Marginal Utility

by Ken Houghton

Aaron Schiff's Economics Blog Directory is an invaluable time-wastera marvelous source of information (even if he doesn't list this blog).

Today's find is Sex, Drugs, and Water Utilities, the title of which I assume is a riff on Diane Coyle's great book (what Freakonomics should have been, and published four years earlier).

It appears to be a Sole Proprietorship, run by one David Zetland, a Ph.D. student in Davis, California. And it's not immune to noting that economic incentives can mitigate, but more often exacerbate, spillover costs and other negative externalities.

Today's sample is the effect of the state of Indiana on fishing in the Gulf of Mexico. Examining the Chicago Tribune article, Zetland notes the direct answer:

There's no free lunch. Pay farmers to grow something and they will. Besides the direct costs (fuel, machinery, etc), there are indirect costs (externalities) that others (people, fish) bear. If the farmers do not bear these costs, they grow too much and we all suffer.

And what externality is causing the seasonal "dead zone" in the Gulf of Mexico?

Indiana, Illinois, Iowa, Missouri, Arkansas, Kentucky, Tennessee, Ohio and Mississippi were the worst contributors to the dead zone.

The nine states represented one third of the 31-state Mississippi River drainage basin, but were responsible for more than 75 percent of the nitrogen and phosphorous that deplete oxygen from the Gulf, killing fish, crabs, clams and shrimp.

The excessive amount of nitrogen in the Gulf was mainly caused by corn and soybean farming, and the overabundance of phosphorous was primarily caused by animal manure on pasture and rangelands, the survey said.

"Conventional thinking has been that the pasture and rangelands don't contribute as much as the cultivated cropland," said Richard Alexander, a research hydrologist and lead investigator on the study. "The thinking has been that the row crops would contribute more phosphorous."

Conventional thinking appears to be wrong, but the economic incentives to the farmers work only one way, the ethanol boondoggle. Zetland again:

[A]gricultural runoff from these states (now running at full steam to grow as much government pork ecological disaster life-affirming, lovely ethanol-enhancing corn as possible)

Somehow, "teach a man to fish, and he won't be able to find any" is not the way I remember that old adage. Who could have predicted this? Tom.

Labels: E85, Economics, Energy, environmentalism, externalities

by Tom Bozzo

Ken (with a h/t to Peter Gordon) pointed me to a recent Journal of Economic Literature survey [*] on the external costs of motoring — i.e., costs not directly borne by motorists, including those related to pollution, congestion, accidents, and oil dependency — and possible policies to address them. A main conclusion is that most of the marginal external costs are mileage-related rather than directly fuel consumption-related, so it may be more efficient to institute charges based on the miles driven instead of by fuel taxes. As I explain below, this is not so obvious.

Gordon sarcastically notes that the 10 cent/mile estimate of the external costs is much lower than the 90 cents/mile he assumes in assessing the net costs of rail-based transit, which he regards as little more than a jobs program in most places. Wev. (Road building, being in most cases heavily subsidized by general tax revenues, may appear much the same.) Anyway, Parry et al. convert the 10 cents a mile into $2.10/gallon, of which only 40 cents is recovered by average U.S. gas taxes. Permanently add $1.70 to the price of gas and the result won't be a chorus of complaints that the U.S. offers too many mass transit options. Calculation of escape velocity for the collapsed remnant of the light truck market is left as an exercise for the reader.

Parry et al. are really jazzed about the idea of recovering the substantial accident-related costs via "pay as you drive" insurance, which is "emerging at the state level." Accident costs are strongly driven by miles traveled, but traditional insurance premiums are not. They cite a study that figures the premium for the average driver at 6 cents/mile. Actual premiums would adjust for individual- and vehicle-related risk factors.

The amount isn't totally unreasonable. As early-middle-aged Midwestern parents driving safe cars with clean driving records [**], and excluding coverage for damage to our own cars, we pay a bit more than 3 cents, which is the result of around 2 cents for the more heavily utilized car and 5.5 cents for the less-driven one.

What bugs me is the implicit alliance of the nanny state and the nanny corporation. Parry &c. note that "advances in electronic metering technology" make it "feasible to charge motorists on a per mile basis." Now, it's my understanding that automobiles have long been equipped with "odometers" that record vehicle mileage pretty accurately, and the data are even collected from time to time (e.g., when cars change hands). So what they're really talking about is liberating data that the cars already collect at much higher reading frequencies versus the current system. This doesn't necessarily require advances in electronic metering, but suppose it does.

Such a system would involve far more extensive data sniffing infrastructure than existing electronic toll-collection systems, since neither EZ-Pass-style transponders — i.e., not linked to the vehicle's computers — nor monitoring of a limited set of entry points would suffice. Electronic data collection costs would be a particular challenge for insurers, who have considerably lower customer densities than traditional meter-reading firms such as electric and gas utilities and (unlike utilities) can't count on the transponder being in any particular place at a given time. The bottom line is that government, probably via big-business contractors, would end up doing the data collection and sharing the results with interested parties.

Both government and insurers have interests in how, as well as how much, people drive; I'd expect agitation to mandate reporting of vehicle speed among other possible parameters. Plus, the systems will collect data on where cars were at various times. This may not be a big deal for a proto-panopticon country like the U.K. [***], but there remains at least the popular delusion in the U.S. that it's nobody's business where you legally go. All of this monitoring would be both expensive and have serious privacy implications.

So what of fuel taxes, which Parry et al. say may arguably have seen their "externality rationale" come and go? Well, they're strongly driven by vehicle mileage, for one thing. Vehicle fuel efficiency is related to vehicle mass and other characteristics that drive accident-related external costs — you want to get into an accident with a Honda Civic or a Ford Expedition? The entire fee-collection apparatus already exists, is visited regularly by all drivers, and doesn't care about when or where you drive. What's not to like?

Granted, increasing motoring taxes is not a political walk-in-the-park, but that's a function of the status quo. If the question is how to be charged the $1.70/gallon (or mileage-based equivalent), maybe we're better off with the devil we know and spending money on railroad track instead of roadway antennas.


[*] Ian Parry, Margaret Walls, and Winston Harrington, "Automobile Externalities and Policies," JEL vol. 45, 373-399.

[**] I.e., Americans who face relatively cheap car insurance rates.

[***] Though I gather that there is occasional civil disobedience.

Labels: Economics, externalities, Trains Planes and Automobiles

by Tom Bozzo

Speaking of area Republicans who are embarassments to their districts, it would be remiss to fail to mention perennial University of Wisconsin system critic Rep. Steve Nass. He discovered that a couple of UW-Madison professors were studying fantasy sports leagues — can't they just stand around the water cooler like everyone else? — and the Pol-O-Matic 2000 (R edition) spat out (via the Cap Times):

"On the same day that system leaders are trying to convey a message of doom and gloom over a 3 percent increase in state funding, the folks over at UW-Madison promote the concept of sifting and winnowing' by announcing research into one of the greatest dilemmas of our time -- fantasy baseball," Nass said in a written statement.

"The people running the UW System really ought to consider taking some of this material and piloting a television sitcom."

Tuition and taxes should not be raised to fund "intellectual farces," Nass added.

That's telling 'em, Steve. Uh, wait, HQ asks what actual researcher Eric Halverson says:

Noting the state legislator's criticism, Halverson pointed out that the fantasy league research is not funded by taxpayers. It is financed with part of a $1.8 million grant from the prestigious MacArthur Foundation for a group of UW-Madison digital literacy researchers organized through the UW System's Academic Advanced Distributed Learning Co-Lab.

Oh, so that's the kind of "intellectual farce" that brings big chunks of non-taxpayer money into the university system to (partly) offset funding cuts pushed by punk-ass Republicans! In fact, it turns out that you can learn from fantasy sports leagues:

"My son learned about sample size and statistical formulas, but did not know how to apply that outside statistics class. With fantasy baseball, he had to calculate the impact of any given player on a team's performance. A guy could have really good statistics, but if he doesn't play that much, he is not that valuable," Halverson said.

Yeah, but surely spending valuable class time on fantasy football is stoopid, eh? (*)

The researchers don't want kids to play fantasy sports in school, he stressed, but they do want to help transfer the same type of engagement and interaction that happens in the leagues to math classes in middle school, high school and college nationally.

"The commitment you see in these virtual spaces is noticeably absent from most middle schools," Halverson commented.

Well, never mind.

This would all be funnier if the Republican-controlled state Assembly weren't advancing the backdoor privatization of the UW system. Dave Zweifel opens:

I hope the Republicans who control the state Assembly were just playing silly political games last week when they voted to slash a host of state programs for the most vulnerable among us and then lopped off a crippling $120 million from the University of Wisconsin budget.

Well, some of them probably are serious, since the likes of Nass who get half of their votes from famously wingnutty Waukesha County (**) have safe seats until they tell someone that collecting taxes may be justified for some public purposes and get drubbed out of the service from the right. Still, Zweifel is right on in pointing out, on a level even George W. Bush (or, rather, his advisors) would be smart enough to at least pay lip-service to, that a healthy university system is good for the business climate.

Don't these Republican representatives read newspapers or listen to the news? Don't they know that the University of Wisconsin is one of the state's biggest economic engines? Are they oblivious to the Madison campus positioning itself to be a national center of the biotech industry? Can't they see that, as a result of the UW's activities, more businesses are being started that promise to bring more tax revenue and higher salaried workers to Wisconsin? Don't they know that to cut vital funding at this time will deliver a body blow to all of that?

Zweifel suggests the answer is no, but the better question is, "Do they care?" If we're no dumber than Minnesotans, maybe they should.

Also: Paul Soglin explains why employers maybe shouldn't be so quick to say "get back to work" to their fantasy sports leaguers. (Though a back-door Excel training argument wouldn't cut it in our shop.) Thanks to Barry in the comments.


(*) Though there may have been a missed opportunity to brand this research in a manner that exploits local Packers fandom for a more positive reaction.

(**) And hey, the new Madison Apple Store means one less reason to drive through y'all's exurban hell-on-earth.

Labels: externalities, Utter Stupidity, Wingnuttia, Wisconsin

by Ken Houghton

A marvelous novelist in her own right, spouse of (and coauthor with) Steve Gould—a novelist in his own right as well as the tech-brain behind of Eat Our Brains—and a lapsed Investment Banking professional, Laura Mixon was the first person who taught me (while shopping in NYC) that one of the easiest ways to help the environment is to carry your own bag for the small-shopping moments that are endemic to big cities.

The dynamic is somewhat different in non-metropolitan areas, where buying is done on a less frequent basis. But the damage is exaggerated every time one opts for "plastic" instead of paper.

Now, one city is battling back:

It was watching sea creatures choke on plastic bags in the Pacific Ocean that finally persuaded Rebecca Hosking that enough was enough.

The British filmmaker had already recoiled in disgust at deserted Hawaiian beaches piled up with four feet of rubbish, the jetsam of Western consumerism washed up by an ocean teeming with plastic. Now, filming off the coast, she looked on aghast as sea turtles eagerly mistook bobbing translucent shapes in the water for jellyfish.

"Sea turtles can't read Wal-mart or Tesco signs on plastic bags," fumes Ms. Hosking, who returned to Britain in March. "They will home in on it and feed on it. Dolphins mistake them for seaweed and quite often they'll eat them and it causes huge damage."

Within a few weeks of coming back, Hosking persuaded her hometown to ban plastic bags outright and found herself in the vanguard of a sudden British revulsion for that most disposable convenience of the throwaway society.

Think globally, act locally. Or maybe follow Tom's suggestion and "kill all the subsidies":

And there is a climate-change dimension as well: Plastic bags are manufactured using oil. Cutting usage in Britain by a quarter would reduce CO2 emissions by as much as 63 tons a year – equivalent to taking 18,000 cars off the road, the government says.

Some countries have taken decisive action against the plastic bag. Bangladesh and Taiwan have banned them. Ireland took a much-lauded step of imposing a tax (€0.15 per bag) in 2002, leading to usage reduction of up to 95 percent. Next month, California will become the first US state to force supermarkets to provide recycling bins.

The tax is just a realisation of the cost of externalities, which, as Prince Charles noted, is actually just a matter of presenting people with the information about the full cost of their decision and letting them decide.

Those who support Greg Mankiw's "Pigouvian tax" argument have only two possible answers to "Paper or plastic"? One is "paper." The other is "I brought my own."

An entire British city and several other economies understand this. UPDATE: And so, apparently, does the mayor of San Francisco, at least as a start.

Labels: Eat Our Brains, environmentalism, externalities, Pigouvian tax

by Ken Houghton

Cities build new bike paths

If you look at the data from high enough up, you can see nothing:

While some municipalities see a surge in bicycling, national figures for 2005 show the same number bike to work as did in 1990.

If you look at the data through the eyes of the politicians, you see data without context:

New York Mayor Michael Bloomberg has called for 200 miles of bike paths throughout the city by 2009.

And buried in the 15th 'graf is the lede:

If cities make biking easier and safer, proponents say, more residents will do it.

I biked in NYC for over ten years, and lived to tell the tale. But I stopped biking to work after the second or third theft. (The daily attempts to run me off the road at Columbus Circle or on Riverside Drive weren't helping, either.)

The legacy of Robert Moses is that there is no safe bicycling area in NYC. The "bike lanes" added during the Koch administration are a joke (and were made even more so when Steady Eddie declared them a failure three months into their use—February of a harsh, heavy snows winter). So this presents some hope:

Another measure of the move to biking is the growth of Thunderhead Alliance – a coalition of state and local bike and pedestrian organizations that help strengthen local advocacy groups. They have grown from 12 member organizations in 1996 to 128 coalitions in 49 states. The alliance's Complete the Streets Campaign has helped win legislation in 23 cities and nine states, which requires that streets be designed to be safe and accessible for all users. [links added]

This is one of the times that I wish NYC were more like Madison.

Labels: Economics, externalities, Trains Planes and Automobiles

by Tom Bozzo

(Another installment in an occasional series of posts.)

Rob Zaleski has a pretty interesting article in the Cap Times describing how U.S. Highway 12 was expanded from two to four lanes along a 17-mile stretch between the far west side of Madison and Sauk City without turning it into a sprawl magnet. I think the jury is out on near-Madison sprawl — that depends, for instance, on the fate of the to-be-heavily-subsidized and comically named Tribeca Village development proposed to occupy a chunk of ex-open space on the Middleton fringes.

The Highway 12 project went ahead despite concerns about the amount of land it consumed along the route, etc., in part because of strong support from Tommy "King of Pavement" (*) Thompson and the political implications of the amount of money to be spent — $130 million. That's $1.91 million per lane-mile. (**)

One major way our transportation policies are screwed up is that transit projects are criticized (usually) from the right for failure to cover their costs. Apologists for sprawl often suggest that people are still voting with their feet in favor of suburbia, and some barely stop short of suggesting that suburbia and the accompanying automobile use is the natural economic ordering of things. I wouldn't object under the principle of 'if you pay the full cost of what you're doing I'm happy to be a libertarian.' But, as even us liberal economists will tell you, incentives matter, and less commonly aired is whether plain-old roads cover their costs and thus if sprawl is at least partly a response to subsidies.

Short answer: The car society requires roads that are, at best, funded by a tangle of cross-subsidies from very heavily-trafficked roads to feeder routes that can't pay their own way. In practice, motoring is heavily subsidized by general tax revenues and not-entirely-voluntary contributions of resources from motorists themselves.

The Highway 12 project provides a good example. Servicing the construction cost runs about $300 per lane-mile per day. That assumes a 30-year life of the road, 4% cost of funds, and does not include interim maintenance. If you think of the route's "revenue" as the tax on the gas burned by the traffic, that works out to about 2 cents per vehicle-mile (combined federal and Wisconsin tax) assuming 25 mpg. It follows directly that the break-even traffic is about 15,000 vehicles per day per lane.

The DOT helpfully provides traffic projections (PDF) for the stretch heading out of Madison. Only the sections (near Madison) with the heaviest traffic have half that much traffic. More typically, U.S. 12 carries less than 1/3 the breakeven volume, even in the 2025 projection.

Yet, as the state's project page notes, "The [pre-construction] Average Daily Traffic (ADT) volume on this corridor was over double the average statewide volume for similar two-lane highways. The increasing volumes had caused the road to become congested and unsafe."

Indeed, Zaleski notes that accident rates have dropped dramatically since the new road opened, avoiding perhaps 130-140 accidents annually. If that saves $30,000 per crash (***) in avoided economic losses, the safety improvements make up much of shortage of traffic-generated revenue, though probably not all. Highway 12 is something of an exceptional case, since the old road was very dangerous. Major reconstruction of an existing road would tend to have negligible safety benefits.

The conclusion is that most roads become congested and/or unsafe long before they even get close to "paying for themselves" without tolls or congestion charges. To the question in the title, the subsidies arguably can't be killed off entirely, but there would be less mode-choice foolishness, perhaps, if people didn't act like we motor about under conditions that have, or would, arise under the "free market."

So, Susan Lampert Smith, next time you're sitting in Verona Road traffic and inclined to complain about city-dwelling smartypantses who aren't, just keep in mind that in doing so, you're not even paying for the costs your suburban motoring lifestyle. (****)


(*) Another byproduct of our spelunking in the state Democratic Party files at the Wisconsin Historical Society: back in the late 40s, the Democratic Organizing Committee's platform documents complained about the influence of the "concrete lobby" in the Republican-dominated politics of the time.

(**) Portions of the project re-used stretches of the old highway, so this is may be somewhat less than the average cost of totally new construction, even netting out state DOT expenditures on conservation easements along the route. The current phase of reconstruction of East Washington Avenue on the east side of Madison has a contract cost of roughly $1.8 million per lane-mile; weekday traffic along that segment is between 7,000-8,000 cars per lane-mile.

(***) The Wisconsin DOT's crash facts indicate some $1.7 billion in economic losses due to 60,000 rural accidents in 2005, for an average loss of $28,333.

(****) Driver of gas guzzlers pay for more of the road but lard on external costs that I haven't considered and which work in the opposite direction. And if you're inclined to object that roads at least could be construed as recovering some of their capital costs, I'll add that the external costs are massive.

Labels: Economics, externalities, Trains Planes and Automobiles

by Tom Bozzo

OK, so it's Michael Bloomberg, advocating a Londonesque congestion charge for driving in some parts of Manhattan. But here's how Sara Kugler of the Associated Press quoted him:

"Using economics to influence public behavior is something this country is built on — it's called capitalism," Bloomberg said. "Tax policy influences you to drill here and mine there, and grow this and live here and do that."

To think, all that class warfare for nothing.

Addendum: But seriously, folks, this post should not be read as disparaging the concept of instituting tax-like charges to encourage commuters to internalize the full costs of their choice of transportation mode. As may be discussed at greater length in a future post, undoing entrenched patterns of subsidization (some so entrenched as seemingly not to be recognized as subsidies) is key to rationalizing transportation systems for a world where neither fuel nor emissions are necessarily cheap.

Labels: Economics, externalities, Trains Planes and Automobiles

by Ken Houghton

I mentioned this EnvEcon post earlier. It assumes several things:

1. That the status quo is efficient (the market is at equilibrium)
   
2. That the quotes from the article—all of which are from smokers and their suppliers—indicate what will happen (e.g., that a store where 70% of its revenues are from cigarettes "might just have to quit selling cigarettes.");
   
3. That those quotes and the localized result are representative of the overall state, and, most importantly,
   
4. That the Kentucky tax is also optimal for that state.

(In fairness, Dr. Whitehead does note that "an increase in Indiana's gas tax might encourage Indiana smokers to support their local smoke shop." But one suspects he does not mean this as a policy proposal so much as a snipe. He also provides some back-of-the-envelope analysis at the bottom of the post that indicates that he knows the quotes do not represent the expected behavior of the total population.)

Now don't get me wrong; this is a traditional Marginal Utility analysis—but it is applied to a smaller sample and tacitly assumes that all changes to the status quo should be not just optimal, but Pareto-optimal.

Let's now also look at this:

West Virginia and Kentucky, states known for high levels of obesity,diabetes and smoking, have the highest proportion of people with heart disease in the nation, health officials said Thursday.

From a Utility point of view, the costs of behavior should cover the incremental cost of participating in that behavior. (a variation is the Pigouvian Tax argument) Otherwise, we must conclude that there is a "free rider" issue (or, a subset of same, that "externalities" are not being covered).

Given that the prevalence of heart disease, per the CDC study mentioned, is 2.0% greater in KY than that in Indiana, perhaps the argument should be that the KY tax is too low (does not cover the full social cost of smoking) rather than that the IN is or will be too high?

After all, consider workers at a KY-based firm against those at an IN-based firm. If insurance costs are calculated optimally, it will be less expensive to do business in IN. However, non-smokers (the large majority of the population) in both states will pay a higher premium solely because their coworkers are more likely to require costly care. This is, of course, no less of a "tax," but the worker is provided with an even lower Utility.

(In fact, if we look at the county-by-county maps of deaths from heart disease in Indiana for the 1990s (from this CDC site), we can see that the area discussed in the article cited by Professor Whitehead is the highest in the state, matching the legendarily-dangerous and dirty steel-processing area around Gary. So IN workers treated as a whole are paying extra for the "free riders" on the KY border, whose behavior is clearly not socially optimal.)




Also, given the incremental costs, and absent charging full costs for behavior, is this not a reasonable alternative step?

After being thwarted for years, a bipartisan group of members of Congress reintroduced legislation yesterday that would allow the federal government to further regulate the tobacco industry by cracking down on marketing aimed at young people and requiring that reduced-risk tobacco products back up their claims with science.

The Altria Group, the company formerly known as Philip Morris, is among the bill’s biggest supporters.

Labels: externalities, free riders, marginal utility, Optimal Resources, Pareto-optimal, Pigouvian tax