The UVA Housing Dilemma

          As most first year students can attest, the off-grounds housing situation at the University of Virginia is extremely stressful. Within the first month of school, there is already a frenzy surrounding the housing situation for the following year. As a first year, this is most likely well before you have even met the people you will truly be friends with the next year. Making a decision about your life 12 months in advanced is a daunting task for anyone. Year after year students complain. So why hasn’t the situation changed?

It may be due to the fact that this situation contains the defining characteristic of a Prisoner’s Dilemma. All student’s in the UVA community have a dominant-strategy to sign their lease earlier than all of the rest, to make sure they secure their optimal apartment complex, while everyone would be better off if we pushed the “frenzy” back to spring semester. As most leases commence in July, signing in the spring is still early. Singing in the spring would give student’s more time to figure out their friend and financial situation, give them more opportunities to research apartment complexes before signing a lease, and have a smoother adjustment for their first semester of the school year. However, if only a few students decide to wait for spring semester to come around, they will have significantly less choices and will be much worse off than if they had just decided to sign in October. If everyone waits until spring semester except for one student, that student has all options available to them and no competition for apartment complexes, they are also much better off signing in October.  

 For this example, we are going to assume that the prices of the apartments are constant throughout the year, that the benefits of signing later apply to all students equally, and that only UVA students are participating in this apartment renting situation. In the situation given, the matrix below represents the dilemma along with numbers representing utility (Student A/Other UVA Students). Student A’s optimal choice is to rent in October regardless of what the other UVA Student’s choose. The same is true for Other UVA Students. In this situation, all players signing in October is the dominant-strategy equilibrium, but it is also a Pareto inefficient equilibrium. At least one, in fact all other participants can be made better off without making another player worse off.

Student A --> Other UVA Students	Wait until 2nd Semester	Sign Lease in October
Wait until 2nd Semester	(10, 10)	(12, 3)
Sign Lease in October	(3, 12)	(7, 7)

 Perhaps we should all decide to hire a thug to break the leg of every student who tries to rent an apartment before the spring semester in order to push us away from this Pareto inefficient equilibrium.

Professional sports: Non-rival (and non-excludable)

This year, the soccer club DC United moved into a brand new stadium. Among the controversies surrounding this move was the role of public funds, by some estimates accounting for half the cost. While the merits of this funding scheme are grounds for debate elsewhere, it did get me interested in the placement of professional sports teams more broadly on the “public-private spectrum.” On the one hand, the stadium experience is on the private end of the spectrum. It is rival (we can’t both sit in the same seat) and excludable (if you don’t have a ticket, you will get turned away at the front gate). However, the more abstract act of “consuming” the “fandom experience” shares neither of these qualities. My being a  fan does not affect your ability to be a fan, and there is no reasonable way to exclude anyone else from being a fan. Assuming that one derives benefit from their fandom regardless of one’s level of financial support for the team, it seems to have the makings of a public good. To support this analysis, assume professional sports operate in a free market (which given the earlier DC United example, we know is not the case).

Extending the idea, if you apply Buchanan’s intuition from A Theory of Clubs to professional sports, the good’s “publicness” is revealed even further. Nobody wants to be the only person cheering for their team. As such, the optimal “N” of people to share a fandom for a professional sports team is high. This high optimum “N” combines with the cost saving features of collective membership to motivate a possible public provision of the good.

Public provision could help address the market failure associated with pro sports fandom. To illustrate this point, suppose there are two fans of the Detroit Lions, each representative of a different sector of the fandom: Lee and Matthew. Lee is a die-hard fan: he holds season tickets and has a den decked out with Lions merch. Matthew is also a fan of the Lions, he derives a lot of benefit when they do well. Unlike Lee, however, Matthew only occasionally watches Lions games at his local sports bar, keeps up with scores on his local news channel, and doesn’t own any merchandise. Though both fans derive similar benefit from their fandom, Lee alone is bearing the cost, an example of a free-rider problem. Because the team management relies in part on revenue from ticket and merchandise sales to pursue top talent (athletic and administrative), this could lead to an underproduction of the good. Given this market failure and our previous assumptions, public provision might better approximate the allocatively efficient outcome.

WiFi and the Free Rider Problem

I live in my sorority house with 25 other girls and one single WiFi modem that lives on the first floor. As you may guess, my third floor room receives little to no WiFi access at any point during the day- a fact that causes me (and my 7 other third floor roommates) several issues.

Determined to rid our floor of this problem, a few of my roommates proposed that someone should go buy an additional router that would resolve the issue and bring the gift of WiFi into our suite. If we start with the assumption that WiFi would act as a sort of public good, we assume that WiFi would be a non-rivalrous, non-excludable good for all of the girls living on the top floor. When we proposed the logistics of adding the additional router into our suite and imposing an equal cost on all 8 members of the suite, two of our roommates disagreed and we knew we would eventually run into a serious free rider problem, leading us to the decision to not buy the router.

This is the perfect example of a market failure because of the free rider problem. Our suite underproduced the public good of WiFi at an inefficient level because of the lack of cooperation from everyone and the assumption that those who did not pay would still probably use the WiFi network. One way that we could rid our suite of our free rider roommates and produce WiFi at an efficient level is if the sorority house itself provided the WiFi as a private, excludable good in which we had to pay a monthly fee in order to receive the password giving us access to the network. This solution would allow our suite to produce the WiFi at the optimal amount for those who are willing to pay and would save me from writing this post by using a hot spot and wrecking my family's data plan.

Wait.. so who had the property rights?

“Who authorized the construction of an industrial park within a community? At the same time, who authorized the construction of a school located near the industrial park? These are simple questions that do not have concrete answers” expressed a concerned woman from Quinteros, a Chilean community suffering from intoxication due to toxic hydrocarbon fumes since early August 2018. According to BioBio Chile News, Quinteros is one of Chile’s largest industrial parks with 17 industries which has polluted nearby communities causing the suspension of 31 schools. Since this area is known as the “sacrifice zone,” community members have begun a series of pacifist protests against the polluters resulting from the decrease in quality of life. Due to the large concentration of factories and power plants, there is no clear census of who the real culprit is.  For this reason, this event has been named as a national crisis, where the community of Quinteros is demanding serious action from the government to clean up the toxic fumes.

According to Coasian Theory, both parties impose a cost on each other, yet a bargain with zero transaction costs and well defined property rights is an idealistic and quite unrealistic scenario. Currently, there is a cap on the amount of toxic fumes that factories are supposed to emit and if ever surpassed the firms must pay a substantial fine. The fine however, which would be the compensation from the firms to the community of Quinteros gets lost in the grand scheme of transactions. The money directly goes from the firm to the government, but then there is a lack of transparency as to where the money ends up. The contradiction then becomes: the government designated the area as an industrial park, yet now the government has defined property rights making the firms liable for the damage. In no way that means that I am arguing that the burning of coal is worth more than the lives of the people of Quinteros, instead I want to point out how the factories comply with the norms and regulations, but it’s not enough for the community members to continue with their daily lives.  

Through this chaos, there is a clear market failure resulting from the negative externality of production caused by the 17 industrial plants on the community. The industries impose a cost on the civilians, which means that if we were to visualize the situation on a price and quantity graph, the negative externality of production would depict a higher social marginal cost (SMC) curve and a lower social private cost (SPC) curve, thus creating a dead weight lost (DWL) triangle between the two parallel SMC and SPC curves. This results in a disagreement between the quantity that represents allocation efficiency and the quantity that gets produced (Q*).  The community is willing to lighten the protests and allow the continuation of production if and only if the “government closes the Codelco foundry, regulates arsenic norms, improves emission standards and increases tests fun on children.” In order for the industries to keep producing they must provide these non-monetary compensations to the community. In other words, the industries’ Private Marginal Cost (PMC) plus these previously mentioned costs become the new SMC which must be less than the Social Marginal Benefit (SMB). It is essential that the government keeps an eye out for free riders, especially since the factories tend to produce similar fumes which then makes it difficult to distinguish the source of the problem. At this point, all the industries are liable for the problem imposed on the families, where regardless of who owned the original property rights, it looks like the community of Quinteros now has the final say in how the problem will get solved.  Does that mean that the ideal bargain between the industrial plants and the community should be done directly without the government as the intermediate party?

An Uber Theory of Clubs

Last week while I was reading "An Economic Theory of Clubs," I found myself largely agreeing with the distinctions that Buchanan made from Samuelson on the notion of public goods. Then I saw the graph on the second to last page and felt the magnetic pull that all Econ nerds feel when they see cost curves. Normally, I get the intuition behind the graphs that I see, but this time it was different.  This benefit curve sloped up at first and that made no sense to me. Buchanan was saying that it is possible for an individual's benefit to increase from sharing a good with another person and he used this to discuss the degrees of publicness that a good could have.

Feeling assured by the quickly approaching final page of the paper, and my unearned arrogance, I hastily scribbled on my copy "Why would it increase at all?" I felt just as assured of this when I entered class and still assured after I left it. "Who would want to share a pool when they don't have to?" I kept asking myself that question, because I would certainly rather have a pool or probably anything to myself rather than split with someone else. Having accepted the fact that I was right and the paper wrong, my thoughts turned to my plans for the evening and how one friend would have to Uber over to a restaurant where we were meeting. The only problem was that she refuses to take Ubers alone.

Then it hit me, I should have known not to think I'd outsmarted a Nobel laureate, it was entirely possible that for some people, my friend included, Uber functions as a club the way Buchanan described.  For my friend, there is almost no benefit to riding an Uber by herself.  She can back up this belief with a poor record of safety for women in Ubers. Her benefit from an Uber increases dramatically with the addition of another person and then falls as the car gets too crowded and hot. Further, the cost curve of an Uber reflects the same fixed cost that gets spread over more and more people that Buchanan illustrated. So, while I still believe strongly that a swimming pool does not follow the curves of Buchanan's clubs, I will admit that, for some, an Uber pool just might.

Taking Matters Into Their Own Hands

When I visited South Korea, my friend made sure to take me to Ihwa Mural Village. A once poor neighborhood, Ihwa Mural Village was transformed back in 2006 by the Ministry of Culture, Sports and Tourism. The village is now covered in beautiful murals done by local artists. The revitalization of the village worked and Ihwa Mural Village is now a popular tourist attraction, especially after becoming the backdrop of popular Korean Dramas. Local store owners have greatly benefited from the influx of customers and artists get a chance to utilize their talents to benefit their community. Seems like a win for everyone. So, what's the fatal flaw that created a negative consumption externality? Noise.

What used to be one of Ihwa's main attractions

Sign asking visitors to be quiet

Villagers, while appreciative of the increase in business, became fed up with all the noise that tourists were making. One shop owner stated that it got so bad that he has "chosen only to work [there] and to live far away from [the] area." Signs are now all over the village urging tourists to be mindful of village residents, but some villagers decided that signs were not enough. One night, three village residents decided they were going to fix the negative consumption externality on their own. They took buckets of gray paint and covered up one of the village's most famous murals. This sent a strong message to tourists that these villagers no longer intended to bear the costs of their visits.

What the stairs looked like when I visited

After visiting Ihwa Mural Village myself a couple of summers ago, I believe the villagers' problems are far from over. Even after the destruction of one of the most famous murals, it was still crowded and loud. In order to mitigate the negative consumption externality, I believe fees must be put into place. Currently, there is no fee upon entry to the village. As a result, tourists can come and go as they please, leaving the villagers to shoulder the entire cost of their stay. The addition of a fee would help fix the current over-consumption that is taking place, bringing the village closer to allocative efficiency. If nothing is done, Ihwa Mural Village runs the risk of being destroyed by angry villagers which would in turn greatly harm local store owners. In order to remedy the negative consumption externality, fees upon entry should be implemented.

College Athletes SHOULD Be Paid... by the Government

Imagine you are the newly elected governor of Virginia. A key part of your platform was to help the state economy by improving the quantity and quality of the educated labor force in the state. As all politicians have clearly illustrated over the years, it is much easier to say you are going to improve the economy than it is to actually do it. Thus, you know the importance of coming up with a unique yet impactful solution to this problem.

A couple months into your term, you are at a UVA football game, rooting on your alma-mater. Shortly after a last-second, game winning touchdown throw, you are happily leaving the game when a young boy decked out in full blue and orange catches your attention. He looks up to his parents and says, "I'm definitely coming to UVA when I'm older!" That's when it hits you! Prospective students are drawn to schools with great athletics programs. In fact, the "Flutie Effect" notes that a college football team going from mediocre to great has the same effect on the quantity of applications as a 3.8% decrease in tuition. Thus, the key to improving the state economy is to improve UVA football.

I know this may sound like a bit of a stretch so let me break it down. A better football team at UVA means more applications. More applications mean that UVA admits more students and/or more qualified students (assuming that increased athletic success does not change the composition of the application pool by deterring academically-successful students from applying). This means that there will be more qualified graduates coming out of UVA. Since businesses in the DMV recruit heavily from UVA, this means the overall quantity and quality of the educated labor force in the state will improve. This makes your constituents happy, it improves the overall standard of living in the state, and also leads to increased production for the businesses that hire these students.

This is a classic example of a positive production externality. The production of high-quality collegiate football leads to an increased educated labor force in the state. The SMC is lower than the PMC, and thus high-quality collegiate football is underproduced (a concept that UVA students are all too familiar with). Therefore, I argue that college athletes should be paid. Not by the NCAA. Not by the school. But by the state. Paying athletes will attract better athletes, and the athletes will train harder if their is a monetary incentive. This leads to a better athletics program, and, as mentioned above, a better state economy. You implement your solution, and it works! It works so well, in fact, that Amazon chooses Northern Virginia to be the site of its HQ2, which has several positive externalities on the state (but that's a blog post for another day).

Economic Analysis of Social Media

The introduction and growth of new technologies for communications has affected the world in an exponential manner, pertaining to business and the economy, and considering new pathways of marketing products. As we know, aggregate supply has been shifting positively since the 90s due to the increase in complicated technologies, with the internet arguably having the greatest growth magnitude in human history. I am here to discuss the costs of a particular subset of new internet technology, social media.

The Financial Times displays a new and costly view on the introduction of social media to the developed world (here). We have any piece of information that we want to know in our pocket; it can be accessed with a few taps of our thumbs. As we can provide through anecdotal evidence, such simplicity regarding access to information is immensely distracting. Right now I could completely neglect this assignment and decide to watch random Youtube videos, a guilty pleasure that is most harmful to an imperative aspect of modern life, which is productivity. As displayed in the article, it is shown that when global smartphone shipments sharply increased, productivity growth in advanced economies measured in percentage points sharply declined. Although we must keep in mind that correlation does not equal causation, this is an interesting point. Advertising strategies today are near subliminal levels, which bridges to the next point of the article; this attention capturing strategy potentially correlates negatively with a persons true underlying preferences. The "click bait" strategy of the internet age simply does what it is designed for and what the name implies. Since a consumer's utility function is dependent on the goods that a consumer consumes and is maximized with that consumer's budget, this creates an inaccurate demand curve. It seems clear that there are some problems with the way that the modern citizen of a developed country operates due to these theories.

The decrease in productivity growth caused by social media is a negative consumption externality. When an individual engages with social media during work or during a situation in which that person is supposed to be doing something productive, that person's lack of production causes the company or the people around them to bear the cost of their lack of production. That person's coworker's or peers has to make up for their lack of production to cover the dead weight loss or they just bear the cost. Considering this void in the market for productivity, it is unclear who should bear the cost of this externality to reach allocative efficiency. Should that person pay for the value of the production lost due to their social media usage? Should the social media company pay this cost for distracting the worker? If it is assumed that this extenality is happening on a large scale and the the worker is not liable for damages, there is a holdout problem. I imagine, for example, a company blocking websites on their internet network, then the workers becoming fed up with the controlling nature of the company, saying they don't get paid enough to be worked so hard with so few breaks, and finally, those workers taking action and causing more damage to the company. Many companies may say that these workers are lazy and unproductive, but they may neglect the very root of the problem with the unproductive modern worker. This article argues that the "click bait" advertising done on the internet causes people to be less mindful in their decisions, caring less, and in turn making people less empathetic. If we assume that empathy is a desired social characteristic, then we can say that social media is creating a negative production externality in the market for empathy by decreasing the mindfulness of people. This, which is such an abstraction, I find to be most interesting. There is great cost to be paid when on a large scale people are not empathetic; discriminatory laws are passed, businesses act without regard for their people, financial crises happen, greed runs rampant, crimes are committed..., and many others. Considering that this cost is at this point immeasurable, who should bear it? The person who lacks empathy? The causer of this person's lack of empathy? What problems does this new social norm entail?