Shocking Revelations: Am I a Free-Rider?

I can safely say that, of all living situations in Charlottesville, my roommates and I have one of the best. I often find myself wondering; how did I get so lucky? Everyday we continue to live amongst each other in perfect harmony, never squabbling over who has to do the dirty dishes like Nick so tragically complained to us about. The Brita is always full and Venmo requests are always completed. After some consideration on what makes our apartment living so cohesive, I came to a shocking conclusion.

I am a free-rider. Not in the sense that I don’t take out the trash, but in the provision of our apartment’s public goods. These goods include household staples, from dishwasher detergent, paper towels, pam cooking spray, and even baking supplies (vanilla is expensive, you know). Somehow, we have come to an unspoken agreement for a single person to bear the costs of these public goods, yet this person has never been me. The success of our private provision of public goods can be attributed to many factors. For one, my roommates have determined that the benefit of the public good (having clean dishes or a stocked pantry) is greater than I think it is, so they are willing to purchase these supplies. Or rather, they possess altruistic tendencies and are willing to contribute to our public goods even when the opportunity to free ride presents itself. 

While these goods are rival in consumption, they are a form of impure public goods in that they are non-excludable. Yes, my roommates could physically take the pam cooking spray from me every time I intend to use it, or hide the dishwasher detergent, but that would decrease their own utility of the product, as my consumption of the public good lessens the chore load. My use of the dishwasher detergent helps keep our sink empty, which has positive externalities by saving them time. The exclusion of these goods is too costly to maintain, so our 'utopia' lives on.

Coasian Crowdfunding

 One of the central insights in Ronald Coase’s The Problem of Social Cost is that, because costs and opportunity costs are equivalent in accounting, it doesn’t matter who is made liable for compensating an externality. The best way to understand this is via example. To use Coase’s; imagine a cow rancher and crop farmer share neighboring plots of land. Cow ranching has a negative externality on crop farming because the cows eat some crops. Say the marginal cow eats $5 worth of crops. If the cow rancher is made liable by the government then he has to pay this extra $5 if he wants to add that cow to his herd. Even if the government takes no stand in the situation, however, the cow rancher will still have to pay that $5. The crop farmer can no longer force the cow rancher to hand over the money, but he can still exert influence on his balance books by offering up to a $5 payment if the rancher doesn’t add that next cow. The farmer is willing to do this because he can avoid $5 of crop damage. Just as before, if the rancher wants to add another cow to his herd, he has to give up $5.

This counter-intuitive idea inspired an idea of my own to help resolve global externalities: Coasian Crowdfunding. The idea is to impose costs on externality producing corporations by offering them money if they scale back production closer to the socially optimal level. By crowdfunding what are basically carbon-offset payments from people all around the world, we can force Exxon to incorporate the social cost of carbon into their accounting by forcing them to forgo this large prize if they want to continue polluting. 

This strategy can overcome many of the problems facing coasian bargaining. The assignment problem is lessened because people are incentivized by their private value on carbon offsets, which is easy to know for them. There are still challenges in identifying which corporations are responsible for how much pollution, but at least there are many fewer of them. The free-rider problem is still somewhat of an issue. Since everyone enjoys an improved global climate regardless of whether you pay, it can be personally beneficial to just let others pay. This sort of online crowdfunding has proven resilient against free rider problems, however. Tens of billions of dollars flow through patreon and twitch donations. Fans of certain shows pay money for video content that is posted for free on YouTube. There are some excludable goods like early viewing or extra content though. Similarly, our carbon-offset crowdfund could provide people with a green-check NFT that donors can use to signal how much they care about the environment. Because opportunity costs are the same as costs, the power is in our hands to make carbon producers pay for the damage they do to the global environment.

The Free-rider Problem of the House Clean

 It's a Sunday afternoon, and the house is a mess. After all, that's what one would expect after 18 guys have been living there for a few weeks. A mass text is sent out: "House clean in 5 minutes." Thirty minutes later, the once filthy house is sparkling clean and most of the guys in the house are feeling pretty content with the results of their work cleaning the house. However, not everyone is satisfied. This is because while a majority of the house members participated willingly in the cleanup, a few decided to take the 'time to clean' text as their opportunity to leave the house. This resulted in a classic free-rider problem. Those who did not clean the house knew that the house would be clean with or without their efforts, which may have been why they chose not to participate. As a result, the guys who did clean had to put in more work, while the guys who did not clean were able to enjoy the product of others' labor without putting in any of their own efforts. This could potentially lead to fewer people cleaning in the future, as they see that others will do their work for them. This will result in both disgruntled members of the house who do participate and also potentially a failure to clean the house at all as more and more guys decide it's not worth their time and effort to participate because everyone else is skipping out on the job.

My proposed solution to this problem is to provide incentives to work, or in this case, disincentives to not clean. Our house should make a rule that if you do not show up to the house cleans in the future, that is ok, but you will simply have to pay those who do a small sum of money to compensate them for their extra work. This will be an efficient solution as those who value their money over whatever else they might be doing will help clean the house, and those whose opportunity cost of participating is too high will compensate everyone else for their share of cleaning.

Thank You for Drinking

UVA’s student body has heard it and seen it before, from the critical opinion articles from Charlottesville residents to the harsh glances as older neighbors see students with drinks in hand. All these interactions originate from a critique of UVA students’ drinking habits. However, economic logic suggests that that beer belly (or, in the context of this article, liquor belly) is actually doing the community a service.

As any 21-year-old Virginian knows, alcohol can only be purchased at government-run ABC stores (a public monopoly, as Emma analyzed in her post). An interesting factoid of ABC stores in Virginia is that they return more than $600 million annually to the state’s general fund. Put another way, that $20 handle you bought the other day contributed almost $9 to Virginia schools, roads, and even funding for state universities. In comparison, for a traditional $20 purchase, less than a dollar would go to state and local governments. Thus, logic follows that liquor purchases are a positive consumption externality in alcohol-controlled states like Virginia given their significant financial contribution to society. In that vein, our state would be right to encourage hard alcohol consumption because of its social marginal benefit.

By examining the benefits to civil society from liquor purchases, we can see that the social marginal benefit of liquor consumption is greater than the private marginal benefit. Of course, this post does not analyze the long-term costs to society with regards to the risks of drunk driving and other long-term health effects. However, in this simplistic lens of consumption, the solution is clear: party on – our communities demand it. 

ABC, a Monopoly?

     On August 26^th, we discussed the different types of monopolies – public, private, and publicly regulated. I understood the examples that were discussed but wanted to look further into which category other companies would fall under. Being from Florida, one of the first industries that came to mind was the sale of liquor in Virginia. At home in Jacksonville, there is a corner store that sells liquor every few miles, with bright flashing lights usually advertising the sale of the week. When I came up for move-in weekend my first year, it was weird not to see those bright attention-grabbers here. The ABC store is the only store in the state allowed to sell liquor, which leads directly into the question of what type of monopoly it is. Although I assumed the stores were government-run, there was also a strong possibility that they were just publicly-regulated – something I had no expertise on given that the idea of the state being so involved in these sales still is unique to me.

After looking into some background information on alcohol laws in Virginia, I came to the conclusion that the ABC store (in Virginia at least) is actually an example of a public monopoly. This means the government itself runs the ABC stores. Further, I even found out that Virginia is rather uncommon in its handling of this industry, and some are trying to overturn this monopoly in the name of privatization. There is, however, push back due to the high revenue these stores bring in for the state. So, in answering my question of what type of monopoly it is, I am left with even more questions – namely, if a public monopoly on the sale of liquor brings in so much revenue, what incentives do already privatized states have to leave their own liquor sales in the hands of the market at large?

The Wolf of Wall Street - A True Story of Fallen Brokerage Giant and Its Deadweight Loss

On a chill night, in celebration of my roommate’s recruitment into an investment banking firm, we watched the classic move - the Wolf of Wall Street. The movie is based on a true memoir of Jordan Belfort, the founder of Stratton Oakmont, a brokerage firm in Long Island, New York. Jordan led the firm on participating in several financial frauds, including pump-and-dump schemes, defined as a security fraud that “involves artificially inflating the price of the owned stock through false and misleading positive statements, in order to sell cheaply purchased stocks at a higher price.”

Jordan Belfort’s life started off as a son of two accountants. As Belfort slowly explored his career as a broker and accumulated wealth through running Stratton Oakmont, he developed a lavish lifestyle filled with luxury ownerships, sex parties, and abusive use of recreational drugs. He became fanatic with money-making; under his leadership, the firm had developed a cult-like culture where all employees submitted themselves unconditionally to the principle of the firm and became completely money-driven. Everyone who came in as financially-incapable has now become millionaires, sitting on top of the money they have defrauded from investors through convincing them to purchase large quantities of penny stocks. Belfort showed excessive greed for the possession of wealth and women, and have committed over 21 cases of money-laundering to scale up his earnings. 

Halfway through the film, me and my roommates began to wonder if we could ever adopt a similar lifestyle portraited in the movie and whether money could ever be of such big attractions to us. We concluded that the marginal private benefits we may receive from earning an extra $10k - $1M is not worth trading in our sanity and basic moral grounds. As wealth accumulates, the private marginal benefit (PMB) diminishes, and private marginal cost (PMC) also grows at a faster rate because the risk that Belfort had to bare became larger and larger under illegal operation as the volume of transactions grew. In real life, as Belfort committed more fraudulent deals, the social marginal cost (SMC) brought along by the existence of Stratton Oakmont had gone way up, not only incurring an opportunity cost on the money tied to those pump-and-dump schemes when it could have been invested elsewhere and generated tangible return, but also resulted in investor net losses of $200 million dollars when the overvalued scheme collapsed. This case differs from market production inefficiency cases that we learned from Gruber's reading; it is more like a market failure resulted from information deficiency which ended up creating an off-balance between the supply and demand for stocks. The financial operation of Stratton Oakmont still created a deadweight loss for its investors and the society as a whole. As a consequence, Belfort lost everything and was federally imprisoned for 2 years. 

Vaccine Mandates

There has been widespread debate as to whether Covid-19 vaccines should be mandated by the government, with polarizing opinions across the country. Vaccines have a positive consumption externality, the social marginal benefit of receiving the vaccine is greater than the private marginal benefit.  However, many scientific studies have estimated that this positive consumption externality will be reduced once the country reaches herd immunity (estimated to be around 80%). Similar to Gruber's example of global warming, increases in vaccinations produce diminishing marginal returns.  

Mandating vaccines would be considered a collective action response to the externality. Due to the diminishing marginal rate of returns to increases in vaccinations, a government mandate is not the economically efficient solution to the externality. A Coasian solution would define property rights and determine who is liable. We can see examples of this occurring within the private sector. For instance, some companies are offering to pay their employees to receive the vaccine. In this case, companies are assuming liability and have determined that reducing the risk of Covid-19 spread is more valuable than the money they are willing to pay the employees. The employees will get the vaccine if the private marginal benefit with the addition of monetary compensation outweighs the private marginal cost of the vaccine. In this scenario, the employees retain property rights over their body but they have increased incentive to receive the vaccine. In other words, the social marginal benefit would equal the private marginal benefit. This is an example of a Coasian solution internalizing the externality. 

The Negative Externalities of the Activities Fair

 As the Treasurer of a political organization at UVA during my first year, part of my role as an exec board member was to table at the activities fair for the spring semester. Because it took place during the winter months, the fair was held indoors in Newcomb. For some reason, the fair organizers decided to place all the political organizations, from both sides of the aisle, in the same small room. On the one hand, one can see the purpose of this decision. It would be more efficient, as all those who were interested in political advocacy would only have to go to one room, saving them time and effort. It would optimize space and preparation time for the fair organizers. However, this decision did not take into account the negative externalities of placing political organizations from different sides of the aisle in the same room as each other. Members of other organizations came to our side of the room and made negative comments as well as obscene hand gestures. These actions hurt our organization's recruitment because potential members may well have been turned off after realizing that they would be subject to the same harassment if they joined our club. As a result, they missed out on being part of a club from which they would have gained utility through free and open debate.

Without intending it, the club's organizers imposed a negative externality on potential members of our club by placing all the political clubs in the same room during the activities fair.  If the fair organizers were interested in an efficient market of club recruitment, they should have compensated our potential members who decided against joining our club because of the harassment we received. This would make up for the opportunity cost of the utility they would have received from becoming members of our club.

The Defining Problem of Our Generation: Who's Going to Wash the Dishes?

     I live in a house with eight other people here in Charlottesville. While this makes rent very cheap and days very action-packed, it also leads to a lot of dirty dishes. Divvying up this godforsaken chore is one of the greatest sources of animosity in the house and is quite literally, the worst. Dishes are an economical nightmare in my house. Those who have the lowest private marginal cost (not caring about dirty dishes in the sink), produce the most dirty dishes, while those with the highest private marginal cost (caring deeply about having an empty sink), produce the least dirty dishes. This results in a massive negative production externality where my sink is normally full, to my detriment, even though I wash all my dishes.

    With equal property rights to the sink, am I entitled to a clean sink or are others entitled to a dirty sink? We knew dishes had to eventually become clean so a few members of the house produced a weekly dish schedule system where everyone washed all the dishes once a week (with the exception of two members/free-riders with meal plans who never used the sink), because everyone washing their own dishes "just wouldn't work". In this system, the sink remained full throughout the day, with nobody having any incentive to wash their own dishes, knowing somebody else would do it for them at the end of the day. Furthermore, knowing the kitchen would just be cleaned the next day, it was easy for those who didn't care as much about a clean sink to skip out on cleaning the dishes on their day and leave it for the next guy, leading to a detrimental free-rider problem.

    This problem continues to plague my house, with variations between washing own dishes and having a schedule. So here I humbly ask all of you economists to help me come up with a solution to this predicament.

Best,

Nick Cummings