Ask the grumpies: How to subvert the Tragedy of the Commons

Leah asks:

Is there any way to subvert the tragedy of the commons, or are we doomed to that fate? I seem to remember learning some examples way back when I took environmental economics but they all escape me . . .

I just happen to teach a class on this!

The first way we learn about is with government setting property rights and facilitating costless Coasian bargaining.  In the canonical example, there’s a river and a factory and a fisherperson.  The factory pollutes the river which kills some fish.  If the factory owner owns the river, then the fisher can pay it to pollute less.  If the fisher owns the river, then the factory owner can pay them to allow some pollution.  There’s problems with this solution when there’s not costless bargaining, when there’s multiple fishers (that can cause a holdout problem) or multiple factory owners (and they don’t know which ones are causing the pollution), but that’s the “preferred” government intervention when it works because it leads to the least amount of deadweight loss.

Fancier versions of this solution include things like the government setting a specific number of pollution credits and allowing firms to bargain over them.  That’s the idea behind Cap and Trade.

When the Coasian solution is difficult to implement, generally because of bargaining problems or informational aysmmetry, the government can step in a bigger way.

First:  The government can mandate that firms not be allowed to pollute more than a certain amount or fish more than a certain amount or hunt more than a certain amount.  Associations can also take the role of government in order to say, prevent over-fishing, though it’s often harder for a non governmental association to enforce these kinds of mandates.  Mandates are most enforceable when there’s jailtime associated (not just a shell company going bankrupt), though that tends to be unpopular.

Second:  The government can tax things like pollution or things that cause pollution.  Think gasoline taxes or hunting fees.

Third:  The government can subsidize companies to not pollute or to not fish etc.  This option tends to be the most popular with industry.

All of these methods have situations in which they work better or worse than the other solutions.  With nuclear waste, you want a mandate because even a little bit of waste is bad.  With air pollution you might want a tax or subsidy or cap and trade system.  The government can make money with taxes or by selling property rights in a Coasian situation.  Companies tend to lobby for subsidies which makes them more politically feasible.

So the short answer is:  yes, government can subvert the tragedy of the commons.  Market failure is why there is an economic role for government and the tragedy of the commons is one of the causes of a main source of market failure (negative spillovers).  But we need political will for it to work.

Ask the grumpies: Which is more important: Macro or Micro?

Leah asks:

Which is more important, macro or micro economics?

For most people, microeconomics is more important.  Both, however, are very important for the government, particularly the federal government.

Macroeconomics tells us about whether there should be a Fed, how should we peg the monetary system (if we should), when should the government spend and when should it pay back debt, how can the government lower unemployment and inflation using monetary policy, and so on.

Microeconomics tells us everything else.  How do we best invest in kids?  How to firms set prices?  How do we help marginalized groups?  How much should people save for retirement?  How do we best finance schools?  And on and on and on…

So… both are incredibly important, but there are a lot more microeconomists out there.

Ask the grumpies: How to address the affordable housing crisis in expensive cities

Yet another pf blog asks:

What policies do you think are best to address the affordable housing crisis in expensive cities?

Definitely not rent control!  I cannot tell you how many lectures I’ve suppressed on this topic when being a tourist.  (Instead I say, “Sorry!  I’m registered to vote in another state and cannot sign your petition.”)

The big answer is:  Loosen up zoning to allow more high-rise apartment buildings to be built.  It is as simple as that, so long as you make sure that the developers and additional taxes contribute to the additional pressure on local public goods.  But there are a lot of SF suburbs that only allow 2 or 3 stories to be built.  The second big answer is reliable public transportation (my favorite is light rail, but commuter rail and buses with special highway lane access are also good) to places outside that have affordable housing so people can commute to work.  Even our best subway and elevated systems could use expansion in terms of number of trains, number of lines, and just plain maintenance.

Ask the grumpies: Macro 101– why can the US have so much debt?

First Gen American asks:

I don’t get the deficit and printing money in general. Why is the US able to be in such enormous debt and continue to grow it without short term negatives consequences aside from servicing the debt. I just read that something like 70% of foreign countries still use USD as their reserve currency Despite President Obama adding something like 7 trillion to the deficit during his 2 terms and Trump is continuing the spending spree with tax cuts. There are a number of articles in this question and I figured as economics people you may have more of a clue.

At some point it’s not sustainable. Does anyone even know where that cliff is? Does anyone care? Is there a real risk of economic collapse at some point?

The short answer is:  We’re ok so long as enough folks believe we will not renege on our promises.

Longer answer:  We’re ok so long as there’s still decent GDP growth.  We’re better off if that spending is investing in our future and worse off if it’s contributing to widening income inequality.  (This was one reason I loved HRC– she really got that.  Spend on investment.)

Let’s see if I can find a good longer answer somewhere online.  There must be a wikipedia page or something… This investopedia article seems reasonable, laying out all the different arguments.

Basically, some debt is good because it contributes to investment so long as the rest of the world believes in the continued existence of the US as a country (and not one that will refuse to pay).  Too much debt can cause problems.

Here’s a planet money podcast that doesn’t go into too much detail, but is somewhat interesting.

How to talk about how awesome your work is without sounding like a jerk (in an academic paper)

Being a woman, and a woman not at a top 10 institution, in a field in which there is little to no double-blind reviewing, I have to walk a very fine line when promoting what is novel and new about my work compared to previous work.  This is especially hard because I do really innovative work that ends up getting cited a lot and taught in classes but faces a huge amount of push-back from the people who don’t think that way.  (When I put it like that, maybe I’m not the best person for giving advice given my lack of top general interest journal publications.)

Anyway, don’t say that you’re the first person to do something unless you’re an asshole at a top school.  They are always wrong.  They have always not done enough literature review.  But that doesn’t kill them whereas it is the death knell for the rest of us.  Don’t do it.  (I review a lot of papers and see this dichotomy in action– asshole reviewers are so pleased to bring their work to the attention of the famous white dudes, but are insulted that junior scholars should not know their important paper published 30+ years ago.)

When you’re an asshole at a top school, a good strategy is to do an extremely light literature that only cites top general interest journals.  That makes it look like your paper is new and innovative.  And people believe it is because your work doesn’t get sent out to the other people (women, junior scholars, people not at top 10 schools) who have worked on the same question because the editor doesn’t know they worked on it and you didn’t cite them, so how is the editor supposed to know.  Yes I am still really bitter about this.

When you’re not that asshole, you have to do a really complete literature review because if you don’t cite someone, the reviewers take offense and think you haven’t done a thorough lit review.  You can get away with not citing things that aren’t in your field (but I cite people outside anyway because they do work I think economists should know about– this is part of why my way of thinking about things is so innovative– innovation in economics is what another field discovered 30-50 years ago…).  You can get away with not citing things that got published in second tier field journals or lower, but if it was in a top field journal, it needs to be in your list of works cited.

Now, if you’re a white male asshole at a top school, you can make your career out of proving another top economist’s top general interest paper was wrong.  Or, if it’s a female top economist, all you really have to do is harshly question it.  If you’re female and you do this, it can destroy your budding career unless you coauthor with a senior top male economist or two who will take the credit and shift the blame to the bad paper author.

All of that aside… and back to the topic that inspired this post.

If you are a woman/non-famous person, how do you make it clear that your paper is doing new stuff without insulting your potential reviewers?  The answer, my friend, is data limitations.  Or, if it is much older work, new technology.  They *couldn’t* answer the question you’re answering because their dataset wasn’t good enough.  No fault of theirs.  You have something new to add because of your great luck or your hard work.  This probably explains why I am forever amassing new datasets instead of writing papers with the sets I already have.  (That and I’m a dilettante).

So, is this good advice?  I don’t know.  My career looks like a glass ceiling– I am very good at publishing at top field journals, but have yet to hit a top general interest journal.  Some of this is because other than my job market paper I didn’t send my work to top field journals until after tenure, but some of it is that I still don’t know how to play the game perfectly and my reputation is not such that I get the benefit of the doubt.  I still get desk rejects with useless comments for papers that end up getting accepted with minor revisions at similar journals.  There’s a lot of crap shooting going on.

(Disclaimer:  #notalleconomists are assholes, #notalltopeconomists are assholes.  Some are really nice and are generous with their citations and work and try to write the best papers they can because they care about economics and policy.  Others care a lot about playing the publication game.  I’m sure it’s similar in many lines of work.)

Ask the grumpies: whether or not to purchase insurance

H.I.P. Person (Home Insurance Purchasing Person) asks:

How do you decide if you need insurance for something? We are updating our home owners coverage and they are peddling the following:

1) service line coverage –  up to $10,000 per event
2) systems coverage (a/c, hvac, water heater, furnace, and the like) – up to $50,000 per problem
3) sewer back up (?? not sure of max coverage)

We live < 75 miles from the coast; <20 miles from two major water coastal inlets but  not in a flood zone. What hurricane related insurance should we own? The policy comes with wind/water but not flood and they don’t really want to sell us flood (they are offering #3 instead).

Are any of these worth it?  What price point would make them worth it or not?

DISCLAIMER:  We are not financial advisors.  Get advice from real professionals or do your own research before making important monetary decisions.

So in economics, you purchase insurance when the expected utility of the insurance is greater than the cost of the insurance.  So, assuming you knew how your utility function was shaped (the important part for this purpose is that you know your coefficient of risk aversion, in this case specifically how much you hate the possibility of loss), and you know the probability of a bad thing happening, you just multiply that probability by your expected utility plugging in the amount you’d be out if the bad thing happens and then add the probability that the bad thing doesn’t happen and multiply that by your expected utility plugging in the amount you’d have if the bad thing didn’t happen.  Problem is… in reality, we usually don’t know the probabilities of these negative events occurring (or even what those negative evens could be!) and we definitely have no clue about what our utility functions look like.

So how does one decide what to get insurance on in reality?  Well, if you have rough ideas of probabilities, you can look at the expected value of something happening.  Expected value is like expected utility, but it tells you what the break-even point is assuming you have no emotions.  You’re neither a gambler nor risk averse.  But risk averse you can look at those numbers and think to yourself, “How do I feel about this calculation?”  In general, the insurance company is out to make money, so they’ll be charging more than the expected value of the thing happening, but does the amount more that they’re charging seem reasonable to you?

If you don’t know the probabilities of something bad happening, you can still play with worst case scenarios:  If the bad thing happens, what would you have to pay out of pocket to fix it without insurance?  What would you have to pay out of pocket with their insurance?  Is the peace of mind for the difference between those two numbers worth what they’re charging?  (And again, if you have rough ideas of how probable these events are, you can factor that in as well).

Another thing to do is to google around, preferably with reputable sites, to see what kinds of insurance are usually a good idea and what kinds are generally scams.  You can ask people around you too, though people often do things that don’t make sense if there’s good marketing on the part of the insurance company or if they’re more credit constrained or risk seeking than you are.

An important thing to note is that you want insurance to insure against risk.  You don’t want it as a pre-payment for things you’re going to pay for eventually.  You don’t want a high monthly cost if you can avoid it by sharing some of the pain should disaster strike through a higher deductible.  The goal isn’t to save money, it’s to smooth your consumption over good and bad states of the world.  Don’t try to beat insurance– in the best states of the world you give them money and they never give you money.  But you want it there when disaster strikes if you can’t handle the disaster on your own.

If it were me, I’d definitely eschew the service line coverage unless it was really cheap– we can afford a 10K emergency.  Since the limit is capped, it is not actually useful insurance unless paying up to 10K would be devastating.  (Capped insurance is often a red flag– if they stop paying after a certain amount is spent you may be better off self-insuring because if something really terrible happens they’re not going to be much use, and self-insuring means you’re not paying for the additional administrative costs of going through them.)

Systems coverage again, we probably wouldn’t pay… replacing a/c, hvac, water heater, furnace etc. is all stuff that has to get done some time anyway (and none of these should cost 50K, unless that’s including the damage after a water heater explodes or something) so paying them is like pre-paying for bills you’re going to have, but it is likely you’re going to have less choice about how to make those replacements and you’ll be paying their administrative costs over what you’d be paying if you did these things yourself.  And, again, it’s capped.  This is unlikely to be good insurance.

Sewer back-up is the only one of these that doesn’t sound 100% scammy.  Check all your other insurances to see if this is covered under them.  Estimate how much a sewer backup could destroy.  Make sure that it’s unlimited covered and not capped and there are no other strings attached.  Think about the probability of this happening.  Look at how much they’re charging for it.  Then go with your gut.

We have no idea about hurricane insurance.  The internet has a bunch of pages about it, noting you should get wind and flood on top of home, but I’m not getting a good idea of what numbers you should be looking at or even how to make that calculation.  You may also want to look into the different deductibles they offer, because none of these sound particularly cheap, but it may be that if you have a high deductible the insurance cost will be more reasonable (assuming you can afford the deductibles).

Good luck!

Grumpy Nation, do you have any better advice for H.I.P.?

 

Ask the grumpies: Private vs. public colleges

Sandy L. asks

Cost benefit of public vs private college. What is the value of the network, etc.

The question isn’t really about public vs. private.  Berkeley is going to open a lot more doors and have a much more impressive network than the expensive small regional private liberal arts college one of my sisters-in-law went to.  The question is really about the prestige of the school.  There’s a lot of interesting new research on that topic.  And the answer is that, first off, we don’t really know, and second off, it is nuanced.

In general, for your white upper-class/upper-middle-class kid, it doesn’t really matter where they go.  Harvard, top flagship, regional state school– it just doesn’t matter.

For your lower income family, minority, etc. etc. etc. student, it can matter quite a bit.

But even with that mattering, some schools are better than others at elevating kids into higher socioeconomic status.  And some schools (like Harvey Mudd) are phenomenal at elevating low SES kids, but don’t actually admit very many of them (that $72K/year sticker fee and all).

I’m too lazy to source and cite this, but if you’re interested in finding out more, flip through the NBER working papers abstracts for the education group.  If you need to narrow your search window down, Carolyn Hoxby is a good place to start– she’s written extensively on this topic and cites a lot of the other work that has been and is being done.