The Negative Externality of a Local Police Raid

On Wednesday, August 28 the Virginia State Police raided 311 7th Street SW, just across the street from my house, to execute a search warrant.  The police force arrived with an armored vehicle, and dressed in full tactical gear, and neighbors were outraged and scared by their use of loud flashbang grenades, and assault rifles.  The police raid is an example of a public good because police protection is both non-excludable and non-rivalrous in consumption. 

In this case, however, the use of this public good, the state police force, resulted in a negative production externality felt by residents of neighboring homes; the raid imposed adverse effects on neighbors, without compensating them for the cost of these effects.  The social marginal cost of the raid was higher than the private marginal cost due to the marginal damage that the raid created, which caused a loss in welfare that can be seen in the dead-weight-loss on the graph below. In order to achieve social efficiency, the state police must account for the cost of the negative neighborhood effects, which would move q* → qae.  

I am pleased to say that I was not home while the raid took place, so I did not have to experience these traumatic externalities. 

Self Regulating Scooters

I love electric scooters. Companies like Lime and Bird provide convenient, cheap, and supposedly environmentally friendly transportation. However, they have conspicuous negative consumption externalities as they are often left in the path of walkers or acting as an unsightly blemish on an otherwise scenic location. Several cities have outright banned these scooters for the aforementioned considerations, in addition to safety concerns. Charlottesville seen a different method of dealing with it, with Lime being allowed everywhere but the lawn, and Bird being disallowed in Barracks and the downtown mall. These restrictions are enforced by the companies themselves, a good example of self-regulation by the companies.

Crozet and Biltmore: A Tale of Two Restaurants

Earlier this month, I wanted to spend some time with my friends by breaking bread with them. So we walked over to The Biltmore and had dinner. While we were eating dinner, something seemed off to me. The food tasted good, the company was good, but I felt an imbalance of costs and benefits! But the strange thing was, I didn't miscalculate the cost (I thought of everything from monetary to time costs), but rather, I miscalculated the benefit! All of a sudden I realized that Crozet Pizza–which is located right next to the Biltmore–had booked a live band for that same night. This practice is common at Crozet as bands have been shown to (potentially) be a great financial benefit to a restaurant/bar. Since they were playing outside, I could enjoy the music at Crozet while eating food at Biltmore.

After I remarked how lucky we were to one of my friends, the conversation quickly devolved into an argument. My friend remarked that this remarkable event was a positive externality; I remarked that it was a public good. After having some time to think about things, I realized that we were both right. First I realized that this was a positive consumption externality. "Positive" because my friends and I were benefitting without having to compensate another person and "consumption" because Crozet was not being compensated for consuming live music. If markets were perfect, we (or more accurately, Biltmore) would have been paying some money to Crozet. But this is also a public good because Crozet could not exclude us from using the good nor did their consumption of listening to live music affect our consumption.

After my friend and I finished our discussion on the economics of that night, we moved towards maximizing our utility by spending more time with each other and our friends!

Scott Stadium's New Beverage Policy

Recently, my friends and I were talking about the changes Scott Stadium is making to the 2019 Virginia football season. A notable change includes Virginia Athletics announcing that Scott Stadium will sell alcohol—beer, wine, and cider—during football games to attendees 21 years old and older. At first thought, I considered the many implications of the proximity of of-age Virginia students to a large stash of alcohol in a competitive, high-octane environment. One can argue this announcement introduces a possible negative consumption externality to Virginia football games. Given the psychological and physiological effects of alcohol consumption, consider other attendees who may be bothered by intoxicated Virginia fans who may or may not be rowdy. Thus, a Virginia fan’s private demand and consumption of alcohol, in this case, would directly affect the social marginal benefit, which for simplicity would be the sum of all private marginal benefits of every attendee, reflecting an over-consumption of alcoholic beverages in Scott Stadium. Assuming each of-age attendee enters Scott Stadium sober (because it would deny the possibility of of-age attendees only consuming alcoholic beverages outside Scott Stadium), we can construct a simple economic model detailing the effect of Scott Stadium offering alcoholic beverages for 2019 football games: 

Source

Assuming the marginal damage is $2 for every alcoholic beverage consumed by attendees who have a blood alcohol concentration of 0.05 percent or above (the level where impaired judgment, slurred speech starts) and that attendees over-consume by 2,000 beverages every game, a deadweight welfare loss of $2,000 is created (1/2 of $2 multiplied by 2,000). Predicting this deadweight loss, Scott Stadium has also enacted caps on alcohol consumption for each of-age attendee. Each of-age attendee will get a bracelet allowing them to purchase at most two alcoholic beverages at once and at most four during the course of the game. Further, alcohol cannot be consumed outside specially-designated areas and all alcoholic beverage sales will end once the third quarter ends. So it appears Virginia Athletics and Scott Stadium are opting for a rules-based remedy rather than a market-oriented remedy in attempting to mitigate this negative consumption externality.

A Quick Buck on a Moral Victory

I was one of many who were fooled into attending UVA's condoned celebration of winning the NCAA basketball championship in Scott Stadium. But, I was one of the few who reaped a positive externality of the situation as well.

For those who aren’t familiar with the situation, the football stadium was opened for a few hours, and the attention span of attendants was handed directly to advertisements. City officials spoke, athletics’ partners ads ran on the jumbo-tron, merchandise tents were set up, and of course the snack bars were open. The incentive that was offered prior to this event was a commemorative poster, which cost the University pennies, if that. They made out like bandits economically speaking. For pennies a head, athletics played off of the emotions of the community, creating a captive audience.

Quickly, I determined my opportunity cost of leisure was too high. I then made my escape on a death machine known as a lime. The entire city must have been in the stadium, as the roads were a ghost town at 2pm on a Sunday. Sure, I would have taken the lime and driven precariously between cars over a 30 minute walk back to my apartment, but the lack of traffic created by this “celebration” optimized my travel. My utility increased, as the cost of the ride is measured in time (which decreased), and I was able to make the ride safely using Jefferson Park Avenue, a public good.

I’m curious if other consumers realized the event was a marketing ploy in pursuit of marginal revenue, if they would have also taken a lime scooter home.

Having a roommate in Public Choice

My roommate (also one of my best friends/teammates) is in ECON 3330. He is one of the three Jacks in the class and sits next to me in the front row. Yes, there was definitely a high demand on my part of wanting Jack to be in the class with me. Not only was there high demand, but there was also a high supply in this instance because I have another roommate who is an Econ major that also applied to get into this class, but he did not get into the class :( (still 1/3 roommates in the class). At first, I only thought there would be marginal benefits of having Jack in the class, with no marginal costs, but I was wrong. The negative externalities have already showed themselves within two weeks of classes starting. For starters, Jack and I have many of the same t-shirts. Two out of three days of class so far we have matched. How am I suppose to have any since of originality in my clothing if I am matching with the person who sits besides me. Secondly, and more important, we have basically identical schedules. We have the same practice schedule, four out of five classes together, attend the same church/bible study, and live in the same apartment. Anything that I experience, Jack experiences. This becomes a problem in the blog because we both cannot blog about the same experience. Immediately after class today we talked back and forth with each other about how each one of us has the best idea for a negative externality that we could post on. It turns out that we had the same exact one. Jack called dibs before I could so he took ownership of the idea. I am now realizing that the marginal benefit of Jack being in Econ 3330 is not as high as I thought it was, meaning that I (the consumer of Jack being in the class) am not having as much surplus as I once thought I had. We have yet to decide the solution to this negative externality, but I am sure we will come up with something. I hope to keep the class updated and that my consumer surplus does not effect the rest of the classes social surplus of Jack being in the class.

The Blog Poster's Dilemma

I like short blog posts, you like short blog posts, we all like short blog posts. But for some reason, even though we've been told otherwise, there are some long blog posts on this site.  My first thought was just that this obvious error could be explained by members of this class being UVA students. We like to overachieve (even though it's bad for us) and we just can't stand the idea of putting less than our full genius out into the interwebs! That's one thought, but I don't want to live that cynically so I looked for another answer and I found one. It's a prisoner's dilemma!!!!!!

These blog posts factor into our grades through the mid-term and final exam. Studying them takes time, and because we all have limited study time long posts limit the amount of time you can spend studying other things. Because your study time is more spread out, you may do more poorly, which advantages others via the distribution. The prisoner's dilemma I'm about to describe is simplified to only two participants (because I wouldn't know how to do it with 30 but imagine how much worse it is when 30 people are all doing this same thing!!!)

	Short	Long
Short	10/10	4/12
Long	12/4	5/5

If we both post short posts that is ideal because we both only have short posts to study and can do better on the test.  I can make myself better off and you worse off by posting a longer post (you have to study more and you doing worse improves my performance in the distribution). You then have an incentive to post a long post so that you even out the distribution. As a result, we each have the incentive to make long posts no matter what the other person posts, BUT THAT'S THE WORST OUTCOME BECAUSE LONG POSTS TAKE TIME TO STUDY.  Hopefully next year's students read this post and heed my warning.

Radio City Rent Seeking Rockettes

Over Thanksgiving break, I, like many others, watched the Macy's parade. Ever since I was young, I have always watched for one specific performance: the Radio City Rockettes. Famous for their precision dancing, it's safe to say that their annual Christmas Spectacular is a NYC staple. Having danced from a young age, I've done my fair share of research on them and the road to become one of the famous Rockettes. (For clarification purposes, the road ended when I realized that the average height is 5'8 and you need to be 5'6 to even audition).

While finding a job is a difficult and grueling process for most, I was especially reminded of the resources that dancers spend in finding a job as a pro. The very selective nature of the dance industry is a classic example of rent-seeking: dancers spend thousands of dollars and hours over their life in order to audition for a limited number of roles - with costs, of course. (For reference, the average estimated cost of putting a child through 15 years of ballet training is over $120,000). While the Rockettes have contracts that are longer than some (one-off contracts for some dancers can be stressful while they hop between gigs), just getting into a company is incredibly competitive. There are many specific requirements, starting with just physical requirements (such as height), but once you've cleared those, you still have to exhibit the best technique (which comes from training with the best, and training the most, with the best equipment), and have the right connections in order to get to the audition in the first place.

If we think about this like the college admissions process and Katie's post on how the resources spent on applying to college is an example of rent-seeking, perhaps there is a way to address some of the inefficiencies. While the Common App for colleges can reduce some administrative inefficiencies, the dance world lacks a "common" platform for the basic information on dancer training and statistics (maybe even a standard video of their technique?). Of course each company and agency has their own database, but putting out standard requirements for specific auditions can eliminate the dancers who see that they simply don't "make the cut," reducing the resources spent on transportation and audition fees.

In any case, the dancers who do make it have truly expended their resources to get where they are, so that viewers like us can enjoy their work - either live at a theater, or on a TV from the comfort of our own home.

Big Government Cheese

As I was catching up on some of my favorite podcasts this weekend, I learned of the time when President Jimmy Carter decided to help American dairy farmers by buying lots and lots of cheese. The podcast from Planet Money, called Big Government Cheese, details the story of how the government, in order to raise the price of milk, bought tons and tons of storable dairy products like butter and cheese. By offering to buy any amount of cheese at a certain price, the government created a price floor which increased the demand for cheese and, resultantly, the demand for and price of milk. This program, clearly inefficient, cost taxpayers over $2 billion and created a huge problem for the government in terms of storage. Since the government had a huge surplus of stored cheese, they had the equivalent of 2 pounds for every American stored in caves in Kansas, they began giving it to food banks to avoid flooding the market. As a result, millions of Americans began eating “government cheese.”

This story reminded me of many things we’ve talked about in class, but most specifically of externalities. By artificially setting the price for milk through buying cheese, the government manipulated the dairy market and crowded out potential milk drinkers because the price was too high. When the government realized they had created this problem, they paid farmers to stop producing milk to decrease supply and started marketing campaigns like “got milk” to increase demand.  For this reason, the government created a positive consumption externality because the purchasing(consumption) of all this cheese led to the creation of public health campaigns to increase milk consumption which is beneficial to public health.

Stadiums as Public Goods

It is very common for professional sports stadiums to be at least partially funded by taxpayers and the local government.The proponents of this funding argue that stadiums generate jobs as well as income for the area by attracting fans for sporting events and concerts who will in turn support local businesses around the stadiums. Is the decision by local governments to treat these stadiums as public goods  a reasonable choice?

Looking at the two basic characteristics of a public good, it is easy to see that stadiums are definitely not purely public. Every event I have ever been to at a stadium has required a ticket in order to enter the stadium. If you don't have a ticket there is no easy way to get in. This clearly shows that stadiums are excludable. When it comes to whether or not stadiums are non rivalrous it is a little bit trickier. Generally one extra fan watching a game or concert with me does not affect my experience. As the number of other people consuming the event with me increases, however, at some point it starts to negatively affect me when I can no longer see or get a seat. In addition to not satisfying either the non-excludability or the non-rivalry requirements to be deemed a public good, I believe the other arguments for public funding of stadiums are also overstated. Many of the jobs they generate are jobs such as ushers and concession workers at events. These jobs work far less than 40 hours a week and are rarely enough to support someone by themselves. The other benefits that these events bring are largely given directly to the sports team or owners of the stadium and not redirected into the local economy. Fans often spend their money on concessions and at the team store, not in local restaurants and shops as the proponents of the funding would have you believe. The events at the stadium also almost always require increased spending on police for traffic and crowd control as well as increased public transportation. These costs further decrease the benefit of the stadium to the local economy and add even more reasons why I don't believe these stadiums should be treated as a public good.

Confessions of a Rent Seeker

This summer, I worked for the Office of Economic Research in the Small Business Administration’s Office of Advocacy. Whenever other federal agencies create a new regulation, they have to (by law) take the effect on small business into account, and the Office of Advocacy represents those interests in Washington. Coming from a small town brimming with small businesses, I thought my work to promote smart, small-business friendly regulations was noble--that is, until Mr. Coppock’s lecture on rent-seeking a few weeks ago. The Office of Advocacy works to promote regulations that benefit small businesses. In some ways, this is an example of rent-seeking. Rent-seeking is when resources are spent to obtain rents which derive from socially wasteful activities.

This summer, the FCC considered a petition from US Telecom to change a 1996 regulation concerning copper wires. I won’t get into the details here, but we can say that big firms wanted the regulation to change and small firms wanted the regulation to stay the same. At one particular meeting, we had 12 different representatives from 12 different small telecommunications companies present. I imagine that each of those companies flew those representatives out from across the country, put them up in hotels, paid for their meals, etc. On the other side, US Telecom commissioned a study to investigate the effects of the regulation change. I’m sure this study cost thousands of dollars. In short, all the companies involved in this issue spent money that did not create any value. After all those socially wasteful activities, the FCC decided not to change the rule after all. In the future, I hope the Office of Advocacy will focus on creating a healthy, competitive environment, one into which small businesses can freely enter. These kinds of regulations, rather than ones which merely transfer rents from one group to another, will optimize social welfare.