My Anarchist Friend Noah

 All this talk about voting got me thinking, what would my anarchist friend Noah have to say about this? So I asked him, and I pulled the following valuable insights. 

Noah doesn't want anybody in office at all. He thinks the whole government is pointless. For him to vote would be consenting to be governed by one of the two choices that were forced upon him by the powers that be. Contrary to "if you don't vote, you can't complain" (which is already a faulty argument), Noah says, "if you vote, you can't complain either."

Noah's D and B in the PxB+D-C equation are negative. To vote would be hypocritical, counterintuitive, and a waste of time. Noah doesn't vote "because he doesn't want to." What separates him from so many others is that he just doesn't care what people think about him, in his own words, he is "shwoke." He has no civic duty, no moral responsibility to vote, and clearly doesn't succumb to social pressure or else he wouldn't be an anarchist. Interestingly, Noah still has preferences over who's in office, preferring a Libertarian candidate over a Democratic one. However, even in this case, he still would not vote because he doesn't believe in the office itself. 

A lot of Noah's ideas don't make too much sense to me when it comes to voting. Maybe he's not all that rational, then again maybe I'm not either, and maybe neither are you. So go ahead Noah, down with the man! Become ungovernable.

Rivalry & Voting

    When we discussed public goods last week, we zeroed in on non-rivalry and non-excludability as defining characteristics of such a good. However, according to Buchanan’s Economic Theory of Clubs, many goods fall somewhere on a continuum of rivalry and publicness rather than a binary dichotomy of either rival or non-rival, private or public. This point is especially impactful for supposed non-rival goods, which, Buchanan argued, eventually reach a point of overcrowding. At this point, the good, though still technically available to you, gives you less than its possible utility because of the number of people you have to share it with. 

    As I read Johnson’s piece on voting, this conception of rivalry returned to mind. The ability to vote can be seen as a traditionally non-rival good; your exercise of your right to vote does not deny anyone else the ability to exercise their right to vote. The right to vote is not “consumed” when it is exercised. This principle of equal and unfettered access to the vote has been enshrined in American case law, such as Baker v. Carr, as well as in constitutional amendments. However, as Johnson points out, the utility you might get from voting certainly diminishes as more people exercise their right to vote. As more and more people use their right to vote, your vote goes from decisive to totally inconsequential. In fact, the probability that your vote will be the decisive one is so low that a rational person likely would not vote at all. These characteristics make the ability to vote seem more like a semi-rival good, one which is subject to a point of overcrowding, upon which it loses the utility it might otherwise endow. As the number of people who exercise their vote increases, p - the probability that your vote will be the decisive one - decreases, functionally reducing any marginal benefit you might derive from voting to 0. When some number of voters decide to exercise their right to vote, sufficiently reducing p, the right to vote essentially crosses a “threshold” of rivalry. After this threshold, the right to vote may as well have been “consumed,” for all the utility it offers an additional voter. 

Does the nature of "Market Makers" lean the profession towards the public good side of the public-private spectrum?

The benefits that registered market makers (MMs), or equivalent volatility suppliers, consign to the efficiency of the equity market is a concept that deserves careful consideration. MMs provide valuable liquidity to the stock exchange, and in doing so increase the functionality of the market. A primary aspect of MMs is that they are (for the most part) not profit-making entities, MMs are not speculating on the price of a stock, nor are they inclined to justify their actions with thoughtful due diligence. It is clear that a world without market makers would be a world with limited liquidity; the price formation of a particular security would be feeble, susceptible to the daily fluctuations in the proclivity of an individual to sell their securities to a buyer (or vice versa). This promotes the idea that Market Makers serve, in some sense, as a public good as the positive externalities (efficient and highly liquid markets) that result from their actions seem to surpass the negative ones.

Since the efficiency of the market depends on MMs, there is justified support for regulation via policy. One example of this is the 2019 Lead Market Maker (LMM) incentive program, a program the CBOE deployed to incentivize Market Makers to meet liquidity and market quality metrics. If Market Makers are rewarded for their ability to supply efficient markets, does that remove them from the discussion of being a public good? I’d surmise no; incentives are used often to reform and ensure the proficient caliber of public goods. Regulating Market Makers is a way that policy can ensure highly efficient markets, though sometimes this regulation has not always yielded the results policy makers would hope for. Market Makers are non-rival in consumption (one person’s trading of a security via market maker assistance does not detract from the next person’s predilection to do so) and non-excludable (anyone who trades almost any stock is subjecting themselves to an inescapable realm of MMs.). This analysis leads me to believe that MMs are more towards the public good side of the public-private spectrum than they are towards the private good side.

The American Court System = A Public Good?

            A recent topic in my Introduction to Public Policy course was Public Goods. In my discussion section, the TA encouraged us to name Public Goods. One of my classmates suggested the American Court System as an example. After a pause of contemplation, the TA agreed and moved on. I, however, spent the rest of the class thinking about the qualities of the American Courts System and how it does or does not resemble a public good. 

            In theory the Court System should certainly be a Public Good. They are a publicly financed system that is freely available to all Americans to utilize. One citizen's use of the system doesn't take away from another's and all citizen's personal rights are protected by trial in a court of law. Referring back to our Gruber readings, in Chapter 7 Gruber makes the point that most Public Goods we think of are actually "Impure" Public Goods, exhibiting imperfect non-rival or non-excludable properties. The Court System certainly is one of these Impure Public Goods. For example, Court back-log is massive issue in our society, as citizens are unable to have their cases heard in a reasonable amount of time. These problems have only been exacerbated by COVID-19 with the pace of case-work slowing further. Around the nation people are in prison, on bail, or roaming freely due to the Pandemic-driven severe back-log while they wait for their cases to be heard. Negative externalities abound with these situations. While there will always be a threshold of rivalry of use with regards to our Court System, such as number of cases a court can hear in a year, the Pandemic has pushed the American Court System further and further away from the nature of a Public Good. In some areas many non-violent crime cases were simply dropped to ease the growing court's burden. Citizen's issues are being prioritized and evaluated rather than heard. The American Court System may be partially resemble a Public Good, but it is an impure one to the core. 

"Keep Calm and Trust the Government": How a Deeper Trust in our Government Leads to Maximum Resource Allocation

 “Trust in our government” has been a popular topic in the news cycle for generations. Pew Research Center conducted a study this past May on this very issue. The National Election Study started taking data on trust in the government back in 1958. Then, roughly two-thirds of the public had faith in the federal government. Today, Only about one-quarter of Americans say they can trust the government in Washington to do what is right 'just about always' (2%) or 'most of the time' (22%). 

            Our class has studied efficient resource allocation much in the past three weeks. When , there are no externalities and no misallocation of resources. Yet when externalities are present, the government can either set restrictions or levy taxes and subsidies to try and return to . The government uses consumer votes to determine their taxes, yet the flaw with this system is consumers have little incentive to accurately reveal their preferences. Most consumers do not trust the government in general, thus they certainly don’t trust the government with taxes. Instead, utility-maximizing consumers latch onto the “free rider” principle by trying to contribute as little as possible while still using the resource. According to Charles Tiebout, “[i]f all consumer-voters could somehow be forced to reveal their true preferences for public goods, then the amount of such goods to be produced and the appropriate benefits tax could be determined” (p. 417). Because of the low percentage of Americans that have faith in the government, consumers do not reveal their true preferences and the government cannot tax efficiently. If more of the population trusted in the government, they would reveal their true preferences and be accurately taxed. Externalities would be eradicated, , and our society would be better off. 

I-5 Southbound: Wilsonville’s Worst Nightmare

My hometown is Wilsonville, Oregon – a standard suburban town south of Portland, Oregon. Wilsonville is situated along I-5, the interstate that runs down the west coast from Washington to California. Now, when I say my hometown is on I-5, I mean that the freeway runs directly down its middle. Over time this has created a major traffic problem; whenever there is traffic going southbound on the freeway, the center of town essentially comes to a standstill. Good luck trying to get from one side to the other during rush hour. Here, we have a classic negative consumption externality problem.

The issue is that I-5 consumption (drivers using the freeway during rush hour), exerts a negative externality on those in Wilsonville trying to move about town. This negative externality takes the form of increased travel times for drivers who have zero intention of using the freeway and are not compensated for the costs inflicted by others. So, during rush hour the private marginal benefit (PMB) of using I-5 is greater than the social marginal benefit (SMB). This means the equilibrium quantity of road consumption is greater than the allocatively efficient level. The solution? Putting tolls on I-5 – something that Oregon does not currently have on its freeways. This would lower each freeway driver's PMB of freeway consumption, ideally to equal the SMB. Much to my surprise, the Oregon Department of Transportation is actually in the process of considering tolls to remedy congestion problems such as this. Wilsonville may see a government solution to its negative externality problem in the near future. 

Shocking Revelations: Am I a Free-Rider?

I can safely say that, of all living situations in Charlottesville, my roommates and I have one of the best. I often find myself wondering; how did I get so lucky? Everyday we continue to live amongst each other in perfect harmony, never squabbling over who has to do the dirty dishes like Nick so tragically complained to us about. The Brita is always full and Venmo requests are always completed. After some consideration on what makes our apartment living so cohesive, I came to a shocking conclusion.

I am a free-rider. Not in the sense that I don’t take out the trash, but in the provision of our apartment’s public goods. These goods include household staples, from dishwasher detergent, paper towels, pam cooking spray, and even baking supplies (vanilla is expensive, you know). Somehow, we have come to an unspoken agreement for a single person to bear the costs of these public goods, yet this person has never been me. The success of our private provision of public goods can be attributed to many factors. For one, my roommates have determined that the benefit of the public good (having clean dishes or a stocked pantry) is greater than I think it is, so they are willing to purchase these supplies. Or rather, they possess altruistic tendencies and are willing to contribute to our public goods even when the opportunity to free ride presents itself. 

While these goods are rival in consumption, they are a form of impure public goods in that they are non-excludable. Yes, my roommates could physically take the pam cooking spray from me every time I intend to use it, or hide the dishwasher detergent, but that would decrease their own utility of the product, as my consumption of the public good lessens the chore load. My use of the dishwasher detergent helps keep our sink empty, which has positive externalities by saving them time. The exclusion of these goods is too costly to maintain, so our 'utopia' lives on.

Coasian Crowdfunding

 One of the central insights in Ronald Coase’s The Problem of Social Cost is that, because costs and opportunity costs are equivalent in accounting, it doesn’t matter who is made liable for compensating an externality. The best way to understand this is via example. To use Coase’s; imagine a cow rancher and crop farmer share neighboring plots of land. Cow ranching has a negative externality on crop farming because the cows eat some crops. Say the marginal cow eats $5 worth of crops. If the cow rancher is made liable by the government then he has to pay this extra $5 if he wants to add that cow to his herd. Even if the government takes no stand in the situation, however, the cow rancher will still have to pay that $5. The crop farmer can no longer force the cow rancher to hand over the money, but he can still exert influence on his balance books by offering up to a $5 payment if the rancher doesn’t add that next cow. The farmer is willing to do this because he can avoid $5 of crop damage. Just as before, if the rancher wants to add another cow to his herd, he has to give up $5.

This counter-intuitive idea inspired an idea of my own to help resolve global externalities: Coasian Crowdfunding. The idea is to impose costs on externality producing corporations by offering them money if they scale back production closer to the socially optimal level. By crowdfunding what are basically carbon-offset payments from people all around the world, we can force Exxon to incorporate the social cost of carbon into their accounting by forcing them to forgo this large prize if they want to continue polluting. 

This strategy can overcome many of the problems facing coasian bargaining. The assignment problem is lessened because people are incentivized by their private value on carbon offsets, which is easy to know for them. There are still challenges in identifying which corporations are responsible for how much pollution, but at least there are many fewer of them. The free-rider problem is still somewhat of an issue. Since everyone enjoys an improved global climate regardless of whether you pay, it can be personally beneficial to just let others pay. This sort of online crowdfunding has proven resilient against free rider problems, however. Tens of billions of dollars flow through patreon and twitch donations. Fans of certain shows pay money for video content that is posted for free on YouTube. There are some excludable goods like early viewing or extra content though. Similarly, our carbon-offset crowdfund could provide people with a green-check NFT that donors can use to signal how much they care about the environment. Because opportunity costs are the same as costs, the power is in our hands to make carbon producers pay for the damage they do to the global environment.

The Free-rider Problem of the House Clean

 It's a Sunday afternoon, and the house is a mess. After all, that's what one would expect after 18 guys have been living there for a few weeks. A mass text is sent out: "House clean in 5 minutes." Thirty minutes later, the once filthy house is sparkling clean and most of the guys in the house are feeling pretty content with the results of their work cleaning the house. However, not everyone is satisfied. This is because while a majority of the house members participated willingly in the cleanup, a few decided to take the 'time to clean' text as their opportunity to leave the house. This resulted in a classic free-rider problem. Those who did not clean the house knew that the house would be clean with or without their efforts, which may have been why they chose not to participate. As a result, the guys who did clean had to put in more work, while the guys who did not clean were able to enjoy the product of others' labor without putting in any of their own efforts. This could potentially lead to fewer people cleaning in the future, as they see that others will do their work for them. This will result in both disgruntled members of the house who do participate and also potentially a failure to clean the house at all as more and more guys decide it's not worth their time and effort to participate because everyone else is skipping out on the job.

My proposed solution to this problem is to provide incentives to work, or in this case, disincentives to not clean. Our house should make a rule that if you do not show up to the house cleans in the future, that is ok, but you will simply have to pay those who do a small sum of money to compensate them for their extra work. This will be an efficient solution as those who value their money over whatever else they might be doing will help clean the house, and those whose opportunity cost of participating is too high will compensate everyone else for their share of cleaning.

Thank You for Drinking

UVA’s student body has heard it and seen it before, from the critical opinion articles from Charlottesville residents to the harsh glances as older neighbors see students with drinks in hand. All these interactions originate from a critique of UVA students’ drinking habits. However, economic logic suggests that that beer belly (or, in the context of this article, liquor belly) is actually doing the community a service.

As any 21-year-old Virginian knows, alcohol can only be purchased at government-run ABC stores (a public monopoly, as Emma analyzed in her post). An interesting factoid of ABC stores in Virginia is that they return more than $600 million annually to the state’s general fund. Put another way, that $20 handle you bought the other day contributed almost $9 to Virginia schools, roads, and even funding for state universities. In comparison, for a traditional $20 purchase, less than a dollar would go to state and local governments. Thus, logic follows that liquor purchases are a positive consumption externality in alcohol-controlled states like Virginia given their significant financial contribution to society. In that vein, our state would be right to encourage hard alcohol consumption because of its social marginal benefit.

By examining the benefits to civil society from liquor purchases, we can see that the social marginal benefit of liquor consumption is greater than the private marginal benefit. Of course, this post does not analyze the long-term costs to society with regards to the risks of drunk driving and other long-term health effects. However, in this simplistic lens of consumption, the solution is clear: party on – our communities demand it. 

ABC, a Monopoly?

     On August 26^th, we discussed the different types of monopolies – public, private, and publicly regulated. I understood the examples that were discussed but wanted to look further into which category other companies would fall under. Being from Florida, one of the first industries that came to mind was the sale of liquor in Virginia. At home in Jacksonville, there is a corner store that sells liquor every few miles, with bright flashing lights usually advertising the sale of the week. When I came up for move-in weekend my first year, it was weird not to see those bright attention-grabbers here. The ABC store is the only store in the state allowed to sell liquor, which leads directly into the question of what type of monopoly it is. Although I assumed the stores were government-run, there was also a strong possibility that they were just publicly-regulated – something I had no expertise on given that the idea of the state being so involved in these sales still is unique to me.

After looking into some background information on alcohol laws in Virginia, I came to the conclusion that the ABC store (in Virginia at least) is actually an example of a public monopoly. This means the government itself runs the ABC stores. Further, I even found out that Virginia is rather uncommon in its handling of this industry, and some are trying to overturn this monopoly in the name of privatization. There is, however, push back due to the high revenue these stores bring in for the state. So, in answering my question of what type of monopoly it is, I am left with even more questions – namely, if a public monopoly on the sale of liquor brings in so much revenue, what incentives do already privatized states have to leave their own liquor sales in the hands of the market at large?

The Wolf of Wall Street - A True Story of Fallen Brokerage Giant and Its Deadweight Loss

On a chill night, in celebration of my roommate’s recruitment into an investment banking firm, we watched the classic move - the Wolf of Wall Street. The movie is based on a true memoir of Jordan Belfort, the founder of Stratton Oakmont, a brokerage firm in Long Island, New York. Jordan led the firm on participating in several financial frauds, including pump-and-dump schemes, defined as a security fraud that “involves artificially inflating the price of the owned stock through false and misleading positive statements, in order to sell cheaply purchased stocks at a higher price.”

Jordan Belfort’s life started off as a son of two accountants. As Belfort slowly explored his career as a broker and accumulated wealth through running Stratton Oakmont, he developed a lavish lifestyle filled with luxury ownerships, sex parties, and abusive use of recreational drugs. He became fanatic with money-making; under his leadership, the firm had developed a cult-like culture where all employees submitted themselves unconditionally to the principle of the firm and became completely money-driven. Everyone who came in as financially-incapable has now become millionaires, sitting on top of the money they have defrauded from investors through convincing them to purchase large quantities of penny stocks. Belfort showed excessive greed for the possession of wealth and women, and have committed over 21 cases of money-laundering to scale up his earnings. 

Halfway through the film, me and my roommates began to wonder if we could ever adopt a similar lifestyle portraited in the movie and whether money could ever be of such big attractions to us. We concluded that the marginal private benefits we may receive from earning an extra $10k - $1M is not worth trading in our sanity and basic moral grounds. As wealth accumulates, the private marginal benefit (PMB) diminishes, and private marginal cost (PMC) also grows at a faster rate because the risk that Belfort had to bare became larger and larger under illegal operation as the volume of transactions grew. In real life, as Belfort committed more fraudulent deals, the social marginal cost (SMC) brought along by the existence of Stratton Oakmont had gone way up, not only incurring an opportunity cost on the money tied to those pump-and-dump schemes when it could have been invested elsewhere and generated tangible return, but also resulted in investor net losses of $200 million dollars when the overvalued scheme collapsed. This case differs from market production inefficiency cases that we learned from Gruber's reading; it is more like a market failure resulted from information deficiency which ended up creating an off-balance between the supply and demand for stocks. The financial operation of Stratton Oakmont still created a deadweight loss for its investors and the society as a whole. As a consequence, Belfort lost everything and was federally imprisoned for 2 years. 

Vaccine Mandates

There has been widespread debate as to whether Covid-19 vaccines should be mandated by the government, with polarizing opinions across the country. Vaccines have a positive consumption externality, the social marginal benefit of receiving the vaccine is greater than the private marginal benefit.  However, many scientific studies have estimated that this positive consumption externality will be reduced once the country reaches herd immunity (estimated to be around 80%). Similar to Gruber's example of global warming, increases in vaccinations produce diminishing marginal returns.  

Mandating vaccines would be considered a collective action response to the externality. Due to the diminishing marginal rate of returns to increases in vaccinations, a government mandate is not the economically efficient solution to the externality. A Coasian solution would define property rights and determine who is liable. We can see examples of this occurring within the private sector. For instance, some companies are offering to pay their employees to receive the vaccine. In this case, companies are assuming liability and have determined that reducing the risk of Covid-19 spread is more valuable than the money they are willing to pay the employees. The employees will get the vaccine if the private marginal benefit with the addition of monetary compensation outweighs the private marginal cost of the vaccine. In this scenario, the employees retain property rights over their body but they have increased incentive to receive the vaccine. In other words, the social marginal benefit would equal the private marginal benefit. This is an example of a Coasian solution internalizing the externality. 

The Negative Externalities of the Activities Fair

 As the Treasurer of a political organization at UVA during my first year, part of my role as an exec board member was to table at the activities fair for the spring semester. Because it took place during the winter months, the fair was held indoors in Newcomb. For some reason, the fair organizers decided to place all the political organizations, from both sides of the aisle, in the same small room. On the one hand, one can see the purpose of this decision. It would be more efficient, as all those who were interested in political advocacy would only have to go to one room, saving them time and effort. It would optimize space and preparation time for the fair organizers. However, this decision did not take into account the negative externalities of placing political organizations from different sides of the aisle in the same room as each other. Members of other organizations came to our side of the room and made negative comments as well as obscene hand gestures. These actions hurt our organization's recruitment because potential members may well have been turned off after realizing that they would be subject to the same harassment if they joined our club. As a result, they missed out on being part of a club from which they would have gained utility through free and open debate.

Without intending it, the club's organizers imposed a negative externality on potential members of our club by placing all the political clubs in the same room during the activities fair.  If the fair organizers were interested in an efficient market of club recruitment, they should have compensated our potential members who decided against joining our club because of the harassment we received. This would make up for the opportunity cost of the utility they would have received from becoming members of our club.

The Defining Problem of Our Generation: Who's Going to Wash the Dishes?

     I live in a house with eight other people here in Charlottesville. While this makes rent very cheap and days very action-packed, it also leads to a lot of dirty dishes. Divvying up this godforsaken chore is one of the greatest sources of animosity in the house and is quite literally, the worst. Dishes are an economical nightmare in my house. Those who have the lowest private marginal cost (not caring about dirty dishes in the sink), produce the most dirty dishes, while those with the highest private marginal cost (caring deeply about having an empty sink), produce the least dirty dishes. This results in a massive negative production externality where my sink is normally full, to my detriment, even though I wash all my dishes.

    With equal property rights to the sink, am I entitled to a clean sink or are others entitled to a dirty sink? We knew dishes had to eventually become clean so a few members of the house produced a weekly dish schedule system where everyone washed all the dishes once a week (with the exception of two members/free-riders with meal plans who never used the sink), because everyone washing their own dishes "just wouldn't work". In this system, the sink remained full throughout the day, with nobody having any incentive to wash their own dishes, knowing somebody else would do it for them at the end of the day. Furthermore, knowing the kitchen would just be cleaned the next day, it was easy for those who didn't care as much about a clean sink to skip out on cleaning the dishes on their day and leave it for the next guy, leading to a detrimental free-rider problem.

    This problem continues to plague my house, with variations between washing own dishes and having a schedule. So here I humbly ask all of you economists to help me come up with a solution to this predicament.

Best,

Nick Cummings

The Real Life 'Up' House - A Storybook Holdout

The other night a few of my friends and I decided we wanted to stay in and have a movie night. The debate over what to watch was hotly contested, but we finally settled on Up, the heartwarming Pixar movie about a grouchy old man (Carl) who goes on an adventure with a young boy (Russell). Part of the exposition of the movie is Carl's stubborn refusal to sell his old home to the developers building skyscrapers around him. This is a great example of a holdout; a developer who wants to build something on Carl's block, even having bought up the surrounding property, still needs to negotiate with him individually. The sentimental value that Carl places on his home is far more than market value, making him a difficult holdout to deal with and giving him inordinate power. The key difference between Carl's example and a true perfect holdout, however, is that ownership of the houses on the block is not truly shared. The developers can build around Carl's home on all of the adjacent properties they own, making his holdout more of a hindrance than a total barrier.

I was curious about the inspiration behind this story, and a quick Google search showed me that Up is loosely based on the story of Edith Macefield, a Seattle woman who allowed a shopping center to be built up around her house rather than sell it. She's far from the only real world example; there's a small leatherworks shop in my hometown that is in a similar position. Again, while these may not be perfect examples of holdouts due to home ownership on a block being an imperfect example of shared property, they are some of the clearest and simplest real world demonstrations we have. The power a single stubborn property owner can have over the development of a larger block of land closely resembles the power a single owner can have over shared property, which is the textbook definition of the holdout problem.

Gonzales v Raich through the Economic Lens of Markets Externalities

    This past Tuesday I was sitting in my Comm Law class, listing to Professor Sherri Moore lecture on the Commerce Clause and its many applications. The Commerce Clause gave Congress the power to regulate interstate commerce to prevent states from establishing laws that may disrupt the free flow of goods. There have been numerous commerce clause-related cases appealed to the courts. One case in particular, Gonzales v Raich, relates to our discussions on markets and externalities. The 2005 case involves Gonzales, a citizen of California, who had been growing medical marijuana in his backyard. The 1970 Controlled Substances Act made the use of marijuana, along with many other drugs, illegal on the federal level. Gonzales was arrested for his possession and potential use of marijuana. Gonzales went on to appeal his case under the 1996 California Compassion Act, which made the use of medical marijuana legal in California. The court ruled that the commerce clause gave jurisdiction to the federal law, specifically because the local cultivation of marijuana affected the state market for medical marijuana, thus altering market prices. Gonzales was found guilty.

            The court’s ruling on Gonzales was based on Wickard v. Filburn, a 1942 case involving the quantity of wheat allowed. The Agricultural Act of 1938 restricted the quantity of wheat individual farms were allowed to grow in hopes of manipulating market prices. Wickard, a small farmer in Ohio, sold only the allowed quantity, yet grew more for his own personal use. Although intrastate and not exceeding the quantity of wheat allowed to be sold, the courts found Wickard guilty. Their ruling was as follows: although insignificant when only one farmers, dozens and thousands of farmers growing excess wheat for personal use affects market prices for wheat. Thus, the intrastate wheat market was affected, and the commerce clause stands. Wickard was found guilty.   

            Professor Moore added another justification for Gonzales’ inditement, a justification that directly relates to our Public Choice class and discussion of externalities. Moore commented on “the possibility of overflow smells” from the marijuana, which would inadvertently influence and intoxicate the neighbors. Assuming his neighbors did not want to “get high”, the “spillover” of Gonzales’ marijuana smoke is a negative externality, much like the smelly hog farms of Michigan. 

 

Unemployment Benefits and Negative Externalities

During covid, the government increased federal unemployment benefits to help those who lost jobs due to the pandemic or those who worked in service industries that may not have felt comfortable going back to work because of the virus. However, since the end of lockdowns and the restart of the economy this has been creating a negative production externality for many consumers. For example, the other week my friend locked her keys in her car and we called AAA to help us out. AAA is a company that provides 24/7 roadside assistance and advertises themselves on their prompt service. However, they have had issues with staffing because of these unemployment benefits and many former employees are more content with their current benefits than their previous salaries. Due to this, we had to wait 5 hours in the middle of the night, the night before the first day of classes, for a tow truck that never came. And apparently this has been an issue for AAA since the end of June, as this article shows.

We experienced a negative production externality because of the external cost of the unemployment benefits that has not yet been addressed by AAA. And while the federal unemployment benefits are coming to an end soon, employees may not necessarily return to their previous jobs, since many enjoyed the changes to their work environments that they experienced during covid. To address this issue, AAA should pay attention to the external cost and either charge consumers more in order to reduce the amount of people using their service or pay their employees a higher percentage of their revenues to entice them to come back and better serve their remaining customers.

Ideology & the Hold Out Problem in the Senate

     As October approaches, the Biden administration is pushing hard for the president’s long-awaited infrastructure bill. With the narrowest possible majority in the Senate, Democrats can only pass the high-spending measure using the budget reconciliation process - a loophole allowed once per year to circumvent the filibuster. Still, in order to take advantage of this opportunity, every single democratic senator and Vice President Harris will have to vote in favor of the bill. As time to whip the votes necessary to pass the infrastructure bill wanes, centrist Democrats like Sen. Joe Manchin of West Virginia can take advantage of the holdout problem described in Grueber chapter 5. 

    Rather than property rights, these 50 democratic senators all share voting rights. As the “last one” to exercise his right to vote - since Manchin’s conservative tendencies mean his vote along the party line is not guaranteed - Manchin is in a position to hold the other Democrats hostage, negotiating bill provisions that uniquely benefit his political interests and/or his constituency. Earlier today, in fact, he decided to capitalize on this position by publicly declaring that the party needed to take a “strategic pause” on the bill the administration is so eager to pass. Majority Leader Schumer will give Manchin much more in negotiations to secure his vote now that he is essentially the only thing blocking this important political victory. 

    This example of the holdout problem is slightly different from those that plague Coasian negotiations. For one thing, though Manchin’s strategy may crumple the collective action of the Senate Democrats, it will not have any negative effect on Senate Republicans, who uniformly oppose the bill. This intragroup effect of the holdout problem is different than intergroup scenarios we studied, where an opposing group’s actions were blocked by the original group’s failure to act collectively. Additionally, unlike a more classical example of the holdout problem, Manchin is one of the only Senate Democrats willing to use the holdout strategy. The political consequences of not supporting such an important party vote could cost more liberal Democrats reelection, meaning there is not much competition to be “the last one.” 

Competitive Governance Puts The 'Choice' In Public Choice

Milton Friedman in the second chapter of Capitalism and Freedom takes for granted the government's monopoly in the role of ‘rulemaker and umpire.’ This assumption is reasonable in the context of his book, as he wants to stress shared values with those who may disagree with him, but it merits closer inspection today as the idea and implementation of competitive governance spreads around the world.

Businesses are forced to fulfill consumer preferences by competition; if they fail to provide what buyers want, they can take their money elsewhere. The absence of competition uncontroversially leads to higher prices and lower quality of goods and services. Governments use the high costs of switching governments and the high cost of starting a new government as barriers to competition. These barriers are undesirable for the same reasons as in the market. They lead to lower quality public goods and higher taxes. There are several technological and institutional strategies that we could implement in order to lower barriers and increase competition in the provision of public goods like rule-making and arbitration.

Barriers to switching governments include the costs of moving, crossing borders, job search, and cultural change. These costs can be decreased by transportation technology, federalism, and remote work. In 1850 the fastest route from New York to San Francisco was a 50 day boat journey through the Isthmus of Panama that cost several thousand dollars and put you at high risk to die of cholera on the way. Moving long distances is now much cheaper, faster, and safer than it was and there is room to improve with advances in supersonic air travel, high-speed rail, and self-driving cars. Federalism can decrease the costs of switching governments by putting many governments close together and uniting them under a free trade and open borders zone. Moving from Texas to Florida is a lot easier than moving from Cuba to Florida and Albemarle County to Fairfax County is easier still. The more autonomy that local governments have, the easier it will be to choose preferred bundles of public goods. Finally, remote work makes moving less costly by making location less important. One no longer needs to search for a new job when moving to a new place. These present and future technologies and institutions are ladders over the barriers to switching governments.

Starting new governments has traditionally required conquest or revolution, but new institutional forms such as special economic jurisdictions and decentralized autonomous organizations allow for much lower entry costs into the market for government services. Special economic zones are already allowing for more competitive governance in China, India, and Honduras, and they are spreading quickly to many more nations. Decentralized autonomous organizations (DAOs) are a way for people to securely organize social groups and governance around an agreed upon set of rules. These preference aggregation algorithms can act as venture capital firms, hedge funds, and even provide public goods. New technology and institutions have made Friedman’s assumption of a monopoly over the creation of rules, arbitration, and public goods provision unnecessary.