Public Goods and the Free Rider Problem

If you want a perfect example of the problem of the provision of public goods and the free rider problem, look no further than yesterday's Oregonian:

"Clackamas County voters likely to decide Sellwood Bridge fee; rejection could doom project"

By the way, if you want a clear indication of how pathetic OregonLive is as a web portal for The Oregonian, go there and type 'Sellwood Bridge' in to their own search box and see what you get.  You would expect a list of articles, beginning with the most recent, that mention the bridge.  What you get is a hodge-poge of old articles. Ridiculous.

Sellwood Bridge Update

A while back I blogged about the new Sellwood bridge design options and professed my fondness for the steel deck arch alternative.  Turns out my opinion was immensely persuasive common: it was the alternative that was the most popular in the opinion survey - good taste people! [Actually, I see now that the above is the steel deck 'tied arch' not he steel deck arch - why is tied better? I don't know, maybe it is cheaper but looks about the same so pretty much the same difference for me]

By the way, I imagine the steel structure being painted green as it is now - a nice nod to the old bridge - not brown as in this picture.

But however it looks in the end: I can't wait for the day I can actually take a bike ride over the bridge with my kids and not feel like I am putting their lives in peril.

Sellwood Bridge

The Sellwood Bridge, which I cross to commence my commute to Corvallis, is now in the next phase of planning and looking for input. Above is the steel deck arch alternative which is my preferred bridge type. I think it is not nearly as ugly as the box girder type (think Glen Jackson I-205 bridge) and not inappropriately scaled like the through arch nor as showy as the extradosed. I also think that it matters as much what you can see from the top as how it looks from afar and this type crates a nice flat top with which to emphasize views. I also want the top to be pretty as well, with nice lighting and railing so you can't blow the entire budget on the structure itself.

But what I think matters little, what we all think is the key, so go and tell them what you think.

Economist's Notebook: Opportunity Cost, General Equilibrium and The Sellwood Bridge

Brent Wojahn/The Oregonian/2008

I have been meaning to write a post on this for a while. The latest news about the Sellwood bridge replacement project appeared in The Oregonian on October 8. Here is a excerpt of Dylan Rivera's story:

Multnomah County on Thursday came one step closer to imposing the state's first county vehicle registration fee, aimed at replacing the cracked Sellwood Bridge for $330 million.

County Chairman Ted Wheeler and commissioners gave a mostly favorable review to a plan that calls for the county to pay for about a third of the project with the new fee.

In the next two weeks, the county board expects to approve a vehicle registration fee that would cost $19 a year per car in Multnomah County. Next year, Clackamas County will consider a fee of $5 a year for its motorists.

The plan puts Multnomah County drivers in the position of paying more than triple the rate of Clackamas County residents for a bridge that is mostly used by Clackamas County drivers. The situation shows the political difficulty of paying for a regional asset that is owned locally.

So what is the problem with the last statement? Nothing factually, but it echoes a common theme that will, without a doubt, become a rallying cry for opponents: "why should Multnomah County drivers pay for a bridge that is used more by Clackamas County drivers?" And this logic is wrong.

Why? The answer lies in the equilibrium effect of cross river traffic. Eventually the bridge will become unusable. Fine say MultCo drivers, it is ClackCo drivers' problem. Not at all, without a Sellwood bridge traffic will push up to the Ross Island. When the Ross Island bridge gets too crowded, traffic that used to use the Ross Island will use the Hawthorne. And then Hawthorne traffic will go to the Morrison, and on and on and on. So you see, the fact that Clackamas county drivers are a majority on the Sellwood is not really the point. Perhaps a better way to think about it is how big a percentage of all Portland bridge traffic is made up of Clackamas county drivers.

So the true opportunity cost calculation of the Sellwood bridge is not what it would be like to have to use another bridge under current traffic conditions (as most are implicitly assuming when they say things like, 'I live in Irvington, why should I have to pay much for the Sellwood bridge?'), but what will it be like to have to use the other Portland bridges and feeder roads without a Sellwood bridge? I submit it would be quite a lot.

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...?

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.