Virginia Political Economy

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.

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.

Bulletproof Pink Beetles: Privately-Provided Public Safety

As São Paolo’s local peacekeeping force has failed to curb its city’s rising crime rates (with a murder rate nearly five times that of the U.S.), private industries have risen to fill in the gap. The newly rich, products of Brazil’s recent economic boom, are in search of ways to live safely in a heavily class-driven society, and the private sector is providing all the answers.

 

So how does this relate to bulletproof pink beetles?

 

Well, over the last three years alone, the production of armored cars in São Paolo has nearly doubled; even Volkswagen Beetles now offer an “armor” dealer add-on. In fact, according to a Wall Street Journal article, the country's armored-car fleet now numbers some 86,300 vehicles and another 6,000 are added annually.

 

This is certainly an evident example of how governments face difficulties in providing the optimal level of public goods, such as public safety. This case is distinct, however, in that the reverse of the crowd-out effect is occurring: the Brazilian government is not providing enough of the "public good," instigating the private sector to provide more.

 

Interestingly enough, Brazil's army is keeping "tabs" on these rolling fortresses; they now have regulations against armor strong enough to resist military weapons. Apparently, having dozens of bat-mobiles cruising around would not be convenient for internal security.

The Metro Gets a Make Over

The US Senate recently passed a bill allocating $1.5 billion for the DC Metro System. This article explains the act, but what I found interesting was the fact that “Metro is the nation's only major transit agency without a significant source of dedicated funding.”
It seems to me that for a public transit system that services Virginia, Maryland and DC, there should be some funding somewhere. For those from the DC area, I am preaching to the choir, but there is a lot that needs replacing, and Metro can never seem to find any money.
Metro responds by hiking fares, which always causes a fuss. This is an example of social benefits being greater than the private benefits, and the need for government to step in. Since the private benefit for each individual of an updated metro is different, it is hard to price this efficiently. The government has to step in to help reach the social marginal benefit of say, an additional car, because individuals are not willing to cover the costs themselves.
In the end, I am glad this bill was passed because I use the metro and I hate the old trains on the Red Line. I do not hate them so much that I would pay for a new one, but I definitely get more benefit because the government stepped in and funded the public good.

Who needs schools anyway?

At least that's what I would be saying if I lived in Fluvanna right now.  Head officials there just voted to start the ball rolling on a $60-70 million dollar high school construction project.  And that's only the beginning, the total cost of revamping their school system is estimated to be more like $90 million if the rest of the proposed plan goes through.  Bear in mind that Fluvanna is a pretty podunk place, with a population of around 25000 residents.  As stated in the article, the tax cost of servicing the debt would be very large.

This presents an interesting situation.  There is a large group with a significant amount to lose, and tax relief is being proposed for senior citizens, so the burden falls hard on those working age residents without school-age children in the area.  How did the smaller group of beneficiaries win in this case?  From our chats on Stigler and Peltzman, I'm guessing that the parents, who are used to getting organized on a regular basis, did so at a relatively low cost and made very persuasive arguments, while the large taxed group was unable to organize themselves efficiently.  Apparently there was a round of applause after the vote, so it sounds like the opposition was under-represented...freeriders are perhaps to blame.

One other idea - if mobility costs are low compared to this transfer of wealth, would Tiebout's model predict that we might see more families with children moving into Fluvanna and those without children moving away?

Self Enforcement

This one was too easy...  When I got back to my office today, the very first item I read was a weblog entry that linked to this Citizen's Self-Arrest Form.  Seriously.  It seems that at the "University" of Oklahoma, the campus police expect individuals to arrest themselves. 

Note the great incentive for doing this: to "provide a savings of tax dollars."

Sure, we can save a lot of tax dollars if we hire no police and we just police ourselves (think about that you under-age drinkers).  That is quite an effective and credible enforcement mechanism!

Here is the source, a weblog written by two economists. 

I just can't figure out why Rhett Bomar didn't turn himself in.