On the Provision of Public Goods: The New OSU Outdoor Recreation Complex

Public goods like parks, police and fire protection and roads, are under-provided by free markets thanks in large part to the free-rider problem.  If you can exclude non-payers from using them, people will opt to forego payment and yet use the good that others have paid for.  Witness Oregon Public Radio which, as I mentioned before, has only 10% of its listeners making voluntary contributions. This is why government is generally involved in the provision of such goods.  But even so it can be hard - witness the difficulty in getting local governments to pony up for the Sellwood Bridge - as there are always some who value the good more and others who value it less and wonder why they are being asked to share in the burden.

Which makes it remarkable that the students of Oregon State University voted to assess an extra fee on themselves in order to pay for the new outdoor recreation complex which I saw on my drive in this morning has been named "Student Legacy Field."  The fields are right in the center of campus and within easy reach of all of the dormitory buildings. I suspect part of the ability of the students to get the fee past has to do with the fact that current students are assessing a fee on future generations of students, but nevertheless I think it is a tremendously good investment.

Where once there was grass fields - beautiful yes, but totally unusable for a big chunk of the school year - there are now turf fields dedicated to student and intramural use that will help keep students active and fit year round.  I would be delighted as a student and this would be a big selling point as a prospective student.  It does this professors heart good to see soccer players out at 8am in the rain running around and getting exercise.

Throw in some volleyball courts, a renovated MacAlexander Fieldhouse and new tennis courts and you have a public good that is going to have huge social welfare benefits for the entire OSU community.

Well done students.

Econ 539-Public Policy Analysis: Public Goods

Driving down to Corvallis this morning I had ample time to listen to the seemingly endless appeals for donations from OPB during their current pledge drive. One line in particular caught my ear - Geoff Norcross said something to the effect of: 'we have a good idea of how many listeners we have and we know exactly how many members we have, the gap between these two is pretty small, but we'd like to make it smaller...'

To me, this statement is incredible. I looked in vein for these statistics for OPB, but for WNYC in New York City, the number of people who donate relative to those that listen is less than 8% according to sfigures I have seen. So, I can't believe that OPB is above, say, 20% and I bet it is closer to 10%.

Which is the point of today's lecture: for goods that are like radio - have some degree of non-excludability (anyone can listen) and non-rivalry (one person's consumption does not leave any less for anyone else) - the private sector does not, in-general, provide an optimal amount of them. Thus the public sector may have a role in providing such goods: parks, roads, national defense, etc. But even the public sector may have trouble in providing them.

In both cases the free rider problem can be severe, just like with public radio. I know as an individual that if I don't contribute I can free ride on the contributions of others.

We will look at examples of public goods and revisit business improvement districts. new bridges and have a look at the example of Colorado Springs whose voters have failed to fund some basic city services.

Update: I realized in my haste that I never connected the dots. The reason OPB wants you to think the gap is small is that the social pressure is presumably greater if you think you are one of the few who don't contribute rather than one of many. A colleague brought my attention to a paper that finds exactly this result (and confirms that my 10% hypothesis is probably not far off).

MLS and The Beavers: Can it Still be a Public Good if it is For-Profit?

The Oregonian has the news that Beaverton has expressed interest in being the new home of the Portland Beavers. This makes a lot of sense and seems to be the best of a host of second-best alternatives (what exactly are we going to do with the Memorial Coliseum that we hadn't thought of before?). I am not sure why it is necessarily better than Lents except it would be Beaverton, not Portland partnering with Paulson.

In the same article the O reports that the plan to renovate PGE Park will come before the city council on Thursday for a vote, and it appears that everyone on the council is reasonably happy with it given that it does on include new urban renewal funds. Thus Portland is one step closer to the reality of MLS.

All this is interesting in its own right, but not what really strikes me, what strikes me is the many commentators who think that public goods and private ownership are incompatible. Most Oregonians would probably accept that art museums, cultural facilities, zoos, science museums, etc. are all important public goods and enhance the lives of most residents of a city and a state. The fact that they have a large positive externality argues for government participation in these activities. But spectator sports also have a positive externality - just look at how many people showed up to support the Blazers for simply making the playoffs. [Of course this externality can be negative, witness the JailBlazer era]

Just because wealthy owners like Merritt Paulson are in it for profit does not mean that there is no public good aspect of spectator sports, nor does it necessarily mean that such sports would exist without public involvement. But I do understand that it is as much about perception as anything else. Still, though there may not be any great economic growth enhancing aspect to spectator sports does not mean the city does not benefit from their existence.

By the way, not to be too anglophilic, but my suggestion for the MLS ready PGE park (other than real grass) is to have a big sign in the rafters saying "Welcome to Goose Hollow" in the tradition of many English clubs that are defined more by their neighborhoods than by their cities.

Economist's Notebook: The White Stag Sign Redux

Randy Leonard has suggested that the city condemn the "Made in Oregon" sign and take ownership of it to prevent the University of Oregon from changing the wording of the sign. I have blogged about the public goods nature of the sign before: there are good economic reasons for public control over the sign as it is something that affects all Portlanders.  Bravo to Commissioner Leonard for being a good public steward and boo to the U of O for being a bad citizen.  Their hubris is unbecoming and unhelpful.  

The O suggests that this is a strategic ploy to come to some sort of compromise.  I hope not, the sign should either be a public property or it should go away. 

MLS and Public Goods: Grass Fields

Okay, now that I have been all rah-rah about MLS in Portland, I think it is a good time to look back at the league's history and future. The summary is: it is mostly a big success story but there are some troubling signs on the horizon - most importantly the move away from natural grass playing surfaces.

The league started as a single ownership structure with 10 teams and only a couple of wealthy backers, most notably, Kansas City Chiefs owner Lamar Hunt. Play was mostly in football stadiums and, truth be told, neither the play nor the atmosphere was very good. For a little while the future was uncertain, the expansion Miami Fusion folded, but the expansion Chicago Fire thrived. Losses were common, but Lamar Hunt's construction of Columbus Crew stadium was seen as a glimpse of the future: soccer specific stadia in which the team controlled all the revenue sources.

Slowly the league became established, more stadiums were built and new teams added, but the most important change was the number of new, deep-pocketed, investors in the league that diversified the league and sent a signal that it was here to stay. Now most existing teams are stable, many have their own soccer-specific stadium, and more stadia are in the works, and the league has solidified the broadcast rights and most games are now shown on TV.

A number of very important decisions were made along the way that facilitated the rise of the league in my opinion. The first was to scrap the silly rules that made MLS an international oddity, most notably the shoot-out that determined outcome in the case of ties. The second was a steadfast determination to get the game out of NFL stadiums and to keep it off of artificial turf. The atmosphere in big stadiums is awful (I know from my time in Denver), and the game on turf is horrible: the ball bounces and skids, and players are reluctant to tackle - a key part of the sport - and in stadiums with football, the gridiron mars the visual experience. All of which degrades the spectator sport badly.

This is where my concerns come in. Recently, in the interest of expansion, the league has gone away from the last two criteria. The Toronto franchise built a soccer specific stadium, but it has a turf field. And the Seattle franchise was allowed to play in Quest field and on turf. Vancouver will likely be awarded a franchise and will play in a NFL-style indoor stadium on turf. The degradation of the quality of the product for the spectator is deeply troubling. The Seattle decision is especially so. In the beginning MLS was seen as a good way for NFL owners to get some revenue out of their otherwise idle stadiums. But it has been a terrible failure: most teams that started in NFL stadiums have either folded, left (or are leaving) or are struggling to fill seats. Seattle may be an exception in the short-run, but the long run impact on the televised product of these reversals in decisions will be painful - especially as TV revenue is the key to the future.

So, should Portland get a franchise, I hope (pray) that Paulson puts in real grass. It is expensive to install and maintain. Apparently Chicago spent 1.7 million on a state-of-the-art natural grass field with heating and drainage compared to about $1 million for a new turf field. Maintenance is more costly for grass and there are concerns about durability. But Chicago is a stadium that hosts football and concerts in addition to soccer so if they can do it, surely Portland can too. I know it is a more expensive short-term option and may even be the individually rational long-term option, but turf is a bad option for the league as a whole. It is time for MLS to insist on grass again and the Timbers should too.

[Note, here is a consenting view, and one that makes another point: if MLS teams want to make money by hosting major international clubs, it is likely that those clubs will refuse to play on turf]

Anna Griffin Needs a Lesson in Public Goods

Anna Griffin of The Oregonian may be right that the PGE park renovation idea is a bad one (though I disagree), but her strange fixation on the term 'blighted' is odd and I find her argument convoluted. From an economics point of view public goods will be underprovided by private markets. The government, then, may have a valuable role to play in providing them. So if a city wants to, say, provide a better, more well-lighted intersection and anticipates that the external benefit of this action will increase the value of surrounding properties, funding it with bonds that will be serviced by the future higher tax revenue from the district makes sense. It doesn't really matter if this is in a ritzy district or a run-down district. Either community will be unlikely to provide it privately and the rationale is no different.

As she says:

In urban renewal districts, communities borrow money to pay for improvements such as better roads or prettier storefronts. When property values rise, the additional tax revenue goes to retire the debt rather than into city, county or school budgets.

The insinuation is that you are taking away from school budgets. But this extra revenue would not exist without the investment in the public goods in the first place. So the real debate should be whether the increased revenues will actually materialize, not whether a district is 'blighted.' Whether this is true for the PGE Park case is an important question for the bean-counters to determine whether this particular source of funding is appropriate, but in my view this is an investment in Portland as a whole not in Goose Hollow...

Stimulus: Public and Private Goods

The Oregonian is reporting on a competing stimulus plan by Oregon's republican contingent in the state legislature that would give tax credits for remodels, bigger if they involve green things like solar panels.

Is this a sensible idea? Sure, these tax breaks only come if you spend the money, so it can be expected to stimulate consumption to a greater degree than income tax cuts, only a fraction of which will translate into new consumption. Promoting green home improvements is also beneficial to society. So this can be expected to lead to an increase in consumption spending and to have a stimulus effect which will help reduce unemployment.

But is it better than the democrats plan to spend on construction projects? Direct spending on construction will also have the same positive effect on consumption. So is it a wash? Well, the key difference is in the fact that the democrats plan focuses on public goods while the republican plan is on private goods.

Public goods are those for which there are at least partially non-excludable and non-rival: anyone can use them and using them does not leave less for others to consume. Roads are a prime example. The key to public goods is that they confer benefits on many people beyond the person responsible for their existence. This means the public benefits are much higher than the private benefits and when left to individual economic agents, the private cost-benefit calculation will often lead to the under-provision of public goods. This is why government provides these goods.

Construction on roads and schools are improvements in public goods, a large swath of society benefits from these investments while private remodeling only benefits the owners of the property (save for the small socially beneficial effect of more efficient homes). In other words, the initial stimulus can be expected to be similar for a similar outlay (assuming, of course, people take advantage of these tax incentives), but the long term benefits of providing more and better public goods will provide much greater benefit to society than better kitchens in private houses.

Economist's Notebook: Incentives and Leaves

There have been a few recent news stories about Portland's leaf collection program. As an economist I obsess about incentives and am inclined to believe (much to the derision of other social scientists) that people's behavior is usually most easily understood through the prism of incentives. So it amuses me to see frustrated Portlanders angry with their neighbors about raking leaves into the street.

It is simple really. It costs $1 do bag your leaves and haul them to a collection point that only operates a few hours a month. However, it is free to simply rake them into the street. You are not 'supposed' to do this, but there is no law prohibiting it nor will any fies be levied. So what do you expect.

[In my defense, I may be an economist, but I try to include social responsibility in my utility function so I took two car loads of leaves to the drop-off. However, I did do a little raking of the front yard into the street as well, so I kinda am a semi-scofflaw. But my inner economist really wanted to just rake it all into the street - which shows you why undergraduates who take principles of economics end up more selfish as a result]

But I digress. Fallen leaves are clearly a public goods problem, they make the streets dangerous, clog storm sewers, etc. We could just tax trees to lessen the problem, but we like trees. Mayor-Elect Sam Adams wants the city to consider a Leaf-Tax Surcharge. Hmmm, I am not sure how you collect a special leaf tax, as this would cause people to feel more justified in raking into the street - what you don't want. As this is a general public goods problem, the city should probably start by simply not charging people to drop off their leaves and perhaps have weekly yard waste pick ups with allowances for extra bags.

In the end though, leaves will simply be a city problem that should be thought of as no different than any other street problem: city wide and something that matters to everyone. So trying to niggle with taxes and surcharges is not a good approach.

Economist's Notebook: Public Goods and the White Stag Sign

I am not really sure what the purview of the Historic Landmarks Commission is in the kerfuffle over the University of Oregon's attempt to rewrite the White Stag Sign to read "University of Oregon." From what I understand they are charged with preserving the historic and architectural heritage of Portland - so I guess this qualifies? I am pretty sure they don't think too much about the economics of this type of decision, so I'll try.

This falls squarely in the 'public goods' realm of economics (what luck - exactly what I am obsessed by). Clearly there is a private goods aspect, U of O would like to advertise both the institution as a whole and their Portland campus. This benefits the U of O. But this is one of the most prominent signs in all of Portland and thus is reflects the city as well - and this is the public goods aspect of the sign. The sign benefits the city and its citizens as well. In allowing the U of O to use the sign for their own purpose it represents both a tacit endorsement of the university and influences how the city is perceived.

To the extent that the fate of the city and the fate of Portland State University are intertwined (and I believe they are), allowing the U of O to use the sign damages both the image of PSU as the city's university and the city itself. There are other institutions of higher ed in Portland as well: Reed, L&C (my alma mater), U of Portland, etc., allowing this aspect of the 'public square' to be co-opted by one (yes, still, out-of-town institution) is a bad idea and violates the spirit under which the sign was preserved and made part of the public goods of the City of Portland.

Newspapers and Public Goods

On Monday, I received my Oregonian with the notice that, starting with that edition, the Metro section would be cease to exist and would become part of the A section. On Blue Oregon, Paul Gronke see it as a sign that it is time to abandon the paper. This is just another indication of the sad trend of dying dailies. Some see this as the inevitable result of market realities and we should let the market decide how and where people get their news. This is wrong.

Markets only 'decide' efficiently if they are complete and this means, among other things, that all costs and benefits of a product are private. But there are clear public goods aspects to newspapers: they provide oversight of government (the 4th estate); they inform the population which, especially in a democracy, leads to better policy; and they enhance community through their coverage of local events.

So why then don't we offer public funding for such a public good just as we do things like parks and schools? I fear for a state that has virtually no professional reporters covering the government, the community, etc. For such a vital role that we assign newspapers we should be much less indifferent to their decline. And, no, blogs are not a good substitute. Nor are the electronic versions of the papers, because without reporters, the web-sites won't have much news.

It is hard to imagine public subsidies to newspapers given the long tradition of leaving it to private market forces (and vast fortunes were once made in the newspaper business when there were few other ways to advertise widely), but I am beginning to worry that the health of our democracy will suffer if we don't start thinking creatively about how to preserve the papers. Look what cable news has done to public discourse and our democracy...

Perhaps we need an on-line national public newspaper similar to NPR. Partly funded by taxpayers, this would ensure that 'print' journalism would continue and could include, as a big part of its mission statement, local state-by-state coverage. I don't know the answer, but I am worried.

Election 08: Ballot Measure 63

So I shall finally take a breather from the national and international economics news of the day (it's bad) and at long last get to my economic analysis of the measures that shall grace our ballots this fall. Where to start? Well, I'll just piggyback on the main editorial in today's Oregonian and talk about measure 63. This measure proposes to exempt from the permitting process any home construction project with a total value that does not exceed $35,000.

I shall frame the question thusly: does government regulation of residential home improvement through building permits make good economic sense? The simple answer is yes: there are externalities involved making the cost of improper construction not strictly private and potentially quite significant.

Perhaps the best way to begin is to set something straight at the outset: free markets work their magic when the costs and benefits of the activity the market is involved in is purely private and accrue to only the participants in the market. Such a market probably doesn't exist and so the relevant questions are: what is the nature of the market failures; and, are they significant enough to intervene in a market, which almost assuredly guarantees a second-best outcome (compared to the ideal)? It is pretty clear from recent events, for example, that credit markets have significant spill-overs and the inefficiency that would result from increased regulation and oversight is probably worth it.

One could argue that the externailites associated with poor construction are minimal compared to the bureaucratic drag on investment that comes from building permits. For instance, the likelihood that if my house catches on fire thanks to an improperly installed gas stove and then catches your house on fire is pretty small. But the fact that there is a higher probability of houses catching on fire in an environment where there is no oversight does impose a cost on me through increased insurance premiums, increased cost of fire prevention and suppression, increased burden on public health for those whose house burned down with them in it, etc., etc. There are also the ancillary costs of lost home equity due to the fact that my neighbor's house is now a heap of charred remains. This is all part of the the public good aspect of home ownership: while houses are private property they do have external costs and benefits that accrue to the community in which they reside.

So the idea that there is enough private incentive to make sure work is done right is not accurate. The true cost of improper construction is quite a bit higher than the personal cost, and thus there is a clear incentive to cut corners. This is especially true for 'flippers' who, once the house is sold, have little fiduciary responsibility to the buyers. The incentive to cut corners would be that much greater.

This gets to another problem that arises in the resale market: asymmetric information. While it is true that there can be plenty of construction that happens illegally, the permitting process is a way to reduce the information asymmetries between buyers and sellers of houses. This asymmetry can be quite damaging to the efficiency of the market and, ironically, hurts the people who don't cut corners the most.

What about the cost of the bureaucratic intervention? Well, for starters, the building permitting process for all other projects will remain in place so the marginal cost savings are likely to be low in terms of the size of the bureaucracy. What about lost investment in building projects? This is impossible to say for sure, and I have no doubt that there is lost investment, but I can't imagine that it is anywhere near the magnitude of the social cost of unregulated construction. I stand ready to be corrected however.

People often mistake economics as being about free markets (and a lot of other things). Not at all. Economics makes clear both the efficiencies of the outcomes of free and complete markets, but more importantly economics studies the implications of imperfect markets and helps figure out appropriate policy responses. This one is a no-brainer.

Portland's New Bridges: Do Economists Care About Uplifting the Soul?

Last weekend, I attended the graduation of my (much younger) sister from the University of Washington's College of Architecture and Urban Planning. The commencement speaker spoke of Architecture and Planning's ability to improve the human condition and uplift the soul. That got me thinking about the planning process for the new I-5 and Sellwood bridges and the question of whether the bridge should be striking and beautiful or just functional. In particular, it got me thinking about what economics has to say about such a question.

Contrary to what most people expect, economics does not just deal with dollars and cents. Economics starts with individual utility maximization. People buy art, commission architects and purchase beautiful things because it returns some utility - it makes them happy - and that happiness is worth some monetary payment. But what does this mean for a public works project like a bridge? Well, we run into the familiar problems of externalities, public goods and free-riders - problems that affect the building of the bridge regardless of the design.

If a beautiful design confers a benefit to users and residents then it has a real value and that values should be taken into account in any cost-benefit calculation dealing with bridge construction. But how do you measure such a benefit?

One way that economists have tried is through something called 'contingent valuation' - a survey of individuals willingness to pay for generally some non-market resource (like clean air). This allows economists to try and come up with a number that assesses the worth of such a resource. The problem is, of course, it is all hypothetical and the valuations, it turns out, can be highly influenced by how the question is asked. [One example: while I was in grad school, an Ag. Econ professor compared the results of a hypothetical 'how much would' you pay to save a tree' to a real tree he brought into the room and would threaten to kill if not enough money were raised - the real tree raised valuations a lot]

Another way is through some sort of democratic process, but as I have talked about previously, voting induces some selfish behavior, most notably free-riding: "I would love to have a nice bridge, and would even pay for it, but if I can get everyone else to pay for it and not have to myself, even better!"

So, in the end, I think policy makers will simply have to understand that design does matter, and that a beautiful bridge (like the Golden Gate and St. Johns above) is worth a lot.

The Glenn Jackson (to the left) is a inoffensive and very functional bridge, but forgettable. Below is Boston's new Zakim bridge. Which would you rather have? Oh yea, how much is it worth to you...?

Portland Wi-Fi and the Private Provision of Public Goods

On Monday The Oregonian reported on the potential demise of the free public Wi-Fi network in Portland. This is not terribly surprising, as economists have long recognized the public goods problem. I have blogged about the public goods problem before, most notably, perhaps, about the Sellwood Bridge, so I'll be succinct: it is hard to make money from public goods and free markets will provide too little of them relative to the socially optimal amount. The fact that MetroFi's business model was flawed suggests that they forgot to ask an economist about this problem. With free access, it is very hard to figure out a way to make the thing pay for itself. Of course, you could say the same thing about Google and yet they are thriving, but this success rests on the very nature of the web search - the learn a lot about you based on what you search for and can target advertising surprisingly effectively (it turns out). In economics, as a rule, information is gold.

It seems to me that there are two important questions to ask at this juncture. One, is a private, fee-based network the way to go?, and two, is the public benefit of a publicly provided free network larger than the cost?

The first question: is public provision of this public good a good idea or should we just rely on markets? What is interesting about Wi-Fi is that it can be made in to a private good very easily and thus a market solution is possible. The problem with doing this is that it requires a large fixed cost investment in infrastructure (for a city-wide network) and is therefore likely to be only profitable for one company. This is what economists call 'natural monopolies.' Monopolists in general charge more than the competitive market price and provide less of the good. This is why telephone, power and cable monopolies were regulated - to counteract their market power. Market power also rests on the fact that you have a good that has no or few good substitutes and Wi-Fi may have a big one: internet service from cell phone providers. I am not a techno geek and do not know how long it will take for this to become as good as Wi-Fi, but my basic knowledge is that when the digital TV conversion is done the next generation of wireless communication systems will be ready to go to fill the space once occupied by analog TV signals. So it may not even be necessary to regulate even if the network went private. But it may not be profitable at all. If MetroFi has to charge a fee and few people want it, potentially because of competing wireless telecom based services, this business might not be profitable even as a fee based service. And even if it can be profitable, do we want really want a private network?

So this leads to the second question: is public Wi-Fi beneficial enough for Portland to provide it itself? It is possible; it could spur efficiency and productivity, lead to new investment and improve the connectedness and "web-literacy" of Portlanders (and especially kids) - a good skill for the 21st century. But the marginal benefit to free Wi-Fi versus private wireless phone networks is a question - but as many Portlanders would not be able to afford the wireless service, I think this marginal benefit woud be large. There is another factor, which is that the cost to cable and DSL customers should decrease with free Wi-Fi as the demand for these services should fall. I am inclined to believe, therefore, that the overall benefit to Portlanders would be well worth the cost, especially since Portland can amortize the investment cost very cheaply using municipal bonds. In other words, the city of Portland can probably borrow money at much lower rates than MetroFi to finance the building of the network.

So just because MetroFi's management and Portland's city councilors failed to study enough economics should not doom the system, Portland should take the lead and provide Wi-Fi for its citizens.

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.

The Fourth Estate

The Oregon Legislature, The Oregonian reported today, was scrambling yesterday to draft legislation to address a problematic practice by which individual school districts get teachers who have been disciplined due to sexual misconduct to resign in return for not disclosing the misconduct to potential employers (in many cases, other school districts).

This brings up two pertinent economic questions:

The first is the practice itself and if it indeed calls for legislative remedy. In this case we have what economists recognize as a classic incentives problem: the private incentive of a school district that faces a teacher who has been disciplined for sexual misconduct is to make the problem go away at the lowest cost to the school district. Thus cutting a deal to have a voluntary resignation is a very good strategy for the district. The cost of cutting such a deal is not born by the school district, but by society at large (assuming that even a small percentage of such teachers are recidivist). What do economists call such costs? Externalities. Externalities are a classic case of justifiable government intervention - often explained in terms of protecting the public interest in the face of private incentives which are opposed. However, there seems to be a couple of potential pitfalls to finding an appropriate policy solution. First, it is not clear to me how much this practice is based on allegations of misconduct, rather than confirmed cases through a system of due process. It seems to me that many school districts are simply trying to make a potential problem go away, so legislation prohibiting this practice would potentially force school districts to go through costly investigations and often costly litigation. Second, this is likely not a state problem but a national problem, so it is not clear that the remedy is a state-level one. If Oregon passes a law that says, for example, Oregon school districts must disclose allegations of misconduct to future employers, this will potential impose a huge cost on Oregon school districts and yet we may still have a large number of teachers who have been dismissed for misconduct coming into the state.

The other pertinent economic question that this raises is the fact that we rely so heavily on the news media to bring problems to our attention. If the news media really are the fourth estate and have a critical role to play in our democracy, is the for-profit model the way to go? What are the incentives of The Oregonian to do such investigation? Sales of papers. Is this private incentive enough to ensure that the socially optimal level of investigative journalism, a public good, is being achieved? No. We all benefit from this journalism whether we read the O or not, so a lot of us are free riding on this information that, once published, becomes a common property resource. Economists know that in these cases - private provision of public goods - the good is underprovided relative to the social optimum. This raises an interesting question - should the public finance investigative journalism?

Hmmm.....