Posts Tagged ‘Externalities’

I’m officially blogging at the Mercatus Center’s Neighborhood Effects blog.  My first post is about Maine’s TABOR bill.  At this point, it seems unlikely to pass, although I’ve crossed my fingers and sent in my absentee ballot.

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Say One Thing

Do another.  That’ s my biggest problem with politics in general, but I think it’s likely that liberals are more prone to that kind of posturing than ‘conservatives’.  At the very least, statists of all stripes fall prey to that more so than liberty-minded folks.

Case in point: environmentalists and building heights in the district.  Renting in D.C. is insanely expensive, especially for commercial space in the good parts of the city.  The reason is simple: building heights are capped by both the city and the Congress.

The height restriction came into existence in 1899, in response to the construction of the 160-foot-tall Cairo apartment building, which was largely seen as an aesthetic threat to D.C.’s cosmopolitan feel. The restrictions are codified under D.C. law, however to make any major revision to the building code would require revision of the Heights of Building Act of 1910, which was passed by Congress. Lifting building height restrictions would presumably channel the high price of office space and real estate into vertical construction, allowing for the accommodation of increased density in the District.

There also overwhelming evidence that when you concentrate people into a smaller space, their environmental footprint is proportionally decreased.

Numerous studies and intuitive wisdom indicate that densely populated urban areas are, in many ways, more environmentally friendly than those that are less dense, and Environmental Protection Agency and National Association of Realtors guidance to cities lauds the benefits of dense building. Case in point: New York City may have the most skyscrapers of any city in the country, but it also has one of the lowest per-capita carbon footprints in the nation. With more dense growth, people are able to live closer to their places of work and to shopping areas, encouraging more walking and discouraging the use of cars.

Not to mention sharing services, which also reduces impacts.  A city can afford a sophisticated sewage treatment/wastewater plant, while sparsely populated communities can’t.  Economies of scale operate even in an environmental context.

As a resident, though, I’ll admit the height restrictions aren’t all bad.  The city is beautiful and sunny, in a way that New York hasn’t been in probably a hundred years.

But I’ll bet dollars to donuts that environmental groups, especially those that make their home in or around the District, would be opposed to repealing those laws, and would be willing to forgo the environmental benefits that increased development in the district would bring.  At the very least, the development of Northern Virginia would be slowed.

I consider myself an environmentalist.  My father has made his living off the land for most of my life, I’ve worked in pristine natural settings, I care about the negative externalities of my actions, and when thinking about future policy I always consider the impacts on the natural world.

I think those principles are consistent with lifting the height restrictions in the district.  It just so happens that such lifting would also conform to my free-market principles.

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We all know Michigan’s economy is craptastic; it’s become proverbial, like the Pope crapping in the woods.  (Is that a joke anyone makes besides my dad?)

Michigan’s a poisonous mix of high, progressive taxes, union influence, and “investments” in public money-sinks like education, public works, and corporate subsidies. From the WSJ

Meanwhile, the new business taxes didn’t balance the budget. Instead, thanks to business closures and relocations, tax receipts are running nearly $1 billion below projections and the deficit has climbed back to $2.8 billion. As the Detroit News put it, Michigan businesses are continually asked “to pay more in taxes to erase a budget deficit that, despite their contributions, never goes away.” And this is despite the flood of federal stimulus and auto bailout cash over the last year.

Following her 2007 misadventure, Ms. Granholm promised: “I’m not ever going to raise taxes again.” That pledge lasted about 18 months. Now she wants $600 million more. Among the ideas under consideration: an income tax increase with a higher top rate, a sales tax on services, a freeze on the personal income tax exemption (which would be a stealth inflation tax on all Michigan families), a 3% surtax on doctors, and fees on bottled water and cigarettes. To their credit, Republicans who control the Michigan Senate are holding out for a repeal of the 22% business tax surcharge.

As for Ms. Granholm, she and House speaker Andy Dillon continue to bow to public-sector unions. There are now 637,000 public employees in Michigan compared to fewer than 500,000 workers left in manufacturing. Government is the largest employer in the state, but the number of taxpayers to support these government workers is shrinking. The budget deadline is November 1, and Ms. Granholm is holding out for tax increases rather than paring back state government.

The decline in auto sales has hurt Michigan more than other states, but the state’s economy would have been better equipped to cope without Ms. Granholm’s policy mix of higher taxes in order to spend more money on favored political and corporate interests.

Where’s Harold Meyerson on this blow to manufacturing?  Oh that’s right, he thinks only private industry can screw up this badly.

In related links, check out Forgotten Detroit, for an on-going pictorial study detailing the death of a city.  Sadly fascinating.

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It seems to me that most justifications for government welfare programs are moral arguments that claim the right and obligation of government to take money from the rich and give to the poor.  My intuition is that this argument is misguided, but I won’t address that here.  Instead, I’m interested in another argument, an actual economic one.  It’s one that isn’t often made, but it’s quite provocative.  The claim is that charity produces positive externalities, and because of this, it should be provided as a public good.

Now, it’s important to note that when economists talk about a public good, they mean a good that is non-rivalrous and non-excludable.  This means that one person’s consumption of the good does not detract from another person’s consumption of it, and that it is difficult or prohibitively expensive to exclude people from using it so that they could be charged for their use.  There are varying degrees of these two dimensions for different goods, but the purest example of a public good cited is national defense.

Lots of activists and politicians clamor for the government to provide things as public goods, but saying so doesn’t make it so.  A private good, which is excludable and rivalrous, is usually best provided on a market, where it is efficient.  You can prevent me from eating an ice cream cone, and your consumption of an ice cream cone diminishes my ability to enjoy it.  The justification for government provision of public goods is much more solid.

Is charity is a public good?  The first premise of the argument is that people care about one another.  They get utility from helping other people, even strangers.  I see this intuitively, but evolutionary psychology proves this.  To illustrate, suppose that you encounter a desperate stranger who informs you if he does not acquire $10.00 in the next ten minutes to buy medicine, he will die.  No one else around has $10.00.  Suppose you believe all this to be true.  You will probably give him $10.00 if you have it.

The second premise of the argument is that when individuals donate to charity, non-donors also get utility from knowing that people are being helped.  The claim is that there is a positive external effect, so there is an incentive to be a free rider.  If people get utility from the actions of others, they will not donate as much as they otherwise would if they only got utility from making the donations themselves.

You can see that the conclusion is for government to tax people and provision charity because private charity does not provide enough.  It is claimed that charity is a public good.  One person’s donation does not diminish utility for another, and it is difficult to exclude a person from feeling good when they know that the poorest in society are cared for by the people who donate.

I take issue with the second premise and therefore the conclusion.  The two premises together constitute a fallacious equivocation.

Yes, people get utility from making a donation, but they do not, in any meaningful amount, get utility from knowing that other donors exist.  My problem is that there is an obvious limit on how much utility people get from knowing about some social problem.  The knowledge must be local for a person to get utility; people can only get utility from helping people that they know about.  It would be silly to ask even a bleeding heart who regularly gives money to beggars how much they’d be willing to donate to a beggar across town that they have never encountered.  The natural capacity to help people, as evidenced by revealed preferences, is certainly not the same thing as utility from the knowledge that people are being helped by others.

These supposed external effects of charity do not really exist in any meaningful way.  People aren’t doing a mental calculation of how much they forgo in donations because other donors cover them.  I concede that this is actually a problem for many, if not most, public goods.  People don’t really know what they might pay for a public good that wouldn’t exist if it were not provided collectively.  Still, regarding charity, people get utility from being involved in giving, not nebulously understanding that donations have been made by other people.

It’s incoherent to suggest that because of positive externalities the government should arbitrarily provision some higher amount of money in a welfare program than what private charities already provide.  Such externalities do not exist.

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