Virginia Political Economy

Some 'Phishy' Externalities

In the spirit of Halloween and the fall Phish tour being announced, I thought it was only fitting to blog about their approaching Halloween festival at the Empire Polo Fields in Indio, California.    Indio businesses are very excited for the band’s eighth festival because up to 60,000 fans will travel to their valley during a typically bad tourism season.  One director of communications for a resort in the area, Mark Graves, even said, “Without being dramatic, it’s been a godsend that we’ve gotten this event.”  Some resorts are even offering 3-day package deals for the festival, and those were sold out in one day.

 

Like we discussed in class, having a music venue or football stadium in an area brings fans and therefore business, which is a positive externality of production because when the venues are produced, people come from all over to enjoy themselves by consuming that city’s food, beverages, and lodging.  The festival is the same except the band is bringing the externalities.  Because there are not typically events at the Empire Polo Fields during this time and because Phish fans are so loyal they will travel anywhere to see the band, Phish carries positive externalities with them. What the business owners may not know is that Phish carries what many people would consider negative externalities of consumption with them as well. After each night’s closing set, I would imagine most hotel customers will go back to their hotel and consume a lot of ‘fun’, creating noise and strange smells of possibly illegal substances, which will make it difficult for some customers to sleep and more difficult for the hotel staff to clean up at their departure. Regardless, resort director Graves says, “Let's face it, we're all experiencing a down economy. This is a shot in the arm the whole valley will benefit from,” so I guess the positive externalities prevail.

Negative Externalities Effect All of Father Jefferson's Children, and More!

            It doesn’t require a degree from the University of Virginia to realize that there has been a lot of construction work on grounds recently. The South Lawn Project has plagued citizens of JPA and Brandon Avenue for years now, while students sitting in Cabell, eager to learn have, been often time rudely interrupted by the drills and clangs of construction. The construction on the South Lawn Project, however, has not been the only cause of negative externalities while attempting to better Mr. Jefferson’s University. In fact, the Academical Village itself has allowed for negative externalities.

            The Cavalier Daily has tried to highlight benefits of construction to Pavilion X, the most recent to begin construction on a “parapet” (Question: Do the benefits of this parapet outweigh the costs? Answer: What’s a parapet?). The Cavalier Daily attempted to point out positive externalities that come from construction of this low wall along the roof - mainly that the company doing the work has now received both the honor of working on the Lawn and a boost to their reputation. However, the inescapable negative externalities, including noise pollution, construction traffic, and a sight for sore eyes, imposed on those living on the lawn, visitors, and students and faculty strolling down the lawn, are significant. University Senior Preservation Planner Brian Hogg must have realized that negative externalities would surely be consequential when he asserted that restoration of Pavilion X was “ideal” because only two lawn rooms are adjacent to it, thus reducing the negative externality effects. Though we can think of this parapet as a public good from the University, it comes at more costs than just labor and supply; it comes with negative externalities costs. 

Taxing Banks to Pay for, and Prevent, Future Bailouts

    To prevent the negative externalities to taxpayers associated with bank bailouts, taxes and regulation seem to be the most effective means.  However, this article claims that "taxes generally beat regulations as a tool for correcting externalities" because taxes allow companies to choose whether production is worth the additional cost.

    To prove this point, the author compares the situation to a highway in which negative externalities are caused by an excess of drivers (i.e. one driver on the road makes it slightly more congested for everyone else).  Regulation in which only certain cars are allowed to use the road, based on their license plate numbers, does solve the problem of congestion, but does not separate those who really need to use the road from casual drivers.  Taxes on the other hand will separate out consumers preferences, eliminating congestion and allowing those who value the road most the ability to use it.

    In addition, taxing risky behavior creates revenue that could be used if a large bank needed a future bailout.  The negative externalities caused by banks, in theory, can be prevented with the use of taxes to regulate the industry.  When this prevention mechanism fails, the income generated from taxes can serve as insurance in the event a bank does need help.

Australian Oil - A Negative Externality Spilled onto a Public Good

            Off the northwest coast of Australia, the delicate marine ecosystem of reefs and atolls in the Timor Sea has been suffering since an oil spill that started August 21st. PTT Exploration and Production, Thailand’s national petroleum company, owns the leaking well. The demand for Australia’s oil has been one of the factors aiding Australia during this time of economic hardship. However, these business ventures come at a price to the environment.

            Oils spills are an example of a negative externality. Clearly, the marine ecosystems experience harmful events when petroleum companies leak oil, gas and condensate into the water. Additionally, given that reefs and atolls are generally non-rivalrous and non-exclusive, they can certainly be seen as a public good. While both the Thai petroleum company and the Australian government are making efforts to clean up the oil and prevent future spills, there are no clear property rights or responsibility involved in this case.

            In conclusion, there is a tough battle between the economic drive of development and environmental conservation of a public good.

Drama in the Soccer World

This article sparked a thought process for me. Two weeks ago Emmanuel Adebayor, a striker on Manchester City in the English Premier League, was supended for 3 matches because of his antics in a game against Arsenal FC. Complicating the controversy surrounding his conduct, Adebayor was traded from Arsenal this past offseason. During this infamous match Adebayor allegedly “stamped” on the face of a former Arsenal teammate (video) and also ran the full length of the pitch to taunt and, most notably, incense the visiting Arsenal fans after scoring a goal (video). The Football Association, England’s soccer governing body, sentenced Adebayor to a 3 game suspension--which could possibly be lengthened in the coming weeks. This will deprive Manchester City of their leading goal-scorer for a considerably important stretch of the season.

It seems to me that sports teams, in producing a winning product on the field, often create a negative externality for players, teams, and fans by fielding players whose talent is extensive but their sportsmanship and maturity are lacking. What leagues and governing entities do in dishing out suspensions is not only to discourage individuals from inappropriate behavior by increasing their personal costs in the event of violation , but they also internalize the cost of the production externality to the entire team and its organization by restricting that player's future participation. This will hopefully lead to a more socially optimum player maturity level among the athletes that teams choose to employ.

As an Arsenal fan, I apologize for any bias in the above exposition. Also, Adebayor deserves way more than 3 games…  

Limit on Roosters per Household

So I was reading some headlines, and I notice that Los Angeles City Council has passed an ordinance that "with few exceptions" (I wonder what those are), only lets people keep one rooster per property. Apparently, some people, such as Janice Hahn, have been hearing too many roosters crow, and decided to do something about it. 

I'm sure Janice would be pleased to be in our class and hear about how the problem their neighborhood is facing is a negative consumption externality (and perhaps a production externality as well, but I guess the ordinance is putting a stop to that). I'm also sure she would agree that there is market failure such that too much of this good is being produced, exceeding the socially optimal quantity.

I can sympathize with Janice. I once went on a trip to Kenya, and the first night we were there, I remember sleeping in a guest house, quite jet lagged, while the choir of Nairobi roosters sang not so sweetly into our room. And it only sounded like there were three or four of them! Los Angeles may not have been aggressive enough in dealing with the rooster issue; it may well be that zero is the socially optimal quantity in this case.

Life, Liberty, and The Pursuit of Free-Riding

Illegal aliens never cease to enjoy all the perks of being a legal alien or citizen of the United States (especially with health care); after all, who wouldn't love to free-ride off one of the most powerful and wealthy countries in the world?

Back in 2005, Madeleine Pelner Cosman wrote a paper, "Illegal Aliens and American Medicine" in which she describes the free-rider problem with respect to the United State's medical care. Cosman writes:

"What is unseen is their free medical care that has degraded and closed some of America’s finest emergency medical facilities, and caused hospital bankruptcies: 84 California hospitals are closing their doors. “Anchor babies” born to illegal aliens instantly qualify as citizens for welfare benefits and have caused enormous rises in Medicaid costs and stipends under Supplemental Security Income and Disability Income."

With illegal aliens free-riding, non-free-riding consumers inevitably incur higher costs (direct and indirect).  A direct cost to non-free-riding consumers would be higher taxes to cover the costs incurred by the free-riders.  Indirect costs include longer travel time to receive medical treatment, overcrowding of hospitals (in the case of overcrowding, each individual is imposing a negative externality on one another due to finite resources and the cost of time), less doctors, etc.

There is no surprise free-riding illegal aliens support the efforts of policy makers to extend medical coverage in the United States.  If through health care reform, health care becomes more of a public good, then illegal aliens, naturally, will stand to benefit.  Therefore, measures must be taken towards limiting illegal aliens from free-riding, if there is hope of successful health care reform.

An alternative to full public healthcare provision

In the wake of President Obama's primetime address to Congress last week, the debate surrounding a "government-run public health insurance option" has intensified. As reported by CNN, Obama's argument is that such an option will provide service for those who otherwise could not afford health care as well as drive down private providers' costs. However, a main concern is that cheaper government provision will go too far and drive public insurers out of the market OR will lead to an eventual government takeover of the industry like with the postal service. We briefly discussed in class that despite the US Postal Service's existence, successful alternatives emerged, like UPS and FedEx. We also mentioned particular communities or neighborhoods that have made contracts with private mail services to get better benefits or lower costs for that particular area.

I stumbled across an interesting CNN article last week that reported on a public health care plan alternative (similar to the private mail services for small communities). The article focused on an example of Wisconsin farmers who have together negotiated with private physicians/providers. This health care cooperation (co-op) allowed the farmers to receive better benefits and the providers to stabilize/gain business. In turn, the co-op created a positive externality in that other private providers outside the co-op have improved their overall benefits packages or cut costs in order to compete. Because they've improved their plans, providers and farmers outside the co-op have benefited as well. At least in this case with the farmers, free-riding is not be an issue since it appears that the value of customized insurance packages provided by the co-op outweighs any additional costs for being a co-op member. While this particular example demonstrates the potential for a successful co-op as an alternative to government provision of health insurance, co-ops face several obstacles: the business model of a co-op varies depending on the members it caters to (ie. rural farmers v. city construction workers) but most importantly, there's a substantial need for funding. So instead of funding a $10 billion government public option Congress could allocate funds toward co-ops and still significantly increase health care coverage.

In Defense of Tiebout

I, like many others I'm certain, was hesitant at first to buy into the very restrictive assumptions of Tiebout's A Pure Theory of Local Expenditures. The costs of moving, both explicit and implicit, are so high that nothing approaching an efficient distribution of "citizen-voters" among communities with their distinct revenue-expenditure patterns could ever occur.

However, thinking upon practical, limited applications of Tiebout's theory, one can see that it does have some merit. I mentioned in class the example of my own home town of Memphis, which just this July completed a deal to convert the first seven miles of old railroad tracks into a public greenway.

As I said, an important aspect of the campaign for public support was comparing Memphis' system of trails of less than 10 miles, to those of nearby cities especially Nashville and Chattanooga, whose trail systems extend over 60 miles each. At the public input meetings, employees of businesses such as Medtronic, a company which recently moved their headquarters to Memphis, all reinforced the idea that public goods such as parks, bike lanes, greenways, etc. are key factors for young professionals looking for a place to settle. Public goods certainly seem to play a part in competition among communities for quality citizen-voters.

Another interesting point concerns the problem of externalities in the provision of public goods. The new greenways run not only through the city of Memphis but extend also into surrounding suburbs. Accordingly, their provision is being administered by Shelby County government, which is separate from the city administration. Thus, the problem of positive externalities is in this case avoided.

Senator Combating Externalities, is Misunderstood

Illegal immigration has been the elephant in the room for the United States. And despite the various proposals such as a 700-mile fence, we've still not managed to kick the elephant out of said room.

The US would like to minimize illegal immigration for obvious reasons. Living in the US has many benefits: greater social mobility, job opportunities, higher standard of living, and numerous public goods. But to enjoy these  benefits, there are certain costs that must be incurred such as undergoing background inspections. Illegal immigration circumvents these costs and allows people to free-ride on the benefits.

Sen. Kent Conrad (D-ND) had recently come under fire for some of his statements regarding the Health Care reform provisions. But this was not to bar immigrants, or at least all of them. The goal was to prevent undocumented immigrants from receiving further federal subsidies.

So it is unfortunate that Sen. Conrad had received much backlash. The senator was only trying to reduce market inefficiencies by preventing another positive externality.