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(Q1) Some clicker questions
(Q2) Spring 2013 Homework questions |
(A) When markets alone might not suffice
Much of the time we do not need to worry about what other people are doing. As the article (Mkts,TV) Markets and Tunnel-Vision shows, market prices help us communicate clearly and efficiently. The rice farmer doesn't need to know if there has been a drought in India, because if one occurs the rice price will rise. The farmer doesn't need to know why it rose, only that rice is more scarce and any rice she can produce is now more valuable. The wealth of information in market prices allows firms to operate in tunnel-vision, where they can tune-out much of the world and concentrating on producing a high quality product at a low price.
In these instances society doesn't need to worry about what each business and consumer is doing. Market prices do all the talking. There are some instances when market prices fail to signal important information, and in these instances we must rethink the tunnel-vision attitude, and consider whether some decisions must be made in a collective fashion. These are settings where everyone might be made better off if they made decisions as a group, rather than as individuals in a market place.
Much of the impetus for collective decision-making can be described in one word: free-riders. As the name implies, a free-rider is someone who enjoys the benefit of an activity without paying for it. There are many things we know that we should do for the common good but do not, perhaps because we are selfish and want to free-ride, or because we believe everyone is already free-riding. This article is about problems that arise because of free-riders and how a society sometimes must act together to either prevent or punish free-riders, all for the common good.
A few examples would help.
- Water, a common resource—The U.S. is blessed with a series of aquifers whose waters are pumped from the
earth and sprayed onto crops that feed humans and livestock. The recharge rate
of the aquifers is very slow, which means the rate at which we pump water far
exceeds the rate at which waters return to it. For the sake of our descendants
we must be prudent in the rate at which water is pumped. We don't want to leave
valuable water sitting in the ground, but at the same time we want our
great-grandchildren to be able to feed themselves also. Everyone recognizes the
need to conserve water, but the incentives facing each farmer does not promote
conservation. Each farmer has the incentive to pump as much water as it is
profitable, ignoring the impacts to future generations. The reason is that
anyone else can pump the water also, and if the farmer doesn't benefit from the
water someone else will! Why be the only chump who isn't free-riding? The farmer is not irresponsible or greedy. If she knew
that other farmers were conserving also she would reduce her use of the aquifer.
She only wants to not free-ride if she knows others are not free-riding either. Using large volumes of water is
then rational for the individual, even if it is irrational for society. This
means that there might be some benefit in making group decisions about how much
water each person can use, like government regulation in a democratic process.
Another improvement might be to give a group of people clear and complete
ownership of the water aquifer. Because they do not have to worry about other
people taking the water they do not use in any one year, they will sell water
rights conservatively, and as farmers are faced to pay higher prices for water
rights, less irrigation will take place. Yes, agricultural output would fall now,
but more water will be available for future generations.
Figure 1—Aquifers Across America (the Ogallala in blue
from the Texas Panhandle to Nebraska) aquifers.jpg)
- Knowledge is a public good—Henry Heimlich invented...(can you guess it?)...the Heimlich maneuver. An altruistic person with a curious mind, he noticed that choking was a leading cause of death among children and that no good procedure for helping choking victims existed. It dawned on him that there was probably enough air in the lungs to force the object out, if it could be forced out by squeezing the victims chest. First he sedated a dog and jammed a big piece of meat in the dog's mouth. Then, he tried squeezing its chest to force the object out. It didn't work. So he tried again. It still didn't work. So he tried a third time...and it worked! After writing an article for a medical journal in 1974 about how the procedure could be used on a human, the Chicago Daily News picked it up. Pretty soon a man read the article, came across a choking victim, used the Heimlich procedure, and saved the person's life. The procedure was born, and after being demonstrated on The Tonight Show and the Late Show With David Letterman it has saved many, many lives. Would a corporation ever invest money into developing something like the Heimlich procedure? No, because a corporation exists to make money, and you can't charge people every time they use the procedure. This means we, the public, free-ride off all the money the corporation spent developing the procedure. The fact that a corporation wouldn't purposely develop the procedure doesn't mean we shouldn't try to invent similar procedures, for we know the lives they save are valuable. This is an instance where it is irrational for an individual to research medical procedures like the Heimlich maneuver, but it is irrational for society not to. Like knowledge in general, the Heimlich maneuver is a public good, and it either must be produced by altruistic people, philanthropic organizations, government, or the like. Here, the way to eliminate free-riders is to make everyone pay for the research through taxes.
(B) Four Types of Goods
How do we determine which goods can be produced and sold in markets without the need for collective action like public pressure, religious sanction, or regulation? That is, how do we know when free-riders are a problem? Conceptually, the distinction is rather simple. Once we know whether a good is rival or non-rival, and whether it is excludable or non-excludable, we can group all goods into one of four categories, and in two of those categories free-riders tends to be a problem.
(B.1) Rivarly and Excludability
- A rival good is one in which a single unit cannot be shared by individuals. If you eat a hamburger another person cannot eat that same hamburger, and so burgers are rival goods. There are some goods where a single unit can be shared among many people, and these are non-rival goods. Just because I watch an episode of The Colbert Report doesn't mean you (or anyone else) cannot watch it also, and so television episodes are non-rival goods. If the U.S. government protects Kansans from terrorists then Oklahomans can share in that protection, and knowledge of how to employ the Heimlich maneuver can be shared by everyone. National defense and many types of knowledge are thus non-rival. Many goods are non-rival only up to a point. Everyone at Oklahoma State University can drive on Interstate 35, but if we all try to drive on it at the same time it becomes crowded and no two cars can occupy the same space. Roads are non-rival until they become crowded, after which they are rival goods.
- Some goods are excludable in that you can be excluded from consuming it, allowing a business to charge people for its consumption. Most goods familiar to us are excludable goods in that we are excluded from consuming it until we pay a price. If Stillwater hosts a fireworks display it can charge people for watching it close to the place they are launched, but they cannot charge people living miles away from also enjoying the spectable. A fireworks display is a non-excludable good. So are the aquifers in the U.S., in that any person with land above the aquifers can pump water. Knowledge is often non-excludable. Remember, Henry Heimlich could not charge people every time they employed his maneuver. Roads are usually non-excludable in that anyone can drive on them, but toll roads are excludable because you must pay to traverse it.
(B.2) Four Types of Goods
(B.2.i) Private Goods
Using these concepts allows us to describe all goods as one of four types. A hamburger and an iPad are both rival and excludable, making them private goods, where free-riders are not a problem. Economists usually say that market prices do an adequate job of coordinating the production and consumption of private goods, and we should leave markets for these goods alone. When free-riders are absent, markets tend to shine.
Figure 2—Four Types of Goods
(B.2.ii) Public Goods
National defense and knowledge is both non-rival and non-excludable, making them a public good. It is often the case that markets will not provide public goods, leaving it up to government or other collective organizations to provide. This is why governments raise armies, not individuals, and why governments subsidize education and research. Many times individuals do form voluntary groups to provide public goods, so just because something is a public good does not mean only the government can provide it. Education may be a public good, but Catholic churches have provided it long before governments. Many philanthropic organizations conduct research for the sake of humanity, simply out of the goodwill of individuals. J. D. Rockefeller used to conduct research on how to grow corn more efficiently, not because he was a farmer, but because he knew that would do more to help the poor than alms. The Bill & Melinda Gates Foundation are conducting research on the best teaching methods than any university, and though this is a public good, the Gates' were happy to provide it.
Protecting the ozone later is a public good. We all enjoy the presence of a healthy ozone layer simultaneously, making it a non-rival good. When the U.S. and other major countries took major steps (e.g., banning certain hair sprays) to stop the depletion of the ozone layer in the 1980's—successful efforts, it should be added—citizens of all countries benefited from these actions regardless of whether they paid part of the cost. Most of the poor in developing countries paid not a cent to help the U.S. and its partners, nor were they really asked to, but they benefited from the efforts just as much as Americans. There were even many Americans who were unaffected by the efforts to restore the ozone, yet they benefitted just as much as those who had to give up certain hair sprays. Protecting the ozone is then a non-excludable good, as some people simply cannot be charged from consuming it. Because protection of the ozone layer a good is both non-rival and non-excludable, it is a public good.
Figure 3—Healing the Ozone Layer (from National Geographic, April
2013)
OzoneLayerPublicGood2.PNG)
Protecting the ozone layer is a particular good example of an important public good provided by prudent government action. It is government at its best The deterioration of the ozone layer was scary stuff, so scary that even Ronald Reagan (a president known for his dislike of regulation) aggressively led the movement to ban the substances which caused ozone depletion. The U.S. could not do this alone, as protecting the layer was a public good and other countries would have to work in tandem with the U.S. if the ozone was to truly be protected. The result of this multinational coordination was the successful 1989 Montreal Protocol.
How does a government know when to provide public goods? The Reagan administration was initially dubious to claims that the ozone layer was depleting and that it could only be stopped with an active federal government. What changed Reagan's mind was a cost-benefit analysis, the most popular government tool for determining the desirability of a law or regulation. It attempts to measure the total costs of a public program to the total benefits experienced by everyone (without regard to who actually pays the cost). Economists found that the benefits of avoiding cancers was enormous compared to the small costs of banning chemicals like certain aerosols.
In agriculture, cost-benefit analysis are used to determine whether certain pesticides should be banned, whether gestation crates should be banned, and whether cattle producers should pay a tax for the greenhouse gases their cows emit. Let's look at the gestation crate issue, the question being whether government should ban the housing of sows in gestation crates for extended periods of time. It is presumed that farmers would convert the gestation crates to a group-pen system, which provides a better life for sows. A cost-benefit analysis finds that converting from the gestation-crate to the group-pen system raises pork production costs by $0.065 per retail lb of pork. That's the costs. What about the benefits?
Figure 4—Gestation-Crate (left) Versus Group-Pen System for Housing Sows
The benefits are measured by the maximum amount of additional money people are willing to pay for the conversion and the improvement in animal welfare is brings. This was measured by recruiting people to attend an information session and then participate in an auction where they bid on pork chops from a gestation-crate and a group-pen system. Their bids suggest consumers will pay up to $0.084 per retail lb of pork from a group-pen system compared to a gestation-crate system. This measures only the the private good portion of farm animal welfare, and if I spend more money for animal-friendly pork others are free-riding off my altruism, as they benefit by knowing the sow making my pork is treated better even if they did not consume any of the pork. A nationwide policy banning gestation crates prohibits free-riding because it forces everyone to purchase more ethical pork, thereby increasing the benefits we receive from better animal treatment. The total benefit of a crate ban is greater than $0.084 because some aspects of farm animal welfare are a public good. Vegans value better sow treatment though they would nover buy pork, so their benefits are not counted in the $0.084 either.
Compared to the costs of only $0.064, the cost-benefit analysis strongly suggests that we should ban gestation crates as a public policy.
Video 1—Humans represent animals because they can't represent
themselves (from The Onion.com)
(must use Internet Explorer)
There are reasons to be skeptical of this analysis though. People consistently misrepresent themselves when they are observed by researchers, and it has been shown that consumers are less likely to pay higher prices for more ethical products in the grocery store than in surveys, experiments, and other forms of consumer research. (N1) The point is that cost-benefit analysis have many problems, so they must be used with caution. Otherwise, far too many public goods will be pursued by government..
(B.2.iii) Common Resources
Common resources are rival but non-excludable, making them subject to something called the Tragedy of the Commons, which is simply a story of how free-riders can exhaust resources. Being non-excludable, no one really owns these resources and so people tend to over-use it. The Buffalo were a common resource, in that no two people can consume the same buffalo hide, but no one could be excluded from heading out on the prairie to shoot buffalo. Because no one owned the buffalo they almost went extinct—that is the Tragedy of the Commons. Many fear the Tragedy of the Commons is and will continue to take place regarding U.S. aquifers, such that we will suck it dry in just a few decades, threatening the ability of future generations to acquire food. We think of Greece being rocky, barren, and dry, but it was once fertile and verdant. Where did all the soil fertile go? It was eroded because property rights in ancient Greece did not give then adequate incentives to care for the soil. That, indeed, is a tragedy.
Video 2—The Tragedy of the Commons
Video 3—The Simpsons Illustrate The Tragedy Of The Commons
(must use Internet Explorer)
What can be done to avoid the Tragedy of the Commons? There are several solutions, some requiring big government, some requiring less government.
- You could privatize it, where individuals actually own the resource
and can use the power of the government to prevent others from taking it. This
has worked for protecting endangered elephants in Africa, where communities were
given complete ownership of the elephants. Less elephants mean less tourism, so
just as the cow has never been threatened with extinction, the elephant is
receiving equal security.
Of the many ways to conserve water in the Ogallala aquifer (shown in Figure 1),
one is to make the water private property using a cap-and-trade system. The
government would first cap the total amount of water that can be pumped from the
aquifer each year. They would then sell permits allowing people to pump a
certain amount of this water, where the total water that can be pumped by all
the permits equals that previously determined cap. People could then be free to
buy and sell these permits. For instance, if an Oklahoma feedlot needs more
water and a Nebraska corn farmer is willing to sell the feedlot her permit (both
pumping from eh Ogallala aquifer) then the trade is allowed. This is good for
everyone. The only way the feedlot would be able to buy the permit from the corn
farmer is if water has a higher value in the Oklahoma feedlot than the Nebraska
corn field. This cap-and-trade system not only conserves water but it ensures
the water used is used where it is valued the most. Moreover, once the
cap-and-trade system has been established, the government can then work with the
permit owners to help set the cap at a good level. The owners of the permits are
now owners of the aquifer and will want to conserve water. Their permits will
lose value if the cap is set too low (as each permit will refer to only a small
amount of water) or if the cap is set too high (as each permit will be worth
less in the future, as there will be less water).
Video 4—How to Save a Dying Ocean (from ReasonTV.com)
- You could enact tough government regulation where people are allowed to take only a small portion of the resource at a time, like when fisherman are limited to the number and size of fish they may keep.
- Sometimes social norms evolve to make it immoral or even a sin to use too much of a resource. Take the Alaskan Natives located around Old Crow, Yukon (near Alaska). Formally called the Gwich'in Nation, for as long as they remember they remember they have dependend on the Porcupine Caribou for much of their food. This is a common resource, for the more caribou they kill in any one year the less caribou that will be able to breed and produce offspring for future years. Yet if any person decides not to kill a female caribou, it may be someone else who benefits from the offspring the caribou produces. The Gwich'in people do not have this resource problem though. Their social solidarity meant there was no such thing as a free-rider. They hunted together and made decisions together, and social pressure made free-riding morally reprehensible. On the hunts they would only kill the older bulls at the back of the herd who were not needed for breeding. The young bulls and cows were left unharmed so that they could breed and provide the same amount of meat, bone, and fur each year. The Gwich'in knew their fate and the caribou's fate was intertwined, and this responsible stewardship was wrought into their culture. If any one person tried to take a little more for himself at the expense of others, he would be seen and would be condemmned by the community. In fact, the caribou was considered sacred, and so violating their social norms about caribou hunting was like an insult to the universe.(B2) Humans have an ability to believe any religious notion, and will worship Zeus or a tree. Communities often harnass this penchant for superstituion, and use it to enforce responsible behavior. When people remark how environmentalism has become something of a religion, this is hardly an unique insight, as human societies have always used religion to dictate social and economic behaviors.
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They would live in a tent atop the packed ice, with a spruce-bough floor and a wood-burning stove to keep them warm, and her mother would keep watch for the caribou from a hole in the tent door. "Sometimes she'd go outside and she'd ask the ravens, 'Where are the caribou?'" recalls Kassi. "I'd watch her and I'd watch her face. And I'd know when the caribou were coming close." Kassi's grandfater and the other hunters would travel to the back of the herd to hunt the older bulls, leaving alone the pregnant cows at the front. When the hunters returned to camp, sometimes three or four days later, the Gwinch'in would feast, and they would watch, reverentially, as the caribou passed by on their way to the coastal plain. "It's a very sacred time, it's a quite time," says Kassi. "You have to give thanks to the caribou. And we give special thanks to the cows. We pray for them, especially the women, we can connect with them, we can feel what they feel as women and as mothers."
—Bakan, Joel. 2004. The Corporation. Page 43. Free Press: NY, NY. Kassi is a member of the Gwich'in Nation in the Yukon, very close to Canada.
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(B.2.iv) Club Goods
Finally there are club goods, where many people can consume the same unit but any one person can be excluded from consuming it. Many people can watch the same football game, at least until stadium capacity. Many more people can consume the same football game over television, at least within range of a broadcast or until capacity of a cable wire. Yet all of these individuals can be charged for its use. Every single American can watch the same movie, but every person can be charged for it, also. Like its name implies, club goods are those for which it makes sense for groups of people to consume at the same time, but where the size of that group is limited. Often clubs are formed to provide open access to everyone who pays a membership fee.
References
(B1) Buchanan, Rex C., Robert R. Buddemeier, and B. Brownie Wilson. "The High Plains Aquifer." Kansas Geological Survey. Public Information Circular (PIC 18). Accessed August 2, 2012 at http://www.kgs.ku.edu/Publications/pic18/index.html.
(B2) Bakan, Joel. 2004. The Corporation. Page 43. Free Press: NY, NY.
(M1) Michael Finkel. August, 2012. "Tibetan Gold." National Geographic magazine. Photographs in Figures 1 & 2 were by Michael Yamashita and accessed on August 2, 2012 at http://ngm.nationalgeographic.com/2012/08/tibetan-mushroom/yamashita-photography#/08-family-harvesting-worms-670.jpg.
(N1) Norwood, F. Bailey and Jayson L. Lusk. 2011. Compassion, by the Pound. Oxford University Press: NY, NY.
(S1) Sojka, Gary A. 2009. "Lecturee Five: Agriculture Impacts Ecology and Geology." Understanding the Human Factor. The Teaching Company.
(W1) Water Encyclopedia. "Ogallala Aquifer." Accessed August 2, 2012 at http://www.waterencyclopedia.com/Oc-Po/Ogallala-Aquifer.html#b.
(W2) Wildlife Conservation Society. October 11, 2012. "Fisheries benefit from 400-year-old tradition." ScienceDaily. Accessed October 15, 2012 at http://www.sciencedaily.com/releases/2012/10/121011123711.htm.
(Y1) Yablonski, Brian. Fall 2007. Bisonomics. PERC Reports: Volume 25, No. 3.
