumption. This a good example of a positive production externality assuming everyone else there also derived utility from the goods provided at no cost to the final consumers (and also the releasing of endorphins from running).
The result of this is a dead weight loss and an increase in consumer surplus since I and most likely all the other attendees would have been willing to pay more than $0 for the goods provided. However, even though a "positive production externality" has a positive ring to it, as mentioned before there is a dead weight loss the producer bears. In order to internalize this, there must be some kind of subsidy in order to move the allocation of goods from Q1 in the graph above to Q2, which would be the allocatively efficient outcome (Q_AE). This situation implies an underproduction of the Bodo's and t-shirts provided. Internalizing the costs through subsidies would help bring the total quantity produced back to the socially efficient quantity of production.
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3 comments:
Hi Alec. I enjoyed your blog! After reading it, I just started to wonder whether there is really deadweight loss that the producers have to bear in this situation. The producers seem to be Bodo’s and the company that printed the t-shirts. Presumably, President Ryan’s team or the CIO either purchased the bagels, coffee, and shirts or had these items donated from Bodo’s and the t-shirt company. If President Ryan (et al) purchased the goods, then the producers were compensated and do not then have any deadweight loss to bear. If the companies donated the goods, then they must have done so because they determined the benefits of generosity to exceed the costs for them. Maybe Bodo’s and the t-shirt company wanted the publicity and promotion this event would provide them, so that donating goods actually provided net benefit to them. Do you think that, despite these considerations, the producers still had costs that needed to be internalized?
Hey Morgan, I understand what you are saying. I do agree with you that because Bodo's was compensated in the transaction between Bodo's and the purchaser (I am assuming it was #HoosGotYourBack), there was no positive production externality on that end. However, though I should have outlined this in my original post, I was more focusing on the transaction between the event and me, the consumer. Aside from getting up early in the morning, I did not have to incur any cost from consuming the food and acquiring a t-shirt. Because I derived some utility in form of eating breakfast and getting a cool-looking shirt, I benefited while simultaneously not paying the event organizers. It's kind of like the example brought up a few weeks ago (forgive me because I am going to use Bodo's as an example again). The delicious smell of bagels and coffee when walking down the Corner may give some pedestrians utility. That smell is a byproduct from transactions that Bodo's is already being compensated for: people buying food and drinks. However, the people walking down the street outside are not part of those transactions, yet they benefit while offering no compensation for that benefit. Going back to the President Ryan event from Thursday, we can apply the same principle. Despite the event organizers compensating Bodo's for the production of the bagels and coffee, I did not as a consumer help offset the costs that the event suppliers undertook. Because of this, there are external costs that theoretically must be internalized on my end for my enjoyment through consumption of the goods.
If Bodo's donated the bagels and coffee to the event, it is definitely a different story. I was assuming that #HoosGotYourBack paid for the goods and provided them for the community's enjoyment. Sorry if this was long-winded, but thank you for asking me to elaborate on what I tried to convey!
Thanks for your response! Yeah, let's assume that #HoosGotYourBack did pay for the goods which they then provided at the event. I know that you didn’t make any monetary payment for the bagels, coffee, and t-shirt, but you did wake up early and take time out of your schedule to attend the event. By doing this, you, in a sense, compensated #HoosGotYourBack for their purchase of the food and shirts. They wanted people to attend their event, so they offered these goods as incentives. You wouldn’t have received the goods had you not shown up at the run. So, I guess I’d argue that the private marginal cost (the cost #HoosGotYourBack incurred by purchasing the goods) does not exceed the social marginal cost (the time cost of those who attended the event) in this situation. Rather, I think the PMC probably equals the SMC. If PMC > SMC, the CIO probably wouldn’t have purchased the goods. If SMC > PMC, you and others probably wouldn’t have attended the event. I could be wrong about this. This is just what I’ve come to understand while mulling over this scenario.
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