So Long ABC Stores

Virginia Governor Bob McDonnell is trying to push legislation to privatize the liquor sales in Virginia. Doing so would end a 76 year Virginia government monopoly on the sale. Governor McDonnell plans auction off 1,000 new licenses to sell liquor to private retailers ranging from local drug stores to grocery stores and even chains like Costco. This auction is expected to provide the government with a much needed initial windfall of money of between $400 and $500 million to be spent immediately on roads and construction. The use of an auction for allocation is a good way to minimize any potential rent seeking by corporations as a liquor sales license is sure to be a very lucrative prize. The auction coupled with the new market for alcohol sales license will ensure that the licenses get into the hands of the companies that want them the most.

Some “public interest” opponents of the bill believe that the Government wants to privatize sales (to the detriment of Virginia Citizens) because it is being influenced by alcohol lobbyists who are asking for less regulation to help their individual sales. This goes against Stigler’s theory that industry actually seeks out regulation to block entry of new competition. If passed, the bill will create a competitive market for alcohol sales which should lower prices slightly and actually provide more brand options for consumers; however, alcohol sales in the state are expected to increase overall, so this argument is definitely complicated. Considering the government will have to make extensive budget cuts to make up for the $47 million per year loss in profits from alcohol sales (which happens to be one of its most profitable sectors during the recession) it is hard to see how this is just being done for the benefit of the government. Governor McDonnell and his supporters are arguing for the bill on the basis of principal (the government should not be involved in the sale of liquor), economics (the competitive market should be allowed to function for this private industry) and for the benefit of consumers (convenience and options).

With the monopoly in effect the government currently gets slightly more than 50% of the price of a bottle of liquor. Without the monopoly the prices of bottles are unlikely to decline dramatically (although higher end brands like Grey Goose may be more affected) but the government will only receive about $2 in taxes per bottle with the rest of the markup going to the private sellers. While most would not argue that this redistribution of wealth from “big government” to private sellers is not a bad thing, the fact is that these losses to the government will have to be accounted for in some other form (say higher taxes). With monopolies and market control the problem is that resources are diverted in seeking the rent, not in the rent itself; so is a government monopoly really such a bad thing in this case? It appears as though the money from citizens was just being transferred to the government in the form of alcohol sales (although I suppose an investigation into the government’s relationship with alcohol wholesalers and producers could indicate some rent seeking). Furthermore, even though the plan to allocate licenses by way of auction minimizes rent seeking, with such a lucrative industry one can expect these opportunities to surface in the future.

Sifting Through the Smog

A New York Times article explains the legal action being taken by the state of West Virginia against the Obama administration regarding coal-mining regulations. At the direction of Governor Joe Manchin, the state is claiming that new federal mountaintop mining regulations are unconstitutional and place an unnecessary burden on the coal industry:

"The lawsuit, filed by the state Department of Environmental Protection, accuses U.S. EPA of overstepping its authority and asks the U.S. District Court for the Southern District of West Virginia to throw out the federal agency's new guidelines for issuing Clean Water Act permits for coal mines."

This raises several interesting questions, which do not have clear answers. According to Stigler, firms use the government to craft regulation in their favor. So then, who benefits from these regulations on the coal industry (Environmental groups, the renewable energy industry, local fisheries, etc.)? Could it be that these regulations are actually in the public interest as it is almost always claimed? Or rather is the inefficiency created by this regulation a type of "rent" that firms are seeking to capture for their own benefit?

NRA Endorsement of Perriello

This Daily Progress article discusses the recent acknowledgment that Tom Perriello will most likely be endorsed by the National Rifle Association in the upcoming election. The NRA follows a “friendly incumbent rule” by which they support pro-gun law makers seeking re-election.

"Tom hasn’t been afraid to stand up to members of his own party when it comes to fighting for the Second Amendment, and the NRA’s endorsement will signify to Virginia gun owners that they can continue to count on Tom to represent them,” said a spokeswoman in his campaign. Perriello has a strong history of defending second amendment rights and the NRA supports their friends who have stood by them in the past.

The article got me thinking about our discussion in class of the median voter theorem. If the single dimension policy space is a social conservatism continuum, or even more specifically a continuum of gun policy conservatism, what will this endorsement do for Perriello?

The NRA’s endorsement and Perriello’s pro-gun platform would move him (as a candidate option) along the continuum towards the conservative end. It can be predicted from the theorem that inevitably Perriello may lose the votes of some liberal anti-gun extremists as a result of isolation. Yet, it would also be assumed that he would gain the votes of those super loyal to the NRA in all its decisions Conservatives.

The overall gain Perriello would get from his position in the policy space would be contingent on the location of the median voter. If the median voter is already more conservative it is likely that the NRA’s endorsement and his pro-gun stance will benefit him, but rather if the median voter is more liberal (with respect to second amendment rights) it could do more harm than good in his efforts to win the election. Given that much of the 5^th district is heavily rural, I’d say this is really great for Perriello and could give him a big boost.

I Would Have Named it the Sabre Center

This Washington Post article discusses the enormous cost of building John Paul Jones Arena at our beloved University. Everything about the stadium is state of the art, least of which the price:

The building's total cost of $191 million includes about $130 million to build the center, nearly $14.5 million to outfit the dining, audio-visual and other areas, about $5 million for fundraising costs and $42 million to pay interest on bonds to finance the building over 20 years, according to Virginia executive vice president and chief operating officer Leonard W. Sandridge. Private donations, suite leases and sponsorships will cover all but $9.6 million, which comes from student fees to be paid over the life of the bonds, he said.

Only five percent of the cost is coming from public funding, which is astounding for a public university. A great deal of the cost is being burdened by private donations, even though they are certainly to be in the minority of people using the stadium. What could possibly motivate someone to put forth money when they could wait around and use it for free? Chapter 7 of the Gruber textbook highlights the main reason why someone would do so; the warm glow model:

Individuals care about both the total amount of the public good and their particular contributions as well. Perhaps they get a plaque with their name on it from making contributions, or maybe their contributions are known publicly so that their friends praise them for their generosity, or maybe they get a psychological benefit from knowing they helped a worthy cause.

Certain donor levels did get recognized for their contribution to the project. And for the paltry sum of 35 million dollars, you can have a state of the art basketball stadium named after your father.

Rent-Seeking and Economic Regulation Hurts Those in Mourning in Maryland

This 2006 article from the Baltimore Sun discusses how expensive funeral services are in Maryland (not to mention everywhere else in America) due to an early 20^th century state law that was passed in order to protect consumers from unreliable morticians; the article goes on to reveal that this law is actually popular amongst funeral business owners today in Maryland because they can use it to prevent legitimate funeral service businesses from opening up around them. The author of this article states that “funeral directors couldn't engineer this protection by themselves; they've had help from state lawmakers who have prevented attempts to reform the funeral laws. Few Marylanders are aware that one of Annapolis's more generous political benefactors is the Maryland State Funeral Directors Association.”

With this quote, the problem of rent-seeking within the funeral service business in Annapolis, Maryland becomes obvious. In terms we have discussed in class via Tullock’s chapter on the topic, because of the monetary gains that can be obtained from keeping regulatory state laws in place, there is an incentive for funeral business owners today to give money to the Maryland state government (aka spend resources on rent-seeking expenditures), and thus money is spent away from the natural direction of the market. Funeral home owners have fought innovations in the funeral service business that would lower funeral costs by “working with their politician friends…they have defended and strengthened anti-competitive funeral regulations aimed at stemming the tide of Internet casket sales, the expansion of funeral home chains and the popularity of cremations.”

In this rent-seeking case in Maryland, resources were wasted trying to obtain the “rent” of regulation to entry in the funeral service business. Therefore, I also felt as though this article was interesting because it provided a real life example that tied Tullock’s article on rent-seeking to Stigler’s article on economic regulation. The author of this article states that “people usually think that businesses dislike regulation. But businesses often find it profitable to have regulations crafted to impede would-be competitors. This allows politically well-connected businesses to charge higher prices and manipulate consumers' choices.” With this quote, Stigler’s argument of how businesses like government regulation because it gives them market power and control is proven. The funeral business owners give money to the government (rent-seeking) in order to make sure that it is hard for new funeral service businesses to open up and therefore their prices can stay high (theory of economic regulation).

My question after reading this article is, how will this cycle of rent-seeking and unnecessary regulation over entry into a market be fixed? Or will people in Maryland just always have to pay more for their funeral services?

The Economics Behind 'The Bachelor Pad'

Of the many hours I wasted watching the Bachelor Pad, I have found a way to gain some value from it—blog about it. This show relies on the economics of public choice in order to create unpredictability and drama. For those of you that are not familiar with it, it’s a TV show in which past bachelors and bachelorettes (From the TV shows of The Bachelor or The Bachelorette) compete for $250,000 and a chance of finding love along the way. At the end of each week an elimination ceremony takes place where all of the women vote individually on the man they would like to eliminate and the men do the same for the women. .

Right off the bat, the contestants divided into the “insiders” (contestants that knew each other before the show) and the “outsiders”. As a result, the women of the insider group would collaborate with the men on the insider group in order to see which man they should voted off. In return for granting the insider-men their wish, the men would place their vote based on what the insider-women requested. The outsider’s did the same. I think this is a great example of logrolling. These mutual agreements lead to both sides (men and women) gaining a better chance at achieving their preferences. Furthermore, just as Mueller describes it in Chapter 5.9, the bluffing problem certainly made its appearance on the Bachelor Pad, creating a good amount of drama. .

Mueller also mentions the problem that occurs when voting is done in sequence, as was the case on the Bachelor Pad. The holdout problem proved to be a very popular strategy for some contestants. Many times right before the last contestant was going to place his/her vote, the contestant most worried about being voted off would strike deals with the last voter. For example, Kip was on the verge of being sent home and Nikki was the last women to vote leaving Kips fate in her hands. Kip bargained with here by promising his loyalty to her in the future—a benefit Nikki only received because she was the last voter.

Finally, at the end of the show only one woman (Natalie) and one man (Dave) were left standing. Natalie and Dave were sent into separate rooms and were given the decision to either share the money or to keep it all to themselves. Who would receive the money was decided in the following manner:

• If both Natalie and Dave decided to keep the money, neither would receive it and the quarter million dollars would be divided among all other Bachelor Pad contestants.

• If one of them decided to share and the other decided to keep the money, the person that chose ‘keep’ would receive the whole $250,000.

• If both decided to share the money, each would receive half of the $250,000.

This is a typical prisoner’s dilemma. In class we discussed that the dominant strategy would be for both of them to decide to keep the money, which would leave both with nothing. However, if there are other convincing incentives put in place (like an inmate breaking the leg of the person who confesses) then this may be avoided. So the burning question the show left its viewers with was whether “love” was enough of an incentive for both Natalie and Dave to decide to share the money. I’ll leave it at that…

Tobacco ban in Britain

Tobacco advertising was to be banned in Britain by the end of 2002. This initiative, called the Tobacco Advertising and Promotion Act, also prohibits the promotion of tobacco products through free gifts, coupons, and spam mail. The government predicted the ban would have saved 3,000 lives a year and reduce National Health Service bills by £340m.

However, there is no evidence of a clear connection between tobacco advertising and numbers of smokers :

Conservative health spokesman Tim Loughton argued a clear link between advertising and smoking numbers had not been proved." Nobody is disputing that smoking is harmful - it is, it's a filthy habit, we hate it, we would like it to be rather less prevalent among the population, particularly the young," he said. Tim Lord, chief executive of the Tobacco Manufacturers Association said: "We have always believed that banning all forms of tobacco advertising will not achieve the Government's aim of reducing smoking. "We are particularly disheartened that we will lose the right to talk to our adult consumers." Our main focus is now to co-operate with the Government and officials to ensure that the regulations governing implementation of the Bill are as practical and workable as possible, particularly from the point of view of retailers."

From the social point of view, ban for advertising in such industry as tobacco can be easily justified. It is a bad habit that most smokers want to get rid of, and it is even harmful to nonsmokers. But are the acts of bureaucrats driven only by the desire to stop smoking? As we found in class, this is not the case. In such an oligopolic industry as tobacco, major firms might invest resources to induce the government (income of the government officials is often supplemented by bribes and gifts) to grant them market power through promotion of the advertising ban. This prevents other firms from breaking into the market, which drives prices up and creates rent for the major firms.

What a difference the rules make

Every spring University students head to the polls to decide on referenda and elect officials for a variety of organizations, such as Student Council, the Honor Committee, the University Judiciary Committee, class councils, and school councils. The University Board of Elections (UBE) is tasked with overseeing the elections, and as stated in its Rules and Regulations, UBE elections use an instant runoff process.

The process, which is based off the Hare system, requires voters to rank the candidates for each office from most preferred to least preferred. When the UBE tallies the votes, if no candidate has received a majority of the vote, the person who received the least number of votes is eliminated. The eliminated candidate’s supporters then have their votes redistributed to their second-choice candidate, and the process repeats until one candidate has received a majority of the vote, who is then declared the winner.

This system of voting made headlines due to the spring 2010 election for Third-Year Council Vice President. As this article in The Cavalier Daily shows, the race had four candidates: Abebe Kebede, Natalia Mercado, Chris Mullen, and Nitya Reddy. After the initial round of voting nobody had a majority, so Chris Mullen, the last-place candidate, was eliminated and his votes were redistributed. Still, nobody had a majority, so the next candidate with the fewest votes, Nitya Reddy, was eliminated and her votes were redistributed. The final round pitted Kebede against Mercado, and Mercado emerged as the victor by one vote – 664 to 663.

After the results were released Kebede considered challenging the results, particularly because in early rounds of the runoff process he had a plurality of the vote but he did not have a majority. Once candidates were eliminated and their votes were redistributed, however, Mercado had a majority and was declared the winner, even though it was only by one vote. Ultimately, with the UBE standing by the process and its results, Kebede conceded the race to Mercado.

The article’s ending does an excellent job summarizing this election’s lessons. One of the biggest problems with this electoral system is voters do not understand it in detail, which opens the door to skewed results. Moreover, Mercado believes that the system is “the most fair type of elections that we have at the University.” Is this really the case? Should the UBE consider switching to a different system?