Monday, March 31, 2008

New Poll! Self-Service Gas?

Readers of my blog may already know, as I have posted on this previously, but there are few things things that get under my skin as much as the prohibition on self-service gas in Oregon.

I find the arguments supporting the prohibition wanting:

Consumer safety? I don't believe that there is a rash of fires, explosions and injuries in the other 48 states that allow self-service gas.

Mothers with babies? (Why is it always mothers, what about us dads?) First, the many times when I was living in Colorado, schlepping babies and getting gas, I never once had a problem. Second, you could still mandate at least one full-service pump, though I think demand will be so weak that this will end up being mostly unused - which is why you rarely see full-service anymore in the self-service states.

Important for employment? You have got to be kidding, right? Oh, no? OK, well you can still tell gas stations they have to employ so many people per pump, etc. Sound absurd? It is! And no different than the prohibition on self-service gas. Why not tell all retail outlets that they have to employ a minimum number of people and eliminate all unemployment in Oregon?! Why did anyone think of that? Because doing so with either force wages down or (especially with a high minimum wage) eliminate some employers altogether likely lowering overall employment.

I am sure most of you are much more level headed than I about this issue, and perhaps I have it all wrong and this, in fact, is a precious quirk of Oregon that you all cherish. State Rep for Corvallis Sara Gelser seemed to think so when I asked her to please introduce legislation to change the law (she refused saying something crazy about mental health care and child welfare being more important - what is more important than letting me pump my own gas?).

So let me know what you think - vote!

Thursday, March 27, 2008

Beeronomics: Local Tastes

The three readers of my blog will know that I enjoy both beer and the beer business. So when I travel, I always try and learn about local beers. A few months ago it was Abita in New Orleans, this month I am in Nashville Tennessee. Upon perusing the beer cooler in the local Harris Teeter I found (and was very tempted by) some Oregon brews: Bridgeport IPA and ESB, Rogue Dead Guy and Hazelnut Brown Ale and Widmer Hef. The only Nashville beer I could find was Yazoo. I had the choice of a pale, a hef and something called "Mexican Style Ale." I chose the pale.

This beer reminded me a lot of Abita products: mild and nondescript - very timid by Oregon standards. Being early in the microbrew revolution and having a competitive environment for brewers I think palates in Oregon evolved quickly and were also pushed by brewers experimenting with bigger and bigger beers as a way to get noticed. What we have arrived at in Oregon then are very intense, hop-forward beers as a signature style. I notice how far we have departed from the rest of the US and the South in particular when I taste a beer like Yazoo Pale. It has almost no hop aroma, pours a very light caramel and has very little flavor. Yuck.

To an economist, having such distinct regional styles makes sense when you think about the challenges of transportation and distribution. Tastes have not homogenized (and thank goodness for that). But you can buy Yazoo, Sierra Nevada, Bridgeport, etc. all for the same price, so this theory seems perhaps a little suspect. With all of these choices, why have tastes not started to converge? I think one reason is that a big part of the success of microbreweries comes from consumers who like to identify with their own regional breweries. I witnessed this as a graduate student when some friends of mine started the Ithaca Beer Company. The initial beer was pretty terrible (and contract brewed in Chicago), but local sales were very strong. People really bought into the 'local beer' idea, it was clearly part of their satisfaction form consuming the beer.

As more breweries start up in places like New Orleans and Nashville, it will be interesting to see if brewers get more bold in their recipes and if the west coast style will end up being more common in the south, or will it be a different distinct regional style? But for now a distinct style is completely absent. I think next time I am in Nashville, I'll buy the Bridgeport.

Tonight it is off to Boscos, a local brewpub which I have enjoyed on past visits, let's see if they are pushing the style envelope.

Update: I haven't gone yet, but this is seriously cool: I am a big fan of cask conditioned ales so I looked up what is on cask tonight and I found out that for four week-nights running they are serving the same IPA but with different yeast styles. Yeast is perhaps the most important ingredient in beer and is usually unappreciated by the consumer. This is a great way to show consumers what yeast adds to a beer's character. Kudos Boscos! Does anyone know if Portland brewpubs have done this?

Update #2: Boscos cask IPA was very good, lighter on the hops than would be acceptable in a Portland brewpub, but well-balanced and enjoyable. I wanted another, but forced myself to try something different and then I passed up the Oatmeal Stout for the "Irish Red." Oops. Why would you want to make a copy of Killians in a brewpub? Anyway, when at Boscos, try the IPA.

Economist's Notebook: Small-Sample Bias and the Media

On OPB last week Ethan Lindsey reported on the firing of a reporter for the Bend Bulletin wherein it was suggested that housing industry poo-bahs may influence the Bulletin’s coverage of the housing market. There was also complaint, echoed elsewhere, that recent press coverage of the subprime housing mess has been too one-sided and has caused increased deterioration in the housing market. This got me thinking - what is the media's responsibility when it comes to sending a signal about markets?

Is it the responsibility of the media, for example, to get the right message across about probabilities when covering accidents? Suppose a fiery car wreck with a large color picture is on the front page of a newspaper, it is the responsibility of the paper to include many pictures of cars making safe journeys and include in the story anecdotes about many other persons who did not crash? I don’t think so. But this appears to be what home builders, realtors and mortgage lenders are complaining about now in the media’s coverage of the housing market. People think the situation is much worse than it is, they claim, due to negative press attention.

But people make mistakes of inference like this all the time: it is what economists call a small-sample bias. Technically, this is where a set of observations are too few to get an accurate average measure from the sample. Suppose I fly to Nashville and find that it is quite cold on the day I arrive in mid-March. Based on that one observation I might conclude that March in Nashville is very cold. But then the next three days are warm and I realize my inference might have been wrong – I concluded too soon. If I spent many years in Nashville, I would probably be able to make a guess about the average March temperature that was quite accurate.

This is similar to what happens when we read a story of a person loosing money on a house – we tend to give the one observation too much credence. But this works both ways, during the housing bubble, stories of people making a lot of money buying and selling houses caused people to conclude that it was almost impossible not to make money.

Do newspapers have some sort of responsibility to respond to these errors of inference by always pairing one bad with one good story? I think not - it is up to readers to understand the errors they are making.

It is worth noting that it might not be an error to see a single story about someone who made a lot of money buying and selling a house and believe that this informs them about the state of the world. If lots of other people read the story and making and gain confidence which leads to investments in property, then the inference based on this single story might turn out to be correct. It is the story itself that made it so. In this sense news coverage is endogenous to the market it can move the market and market movements can cause coverage to appear. It is all part of the bubble process.

What is the answer? Good economics and econometrics training for everyone of course! Look at data, not anecdotes, when making inferences and try and look at data in ways we know eliminates or minimizes biases. Absent that, try and understand that anecdotes are not good ways to make inferences about the state of the world.

Tuesday, March 25, 2008

Portland Housing Update

The latest Case-Shiller data shows definite softening of the Portland market in January. This happened last year too, though not nearly to the same extent. It will be very instructive to see what happens through the spring and early summer months. Especially after these latest moves to inject liquidity and ensure stability of the mortgage market. This is quite a big drop and my recent confidence is being shaken, but I shall await the spring numbers to come to a final conclusion. It seems as if the supply of home for sale is really starting to grow (as seen below), which could be a bad omen.


Sorry for the slow blogging, I am in Nashville to work with a colleague at Vanderbilt on a research project studying child labor. I will have something new up soon.

Thursday, March 20, 2008

Economist's Notebook: Cost Disease and the Decline of Burglaries

NPR recently did a story on the decline in Burglaries in the United States. They interviewed a reformed burglar who said that people don't keep cash around anymore and that the increase in alarms means it is a bigger hassle, but the thing that stuck out to me was the statement that you can't sell stuff for anything anymore. It used to be that you could steal some electronics and make some quick cash, but when a new DVD player can be had at Wal-Mart for $50, how much would a stolen one fetch on the street? Close to zero.

When I was the victim of a burglary at my old apartment at NW 23rd and Glisan in Portland (this was long ago when the area was hip and cool, way before the gentrification that exists now), the thief took the only things of any value in my apartment: my VCR and my SLR camera. These would be absolutely worthless now and the whole endeavor would be pointless.

Over at Marginal Revolution, Tyler Cowan notes that economics actually predicts this phenomenon - through an idea known as Baumol's cost disease (and once again MR steals my ideas, and yet somehow before I write about them - I have to keep the tinfoil on my head!). The basic idea of cost disease it that there are some things that we naturally don't see much productivity gains through time (Baumol's example was a symphony orchestra) while in many other areas (consumer electronics for example) we do. This helps explain why the cost of tuition at a university keeps rising faster than inflation - I am not that much more productive than a professor 100 years ago when it comes to the hard work of teaching and learning (though as a researcher I am, but tuition is reflective of the teaching part and my research is an externality). What is becoming relatively more valuable through time, therefore, are services, like teaching college students economics, but these cannot be captured by a burglar very easily.

So cheap overseas labor is apparently putting burglars out of work as well. What is a poor meth-head to do? Apparently more and more identity theft.

Wednesday, March 19, 2008

Economist's Notebook: The Economics of Individual Energy Consumption

I once joked to my colleague, as he criticized me for being lazy by suggesting taking the elevator from the first to the third floor of our building at Oregon State and thus wasting energy, that it was quite possible that walking up the stairs was less energy efficient. After all, I argued, think of all the energy it takes to provide us with all the calories we need to make it up the stairs: fossil fuels for the farm equipment, transport trucks and electricity for the store; energy to create the fertilizers and pesticides, packaging; plus all of the carbon impacts from these plus methane from livestock, etc. (All good reasons to shop at the local farmer's market perhaps) Factoring in our relative lack of fitness, it seemed like the elevator might be a pretty good deal. I was joking, of course, but it turns out that, according to a couple of people who claim to have done some calculations, I was not too far off the mark.

Now, some caveats: this was mostly about the "typical American diet" which is heavy in processed foods, dairy and meats and comes mostly from supermarkets - nonetheless, it does give one pause. There is one thing that the two researchers did not factor in: that in walking regularly one improves ones health and thus may need much fewer health care interventions throughout life and this may mean a considerable energy savings. It also brings up another conundrum: farmers markets may definitely be the best place to go and get local produce that is in-season and climate appropriate, but what is better, a local hot-house that grows tomatoes in the winter, say, or shipping tomatoes from a hotter climate? (By the way, the obvious rejoinder, that an Oregonian perhaps should not eat tomatoes in the off-season is not particularly helpful - assuming there is a demand, we need to decide how best to deal with it?)

Odds and Ends from the Portland Housing Market

A few odds and ends re: housing and Portland. First, something appears to be working in the long term mortgage market. Here is the graph of 30 year fixed national average mortgage rates for the last month. They are now declining rapidly meaning more liquidity is returning and this is trumping inflation fears for now (a bit of a surprise, that):

Scott Sambucci if Altos Research in the comments sections left a couple of links that were cut off. Here are the graphs of the Portland housing market he was referring to. This first is a break up of list price trends by quartile:

What is particularly interesting here is that conventional wisdom says that high priced properties will feel the pinch more than lower priced ones as the market is thinner and non-conventional mortgages are harder to come by. But not in Portland it appears.

The second graph is price and inventory trends which is very interesting. Notice that in the last half of '07 inventories shot up and median prices declined in response (as we would predict if median price is a good proxy for same sales prices). This price decline eased inventories but they are now on the increase again - will another price decline follow? Perhaps not if mortgages keep falling...

Monday, March 17, 2008


It was only a few days ago I was lecturing in my economic development class about the Asian financial crisis of the late 90s - real estate speculation, bad loans from poorly regulated banks aided and abetted by a central government eager to see the good times keep on rollin'... Hmmm, sounds familiar doesn't it? Why, we even have the quickly depreciating currency! The only thing that keeps us from looking like a developing country we are so often quick to criticize is the fact that the US Dollar is still a hugely important world currency and with so much outstanding US debt in the coffers of European and Asian central banks, they can't afford for us to tank. Still, it is a little creepy how much our current situation mirrors the Asian crisis.

The canary in the coal mine (which many are suggesting is currently the role that Bear Stearns is playing) may actually be the Northern Rock bank in the UK, which was nationalized after facing a liquidity crisis. While Bear Stearns is not being nationalized, much of their risky debt is. So what is next? I remain relatively optimistic (but that is not saying much) - it appears liquidity is creeping back into the long-term mortgage market (see graph), thanks to the feds unusual recent efforts, but they may run out of ammunition soon. That fiscal stimulus plan is still set to roll out, but now you see why many economists think such measures are usually too little and too late to do much good - and at an enormous expense.

What of the state of Oregon? Well today we learned about the unemployment picture - the unemployment rate is unchanged but the state has shed 1,400 jobs so far this year, which is not a good sign. The leading economic indicators are not looking good either. The housing market is OK relatively in Portland, but is no so hot in Bend and Medford. Even if it were going to remain strong overall in Oregon, there is no natural buffer from the national economy. Decreasing demand for what Oregon makes will hurt. The one bright spot is in exports, where the low dollar will make Oregon products more competitive abroad. But this is only a fraction of the market for Oregon's products.

Buckle your seat belts, this one could get rough...

Friday, March 14, 2008

Portland Housing Market: New Data

From Altos Research (and for what it is worth), some data about the housing supply and demand conditions in Portland: a 10 city composite and two other cities I chose for comparison. The average listing price is not very worthwhile, in my opinion, for reasons I have mentioned before; it could be the index has declined due to falling house values or because fewer higher priced houses are being offered for sale. The supply and demand proxies are interesting - the listing inventory and the average days on market - but are they meaningful? I am not sure, but I can't see much to make of it all - still, for data junkies, I am here to serve.

Thursday, March 13, 2008

Economist's Notebook: Irrationality

Elizabeth Kolbert of the New Yorker recently wrote a review of a book about behavioral economics which she uses as an opportunity to criticize economics - but I believe she has totally missed the point. Her errors are all too common among critics of my profession, I fear, which leads to very self-satisfied attacks on a straw man whom I don't recognize as being much related to what I do. She begins by describing a supposedly irrational decision she made: buying a Tintin book for her daughters to get free shipping on an order that originally had only one book she was buying for work. But why does she think this is irrational? By qualifying for free shipping, the marginal price of the new book is now lower and it is quite reasonable to suggest that this book might be desirable at $3, say, when it was not at $7. In fact, why does she think Amazon makes these offers? If everyone decided irrationally, there would be no reason to make such an offer. In reality it is the very fact that people act predictably in the face of such an offer that they exist at all. So how can you call that irrationality?

She says that the shipping cost would have been borne by the New Yorker anyway - but it is not irrational to care about saving the place you work money. I do it constantly - I am about to fly to Nashville to do research with a colleague at Vanderbilt. The state approved travel agent found a flight for $800. I could have just said yes and been done with it. Instead I did my own search, 'wasted' and hour, and found a flight for $300. I am happier now because I did that, so it was worth it to me (of course my flight is on Southwest and they just grounded almost 40 planes, so maybe I messed up).

This idea that economists believe that individuals are only motivated by money is common. This is nicely evidenced by this letter to the New Yorker about Kolbert's article. In it, the writer exposes the stereotype: "People’s behavior is governed by feelings. No one would even bother to buy a house or a candy bar unless he wanted to. And one important measure of a successful purchase is how you feel about it, damn the numbers." But this describes how economists view behavior perfectly. Economic theory only demands that people's decisions are internally consistent. Lets run with this example. You buy a house because you feel good about it for, say, $300,000. Now, do you feel good enough about it to spend $350,000? $400,000? $500,000? At some point the good feeling you get from owning the house is eclipsed by either the cost outweighing the good feeling or the price exceeding your budget. Aha! So, I can predict that when the house price rises, there will be fewer people who want or are able to buy it.

And sure enough, when economists have looked into all kinds of areas of human behavior you might not think as being governed by the laws of economics, we find behavior that matches exactly our predictions: marriage, divorce, sex, drugs, crime, you name it. My favorite example, written by a friend of mine, is a study of births right around the new year. You might think that there is no way economic incentives could influence that most sacred of human activities: bringing a new life into the world. You would be wrong. You see, if you have a baby born in a calendar year, regardless of when in that year it is born, you get the federal income tax credit for that child. That means that if you are in the ninth month of a pregnancy and due right around new year's day, there is a strong incentive to induce or have a c-section before the clock ticks midnight on December 31st. Sure enough, in the US there is a spike of births in the last week of December and a trough in the first week in January.

As for the irrational behavior uncovered in the book, we are learning all the time that we often make decisions that are influenced by things we might not have expected - for example framing choices (as Kolbert mentions). The strength of neo-classical economics is how flexible the theory is - these are things we can incorporate into the theory, not things that destroy the very foundations. In addition, we are studying these things within the discipline, not ignoring them. We are constantly testing our assumptions as any good academic discipline should do, so this speaks to the health of the discipline, not the sickness. Lastly, much of what we find in laboratory experiments does not coincide that well with observed behavior in real life, suggesting that it is important not to make too much of the magnitude of laboratory evidence - but we should pay close attention to the qualitative evidence. So framing might not be that severe in real life decisions, but it certainly occurs.

It is amazing to me that at a time when computing power and data are such that we are now finding evidence of behavior that corresponds to economic theory in so many areas there should be such a desire to suggest that we have it all wrong, but I think it is perhaps evidence that we all like to think of ourselves as exceptional, not beholden to the same incentives as everyone else. Economics, perhaps people feel, reduces people to simple calculators, which does not coexist with the 'humanness' we all feel defines us.

So let's play what Robert Frank calls the 'economic naturalist.' I'll leave you with an irrational puzzle and you play the economist: In my local Safeway, they constantly have "two for..." sales. The big red tag will say something like "two tubs of salsa for $5" and then in smaller print, "$2.50 ea." So really the sale is just $2.50 per tub of salsa. Why on earth do they bother with the 'two-for' ruse? Wouldn't economic theory predict that it should not matter one wit? Can economic theory explain this? You tell me...

Equal Time: Go Vikings!

I recently, and shamelessly, posted about the Cornell University men's basketball team going to the NCAA Tournament (see how I have now shamelessly done it again?) . Now it is time to give it up to the Portland State University Vikings, who are also going to the tournament for the first time ever. This is why March Madness is such a great thing: everyone has a chance to win it all. Yes, the economics are such that there is little chance of a minnow eating a big fish, but it could happen...

We shall all be kind and speak not of the Oregon State Beavers.

Wednesday, March 12, 2008

Beeronomics: Why No New Bottling Breweries in Oregon?

It is finally time to get back to something I mentioned in an earlier Beeronomics post and something that was posed to me as a bit of a puzzle by Full Sail's John Harris: why are there no major new entrants into the craft brewing industry in Oregon? Think about the big players: Deschutes, Bridgeport, Full Sail, Widmer, MacTarnahans, Rogue...these have all been around for at least 15 years (I think). So why was there a sudden burst of new breweries and then ... nothing? (NB: I am aware of Caldera, Terminal Gravity and the fact that many smaller places get some 22oz bottles out - but I am thinking only of larger brewers).

I don't know the exact answer obviously, but I can think of a few economic theories that could help explain the phenomenon.

The first is the relatively high fixed cost of starting a brewery the scale of Deschutes, Full Sail, Bridgeport, etc. This takes a sizable investment and the investment won't be made if the size of the market new brewers can carve out for themselves is small. This is in contrast to an industry where fixed costs are very low (blogging for example) and even a very tiny market is enough to justify the small cost.

The second are the rigidities in the distribution and retail sales of beer, some created by law (having to use a distributor) and others created by the vagaries of retail groceries (competition for shelf space). It is hard to get distribution and shelf space which again makes it hard to justify the start-up costs.

[By the way, this makes Ninkasi's strategy very intelligent. By starting as a distributing brewery in kegs only, apparently they can distribute themselves, now that they have established a reputation, grabbing market share with bottles should be a bit easier. Plus the overhead is a lot lower in kegs than in bottles (save for the kegs themselves, which are becoming more and more valuable as scrap metal). ]

The third is the fact that beer is an 'experience good' (something I have mentioned before) which means that people have to actually consume it to tell how good it is. Thus the purchase if an unknown beer carries risk for the consumer and, in general, people avoid risk.

Finally, entry deterrence by established breweries probably plays a role. This has been found in the behavior of the macrobreweries, but might also be true with the littler ones as well. To prevent new entrants, established breweries can do a number of things. They can lower price when a new entrant arrives and even take a short term loss to try and prevent the establishment of a long term competitor. They can also increase capacity more than is necessary. This can be an entry deterrent because it means that a brewery can increase output with no fixed cost whereas a new entrant would have to incur a fixed cost to enter, thus the excess capacity is a commitment device that signals it will compete fiercely against a new entrant.

To sum up then, the first breweries each got a significant market share of a relatively untapped market (a first-mover advantage perhaps), but subsequent breweries have to face high fixed costs, constraints on outlets, struggles of getting customers to try their beer and possibly strategic behavior by other breweries.

I think these theories can also help explain the explosion of brewpubs rather than distributing breweries. Yes, fixed costs are high, but you create your own sales outlet and are competing not just on beer alone, but location, food, atmosphere, etc.

Mmmm, I'm thirsty...

Tuesday, March 11, 2008

Oregon's Fiscal Policy: Fred Thompson, Guest Blogger

Finals are around the corner and I have been busy so I have been lax in my bloggitorial duties, fortunately Fred Thompson is here to rescue me:

According to the Pew Center on the States, a part of the Pew Research Center at Harvard’s Kennedy School of Government, only eight states fared worse than Oregon in a study of government money management practices. They are about half right and pretty much all wrong. They are right that we haven’t faced up to one very big, long standing problem: the extreme volatility of state government’s revenue structure. They are wrong when they confuse policy advocacy with problem diagnosis.

What don’t they like about us? We don’t have a sales tax; our ‘rainy-day’ fund is insufficient; and we have the kicker. All true; but adopting a sales tax and eliminating the kicker would still leave us with a revenue volatility problem, which is the main concern driving the Pew Center’s assessment, and it is too late to build a big enough‘rainy-day’ fund to make a significant difference the next time revenues go south(probably, next fiscal year), even if that were a good idea, which it is not. Moreover, as my previous column noted, we can deal with the revenue volatility problem directly.The great things about Oregon’s revenue structure are that it is fair and adequate.

The Pew Center damns Oregon’s professional money managers with faint praise, saying thestate “employs an impressive number of talented individuals. Unfortunately for them, allthe good intentions in the world can't overcome the state's thoroughly unwieldy fiscalstructure.” Frankly, their accomplishments deserve better than that. Oregon’s Treasury functions (investment management, debt management, and cash management) are among the best in the nation (as judged by their treasury officers in other states and financial analysts in the private sector). Oregon’s budgeters and revenue forecasters are equally respected. The state’s accountants and internal auditors consistently produce the top-rated general-purpose financial statements and a squeaky-clean, government largely free of financial scandal. Much the same thing can be said of many of Oregon’s state agencies and departments, including the often-maligned Department of Human Services,which has recently made dramatic improvements in its money management practices.

Oregon’s fiscal structure is a lot of things, but unwieldy it’s not.

Wednesday, March 5, 2008

Public Goods Redux: Even Bill Sizemore Recognizes a Role for Government

This story has been getting a lot of circulation: Bill Sizemore finally realizes that taxes and government services are connected. Brings me back to something I ruminated about around the election: what is the proper extent of government involvement in society? These questions are never easy, but relentless cries of "taxes must be cut" without any discussion of what programs are unnecessary or specific examples of waste are destructive because they avoid asking the hard questions. As an economist I believe very strongly in incentives and I also believe that taxes are distortionary and often create disincentives to do things we want more of in society. But I understand market failures and the limits of private markets providing public goods as well. To this end, I often find myself arguing with those on the left about the former and with those on the right about the latter. What I hope is that we can get back to a place where left and right can talk to each other about these issues directly. What I think is necessary for this to happen is a good understanding of economics. So contrary to the opinion of some other economists, I think more economic knowledge is actually a good thing for society. Thus this blog. You are all welcome.

The Public Goods Problem and the Sellwood Bridge

One of the examples I often use in my intermediate microeconomics lectures to motivate the idea of public finance and public goods is an example of a bridge over which individuals with very different valuations of the bridge travel. The problem with public finance is this. Suppose only three people use the bridge, A, B and C, and they all cross it exactly twice a day. A gets $500 benefit from it (and so would be willing to pay up to $500 to use it), B $250 and C $200. Thus the total benefit to this hypothetical society from the existence of the bridge is $950. Now suppose it costs $900 to build it. Would it be a good thing for our little economy? Yes. Unequivocally. It would yield a net benefit of $50.

So now, how do you pay for such a bridge? Suppose we assign the task to government and the government proposed an equal tax of $300 per person which the citizens could vote on? The vote would fail because both B and C would oppose such a tax given that their benefits are lower than the tax. What about a fee for use. You could charge $500 and only A would buy access which would not pay for the bridge. You could charge $250 and both A and B would buy access and $500 would be raised in revenue, still not enough to pay for it. At $200 all three would buy access and $600 would be raised. This is true, by the way, even if you charged it as a per use toll.

What if you asked for voluntary donations? Would A contribute $500? No, if A knew B and C's valuation, A would know that $450 is enough if the others contributed their full amounts. B would know that $200 is enough and C would know that $150 is enough and a total of $850 would be raised. This is known in economics as the free rider problem. This seems a bit contrived in a three person example, so think about a large number of citizens and the free rider problem is clearer: no one individual feels as if their single contribution will make or break the project so many do not donate (think OPB).

So you see, it becomes a real challenge to provide a specific public good. This is why we must empower government to make the purchase for us and it is also why I am generally opposed to taxes for specific goods, the more you tie taxes to specific goods the harder it generally becomes to provide the socially optimal level.

This brings us to the Sellwood Bridge, seen above, which is well past its sell-by date and desperately needs replacement (hopefully before the current one falls into the Willamette). Public good problem? Sure, the local government is struggling trying to figure out how to pay for it. Free rider problem? Yes, again, some local governments are not cooperating on a fee plan. Then there is this letter to the Editor from Eric Fox in The Oregonian today:

Collect toll for new bridge

A toll would solve every problem and argument out there concerning the problems of the Sellwood Bridge. A toll would pay for a new bridge, provide money for future maintenance and repairs and reduce traffic through Sellwood. We could even build a beautiful landmark span (like the St. Johns Bridge) instead of am ugly utilitarian cement hulk. If a Clackamas County citizen or truck driver (truck tolls should be higher) does not want to pay, he can find another route. Only the people who use the bridge would pay for the bridge.

I hate to be a naysayer, but I don' t think this will work, partly because of the theoretical example above and partly because it is pretty easy to substitute other bridges for the Sellwood.

Finally, here is an interesting new wrinkle. I guess my dad, whose old condo (not in the building in the story but in the yellow one above) can be seen in the picture above, sold at the right time: a year and a half ago.

Cornell Going to the Big Dance!

Okay, so I could not resist posting about the Cornell University Men's Basketball Team's first trip to the NCAA Basketball Tournament in 20 years, but contrary to what you might think this does have something to do with both Oregon and economics. First, the Big Red are led by Oregon's own Jason Hartford from Tillamook and second, since the Ivy League does not award athletic scholarships (wink, wink) the economics are such that they are excluded from every other big time athletics event (unless you count the Frozen Four). So this is really the only chance teams from the Ivy League get to perform on a national stage and get media attention - especially if they pull off the miracle upset like Princeton over UCLA in 1996.

You are probably saying to yourself, who cares?, the Ivy League is elitist and snobby and all that. That is definitely true of all the other Ivys, but Cornell is cool: it is the land-grant institution of the state of New York and a mix of public and private colleges. Many of the undergrads at Cornell are working-class New Yorkers who get in-state tuition in what must be the best deal in higher education in America. It is definitely neither elitist nor snobby. So go Big Red!

Tuesday, March 4, 2008

Confusing Supply with Demand

This act of arson, apparently an example of 'eco-terrorism,' has me thinking that the perpetrators (assuming environmental motives) got the economics wrong. The irony that this supposedly environmental act has led to many more wasted resources than has been well noted. I think it is also true that if this is an attempt at raising awareness - they could have done almost as well using Greenpeace-style tactics (i.e. non-destructive). But what strikes me is that the problem, should they want to address it, is demand not supply. By attacking the supply, sure you could make it marginally more expensive (decrease supply temporarily, increase insurance costs), but the resulting decrease in quantity of large homes transacted will be inconsequential. In fact this just adds more pressure to develop rural lands because the demand remains but the supply is diminished. So what should be addressed is the demand for these houses. But of course, the solution to lower the demand for these houses is complicated and requires government - something these groups have seemed to have given up on, but the raison d'etre of The Oregon Economics Blog.

So, other than protecting certain lands from development, what can government do? Pigouvian taxes to get the real social and environmental costs reflected in the price of the house is one way, increase the desirability of living closer to the center (transit, investment in downtown areas, incentives for high density development) and promotion of business investment to concentrate jobs in core areas, are others. Other creative ideas out there?