Oiligarchy and Capture Theory

While discussing capture theory and the work of Stigler, Peltzman, and Olson in class, I was reminded of a computer game I used to play in middle school called Oiligarchy. While the game might peddle a few unhinged conspiracy theories, it is also an accurate parody of capture theory.

As the player, you are an international oil tycoon seeking to maximize profit by passing oil-friendly taxes, subsidies, and price controls, as well as starting wars and destroying rainforests. In order to pursue these interests and to encourage "oiled" policy, you must donate to the "donkey party" or the "elephant party" during elections to capture representatives and the president. If the party you support wins the election, you can leverage your coercive power by deregulating oil production in Alaska or starting an international war to gain control of oil reserves abroad. However, you are also forced to balance these pursuits by maintaining of your favored party's popularity. If your party loses an election, you risk allowing costly isolationist and environmental policy to pass under the "eco reps".

The basic tenet of Oiligarchy aligns with Stigler's central argument that, "regulation is acquired by the industry and is designed and operated primarily for its benefit." In the game, a smart player maximizes their political donations to consistently earn political favors. At the same time, in Peltzman's terms, the game's two political parties attempt to maximize their majorities by accepting political donations from the player. In the objective function, M = (f x n) - h(N - n), the members of the Oiligarchy attempt to maximize f (the probability a beneficiary of the regulation supports the representative) and minimize h (the probability that popularity will decline). Due to the simplicity of the game, the "oligarchy" is actually a monopoly and the player is easily able to find Olson's so-called T*, or optimal amount of collective action. By donating a few hundred dollars in each election, one can expect to "capture" enough reps and the president.

An Open Letter to Railroad Executives

 Dear railroad executives, 

    Kudos to you, you're craftier than I expected. Although I knew that firms' expenditures included vying for potential government favors – like keeping shipping rates artificially high to ensure "consumer protection" – I didn't realize they also included paying to suppress competitive substitutes! Both types of expenditures, of course, are instances of rent-seeking. The specific competitive substitute I'm referencing here, in case you haven't guessed, is the American maritime industry. 

    Not only do your various Political Action Committees (PACs) contribute generously to representatives on the House Committee on Transportation and Infrastructure, but also to at least five of the fourteen representatives on the Subcommittee on Coast Guard and Maritime Transportation. And on both sides of the aisle, no less! I congratulate you on bipartisanship! 

    Now, why would railroad PACs be interested in maritime transportation? Oh, right! As I mentioned before, in seeking favoritism, you're also paying to suppress substitutes, which includes any other form of transportation – including maritime transportation! 

    At first, dearest executives, I doubted that you engaged in such dubious behavior. But upon researching those Congresspeople whom you selflessly support, I found that each of them openly supports legislation such as the Jones Act, a protectionist 1920 law that requires that all intra-U.S. maritime commerce be carried on "U.S.-owned, U.S.-crewed, U.S.-registered, and U.S.-built" ships. This act notably restricts the entire industry, to the point where "2% of American freight travels by sea. In the European Union... the corresponding statistic is 40%."

    I shouldn't have been surprised by your support for the Jones Act and similar legislation, which artificially raise shippers' costs of using an obvious substitute for your services. Such support is exactly what Chicago economist George Stigler predicted, even if his colleague Sam Peltzman added nuance to the representative's rational cost-benefit analysis. 

    I will say, though, that you are not as good at rent-seeking as the airlines. That's why you're only my second favorite group of cronies. Sorry, not sorry. 

Juliette Sellgren

Stigler, Occupational Licensure, and the Lemons Model

George Stigler argued that the licensing of occupations such as lawyers and nurses is a possible use of the political process to improve the economic circumstances of a group. While this is likely true, I also think there are benefits to the consumer as well that I would like to frame in terms of the lemons model. 

As I'm sure everyone in this class already knows, the lemons model by George Akerloff deals with asymmetric information -- if some cars are "lemons" (bad cars) and some are high quality, there are two separate markets for cars -- the lemons market and the high quality car market. Often times, however, there is asymmetric information, so you don't actually know what car you're buying, and thus have a lower willingness to pay for a car because there is a possibility of it being a lemon. The lower price discourages the sellers of the high quality cars, and once the market price hits a certain floor, they exit the market, you are only left with lemons, and efficiency is lost. 

So, imagine a world where a license is not necessary for something like, beauticians, let's say. At first, there would still be people who spent the money to get a license, because they could charge a higher price. On the other hand, however, there would also be people who do a pretty good job at hair for the most part, but do not charge much at all, because they don't have a license. Personally, if I was just going for a trim, I'd get the cheaper one -- I'm sure many of you would do the same. So -- what would be the point of spending tens of thousands to get a license at all, if those without one could easily undercut your price? It would likely eliminate the demand for licenses, and then, you never actually know what you're getting yourself into. The lemons model predicts that, due to asymmetric information in the absence of licenses, the market price is the average quality of the beauticians in the market, all the skilled beauticians leave and you are left with only bad beauticians. Imagine if this was applied to something like doctors and lawyers? The cost of actually obtaining a license takes years and hundreds of thousands of dollars. Occupational licensure eliminates the prospect of asymmetric information, because they have proven competency in that subject area through an education and a standardized exam. You know you are getting at least a certain minimum quality of care. 

Also worth noting is that those with occupational licenses are held to a higher standard in a court of law. When dealing with negligence cases, you can sue those with licenses because they are held to a higher "duty of care" standard than people without a license. If occupational licensure did not exist, this would not be the case. 

So, while Stigler's assertion that occupational licensure creates barriers to entry and thus benefits those with licenses, it is important to note that these licenses benefit the people as well, because it ensures a minimum quality of care that you are getting when you go to lawyers, doctors and the like. 

Occupational Licensing and Nursing

      Last summer I worked for an international nurse recruiting company. Although the company I worked for was very small and only consisted of 3 people, the industry is quite large and it exists mainly because of nursing shortages. This shortage is in part due to occupational licensing. Finding nurses in places like the Philippines that would like to work in the United States is not difficult, but the process a nurse must go through to legally work in the United States is a nightmare. Nurses must pass nursing and English tests, have their education verified, obtain a SSN, obtain a permit from a state board of nurses, and more. One of my responsibilities was helping nurses navigate different different state licensure boards, which was very difficult as there was little reciprocity between states and many states have only a couple employees who answer calls. For all the trouble our company went through to recruit nurses, hospitals would compensate our company with a standard payment.

The nursing industry is very interesting to look at through the lense of Stigler. The profession of nursing is high paying and stable, so the licensure in the industry is understandable. Additionally, nurses that obtain all necessary licenses benefit from the regulation. If the cost of employing an international nurse is high for hospitals, it could lead them to increase wages to attract domestic nurses to their region. The barriers to entry also negatively affect the general public, as the cost to hire nurses is reflected in the extremely high cost of healthcare in the United States. It makes sense that all these regulations were put into place as they heavily help registered nurses who make up a minority of the public, and have a very small cost to people in the majority.

Spatial location theory and economies of agglomeration

In class, we discussed Downs' spatial location theory explaining why firms will set up next to one another in order to capture the greatest portion of the customer base possible. If these two firms have identical outputs, uniform distribution, and easy spacial mobility, then they will relocate next to one another in order to limit the distance that the average customer travels in the hopes of increasing their consumers. In my Real Estate Analysis class, the central place theory and opposing centripetal and centrifugal forces were the main focuses in our discussion of the system of cities. The 3 primary centralizing forces are economies of scale, agglomeration, and positive locational externalities. Economies of agglomeration details that there are cost and productivity advantages to the clustering of firms in addition to the increased opportunity from learning from other's productivity and efficiency. Positive locational externalities occur when firms benefit from nearby locations of others without the first capturing all benefits for itself.

The development of Northern Virginia presents a prime example of the combination of economies of agglomeration and the spatial location theory from construction of homes to tech firms. Construction firms are competing to build neighborhoods close to each other to capture the best school systems hence enticing more homebuyers. Tysons, Reston, and McLean are cities competing for consulting firms and government contractors due to their proximity to DC. My internship at MITRE in McLean was located directly next to competing government contractor Northrop Grumman: a key example of Downs' spatial location theory explained by centripetal forces encouraging corporations to locate close together.

Coexistence of Economic Growth and Crony Capitalism

At the end of class on Wednesday, Professor Coppock connected Stigler’s description of noisy political channels to the term crony capitalism. Crony capitalism refers to an economic system where industry interests are protected based on relationships between business leaders and the government. Crony capitalism is used as an argument by left-leaning politicians as an argument against capitalism, but it is also used by right-leaning politicians to demonstrate the negative effects of government intervention in the economy. Emerging economies with large and relatively unregulated industries often see corruption take form via crony capitalism.

Earlier this year, The Economist published an article in which they analyzed a “crony-capitalism index,” suggesting some interesting implications about wealth and economic growth. The Economist formed the index by classifying data on billionaires into crony and non-crony sectors, with crony sectors being those that are particularly vulnerable to rent-seeking behavior, including banking, casinos, defense, and construction. A section of the article that caught my attention was the increase in India’s share of billionaire wealth derived from the crony sectors: over the past 6 years, India’s wealth from crony sectors increased from 29% to 43%. What makes this interesting is that also in the past 6 years, India’s GDP expanded rapidly (with the exception of COVID), driven strongly by growth services in the form of IT Outsourcing. The existence of these two facts demonstrates that while crony capitalism and rent seeking activities lead to inefficient outputs, nations with large amounts of wealth in crony sectors still see rapid increases in economic growth and standards of living.

Hot Tub Externality

      About a week ago my housemates had the genius idea to purchase an inflatable hot tub. Although the novelty of it has started to wear off for me, my housemates still find it enjoyable at all hours of the day. This is an issue for me because the tub lays directly next to my bedroom window directly above my desk. I can hear every word of tub talk through my window and hot tubbers have a direct look into my room. Our house also lacks outlets outside so the tub is plugged in through an extension cord running through my window into my room.

The private costs of using the hot tub are very low. The price of electricity to run an inflatable hot tub is about ​​$.20, and each time someone uses the hottub it takes about 3 hours to warm up the tub to its previous temperature. This means that the PMC of using the hot tub is about $.60/8 housemates. The social cost of this is much higher as it impedes my ability to sleep or complete work(as it currently is). Since I have property rights over my room, there is a very simple Coasian solution I could choose to implement.  In order to increase the PMC closer to SMC I could ask that my housemates pay me a fee when they use the hottub. I am able to enforce these property rights by threatening to unplug the extension cord that runs into my room. I would prefer to write about newer public choice topics from class, but currently this is the only public choice issue I can focus on and I must submit a blog in the next hour.

Voting Procedures and Fantasy Football Punishments.

 Myself and my 8 housemates decided to make a fantasy football league this season. Like most leagues I have been in, deciding on a punishment for the losing team was very difficult. Different members of the league had very different opinions of what type of punishment they thought would be most appropriate for the winner of our Sacko Bowl. While the method we used to decide the punishment was not very democratic, it is interesting to think about what outcomes different voting procedures could have produced and which one is most desirable.

After debate, there were three options that had considerable support. A more extreme punishment(option A), a moderate punishment(option B), and a punishment that was only really supported by one member(option C). A majority rule was not suitable for this situation as there was no one option that would capture the majority of the votes. The two next potential options would be a Hare method(same as a runoff in this situation) and a Coomb method. Under the Hare method option A would have likely won as the option C voter would likely take option A second. Under the coombs system, it is very possible that option C could win as both option A and B had many voters who would rank them last. This outcome could occur whether the Coombs method described in Mueller was used or a Coombs method that is described here is used(there can be a difference). When looking at this situation, I believe that a system that doesn’t compel many people to do something they strongly oppose is wise. Although a Coombs method might elect an option that does not have a large enthusiastic following, I still think it could be an appropriate way to decide our choice.

The Convergence of Gas Stations

Over Fall Break I drove to Harrisonburg to visit a friend for the afternoon at JMU. As I was leaving I realized I needed to get gas, so that I didn't get stuck on the highway on the way back Charlottesville. As I was looking around for gas stations, I determined that a majority of the gas stations in the JMU area are all right next to each other. This is a great example of Downs' Spatial Location Theory. These establishments set themselves up right next to each other so that they can attempt to capture the greatest portion of the customer base. This approach was successful for these firms because due to the similar location of the four gas stations near me, I decided to go to the one that was a couple cents cheaper because it would save me money (these four were within .2 miles of each other). While in the grand scheme of things this decision likely saved me no more than .50 cents it felt like a good decision because the lower price compelled me to choose the station. 

The difference in cents is like how the Spatial Location Theory applies to voters. If parties move to the middle of the spectrum to capture the median voter the small differences in policy will capture more median voters and determine the outcome of the election. While there really wasn't much of a difference in the gas stations that I had access to, the smallest difference that had little to no true effect on me led me to make a decision on the gas station that I would 'vote' for because I felt that the gas station maximized my utility the most.

And the Award goes to... Rank-choice!: A Brief Analysis of the Oscars

The Oscar Awards have been around for around 92 years now. The very first awards were presented in May of 1929, and around 6 months later, the worse economic disaster in history brought America and the World to its knees. Among other such disasters, the Oscar Awards have always been mired in controversy and cronyism. The Hollywood Elite simply hand each other awards and pat their friends on the back. However, in recent years, efforts have been made to change the mechanics of the Oscars. As of December 2020, there are now 9,427 eligible Oscar voters, which represents the largest pool of voters in the history of the award ceremony. Now more than ever, a definite system of voting must be enacted in order to determine the pinnacle of filmmaking achievement: the Best Picture Award. The system chosen for such a lofty task is (drum roll please)... Rank-choice Voting. While seemingly dull sounding, this particular system scratches an itch which frequently annoys Economists: the Condorcet Paradox, where cycling would inevitably occur without determining an outcome. Under Rank-choice, statistically, the Condorcet winner, defined as a winner of an election who would win in a pairwise election against any single candidate in the race, is more likely to be chosen, but not so often as the Coombs or Borda systems. Rank-choice places emphasis on rank, allowing voter preferences to be more equitably distributed and represented. All of the voter preferences are considered and signified by their ranks. Hundreds of films are submitted to the Oscars and the top films must achieve 5% of the 1st place ranks to be considered in the next round, which usually means the top 10. When voting officially for Best Picture, the Oscar voting system actually becomes a hybrid of Rank-choice and Borda. The voters place all 10 films considered for best picture in their individual ranked lists. Afterwards, Film A could receive 30% of the 1st place votes while Film B receives only 20% of the 1st place votes but 80% of the 2nd place votes. Instead of Film A winning, Film B has accrued enough "points" (points in quotations because it is not mentioned that the films receive points, but the system mimics Borda which utilizes points) from the overwhelming second place votes to win Best Picture. Even though it's a complex system, it still represents more of the voters' preferences and we, the public, can finally see what the best movie is (ha ha ha). 

The Problem with Unanimity in EU Member State Voting

The European Union prides itself on being a pinnacle of liberal democracy and has applauded its own skills in influencing the growth of democracy in other European states as well. In the early 2000s, there was a push to expand European Union membership Eastward. Hungary and Poland, historically the largest recipients of EU aid, quickly became poster children for the democratization and integration of post-soviet countries into EU, but began the process of de-democratization only a few years after joining the Union. Since then, unanimity voting rules in the European Union – which carry major consequences for economic, social, and political functions of member states – have put the stability of the Union in danger. This was most clearly demonstrated when Hungary and Poland blocked funding for the 1.8 trillion EUR coronoavirus recovery package in 2020 as a reaction to an attempt to make EU funding conditional on democratic aptitude as measured by the Rule of Law reports (which Hungary and Poland were failing). Perceiving a threat to a major source of their funding, Poland and Hungary blocked the recovery bill until the Rule of Law Conditionality Regulation (described above) was removed.

While, as Buchanan and Tullock write in Calculus of Consent, unanimity voting rules can be used to make certain that one's own human and property interests are protected – especially when such interests are as important as those under EU purview – such rules can also pose a major threat to actors when the alternative is forced inaction. In this case, EU citizens in need were initially denied the help that they so direly required by members that, altogether, contributed less to the Union in terms of funding and failed to share the Union's democratic ideals. The lesson is perhaps this: Group membership should be selective and members reasonably homogenous where unanimous voting is in use if an effective decision-making process with external validity is to be established*. This is because in groups with heterogenous interests, members will be tempted and might succeed in leveraging regrettable solutions in exchange for their approval on highly important ones.

* Especially where excludable (membership-only) goods are concerned.

Spatial Location Theory in ATL

     Over fall break I went to visit my best friend from high school. She goes to school in Kansas, so I obviously flew to see her. I flew out of Richmond and had a connection in Atlanta. My layover in Atlanta was 40 minutes. I had just enough time to get dinner! I got off my flight and immediately looked for food. My plan was to walk the whole concourse and then pick which place looked the best. While I was walking through concourse C, I realized that the Atlanta airport was the perfect example of spatial location theory! Majority of the restaurants and food were located in the middle of the concourse. 2 Starbucks, 2 Chick-fil-a's, and a Jersey Mikes all within feet of each other, as shown on this map. 

    In the Atlanta airport, there are multiple fast food restaurants, all producing the same type of food, within a given concourse. This explains spatial location theory perfectly. If there are multiple firms producing similar/identical output within a given territory, eventually they will end up in the middle. This is because the middle minimizes walking distance for consumers and they want to beat out competition. They pick these points to maximize profits and foot traffic. And let me tell you, there is a lot of foot traffic at the Atlanta airport! This is similar to the example we talked about in class with Peter and Christina selling hot dogs on the beach. At the beginning Peter and Christina start at different locations on the beach (equal distance from the middle) but as one of them gets closer and closer to the middle so does the other. This is because when one of them moves closer to the middle, they are gaining more customers. Eventually, it is a race to the middle. This race towards the middle is what is reflected in the Atlanta airport, they want to serve the median to maximize profits. 

Netflix Free Rider

 

    I play on the softball team with twenty-four other girls. We spend countless hours at our stadium with each other, which means we need ways to entertain ourselves. We are fortunate enough to have a big flat screen TV in our team lounge. In order to watch TV, you have to have apps like Netflix, Hulu, and Prime Video. An old teammate of mine, Kate, was nice enough to log into all of her accounts on the TV. The entire team just has to click on the app of their choice, and they are free to watch any movie or show. The thing is... Kate graduated three years ago.

    This is a prime example of the Free-Rider problem. We have been using Kate's accounts for the past three years. The whole team loves watching Hulu, Netflix, and Amazon Prime, but no one wants to pay for it . We have zero incentive to buy a Netflix or Hulu account for our locker room, because Kate is paying for us to watch on her credit card. This can create a market failure in Kate's house, because she gets a notification saying she can't watch Netflix or Hulu, due to an overload of viewers. The IP address of our stadium is different than Kate's home. Kate is paying for others to watch movies and shows, and she can't even watch herself. The solution to this problem would be for UVA Softball to create a Netflix, Hulu, and Prime Video account of their own. The accounts would be on the team budget, and we would log into those accounts on our television. Netflix is starting to crack down on their account sharing, as well. We might be in deep trouble. 

The Social Marginal Costs and Benefits of Reintroducing Gray Wolves

     On the 2020 Colorado ballot, I was asked to vote on the reintroduction of gray wolves into the wildlife of Colorado by the end of 2023 (to the west of the Continental Divide). I researched what this would mean for Colorado residents, and what the social marginal cost (the complete cost faced by society for producing one more unit - or in this case reentering one more wolf) and social marginal benefit (the complete satisfaction or increase in welfare society experiences with one more unit or action taken) would be for residents.

On analyzing and researching the total cost, there is obviously the financial cost that would come from monitoring and reintroducing the animals back into society. Funds would primarily come from the division of parks and wildlife. Additionally, there is the financial burden of compensation for whatever damages these wolves cause for farmers mostly a focus on the human and livestock interactions with wolves. There is the social cost for ranchers who are deeply concerned with what this would mean for their way of life and the animals they depend on for profits. There is another external cost in ways of human and tourist interaction with the wolves. Ultimately, they are predators, and the population of the state, as well as the number of tourists enjoying the mountains and outdoor activities has increased significantly since the wolves were last roaming. There is an increase in danger to humans and their pets in the outdoor areas where the wolves would be introduced, or where they would eventually spread to. On analyzing the benefits, there is the overall benefit to the ecosystem that the reintroduction of this predator would regulate overgrazing that is taking place in some areas of the Rockies and along some waterways. There is the financial benefit of wolves actually attracting tourists, if they are able to witness and see this endangered species in various areas in a safe manner. It would bring back an indigenous species to the state that had been previously wiped out by human actions. If the population became large enough, there would also be the financial benefit of hunting licenses in the future.

As someone who is regularly in the mountains on hikes with my black lab, and lives on a ranch with livestock, I ultimately chose to vote against the proposition as the social marginal benefits didn't outweigh the costs in my mind. Nonetheless, it was a majority rule vote, and the proposition ultimately passed, but very narrowly (it won by about 56,000 and was the closest decision on the 2020 ballot) and is currently in progress today.

Gamestop Market Revolt and the Rationale of Voting

 In early 2021, retail investors embarked on a mission to save a stock called Gamestop ($GME). Hedge funds were taken by surprise and after a week of various “market attacks”, they lost an estimated $12.5 Billion to retail investors who were tired of financial cronyism. Read this article for a more full explanation. 

    Participating in a market is akin to a continuous election. I used our idea of a rational voting utility formula to analyze this event. Our expression for participation and rationality is thus: 

p[B] - C + D > 0

The cost of participating was purchasing the stock GME (or any memstock). Around $200-300 depending on buy-in time. Moreover, D (intangible fervor) was significantly high for many people, who saw an opportunity to strike back at institutions that had wronged them. Many posters “delivered” dramatic speeches, about getting revenge from their parents suffering during the ‘08 crash caused by the same crony establishment.  The probability of benefit was also most interesting. It was a gamble on whether the stock would end up higher or lower than originally purchased. Yet, the probability was significantly higher than a normal election where you’d either win or lose. You could either gain big but even if you lost, you could still have partial recuperation. The potential benefit was also high. There were believable claims of a gamma squeeze occurring amid the 141.8% float of the stock. This would’ve meant possible financial benefits over $5,000.

Therefore, it was rational for people to have participated in the 2021 GME Stock Revolt if expected benefits and intangible satisfaction at striking crony institutions were not offset by the costs of participating. Sample equation: .75[$375] - $200 + $500 > 0. Therefore, like gambling or voting it was rational for many to participate in the GME and AMC markets. 

(Warning some of the comment sections of the links contain foul language)

Spacial Location Theory of Tampa's Designer Stores

As someone who loves to spend my paycheck shopping for clothing, I frequent the Tampa International Mall quite often when I am home for the summer or on breaks. I love Nordstrom, Lululemon, and mainly boutique stores, which happen to be on all different sides of the mall. As I walk from one end to the other, I have noticed how close together the designer or higher-end stores are in comparison to your "lower or average-priced" stores. In fact, Gucci, Louis Vuitton, Tiffany's, David Yurman, Michael Kors, Coach, Saint Laurent, Swarovski, Golden Goose, and Tesla are all located on the second level near the food court right next to one another, just within a few steps. 

This is a perfect example of Spacial Location Theory. Spacial Location theory is the idea that if there are two firms with identical output, uniform distribution, and spatial mobility, they will eventually come to locate next to one another in the middle of a specified distance to steal customers from each other and limit the distance the average shopper has to walk in order to shop in their store. If you think of International Mall as its own community, there is in fact an optimal place for these types of stores to set up as they try to poach other shoppers interested in designer items -- the exact center of the mall right next to one another. And they did just that. These designer stores have close to similar outputs (high-end clothing, shoes, and jewelry) and are drawing a similar demographic of people who want to exemplify they have money to spend on their appearance. Setting up shop right next to one another shows that these designer companies understand the need to "race to the center". Instead of being scattered around the mall, they can all converge to the median and maximize their profits, and individuals chose these stores to maximize their utility. 

How much would you pay to change the stock market?

Through the first 623 days of their respective presidencies, the stock market has looked quite different for Donald Trump and Joe Biden. Under the Trump Administration, the S&P 500 (the most common index used when determining the market’s health) was up 28.18% on his 623rd day (which is better than the average 623 day period; the average 623 day period is about (about) 16%). Under the Biden Administration, the market was down, -0.21%. Factoring inflation, this real loss is much greater, but nominally, the difference between the two is 28.39%. Now, think about this in terms of how much you would be willing to pay to change the outcome of the Presidential election. Of course, who the president is doesn’t directly affect how the stock market goes up and down, but let’s assume you have a stock market obsession; you put $10,000 into the S&P 500 each year, track it constantly, and you think who the President is has a strong, strong correlation to how the indices perform. 

To determine how much an investor would be willing to pay, we have the equations MB > MC, MB = |V2 - V1|, B = MB, E(MB) = pB (E(MB) = Expected Marginal Benefit), and pB - C > 0. From ECON 2010, if MB > MC, the action should be done. So, the Marginal Benefit equals the amount you would pay for each candidate to win. For Trump to have won, the investor would pay $2,818, or the amount his portfolio would be greater (he believes) if Trump had won. For Biden to have lost, he would have paid $21, or the amount his portfolio is down. So, we plug these numbers in for V1 and V2, and get our MB. The MB is $2,839. We know from the reading that p’s value is 1 in 10,000,000; there is a 1 in ten million chance that your vote is the deciding vote. Therefore, pB = $2,839 * 1/10,000,00, or 0.0002839; less than 1 cent. The cost, C, we will assume is $17, or the median hourly wage in 2020. Plugging into our equation, we have $0.0002839 - $17 > 0, which is false. Therefore, voting is irrational even if you put $10,000 into the stock market in 2020. But, the paradox of voting states that there is a positive third variable, we’ll call it “u”, that stands for utility gained from voting, or civic duty. Plugging that in, the equation will look like pB - C + u > 0, meaning that u has to be at least $16.9997. This is important; the way I think about it is, would this investor be willing to pay $17 to put a Donald Trump sign in his front yard? If yes, then voting is rational for him. If not, then it isn’t and the voter is stuck with his portfolio’s losses. 

Irrational Baseball Fans?

A couple weeks ago I read a little a piece in this newsletter that concerned Aaron Judge's home runs. The prices of Yankees seats were going up tremendously, partly because of the chance of catching the record breaking ball that could sell for between $500,000 and $5 million. However, if someone was going to the game just for the chance of catching the ball, it would be an irrational decision. 

The probability of choosing the right seat at the right game and then actually catching the ball is so low that the expected value from just the monetary costs and benefit is non existent. People might have overestimated their chance of catching the game ball (similar to how people might overestimate their ability to affect an election) and bought a ticket based on this. But, I think the real reason that people bought these Yankee tickets was because of the utility of going to the game and the expected utility of even seeing the record breaking homer exceed the cost of the ticket. So in the expression pB - C + D, D essentially outweighs C, as pB is tiny.

Altruism and the Free Rider Problem

    Last week a category 4 hurricane hit my hometown of Cape Coral. It was one of the worst hurricanes to hit the US in decades, definitely the worst to hit my area. Like I said in class my social media has been dominated by images of flooding, boats in people’s backyards, and now pictures of people’s favorite Memories at a lot of places that are no Longer there. Times like this are pretty nerve racking, all my out-of-state friends have been itching to go back home to see what’s left and to help our families who stayed behind. My family is all ok, limited cold water is back and they expect power to return by the 9th of October. It is hard to get food and water before a hurricane because people buy out the shelves in worry. After the hurricane there is a shortage of potable drinking water and food. I have seen a lot of scary and upsetting images but I have also seen a crazy amount of care and compassion. So many people I know have been working for free around the community to help rebuild, have raised money to buy supplies to give out, or are using their boats to shuttle people on and off the islands which no longer have road access to the mainland. 

    The wellbeing of people in the Cape Coral/Fort Myers area is a public good. You cannot exclude people from improving their wellbeing (and I am sure there are some legal routes of harming their wellbeing) and my benefitting from their well being doesn’t take away from my friends benefit. It should then suffer from the free rider problem and people should be hesitant to contribute to the costs of their wellbeing because there is a communal benefit. In our Gruber textbooks, altruism is one solution to the free rider problem. In a totally rationally self-interested world we make decisions based on the costs and benefits to ourselves. But sometimes, and I would push to argue a lot of times, we do care about the outcomes of others. That’s why even when it doesn’t make sense to contribute personal funds there are Restaurants offering free food for as long as they can make it. And I’m sure the economists will say that there are still remnants of the free rider problem, that there is still an under provision of aid, but today I am choosing to focus of the positive. 

The Voting Paradox of the Funk Parents

     “So what even is Public Choice?.” Earlier this morning I was sharing my class schedule with my mom, and she was very perplexed by the idea of this class. At first, when I tried to describe it, she thought like most people, that it was a class discussing economic policies in the political realm. In an attempt to make it more clear to her, I shared some of our topics from class, and we got into an interesting discussion about voting and rational abstention. She explained to me a very interesting example of the voting paradox we discussed in class that has been occurring within our own family.

    You see, historically, my mom has voted republican in most elections, while my dad has voted democrat in those same elections. Both of them vote in the same district of the same state - congressional district 5 of Tennessee. She explained that they are both very aware that when they go, often together, to the polls for an election, their votes cancel each other out. They know their votes aren’t decisive because they know for a fact it was matched by someone else of the opposing party. They see the irony of this and even make jokes about it, so why in the world do they keep voting? According to our readings, they are completely irrational! I asked them about their motivation and they both agreed that out of a spirit of patriotism and an appreciation for our respect to vote, we must go to the polls even if we know our vote won’t make a difference. For both of them, the utility from acting on their sense of civic duty fully outweighs the costs of voting. This does not surprise me at all coming from my mom. I know she receives large utility from doing patriotic things and her cost of voting is relatively low now that she only has one kid at home and works part time. What surprised me was to hear this from my dad. He has to take time away from his work, making the cost of voting relatively high, and isn’t the most patriotic guy compared to most people I know. Regardless, they both must receive a lot more utility than I realized from fulfilling this civic duty because they continue to go year after year to vote despite the high costs and knowing it doesn’t make any difference.