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.

Replacing a misogynistic mnemonic

It is easy to get backwards when doing t-tests, especially when you’ve first started.  You have to remember that big t and small p-values mean to reject.  Of course, if you’re a little dyslexic (undiagnosed) like me, when you get confused, you can go back and re-figure out that you want small amounts in the tails and the t-slice to be far away from the mean making it large etc., but that is really time consuming, especially if you’re in the middle of a lengthy problem set or a timed exam.

Many years ago, one of my students shared a dirty misogynistic mnemonic.  When p is low, she said, reject the ho.  This is clever and funny because p is both probability and slang for penis.  Ho is both how a null hypothesis is written and a derogatory term for female prostitute.  When one’s penis is at low mast, it makes sense that said penis-holder might not be purchasing the services of a prostitute.  And it rhymes.

But it’s both dirty (I got into trouble for saying “prick” meaning “jerk” early in my classroom career) and one should not be using derogatory terms for prostitutes or women anywhere, much less in an institution of higher learning.

More recently, I was explaining my conundrum in office hours and one of my sunshiny students came up with a much better mnemonic.  It isn’t quite as clever, but it’s just as memorable and it still rhymes.  “When p is lo, reject H-O!”  Like a cheerleading chant (aich – oh).

It makes me much happier.

What are some good non-racist, non-misogynist, non-ablist, non-patriarchy mnemonics that you know?

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: Privatizing nation’s air controllers?

Crone asks:

opinion on privatizing our nation’s air controllers. I oppose but was told the whole system should be moved to computer based GPS system and then Highways in the Sky for planes could be free form making flights faster and private industry can do this more rapidly than government. (I was in social situation so could not say I have never known a single computer system that did not ‘go down’ or ‘have ‘undocumented features ‘ so how would that work…) The topic of pipelines that ‘will not fail but ALL LEAK at some time’ had already come up.~~ I had been assured I was wrong on that point and ignorantly female. SO, back to air controllers: If this would be profitable for private companies to do why isn’t it done profitably or better by public government?

OMG, the WORST IDEA. OMG OMG OMG.

Well, it’s only the WORST IDEA if you think that airplane passengers are more important than prisoners. If you think prisoners are people too and should have rights, then privatizing prisons is actually the worst idea and this is only second worst. I guess there’s also privatizing foster care systems… if you think all people are equal then that might be slightly above air traffic control but still below prisons in potential harm done by privatization. (Foster care systems empirically aren’t as bad as prison systems, even though the potential is there to be as bad. This has to do with better state oversight.)

I had a section on privatizing public systems in one of my classes last semester and students brought in stuff– if I’d known it would come up as an ask the grumpies I’d have taken a picture of the whiteboard commonalities of when it works and doesn’t that we came up with. It can be ok, but it depends on a lot of stuff and it really shouldn’t be something where you know, people could die.

Ugh, so no, not you being ignorantly female. There’s a reason there’s a role for government for various systems.

We generally think that there is a potential role for government intervention when there is market failure in the competitive markets.  One form of market failure comes from monopolies.  Something like air-traffic control is what we call a “natural monopoly”– natural monopolies occur when it just doesn’t make sense for more than one company to be in one market.  A lot of utilities are in this kind of situation– where it doesn’t make sense for two companies to lay down pipes or what-have-you.  (You can also have government-private partnerships, where, for example, the government owns the rail-lines but allows different companies to pay to use them.)  Air traffic control is an example of a natural monopoly.  At an airport, it makes sense for only one company to do the air-traffic control.  Any more could lead to planes, for example, hitting each other.

The government in this situation could still allow private contractors to bid on the ability to be that one company doing all the air traffic controlling.  Unfortunately, air traffic control benefits a lot from experience and there are switching costs when an old company leaves and a new one takes its place.  Those switching costs could lead to not just inefficiency but also death.   Finally, oversight is really important with privatization.  Unlike the government, companies can just go out of business when they cut costs so much that people die, so they don’t have as much of an incentive to stay safe when it means cutting into profits.  Government can combat that by making it costly for them to cut corners before someone ends up dead, but that oversight comes at a cost.  Those costs could be large enough (and the possibility of bribes could be high enough) that it makes sense for the government just to do it itself.

 

What does statistical significance mean?

One of my students sent me this article because we spend some time in class covering Type 1 and Type 2 errors.

All the .05 threshold means is that you have a false positive 1/20 times.  A .005 threshold would say you’re getting a false positive 1/200 times.  So by moving to a .005 threshold, you’re less likely to get a false positive.  That’s good, right?  In common parlance, we’d be less likely to send an innocent person to jail.

Well, that depends.  At the .005 threshold, we’re more likely to get a false negative than you would at the .05 level.  That means we’d be more likely to get a guilty person go free.  (Indeed, the only guaranteed way to send no innocent people to jail would be to send nobody to jail.  I, for one, am happy that folks like Charles Manson are behind bars.)

It isn’t as easy as saying, oh we should just switch to .005.  When you adjust the p-value you’re making trade-offs between type 1 and type 2 error.  With a lower p-value threshold you’re going to be getting a lot more false negatives even with fewer false positives.  What we always need to be cognizant of when we’re doing policy is that significance isn’t everything– we also have to think about what the damage is if this information turns out to be incorrect.  For example, doctors recommend that pregnant women should heat up cold cuts if they’re worried about listeria, which is a very low probability event but if it happens it’s horrible.  It’s pretty easy to avoid room temperature cold-cuts for 9 months, so unless there’s some other difficulties attached to diet, women will probably follow this recommendation.  (And if one accidentally eats room temperature coldcuts while pregnant, one shouldn’t freak out because the probability of getting listeria is very low!)  But if we’re talking about something like doing chemotherapy or surgery, that’s a much more onerous action and we might want to be more sure we need it before going ahead with it.

Another thing to note is that the article talks about how physics and genetics have already made this switch, while most social sciences haven’t.  One big difference between the fields that have made the switch and the fields that have not is how easy it is to get large samples.  A larger sample size will make it so your sample behaves more and more like the population that you’re trying to study.  We can reduce both Type 1 and Type 2 errors simply by increasing the sample size.  So why don’t we do that?  Well, it turns out that increasing the sample size can be very very expensive when you’re dealing with people and behavior.  Sometimes doing the study with a large enough sample to get 80% power and an alpha of .005 might be more expensive than just throwing that same money at the intervention you’re trying to decide about, whether or not it actually works.  There probably is some resistance because people in these fields want to be able to publish their 5% results, but that’s not the main or only reason we haven’t yet made the switch.  Research is complicated and expensive and we have to make trade-offs.

The context for these really does matter, and you shouldn’t necessarily put off making policy choices just because your sample size is too small to get significance (or to make policy changes just because you have significance).  You always have to be aware of the costs and the benefits.

 

(Incidentally, in case he comes across this, Hi Dan!  I’m assuming that the reporter greatly simplified your arguments here because I know you must know this stuff.)

Ask the Grumpies: Where to learn economics?

Leah asks:

I’d love to learn some basic econ. Where’s a good place to start that is not too arduous but is also accurate?

I know there are a lot of Econ for laypeople books out there (Freakanomics being the most famous), but when people ask me this question I always stick to two textbook recommendations.  The first is the Intermediate Microeconomics by Robert Frank called Microeconomics and Behavior.  The second is Public Finance by Jonathan Gruber.

I love Frank because he discusses microeconomics in a way that contrasts how the rational person would behave with how people actually behave.  This I think makes the theory more believable and more powerful.

Public Finance I really think ought to be taught in high school.  If you want to understand the role for government, it is a must read.  So much of what is going on with healthcare right now violates basic economic principles and after reading about adverse selection, you, too, will understand why.

Note for these that you do not at all need to buy the most recent edition.  The 1998 edition of Frank is fine for understanding the basics.  The first edition of Public Finance by Gruber is still a fantastic read.  Get whatever is available and cheap.

What economics tomes/videos do you recommend, Grumpy Nation?

We live in interesting times

We live in interesting times.

I often think that this is must have been like what it felt for our parents growing up in the 60s.  Marches and riots and violence in the news all the time, but a sense that progress was finally being made.

Life was so much easier during the booming 90s.  Of course, that’s not really true.  Life was easier for us white folk, and we just didn’t know about what was going on elsewhere.  The Rodney King riots were a glimpse into what life was like for others, but the rest of us really stopped paying attention until recently.

One of the reasons Hamilton is doing so well is that it isn’t really about the 18th century.  It is about today.  This musical number really encapsulates it.

Change comes slowly and then it comes all at once.

Change comes with violence.  Or rather, that’s what we perceive.  Those of us who are sheltered and privileged.  The violence was always there.  On the plantations.  Against share-croppers.  Burning crosses on lawns.  Killing people in our cities.  Lynching, rape, murder, beatings.  Those of us who are outside don’t notice.  We believed things were accidents and tragedies or isolated incidents or provoked by criminals.  But that’s not what was going on.  That’s not what is going on.

Like now, change happens when violence is made visible.  Then violence escalates.  Violence escalates because the people in power, the ones doing the terror attacks against minorities, the ones subjugating their wives, girlfriends, and daughters, are afraid.  And they are afraid.  And violence is their only real weapon.

Which isn’t actually true.  Violence is not and has never been their only real weapon.

The Voting Rights Act was in response to their hold on local governments.  They own state and local governments again.  We MUST organize locally.  We must pay attention to downstream races.  We must run candidates even in red areas.

They’ve owned the media before, they own some of the media now.  Fox News isn’t the first news organization to have a racist misogynist agenda.  Not the first media organization to sway angry poor uneducated white men for their own causes.  It makes sense for uneducated white losers to want to keep women and minorities down– if they don’t have them to scapegoat and feel superior to, then they’ll be at the bottom of whatever metaphor you can think of.  It doesn’t make as much sense for the people who control these empires.  Why are there evil rich people?  Is it because they want more power than their horrible rich white associates?  But isn’t it better to be a Philanthropist than a Bond Villain?

Revolution means progress.  But revolutions are rarely easy.  Those in power fight back to maintain the status quo.

It’s best when revolutions occur with the fewest lives lost.  With the least blood spilt.

I think there’s a politician and bureaucrat who can help the revolution shed less blood while moving forward.  But she can only do it if she gets support downstream.  Senators.  Representatives.  State Government.  VOTE.  WRITE.  Be angry.  Protest.  Support protestors.  Become woke and stay it, even when the media moves on to the next story.  We want a government for all people, not just some of the people.

And after this movement dies down, we’ll still have a long way to go.  But let’s go as far as we can towards equality of opportunity, freedom, peace, and happiness as we can, so that maybe it won’t be as hard or dangerous next time around.  And so people can live closer to their best lives while we wait for the next revolution to bring them closer still.

#Imwithher