Of Free Riders and Forced Riders: America's Cup edition

We're all familiar with the typical free rider problem. If there's some public good, individual incentives to contribute towards its funding are attenuated by non-excludability: if you benefit from the good whether or not you pay for it, why pay? And so we get all kinds of arguments for government provision of various public goods.

A couple of days ago, my former Econ 224 student Brennan McDonald sagely suggested that the America's Cup bid be funded via Kickstarter. Economists know that most of the "economic benefits" case for these things is, as Shamubeel Eaqub so precisely put it, bullshit. What's left then? If the fun from a big party outweighs the cost, fine. Otherwise, not. Brennan then suggests:

If we host the next America’s Cup, Kickstarter or some other sort of crowd-funding is the only responsible choice. We should be forcing these special interest groups to put their money where their mouth is. I’m sure that a non-trivial proportion of Kiwis would donate to such a campaign. The deal with council and government could be that if you reach $XX million in voluntary contributions, we’ll streamline the resource consents necessary.

I think Brennan's largely right here. Kickstarter's pretty well placed for funding things that provide warm glow benefits, though they're not the only one. I gave some money to the Indegogo campaign for SeaSteading's current fundraising initiative; I'll get a polo shirt to wear. Actually, a third identical blue polo shirt with a nice Seasteading crest. I get warm glow and get to show affiliation, they get money, I get some prospect-theory-based utility.

Will Taylor then raises the usual objection:

@EricCrampton @brennansmacro @tvhe agree, though free-rider problems would be an issue.
— Will Taylor (@WillTaylorNZ) September 18, 2013

Yup, free-riding still could be an issue even for a decent Kickstarter. If we don't make payment mandatory, we'll get some free-rider problems from those who enjoy the benefits but refuse to pay. Sure. And I'm certain that Will here is simply raising the theoretical point rather than taking it as an argument for state funding of yacht races. However, others would use this argument as justification for state support: free-riding on a public good can provide reason for funding.

But there's a necessary complement to free-rider problems. If we do make payment mandatory through taxes, we'll get a forced rider problem: lots of people who get epsilon, zero, or negative utility from the yacht race are forced to pay for it through their taxes. I would currently be willing to pay $50 for the America's Cup to simply cease to exist; I'd pay more to abolish the Olympics. I hate the America's Cup. It clogs up tv, the Twitter Stream gets a bunch of unblockable nonsense added into it, radio blather gets worse. The America's Cup is almost intolerable being held a Pacific Ocean away; it would be unbearable in Auckland. At least it wouldn't be held in Christchurch.

Yes, I'm being ornery and maybe I'm exaggerating just a little. But worries about free-riders' benefiting from the America's Cup without paying lead people to force me to pay for stuff I do not want and the abatement of which I would view as a good. I wouldn't really push a button to abolish these things because I can't know that I wouldn't be doing more harm than good. But none of the darned boosters seem to give a hoot about whether they're doing more harm than good when they want to force everybody to pay for their parties. That's why they keep trying to frame this nonsense in "aggregate economic benefit" terms - so that they can pretend that even people who don't like the Cup get some notional benefit from it. And the merits of that argument were succinctly summarised by Shamubeel.

Free-riders can be a reason for government funding of public goods. It's possible for the aggregate true willingness-to-pay for something to exceed the cost of provision but for the payment not to be forthcoming because of non-excludability. But for stuff like the America's Cup, it's entirely plausible* that the losses from impositions on forced riders exceed, by orders of magnitude, the gains from avoiding free-rider problems. Please let's not go about creating political failures that are worse than the purported market failures they seek to solve.



* James Zucollo asks for evidence that forced rider problems will here be greater than free rider problems. I'll confess that I haven't gone around and run surveys on it. But surely the onus ought to be on those who would use force to compel my payment for a yacht race to prove that the thing creates rather than destroys value. And it's not that hard to turn Brennan's suggestion of Kickstarter into something more like Alex Tabarrok's Dominant Assurance Contracts. In that system, everyone who pledges towards the Kickstarter gets some small reward for their pledge whether or not the Kickstarter raises enough money to activate. If the campaign raises enough money, everyone has to pay up for their pledge. But because everyone is rewarded for pledging regardless of whether the project goes ahead, free-riding problems are reduced. Maybe it's not perfect as you still need some high demanders fronting a bit of cash for the up-front payments to supporters, but it's a decent way of reducing free-rider problems while avoiding forced-rider problems. That boosters of major events typically go for compulsion first suggests, to me at least, something about their expectation that individuals have more than notional demand for these kinds of things.

I'm having a rather harder time imagining how you run a Kickstarter for "No America's Cup Bid For New Zealand". Sure, I can imagine a site taking donations. But where a pro-Yacht Kickstarter would actually pay for the event, an anti-Yacht Kickstarter would have to be providing something to the governing coalition in order that they not go ahead with an America's Cup bid. It couldn't just donate to the National Party as too many potential donors would be put off by that and because Parties can't actually be seen to be selling policy. Instead it would likely have to be providing some desirable-to-the-government public good but only in the case that there's no Cup bid.

Update: I've been informed that if New Zealand wins the racing, the next America's Cup will be held in New Zealand. While I still think this is better funded by Kickstarter if it does go ahead, it's seeming increasingly likely that there might be me and maybe two other people in the country who might be annoyed by having to pay for a yacht race. A lot of people seem to be getting utils out of this thing. And while I think that this makes it way more likely that you could get a million people each shelling out $10 - $15 to support the cup in exchange for exclusive supporter t-shits, it also means that Zucollo could be right: losses from forced riders could be low. Bread and circuses are popular.

Information failures and risky buildings

There's a trade-off when government agencies disclose known risks. Take, for example, AIDS disclosure laws. Some US states require that partners or others likely to be at risk from a patient testing positive for HIV;  others fear that the effect of such disclosure laws is to induce those at risk to avoid being tested. I've certainly not seen any data sufficient for running that cost-benefit analysis,* but it's plausible that either regime could be the correct one.

Wellington Council has a list of buildings sharing the same design flaw as the collapsed CTV building in Christchurch. But they won't tell anybody which buildings are on that list. Is this likely to be efficient? It depends on how Council knows and what they do with the information. If these kinds of flaws get found when Council officers dig back through the old building plans, then there's little risk that disclosure induces building owners to hide flaws. If they're found instead when owners inform Council, then disclosure could induce owners to keep quiet. So, in the former case, disclosure makes sense. In the latter case, it's a trade-off. Whether it makes sense to keep things quiet then depends on the number of owners who would likely be deterred from revealing risks in the disclosure regime and on whether Councils actually do anything to ensure that risky buildings are made safe. If buildings of that sort fall under the usual "you have 30 years to fix it" rule, then it seems unlikely that we're doing much good by keeping things quiet. If they're working towards much quicker repairs of disclosed faults, and if we think that tenants would overreact to the risk disclosure, and if we think that building owners would hide faults in a disclosure regime, then perhaps non-disclosure makes sense.

I'm inclined to agree with NoRightTurn that the case for disclosure seems strong - and especially since the justification seems to be to avoid imposing losses on the owners of risky buildings rather than to avoid that other owners notify Council of building deficiencies. But I'd reverse that call if it turned out that Council were really pushing to get this fixed and if there were substantial risk from unknown building flaws that would fail to be notified under a disclosure regime.

* This state-by-state variation seems eminent fodder for empirical work on the effects of disclosure laws on testing rates. File under "future honours projects" if it's not already been done.

Parking Market Failures

Does any market failure argument justify parking minima? Many cities require that residential developments include some minimum number of off-street carparks. Can these be justified?

Well, I'm glad you asked, Agnito.

The best argument I've heard for these regulations is that on-street parking is rivalrous and non-excludable. If you have an apartment building with too few carparks, residents will park on the street or might keep flitting between a few different no-parking zones, staying one step ahead of the enforcement officers. A lot of people see paying for parking a bit like hiring other kinds of personal services: why pay for it when you can apply yourself and perhaps get it for free? And if you find the perfect parking spot, there's then a huge opportunity cost of leaving the space: people with really good parking spaces never give them up. Finding the perfect space can be a joy to be shared with others. Further, where excess congestion from everyone's free-riding on on-street parking gives incentive for the able-bodied to park in handicapped spaces (or in front of fire hydrants), disastrous consequences can ensue.

Having mandatory parking minima then avoids the free-riding on the on-street parking that could best be left for higher-turnover use. And where long-term on-street parking is discouraged only by time limits, it also encourages other socially wasteful forms of entrepreneurship.

The best response to this kind of argument is that it's massively second-best relative to the more efficient solution: price on-street parking. Do that properly and everything else sorts itself out.

Of course, in that world, Seinfeld wouldn't have been nearly as good. And where Gerry Brownlee wants to ban Auckland from using congestion charging, we might not be able to get first-best parking charges anyway.

For the record though: there is no real-world market failure sufficiently large to justify mandatory parking minimums. At least not in Auckland, best I can tell.

Inducing failure

Is cybersecurity a market failure? Every individual counts the cost to him of a virus attack but ignores the cost to others if his system becomes a zombie spam machine; consequently, people underinvest in computer security.

Eli Dourado does a great job in taking on this kind of argument in his Mercatus working paper - on the syllabus in my Economics of Current Policy Issues course. 

First, the externality is, in most cases, inframarginal: most individuals have sufficient personal interest in ensuring security that the external benefit accrues inframarginally rather than at the margin. In other words, while it's true that people benefit others when they install proper security software, they're doing enough to benefit themselves at the same time that they're likely getting things right.

Second, there are plenty of other parties that have an encompassing interest in ensuring that the Internet works well. Google has a harder time selling ads if a lot of clicked links install malware and the like; consequently, Google works hard to make sure that, if you're using their Chrome browser, you get lots of warnings if you try to visit a dodgy site.

We'd think that Microsoft would have a similarly encompassing interest. Why isn't a decent security system built into Windows? I recently built a computer and put Windows 7 on it. After a bit of searching around, I found that Microsoft produces a very decent, and free, Internet security package. So I downloaded it, for free, and installed it. And I wondered why it wasn't built into the OS. Surely it would be in Microsoft's interest that people using their machines be protected against virus attacks, and it's precisely the kinds of people who don't know they need to go searching for an antivirus package who'd be the kinds of people who'd impose costs on others by letting their machines turn into a zombie.

Then I remembered... Microsoft gets slapped around by the Department of Justice and the European antitrust guys whenever they try to make Windows better by adding features. Bundling antivirus into Windows, where it should be, could be deemed a measure that the Europeans would figure would hurt competitors; hurting competitors seems to matter more than helping consumers in European law. And Eli pointed me to this article from 2008 offering antitrust as reason why antivirus hadn't been built into Windows.

Fortunately, it looks like Microsoft's found a workaround for Windows 8. Antivirus will be built in, but will be automatically switched off if any other vendor's product is installed; it only turns back on if the user fails to renew the subscription to the alternative product. Note that Windows 8 is already under antitrust investigation in Europe, but for browser default issues rather than antivirus (so far).