The Road to Externalities

Several years back, many Charlottesville citizens grew increasingly worried or excited over the prospect of a new Western Bypass.  Those in favor saw a positive externality: this road would make travel easier for many people.  However, those opposed- particularly those living close to the possible site of the road- viewed the negative externalities: the road would lower their home values and increase the noise level, disrupting their daily lives.

After taking economics classes, my views on this project have shifted.  Looking at roads in general, if a proposed road were built by a private company, which Friedman suggests is an option if the road were excludable, then the residents around the road could work out a Coasian solution.  Depending on the property rights, the road builder could either pay the residents for the right to build the road near them and cause them discomfort, or the residents could pay the builders to reduce the size of the road or simply not build it.  Under Coase's assumptions, either way would lead to the same outcome. However, in a real world situation such as this, there are not two clear sides.  Instead, some citizens will support the road, and some will not, while other free riders will remain uninvolved and hope that their side wins. Therefore, the transaction costs would be extremely high.

In the case of the Western Bypass, the government ultimately decided the fate of the road.  Although the government's decision is almost certainly not allocatively efficient, nor is it proportionately representative, it provides a solution to the confusion and chaos caused by the real world negotiations a private market Coasian solution would cause.

Government Shutdown Prevents "Grand" Weddings

The citizens and visitors of Flagstaff, Arizona are facing terrible nightmares due to the recent government shutdown. Vacations are ruined; weddings are being canceled; restaurants and stores are losing business. The recent government shutdown is creating an external cost of production to the businesses and people that reside near national parks. These national parks can no longer produce a service for visitors due to the fact that Congress cannot vote on a funding bill; therefore, tourism in the surrounding areas of national parks are suffering. This article illustrates the effects and potential future effects of the shutdown in the area surrounding the Grand Canyon.

The Grand Canyon attracts many people to the town of Flagstaff and creates a significant revenue for Flagstaff businesses. The privately-owned business, Arizona Raft Adventures, stated, "If the government shutdown lasts a month, as some suspect it will, Grand Canyon river outfitters estimate a million dollars in total lost revenue." It's not only the furlouged government employees that are affected by the shutdown, but also the employees and private businesses, like Arizona Raft Adventures, that depend on tourism. Further, people have booked vacations to the Grand Canyon and have traveled many miles just to be turned down once they arrived. A spokeswoman at the Grand Canyon entrance stated, "We have a lot of international visitors that we've turned away this morning." The negative production externalities are not only financially hurting the people of Flagstaff, but they are also depriving visitors and people from appreciate the beauty of these national parks. Is it right for these private businesses and Flagstaff citizens to pay for the additional costs that Congress is creating? I don't think so. 

High Impact Ruling

A recent NFL.com article explained the recent policy development in the NFL following a weekend riddled with helmet to helmet hits that caused several players to be carted off the field and left several others with concussions. The NFL wants to create an incentive for players to avoid this sort of brutal dangerous play. A spokesmen for the NFL described the new policy that would seek to curb these types of brutal hits.

"Ray Anderson, the NFL's executive vice president of football operations, said Monday that harsher fines and possibly suspensions for helmet-to-helmet hits could be coming immediately, even for first-time offenders."

According to the league, these type of hits create a negative externality in the production of their product, which is professional football. The impact on the long term health aspects and the short term ability to play full careers apparently outweighs the cost of removing exciting physical plays from the game. A major part of the popularity of the game is the physicality and brutality unseen in any other sport. Will removing these types of hit ultimately hurt the game's popularity and turn the game into a quasi-physical game of soccer with pads? Would a better solution to this externality to produce a public good for the players such as more advanced helmets rather than attempting to regulate the game further?

Regulation such as this will create a "rent" that one group will try and capture. What exactly is the rent of this new rule and who stands to gain? Could it be that the rent is an opening for less physical players to excel in the league? Could it be kickers all along who have lobbied for this regulation in order to finally take over the game of football?

Loudoun School Board Votes for Obesity (ok, maybe not directly)

At home for fall break, I encountered many high school friends. I was shocked when one of my friends informed me that her little brother (now attending our old high school) was required to pay $200 dollars for parking, $86 per AP test, and $100 per sport season. I looked it up online to confirm and found a Loudoun Times Mirror article on the topic. Immediately, all I could think about were resulting externalities. When I graduated from Heritage High School in 2007, parking permits cost $25 per school year and sports and AP exams were funded by the school. This past year there was a $15 million budget cut for the Loudoun School system and that is what has lead to these new fees. Externalities of the 700 percent increase in the parking fee:

• Positive: Encourages carpooling, riding the bus, or walking to school, leading to reduced pollution and traffic
• Negative: Inconveniences parents who have to drive their children as a result

The $86 per AP test also has its externalities:

• Positive: may encourage more students to take AP classes more seriously and better prepare for the exam
• Negative: could act as a barrier for students that cannot financially afford to pay for the exam

The $100 fee per sport played:

• Positive: can’t think of significant ones (maybe you can!?)
• Negative: discourages many students from trying out for the team if they know they won’t be getting significant amounts of playing time.
• Negative: it will become more difficult to get student to try out for the less glamorous JV and freshman teams.
• Negative: reduced participation in after school sports could contribute to drug, alcohol, and obesity problems.

Of the three fees, I am most skeptical with the sports pay-to-play fee. While the parking fee and the AP exam fee truly charge the individuals that are benefiting from parking and taking AP exams, I don’t think the pay-to-play fee does. Like I mentioned above, not all athletes on a team participate equally and arguably should be charged the same fee. Furthermore, playing time is based on a pure comparative measure (if your friend is a better athlete than you are, then he/she gets more playing time), so it is more difficult for the individual to decide his/her fate (unlike the parking permit where you are guaranteed a parking spot). For this reason I think the negative externalities of the pay-to-play fee are much more discouraging and I am interested to see if its costs will eventually outweigh its benefits leading to a reversal of the fee.

Are Long Weekends always a good thing?

Friday's Cavalier Daily held a column reporting on a proposition for Virginia state employees - obviously of concern for the University. Associate Editor Rebecca Rubin tells us that the Virginia state government is reviewing a proposal to place many government workers under a four-day work week of 10-hour days, maintaining forty hours per week. The idea, according to Isaac Wood of the Centre for Politics, is to save possibly more than $3 million in energy costs.

Wood apparently ignores the social costs or externalities of the proposal, calling the cuts "really painless" before he asks "do the benefits to the state outweigh the costs?" Rubin is more economically astute and (though without calling them such) assesses some negative externalities that the proposal could inflict. She highlights the inability of the public to work with the affected agencies for the additional day each week. Are there more externalities hidden here, positive or negative?

The Effect of Education on Global Health

This recent Washington Post article details the effect that a mother’s education level has on her child’s health. The article claims that an increase in women’s education indirectly leads to improved care for children because mothers are more likely to take their children to health clinics when sick and they are more aware of treatments and disease prevention methods. Increased schooling of women also results in these women having fewer children and children who are more widely spaced in age. The effects of women’s education have been seen in poor and wealthy countries alike and show that investments in education seem to be just as important as direct investments in health care. Here the author discusses the magnitude of the results:

Half the reduction in child mortality over the past 40 years can be attributed to the better education of women, according to the analysis published in the journal Lancet. For every one-year increase in the average education of reproductive-age women, a country experienced a 9.5 percent decrease in the child deaths.

This article provides further evidence that education has many positive externalities in consumption, something that economists have long been saying. A young girl can have a positive effect on the future of her family and the world by obtaining an education. Of course, the article does not provide a “threshold” level of education at which the biggest effects may be seen and in poorer countries, where the benefits of increased education would presumably be highest, obtaining even low levels of education is surely difficult. One final point from this article is that developing countries have options to improve their health prospects aside from simply investing in medical resources. The positive effect of education shows that investment in other public goods like clean water and roads should also have a profound effect on global health.

A 'New' Road in Northern Virginia...50 Years Later

In a few weeks officials in Northern Virginia will open the missing two-mile segment of the Fairfax County Parkway, ending a 50-year struggle to build a central road through Fairfax County. This Washington Post article about the Parkway begins by recounting the process to get the road completed. The road was first envisioned over 50 years ago, but due to intermittent funding from all levels of government the Parkway has been built in pieces. With the money to complete the final segment nowhere to be found, the project was on hold until funds from the American Recovery and Reinvestment Act finally broke the gridlock. Nevertheless, if Milton Friedman were still alive he would probably use the Parkway as an example of government inefficiencies and why government should not provide roads as a public good.

After discussing the road’s funding saga, the article talks about the Parkway’s positive and negative externalities. On the positive side, the road has an external benefit in production because it is a critical link to highways and other roads throughout Northern Virginia. Not only that, but it allows for the continued commercial and residential growth that helps Fairfax County remain one of the economic pillars of the Washington, D.C. metro area. (On a personal note, my neighborhood would likely not have been built if the Parkway wasn’t right next to it.) This growth is one of the main reasons why the road needed to be completed: the Parkway allows for easy access to Fort Belvoir, which is in the process of adding thousands of jobs due to the Defense Department’s Base Realignment and Closure plan.

Unfortunately, these positive externalities contribute to a major negative externality in consumption: traffic. The same Parkway that is a transportation link and engine of economic growth has led to the addition of thousands of cars on Northern Virginia’s roadways. I personally know how congested the Parkway becomes when both commuters and local residents are on the road during rush hour. In fact, in a perfect world transportation officials ought to be working on widening the road, though with both Virginia and Fairfax County still working to recover from the Great Recession, funding will likely not be available anytime soon.

Note: You might have to register for a washingtonpost.com account to see the article. You can also log in using a Facebook account to read the article.

Don't Know What You Got 'Til It's Gone

Last summer, the fourth biggest city in New York, Yonkers, was forced to cut a great deal of teachers and almost all of its extracurricular funding due to an ever increasing deficit. While many of the cuts resonate greatly with the community, one of the most surprising was the overwhelming vitriol directed against the decision to completely cut Athletics from the school districts. It has long been argued that children who play sports often see positive external benefits of consumption from playing sports; namely better grades, better health, and the decreased likelihood of consuming drugs and alcohol. But the comment from one of the students raises another potential lost benefit:

Darius Lofton, the quarterback on Gorton High School’s football team, told the meeting, “Without sports I am not going to college.”

The cutting of programs in this city has had overarching effects on the lives of its citizens, and many of these cannot be overlooked. For these students, the lack of sports leads to a very traumatic change in their potential future earnings. The benefits of saving money do not outweigh the negative consequences, at least with regards to the sub-group of student athletes. However, whatever happened to doing your work and going to college on your own merit? Maybe he can raise his grades in the free time he has now that he doesn’t have practice multiple hours every day and games every Friday night.

When Silly Bandz Get Serious

This Daily Progress article discusses the newest craze among school-aged kids - Silly Bandz. These "bandz" are being worn by people of all ages (I'll admit I have 3), but kids in elementary and middle school can be seen with enough silly bandz to cover half their arm. Schools across the country are citing the bandz as a major distraction to a proper learning environment and have resorted to banning the bandz. Cale Elementary School is the first school in Albermarle County to have banned these stretchy bracelets. "When you think about a distraction to the learning environment, it's through a multitude of things, whether that is arguing over them, [trade deals or] people accusing other students of stealing their Silly Bandz," said Lisa Jones, the principal at Cale. The schools banning these bracelets are arguing that there is a negative externality in the consumption of the bandz. It appears that the benefit to the school as a whole is much less than the private benefit to the consumers of these bandz - really cool 7 year olds. If schools continue to ban these bandz the fad that took the nation by storm this past summer probably won't last much longer.

Hairy Logic

In a recent a recent Yahoo! Sports article, the iconic dreadlocks of baseball star Manny Ramirez have come under attack by his new team's personal conduct policy. The Chicago White Sox have a rule that players must have a "neat" haircut, which would mean the unfortunate demise of Manny's flowing locks that have come to symbolize his larger than life personality that his fans adore. Ken Williams, the general manager of the White Sox explains, "from my understanding, it's not going to be an issue, and he's going to make an adjustment and conform to how we like to have our players represented out there."

This policy assumes that any player with hair that is not "neat" would therefore be imposing a negative externality on the team. It is the view of the management that such an unkempt appearance would tarnish the professional reputation of the ball club, and cause fans to consume less of their product in the form of ticket sales and merchandise.

This logic ignores the marginal benefits produced by Manny's hair. A large part of Manny's appeal as an athlete is his laid back goofball attitude, which is embodied by his wild looking hair. When fans pay to see Manny play or buy his uniform, part of it is due to the persona he has made for himself, not just for his production as a player. Furthermore, by forcing him to cut his hair, it could harm his on-field performance by damaging a source of his confidence. The question remains, do the benefits outweigh the costs of a haircut of this magnitude?

British Petroleum Externalities

This post by the New York times makes an overview of the greatest accidental oil spill in history. On the 20^th of April an explosion caused by a drilling rig working on a well for the BP oil company one mile below the surface of a gulf stream of Mexico lead to a major oil leak which continued for 86 days before 15^th of July when for the first time oil was prevented from gushing into the gulf. According to the press, the oil slick damaged the ecology as well as the fishery and tourism industries of many regions:

The oil from the gulf spill first made landfall in Louisiana. But in June, tar balls and oil mousse began to reach the shores of Mississippi, Alabama and Florida. Shortly thereafter it began to hit shore, smearing tourist beaches, washing onto the shorelines of sleepy coastal communities and oozing into marshy bays that fishermen have worked for generations. It announced its arrival on the Louisiana coast with a fittingly ugly symbol: brown pelicans, the state bird, dyed with crude.

Without using the economic lingo the press describes the scenario, which is a classic example of what we defined in class as a negative production externality. Various remedies can be applied to these problems to internalize the externality. One of those can be the Coasian Solution which is to hold one party liable for the damage and make it clean the spilled areas (which will bring the socially optimal quantity of pollution) and compensate the suffering parties for the damage. However, as there are huge numbers of people and various industries involved which makes the task of compensating everyone almost impossible. It is also hard to evaluate the damages the leak caused. What if the fisherman were going to have a bad year catching shrimp anyway? And how is it possible to evaluate how many tons of shrimp they would have caught without the spill? And how do you know exactly how much money was lost in tourism indsutry? Furthermore, according to the article the long run negative externalities caused by the spill are still uncertain as large amount of oil is being spread underwater rather than staying on the surface which arises the possibility of risk from oil in deep waters. But regardless of what the solution to the problem is, government needs to create incentives for the oil companies to invest in their technologies and account for the risk better to prevent such disasters before they actually happen in the future.

Some Taxes Might Make Our Future Society Healthier.

This New York Times article discusses the various arguments that economists and others make for imposing taxes on consumption as a possible way to raise tax revenue during tough economic times. The article states that there has often been economic support of “taxing consumption rather than income, on the grounds that consumption taxes do less to discourage saving, investment and economic growth.” The author of the article then proceeds to argue that consumption taxes are usually placed on goods which, when consumed, produce unfavorable effects on third parties not involved in the consumption of the good, aka (in terms we have used in class) goods that have negative external costs in consumption. The author argues that a lot of the time, when the government imposes a specific tax on the consumption of a good with negative externalities, like gasoline, the consumer will internally think more about the costs their gasoline consumption has on the environment, road traffic, and their neighbors’ daily activities, which is good for society as a whole (especially if the consumer decreases their gasoline consumption).

However, this article was especially interesting to me because it introduced new information about consumption taxes and the role of government in individuals’ lives that I had not thought about before. In the instance of a good like cigarettes, is the negative externality produced when the good is consumed more detrimental to society or to the consumer himself? The article argues that “if the consumption induces say, smoking- or obesity-related illness, it raises health care costs, which we all pay for through higher taxes or insurance premiums…Yet this argument has a flip side: if consumers of these products die earlier, they will also collect less in pension payments, including Social Security .” When considering all of these elements, what is the actual external cost of consumption of cigarettes on society? How does the government know how to tax cigarettes appropriately (as cigarettes will always be taxed)?

On a similar note, the article also addresses the issue of negative costs of consumption on the actual consumer in the future aka “the person today enjoys consumption, but the person tomorrow and every day after pays the price of increased risk of illness.” As the title of this article suggests, should we give the right to tax specific goods which produce negative costs of consumption for the consumer, like drinking soda, to the government in order to save our future selves from our current selves? If we do, this means society acknowledges that one’s present self is a different person from one’s future self, which is an interesting idea to consider. Also, would taxing soda and other high sugar goods have a positive effect on society today? Or just in the future? How would individuals in society feel about the government placing taxes on goods that they deem unhealthy for future society? Is this giving the government too much control? This article raises many valid points as to how negative costs associated with consumption can be appropriately taxed, but it also seeks to question if it is in the public’s best interest to give the government the right to decide what is healthy and what is not for individuals.

Frat Externalities

This 2002 editorial in the Cav Daily argues the University is right to subsidize fraternities (in the form of loans). The argument is essentially that fraternities bring so much good to the University community, that the University really ought to do everything possible to maintain an extensive greek system. Here's an excerpt:

The fraternity system’s contributions to the University community reach far beyond the undergraduate level. The fraternity experience trains men for success, making an impact that continues to be felt as an alumnus. With the Greek system at heart and the University as a backdrop, fraternity alumni continue to be integral supporters of the school through time, energy and financial donations.

Without using the economic terms, the author is arguing that fraternities produce positive externalities for both the University and the community, even though their primary output is apparently training "men for success." Hmmmmm. Are these the only externalities from fraternities? And what IS the primary output of fraternities?