More Allocatively Inefficient Days May Be Ahead

Lobbying has become one of the most important and criticized industry in the United States. Firms spend an incredible amount of time and money, and therefore resources, to make sure that Capitol Hill has their best interest at heart. This is time and money that could have been spent on producing output. In fact, this may be the most obvious example of rent seeking that we see today. Unfortunately, this problem may become much worse in the coming months. 

According to a recent article, lobbying groups may face more challenges if a "blue wave" occurs. A Biden victory would bring new aides, administrative officials, and, since most people vote straight ticket, congresspeople into Washington. Given their lack of experience in the national political arena, these newcomers may be less receptive and cooperative with lobbying groups than the current lawmakers in power. Lobbying groups have already had to put in extra resources since the onset of pandemic; instead of meeting in-person, meetings must take place over Zoom. It is often harder to make a personal connection over a virtual platform than in person. Impressing newcomer politicians over Zoom will be an incredibly time consuming and expensive process, and we can expect more resources to be spent on these efforts. Since more money will be spent on rent, rent dissipation will increase. 

This will also have another negative effect. It is rational to assume that political outsiders try to get elected so they too can enjoy the economic benefits from doing business with these special interest groups. If lobbyists are spending more time and money on this endeavor, these outsiders will spend more time and effort on winning federal elections to gain access to these resources. This, combined with the initial effect, may result in a considerable deadweight loss.

Rent Seeking and Supreme Court Nominations

 While a typical rent-seeking example might apply to a corporation contributing to a politician's campaign to pass some given piece of legislation, this is just a first-order rent-seeking example. US Senators have more to offer rent-seekers than just legislation: they have power over Supreme Court nominations, nominations that can long outlast any given senator. Due to the life-long appointments of Supreme Court Justices, the expected value to a corporation of a given Justice is much higher than that of a member of the US House of Representatives.  However, due to the inability to directly contribute to nominees to secure their appointment, senators act as intermediaries in this process.

  By donating to senator's campaigns, corporations (through interest groups) are spending large amounts of money to get some benefit from the Justice's confirmation. Since this is just a transfer of wealth from the status quo to some alternative legislative ruling, it is a clear example of rent-seeking. Despite the fact that the nominated Justice is not involved in the transfer, this also represents a case of an externality as a result of the transfer, since the nominee's odds of confirmation go up as a result of the donations. This combination of the two can help to shed some light on the Supreme Court's decision in Citizen's United v. FEC (2010), as it allows for future nominees to benefit from the externality that results from corporate rent-seeking with senators.

Vote (With Your Feet) for Charlottesville

This morning I ran on the AT with my little brother on a section just a little south of Humpback Rocks. When we parked, we were one of two cars in a "parking area" which was designed to fit 2 or 3 cars. When we finished our tenth mile and returned to our car 2 hours later, there were at least 20 cars squeezed off the side of the road to park there. When we drove north to go back home, we passed the Humpback Rocks parking areas, all of which were full. I'd estimate there were at least 120 cars there, and there were dozens of cars lining the edges of the Blue Ridge Parkway. This made me think about how people's choices to hike en masse on Saturday mornings are an expression of preferences that is a form of voting. People in Charlottesville, Waynesboro, and surrounding areas have strong preferences for hiking, and what's great is that our local and state governments know it and have spent money on trails and trash cans and visitors' centers and parking lots to enable hiking. Not only that, but they've also secured federal money through the Highway Trust Fund and the National Park Service to preserve roads. This reminds me of how local governments in Tiebout's theory compete for consumer-voters so public goods are provided at the right level. Charlottesville certainly has had my family's vote for the past 30 years, and I'd say the public goods provision of hiking opportunities has something to do with that. 

This could also mean that people, in the age of the coronavirus, might soon consider moving to places with better hiking opportunities, because outdoor activity is a great way to reduce exposure to COVID-19 while having some fun, and hiking trail usage seems to be up to about 3x what it was in previous years. That means the optimal amount of hiking trails provision may be on the rise, and people may move to places like Charlottesville until other local governments catch on and catch up. 

Why is my Candy Bar so Expensive?

 As someone who is constantly suffering from a sweet tooth, I saw it necessary to address an issue I have been noticing since my public choice class- why is my candy bar so expensive? The answer I found is that the U.S. has tariffs and import restrictions on sugar which makes sugar cost twice as much in the U.S. than the rest of the world. The purpose of these tariffs is to keep farmers and sugar processors employed in the U.S. In the article attached you will see that the U.S. has a long history of trade protectionism for American sugar producers through these tariffs and restrictions. The foreign cost of sugar is less than 15 cents per pound yet the domestic price is more than 25 cents per pound.

The tariffs increase the cost of the candy but do nothing to increase the value. Sugar at half price in other countries tastes the same as artificially high priced sugar in the U.S. There is a cost to rent seeking that doesn't add any economic value. In "The Welfare Costs of Tariffs, Monopolies, and Theft", Gordon Tullock explains that the main costs come from the waste of resources used when people strive to get these rents. Some of these costs include lobbyist salaries, rent, lawyers, etc. This all adds to the cost of my candy and, unfortunately, it does not make it taste any better. 

Facing the Externalities Produced by the COVID-19 Lockdowns

    The COVID-19 lockdowns have become an ever-present part of everyone’s day to day lives for what feels like an eternity. This policy strategy was proposed as an effort to keep hospitalizations due to COVID-19 at a level that did not overwhelm the supply of medical labor and equipment as the world gathered information on the novel virus. However, seven months after COVID-19 was declared a national emergency in the United States, lockdown orders and lockdown-oriented policies implemented by local governments and businesses remain in place. Using data gathered on the virus, a group of medical experts consisting of Dr. Martin Kulldorf, Dr. Sunetra Gupta, and Dr. Jay Bhattacharya, who hail from  Harvard, Oxford, and Stanford respectively, take what I thought was an interesting analytical approach to try and prescribe a public policy recommendation for the COVID-19 pandemic. Dr. Gupta criticizes current lockdown measures saying that most of the thought behind generating these policies stems from the single-variable analysis of case numbers and trying to minimize just this one variable. These doctors focus their analysis on the production of herd immunity and how three different policies affect the outcomes and externalities while herd immunity is being produced. The group defines herd immunity as occurring when there is a level of immunity in a population that is high enough so as to benefit the vulnerable sections of the population. I thought this was an appropriate analysis to make considering the wide reach and effect of many current COVID-19 policies that many have come to accept as based in uncontestable scientific truth and reason because as any decent economist would recommend, one must also look at the cost of opportunities forgone when making spending decisions. Along with looking at the outcomes and externalities that occur on the road to generating herd immunity with different policies, they also propose what the appropriate Coasian solutions would be for minimizing the effects of the externalities generated.

    For the first policy, the do-nothing policy, the group looks at the effects of adopting a hands-off policy that lets people continue their normal lives. They propose that this would be as quick a path to herd immunity as the third, the targeted, strategy but would produce a less favorable outcome. This strategy would produce immunity faster while spreading infections evenly across the young and old during this time at the cost of more death of the old and vulnerable. The biggest externality from this strategy is the death of significant rates of the older population, but there is no available Coasian solution to this externality because they are analyzing an inherently hands-off strategy. Next, when analyzing the complete lockdown strategy, they conclude that the outcome from this strategy is a path to herd immunity that takes a longer amount of time to achieve while spreading infections more or less evenly across the young and old. Dr. Gupta points out that while many pushing for this strategy are emphasizing the importance of waiting for a vaccine that they are missing out on the importance of herd immunity in helping protect a population along with the protection provided by a vaccine. Because the lockdown strategy spreads the infections evenly across the population and prolongs the time period that it takes to reach herd immunity, the same amount of old people will still die from the disease. They also identify many negative externalities that have arisen with the implementation of this policy.  They point out that under complete lockdown restrictions in the US many health-related negative productions externalities have occurred as a result of this prolonged lockdown. There have been lower vaccination rates, lower cancer screenings, worse outcomes from cardiovascular diseases, and worsening mental health reports over the past several months. Anecdotally, the grandfather of my own friend had his surgery to remove a cancer tumor delayed by months due to regulations placed on hospitals in Virginia that forbid elective surgeries. Another outcome as a result of this strategy is the closure of many businesses and the loss of many jobs due to policies closing sections of the economy and limiting gatherings. The economic cost of complete lockdown is partly an externality and partly a direct result of the lockdown policies and leads to a worse outcome than the first policy and the targeted lockdown strategy. We have been able to witness the Coasian solutions for the lockdown policy over the past couple months, and these solutions have mainly focused on solving the purely economic externalities of the lockdown and not the health-related externalities. The federal government has greatly expanded unemployment benefits and provided relief for businesses through the SBA and the Paycheck Protection Program.  Next to nothing has been done by the government to find Coasian solutions for the health-related externalities. They also propose that a problem arises under the complete lockdown strategy due the fact that essential businesses tend to employ a lot of working-class older people. They say that under this strategy most of the burden for generating herd immunity is placed on the older working-class population due to the fact that they are the percentage of the population being most exposed to the virus. Also, anecdotally, having worked at two groceries stores over the summer, I can confirm that older working-class people are put at a more serious risk for getting the virus than professionals and younger students. The third policy they analyze is the strategy that they are recommending to US politicians which is the targeted lockdown strategy. The targeted lockdown strategy proposes that the government put into place measures to protect the older and more vulnerable sections of the population, such as increased testing and safety measures in nursing homes, while allowing the younger part of the population to gain herd immunity. The outcome from this strategy is a fast road to herd immunity while pushing the burden of this duty onto the younger, less vulnerable part of the population. They propose opening schools and businesses but not compelling people to take part in either offering homeschool as an option for those who do not wish to take part in person. A negative externality from this strategy is the fact that older people will be encouraged to stay home from work. The Coasian solution they offer for this is to take advantage of the present welfare systems in place such as Social Security to compensate people and businesses while the old are under lockdown.  I think the strategy proposed by the doctors is the least reckless of the three analyzed and cuts down on time it takes to generate herd immunity while protecting the vulnerable and mitigating externalities. (I found after writing this post that just recently the WHO has actually specifically heeded the advice of these doctors who signed this declaration and has asked its member nations, which of course will soon not include the US, to "stop imposing lockdowns.")

Rafael Nadal's Expected Marginal Benefits

 One of the many externalities of the coronavirus pandemic affected the world of professional tennis. Because of postponements and cancellations, the French Open was moved to October instead of May, only a few weeks after the U.S. Open in September. Because of the ongoing uncertainty and travel restrictions, some players felt they could not play in both tournaments. This situation reminded me of the discussions about voting in Johnson's Voting, Rational Abstention, and Rational Ignorance. Instead of a low expected marginal cost of voting overcoming an extremely low expected marginal benefit for each voter, each tennis player had a very high expected marginal benefit competing against a high expected marginal cost. Rafael Nadal decided to forego playing in the U.S. Open and play only in the French Open. I suspect his expected marginal benefit for the U.S. Open was one of the highest of any player since he was the defending champion and could reasonably expect to win the tournament or come very close. However, his expected marginal cost was such that it would cost him dearly to play in the U.S. Open. 

Nadal is known as the King of Clay, an epithet earned by winning 12 French Open championships and posting an astonishing 92-2 career record there. If he played in the U.S. Open, Nadal would have faced a very quick turnaround before the French at the least, and he might have been prevented from playing altogether because of different countries' pandemic border rules and quarantine requirements. Thus, his expected marginal cost of playing in the U.S. Open was in his mind equal to his expected marginal benefit of playing in the French. The outcome? Nadal "voted" against the U.S. Open because of its interdependent costs tied to the French Open, then he "voted" for the French Open. It transpired that he would not have had trouble with pandemic border rules and quarantine requirements, but he also did indeed win his 13th French Open championship, improving to a 99-2 career record there. I think he is happy with his choices.

Costco has it all figured out

 I was recently at Costco, by far my favorite place to shop, when I couldn't help but notice economics at work. There are many perks to shopping at Costco, of which my favorites were the samples (pre-covid of course) and the inexpensive food court. I have been going to Costco since I was a child and one thing I have always enjoyed is the hot dogs they sell. For only $1.50 you can get a hot dog and a drink. I thought this price was low when I was young, and as I have aged the price of a hot dog has remained constant at $1.50. I have always been puzzled as to why they would sell this and give their members so much consumer surplus. 

The answer finally came to me during my last visit, externalities! While Costco is certainly losing some money each time they sell a hot dog, they are gaining more than that because of the positive externality that is created with consumption. The atmosphere created by having lots of happy customers enjoying their consumer surplus makes shoppers happy to spend more money on other items at the store due to the savings they just enjoyed on their lunch. It also makes people happier to go to the grocery store because the hot dog serves as the light at the end of the tunnel for many food loving shoppers such as myself. I hope Costco understands how large this externality is for me and countless others and never takes away from the consumer surplus I enjoy with every visit. 

Wikipedia and the Free Rider Problem

Wikipedia is one of the biggest privately provided public goods in existence today. With 40 Million users, the site’s information is freely accessible to anyone with internet access and non-rivalrous in nature.

 

 A few day ago, I clicked on a Wikipedia article and was greeted with a message

pleading for a donation to “defend Wikipedia’s independence”. All I had to do was give them $2.75 or the “price of a cup of coffee”. The company claims that they depend on donations to stay alive and that 98% of their users don’t give and instead “look the other way”. As to be expected, Wikipedia falls victim to the free rider problem due to its extremely large user base, for which each user is reluctant to contribute.  Wikipedia tries to guilt the 98% of free riders into giving to their cause, delivering a personalized message describing the “heart and soul” of the Wikipedia community. While there are many free riders, their message falsely indicates their stance of financial desperation, implying that their quantity of contributions is much lower than the socially optimal quantity.

 

In fact, Wikipedia has largely been able to overcome the free rider problem since some users care much more than others. Since its inception, Wikipedia has grown rapidly into a multi Billion dollar company. Contributions are largely from tech companies and big corporate sponsors. For example, Amazon donated 1 million dollars in 2019 as the Amazon Alexa device sources its information from Wikipedia. Nevertheless, Wikipedia targets the altruistic nature of its free riders, trying to guilt them into donating and convince them that their donations really do make a difference. Now, any rational individual, even if they were to believe Wikipedia’s desperate need for money, would realize that the marginal cost of a $2.75 donation would be vastly greater than the expected marginal benefit of donating the $2.75 that made the difference in Wikipedia’s survival. Thus by appealing to a notion of fairness and financial desperation, Wikipedia hopes to raise peoples’ perceived total benefit above the marginal cost of donation (E[MB] + utility from fairness/equity + utility from helping a struggling business > MC). Maybe I would have donated had I not known of Wikipedia’s true financial state, as for now, I think I’ll hold onto my coffee money.

The NCAA Prisoner's Dilemma

Many college look to their sports for an influx of money. Additionally, collegiate basketball and football often bring in so much money that they are exploited to fund other less-profitable sports. Sometimes, however, the profits from football or basketball teams are not enough to save teams like diving. Smaller schools are especially struggling to make up the difference in revenues and expenses to save their athletic programs during this pandemic year. Some may attribute these losses to the high costs of college coaches salaries. In some states, their college coaches are the highest-paid individual in that state. Yet, even large schools like the University of Iowa are considering cutting less-profitable sports because they claim to not have enough funds to cover expenses. I would argue, however, that Iowa has the funds, yet they are allocated to pay their coaches for their popular sports rather than to cover the costs of all of their athletic teams. 

The dominant strategies are varied among universities. For big schools where profits are large for football and basketball, their dominant strategy may be to continue to pay those college coaches large salaries to continue their big payoffs -- if you pay for the best, you continue to attract the best athletes and retain high profits from those programs. Additionally, some teams bring in 0 profits and only incur costs, so it is entirely rational to cut these programs altogether. For smaller schools, however, the dominant strategy might be to cap coaches' salaries because they already operate at a deficit and the only way to lower total expenses may be to cap salaries. Neither of these strategies are Pareto efficient. For big universities, capping salaries may allow for other programs to gain the support they need to succeed and potentially bring in more money for the school. Schools like Duke, for instance, pay their top coaches an exorbitant amount of money considering the average salary of the state -- they can help others without hurting themselves. Cutting their salaries by small percentages would add a significant amount of money to their athletic departments. For smaller schools, capping coaches salaries may indirectly take away from the success of the athletic program if a lesser quality of coach is hired, allowing for even more of a reason to cut a specific program. Therefore the dominant strategy is also not Pareto efficient because it might ultimately hurt their programs. In these ways, collective action through the interpretation or adjustment of anti-trust laws, may bring out a Pareto efficient outcome which caps the college coaches' salaries relative to the profits that that specific sports program creates. If all salaries were capped at proportional rate, smaller schools may be able to cut costs and still maintain to fund most of their sports teams, especially if the athletes (rather than money or titles) are the main focus of the athletic department. Larger schools, too, will likely have more money to support their other less-profitable sports teams if their coaches are willing to take a pay cut.