The Market Failure of Great Smoky Mountain National Park

     Over spring break this past year, I was able to visit Great Smoky Mountain National Park. Attracting over 14 million visitors a year (being the most visited national park), I thought visiting in the "off-season" would allow for ample exploration, while allowing limited encounters with other visitors. Researching online, it was claimed that there was an entrance fee of $35. However, the park has no entrance stations, and does not require parking permits, allowing for mass visitation at essentially no cost to the individual. On the descent from Mount LeConte, the effect of this absence of fees became visible, as we encountered many other visitors and the litter they left behind.

    Parks with high visitation also tend to experience associated negative externalities. Littering and general wear-and-tear to trails and roads show that through mass consumption of this park, a negative externality in consumption is generated. While individuals benefit (PMB) through visiting the park, the overall benefit (SMB) is reduced due to the negative effects of this mass visitation (SMB < PMB) . Without collecting entrance fees, the park has no efficient way to self-combat these drawbacks. This is likely why the park is now establishing an actual fee system in order to help pay for the wear-and-tear the park experiences, internalizing these negative externalities: those that visit the park now take into account the associated effects of their visitation through monetary compensation. The National Park system prides itself on the preservation of natural beauty while also making it available to the public. This is a difficult game to play due to externalities present, and will likely require more tweaking of these fees in years to come to more effectively reduce this market failure.

Comm School Construction Externalities

    For students who live on or near the Corner, the fastest way to the academic buildings on JPA (Wilson, Nau/Gibson, etc.) is to make your way down East Range until the start of Brandon Ave which shortly intersects with JPA. Renovations on the Commerce School*, however, render Brandon Ave inaccessible north of JPA therefore increasing student commute times and thus decreasing well-being for a portion of the student populous (increased commute time = decreased time spent elsewhere). 

    In economic terms, what's occurring here, is a negative production externality.  UVA, in "producing" Comm School renovations simultaneously decreases the well-being of those students in the college (not comm) who use East Range and Brandon Ave to commute to class without compensation. The private marginal cost (to UVA) is lower than the social marginal cost (the cost to UVA + the damages to affected students). Unfortunately, there is no clear economic solution here from applying Coase Theorem. Any solution would likely lead to a free rider problem. UVA is a government institution and the area closed for construction is also government land, meaning the "producer" controls the property rights. In essence the producer has all the power and would need incentive from the affected party to impose any changes. However, most students would be reluctant to make any personal investment for the common benefit of a solution, hoping to free ride off others contributions. 

*Admittedly the whole construction zone is largely for medical buildings as well, but the small section that specifically blocks the path to JPA is for the Comm School.

Not Another Pledge Drive (Please!)

As an avid NPR Morning Edition listener, there is one thing I absolutely hate about the fall: pledge drive week. I really only want two things. First, I want Steve Inskeep, Renee Montagne, and David Green to tell me what I need to know that day. Second, I don't want to pay for it. National Public Radio is an example of a public good as it is both non-rivalrous and non-excludable. It is non-rivalrous because someone else listening to NPR (or in my case Morning Edition) does not affect my ability to listen to NPR/Morning Edition. It is also non-excludable since once the radio signal is broadcast, it would be very difficult to exclude someone from being able to receive and listen to it. This puts me in an exceptional position as a consumer of Morning Edition because I can exploit one of the limitations of the Coase Theorem by being a free rider. 

As Gruber describes in chapter 5, the public sector under-provides public goods because of the free-rider problem, which occurs when an investment has a personal cost, but a common benefit. This will lead individuals to underinvest. I, as a consumer of public radio, have a reluctance to contribute to NPR during pledge week. Any contribution that I make will cost me personally and will benefit everyone who listens to NPR. Thus, I have an incentive to not contribute. Public radio is especially vulnerable to the free rider problem because there are many consumers nationwide. Because public radio is vulnerable to the free rider problem, there is a potential role for the government to improve efficiency and fund public radio. This episode of Planet Money discusses the potential need for government intervention in public radio. On the one hand, because it is a public good, there is an argument to be made for the government to step in to combat under-provision and improve the public radio being produced. On the other hand, they mention the possibility of advertisements and big donors which could both fund NPR enough for it to be produced at the optimal level. In the case of advertisements, the advertisers would be the consumers (and the listeners would be the product). Since advertising is rivalrous (when one ad fills a slot, that slot cannot go to another ad) and excludable (if the advertiser does not pay, their ad is not run), this would convert public radio from a public good to a private good. This means the government would not need to act. The conversation, unfortunately, ends without a conclusion on whether government intervention is necessary in the case of public radio. As for me, for right now, I'll continue to be a free rider. Sorry, NPR (not really). 

High School Sports Complex

Throughout my time in high school, everyone was talking about our new beautiful sports complex. The new stadium would allow my school to host home football games for the first time, and the addition of a turf field would prevent rolled ankles, dirt patches, and other inconveniences that come with a poorly maintained grass field. Serving as a public good, community members would be free to use the facility at any time of the day.

One evening, I attended a discussion between homeowners and representatives from the school district. The homeowners were upset. "You think I want stadium lights streaming through my windows every Friday evening?!" In addition to the external cost of the lights, the residents in the neighborhood argued that increased noise levels, greater traffic congestion on game days, and the eye-sore of a giant cement stadium would decrease the value of their homes and negatively impact their quality of life. In terms of public choice, it is probable that the construction process (road closures, jackhammering, etc.) of the stadium would have been a negative production externality, meaning the social marginal cost of building the stadium would exceed the school's private marginal cost. Furthermore, the ongoing use (lights, noise, traffic congestion) of the facility would also provide a negative consumption externality felt by the homeowners, meaning the social marginal benefit of the sports complex would fall below the school's private marginal benefit of using the facility. In order to achieve allocative efficiency, both the school and the homeowners were forced to compromise. The school proposed using a new lighting technology that would minimize light pollution, thereby decreasing external cost. After negotiations, the school constructed a redesigned sports complex with the new lighting technology and limited seating capacity. After considering the preferences of the homeowners, these concessions by the school district brought the allocation of resources closer to the allocative efficient level. An interesting fact about this case is that my school, a public school, is a good provided by the government. The school district accounted for some of the community's preferences by initiating the building project, while neglecting the preferences of the homeowners. In the Role of Government, Friedman asserts that the government can establish new neighborhood effects in a community "by failing to charge or to compensate individuals properly". If these negative externalities had not been addressed, this new sports complex would have left nearby homeowners disproportionately worse off.

The Warm Glow of DC Buses

    While living in DC over the summer, I often used the Metro system to get around the city. At first, I maintained the responsible approach and paid for every one of my rides, swiping the card without thinking. Eventually after around ten rides, I began to notice an expected but concerning trend: I was only one of a few people who actually swiped my card for the buses. Other riders would either enter through the exit or simply walk right past the payment machine. A clear free rider problem was at play here. The local city government, the few farepayers, and the Federal COVID stimulus had to shoulder the burden of funding this public good, and ended up under-providing the good, creating a positive externality. The fare system and its enforcement by Metro officers provided excludability for the bus rides, but, due to the Pandemic, fares were relaxed and Metro officers no longer rode on the buses. Buses became a impure public good, where it is rival but non-excludable. One person's enjoyment of the bus would affect the enjoyment of another person due to crowding, but there were no longer measures to maintain excludability. Once I realized one did not have to pay to use the bus, we had all become free riders. 

    There are, thankfully, solutions to the free rider problem, but none of them are perfect. Reinstating the laws around paying the bus fare would temporarily increase fare payments, but methods for avoiding fares like entering the exit and fighting the bus driver would return from the past. The people who take the buses have grown accustomed to riding for free in nice air conditioning for as long as they want. Buchanan, in his writings, offers some thoughts around the free rider problem. The warm glow effect and altruism are more psychological than economical but they both combine in this instance to raise the possibility for greater fare payment. They both deal with the private marginal benefit gained from "doing your part." For bus takers, paying the fare creates private marginal benefit as one contributes to not only their conscious but also the DC Metro system. For example, I noticed that whenever a bus driver greeted the passenger at the door, the person was more likely to pay, as they would derive personal enjoyment or benefit from the act of paying. If bus fare is $2, the added PMB from the warm glow effect will provide consumer surplus for a paying bus passenger. The first time I did not pay the bus fare, the person behind said "Man, some folks just don't care." She had to pay while I got to derive benefit from it in the same way. Her moral compass and ethics provided private marginal benefit in her decision to pay the fare and she derived some consumer surplus or "moral profit." She, in fact, experienced the warm glow. While not a catch all, the warm glow effect certainly exists on public transit. The real solutions, however, must combat growing distrust of local government, infrastructure issues, and decreasing Federal funds, but perhaps through the warm glow and the reinstatement of stricter fare laws can combine to mitigate a small amount. 

https://www.washingtonpost.com/transportation/2022/02/07/metro-fare-evasion-pandemic/

Pollution of the Shenandoah Watershed

For over 30 years, my family has been fishing the Shenandoah River System. One of the headwaters, the South River, which flows out of the Shenandoah National Park and through Waynesboro, has been subject of the largest environmental damage settlement in Virginia history. In the 1930's and 40's, a DuPont facility manufacturing rayon released toxic mercury into the South River which is a tribute The devastating environmental effects of toxic pollution are well-known. Although experts predicted mercury levels to decrease, the soil on the banks of the river temporarily absorb mercury, but frequent high water levels cause the mercury in the soak to be re-released into the water. Even when I fish on the South Fork of the Shenandoah River, there are still signs to limit consumption of smallmouth bass due to elevated mercury levels. 

This is an example of a negative production externality: the production of rayon reduces the well-being of othersThe social marginal cost was higher than the social marginal benefit. In our text, Gruber defines an externality as when "the actions of one party makes another party worse or better off, yet the 1st party neither bears the cost nor benefit". The Coasian solution to this problem would have been for fisherman and local businesses to charge DuPont $x/unit of pollution. This charge would increase the private marginal cost, which would coincide with the social marginal cost, thereby decreasing the quantity of pollution. It is possible that a Coasian private remedy could have worked back then, but now, 70 to 80 years later, the solution is retroactive regulation and corrective payments. In 2016, the DOJ, Department of the Interior, and Virginia state government announced a $50 million settlement with DuPont to help finance "restore the precious natural resources of the South Fork watershed". 

Corrective Taxation and Vaping

 The Corner at UVA is a marker of change in Charlottesville. Even in the three years that most of us have been here we have gained and lost crucial members. Gone are the days of late night Sheetz, Little Johns (even Sammy’s briefly), College Inn and Armando’s. In their stead, we have a ridiculously understaffed Chipotle and a new Vape shop. The Vape shop is accompanied by a delta-9 store next to Grit and nicotine sales at Cohn’s, 7-day, and Corner Grocery. Personally, I would much rather have a small late night food stop than another store selling nicotine but it seems like the only businesses that can survive are ones selling alcohol or tobacco/nicotine products. I found a research paper online talking about the increased density and proximity of vape shops to college campuses. The study by Dai and Hao (2017) https://pubmed.ncbi.nlm.nih.gov/27302700/  found that there are more vape stores near college campuses. The conclusion of the study was pretty interesting. They suggested that since e-cigarettes pose a negative health risk to young adults that are not moderated by the private market that there should be some public regulation to limit its impact on young people. The argument is similar to the negative consumption externalities from smoking cigarettes. People smoke cigarettes, there is a bad odor (with potential health risks), and when they get sick they create a burden on the healthcare system and others. The risks of e-cigarettes are still being uncovered. While there seems to be little risk of harming others from secondhand smoke, there are some health risks posed to younger users. Their health problems could also pose a burden on healthcare that is felt by everyone else. 

    As a result of limited studies demonstrating the health risks of e-cigarettes, cities in the U.S. and other countries have implemented taxes like those on tobacco products. However, the strict association of tobacco with electric nicotine introduces another problem. E-cigarettes are commonly used by individuals in order to quit smoking tobacco, and as far as we can tell from current studies, are noticeably healthier (healthier is a relative term). Current regulations don’t take into account the differences between cigarettes and e-cigarettes, or the positive externalities from e-cigarette consumption, and instead they lump them into the same category with the same taxation. The result is a tax that overestimates the harm of consumption of e-cigarettes. An article published by Yale argues that e-cigarette tax increases will push young people to smoke cigarettes. https://news.yale.edu/2022/07/19/higher-taxes-e-cigs-likely-boost-cigarette-smoking-among-young-adults Much of the discussion around e-cigarettes emphasizes its potential dangers and ignores the results of overemphasizing this harm. Government regulation that attempts to correct for negative externalities is difficult enough, but how can they properly adjust for these two related markets? And how can they possibly implement well-informed regulation on e-cigarettes when there is so little information available about their real impacts? I found an interesting paper that goes through in more detail about the problems with the current attempts at corrective taxation with vape products and tobacco products if you’re interested. https://digitalcommons.pepperdine.edu/cgi/viewcontent.cgi?article=1077&context=sppworkingpapers

   

The Externalities of Rabbits

When reading Coase's article, The Problem of the Social Cost, his discussion of the externalities of rabbits stuck out to me, as I knew that I had heard about a similar predicament in the past.  No, I didn't learn about the liability of rabbits in another economics course, rather, I had read about a very similar situation in Miss Penny and Mr. Grubbs by Lisa Campbell Ernst. In case you are not familiar with this 90s children book, Miss Penny and Mr. Grubbs are neighbors who compete for the best vegetables at the town fair, however, when Mr. Grubbs becomes jealous because years of coming in second to Miss Penny, he buys numerous rabbits and sets them free to feast upon Miss Penny's harvest.

In the discussion spanning from page 511-513, Coase discusses the fact that a person may be liable for smoke without owning the smoke, so in the same way, who owns the actions of rabbits that devour a neighbor's produce? Regarding the Boulston case which held the rabbit owner liable, Coase notes that we cannot always know who is liable for the action of rabbits, but in Miss Penny and Mr. Grubbs, the situation is slightly different because Mr. Grubbs intentionally released the rabbits into his neighbor's yard--they didn't wander over on their own. Miss Penny was not involved in the transaction for the rabbits, but she still faces an external cost in the decimation of her prized veggies. While at this part of the story, you might think that Mr. Grubbs has created a negative externality in the 'consumption' of the rabbits because the Social Marginal Benefit (SMB) is less than the Private Marginal Benefit (PMB). But the story doesn't end there! Though her crops have all been destroyed, Miss Penny makes the best of the situation and finds a plump bunny to enter in the fair. When this bunny wins first prize, Mr. Grubbs' action can be seen as a positive externality in consumption because Miss Penny was not involved in the transaction for the rabbits, but was still able to benefit from them--the SMB was greater than the PMB. The switching location of the SMB and PMB lines highlight the challenge of internalizing and accounting for externalities. Who knew that a children's book could teach so much about the complexity of externalities?!