June 13th, 2005


Eco 200: air traffic control

(group) A letter to The Wall Street Journal attacking a proposal to privatize the nation's air traffic control system concluded as follows:

A business exists to maximize economic return. A government exists to maximize public benefit. No amount of imagined gain in efficiency will offset the loss of pulic control of either the town stoplight or the nation's air traffic system.

  1. What does it mean to say that business exists to maximize economic return and government exists to maximize public benefit? Is this a statement of intentions (whose?) or of outcomes?

    This is mostly a statement of intentions. A business exists for the benefit of its residual claimant. A government exists to give benefit to its constituents. In practice, neither may work out that way.

  2. Can a business ordinarily earn a large economic return if it does not provide substantial public benefits?

    Depends on what you mean by ordinarily. Many businesses do get by without providing much benefit through deceit and deception. Cigarette manufacturers and casino operators are an example on a large scale. On a smaller scale, pump and dump boiler room stock operations ordinarily make a lot of money. The vast majority of businesses provide some public benefit. But given the sheer number of businesses in existence, with just 0.1% of businesses providing little public benefit they are still ordinary and common.

  3. How can we measure the public benefits flowing from the air traffic control system if users of the system are required to pay the costs of providing those benefits? How can we measure them if users are not required to pay but all costs are instead financed from taxes?

    One could measure the average delay divided by the number of miles flown by aircraft. Other measures include the number of incidents of near-collision per mile flown. Both measures can be taken regardless of who pays for the service.

  4. The author of the letter quoted described himself as president of the Aircraft Owners and Pilots Association. Does this suggest to you any reason for his opposition to privatizing air traffic control?

    My guess is he doesn't want it coming out of his pocket. In his mind, the public benefits from not having airplane collisions so they should pay for it and not him.


Eco 200: parks & libraries

(group) A frequent argument in support of government-produced goods is that they are vital to social welfare and therefore their provision cannot safely be left to the whims of the marketplace. Does this explain why parks and libraries are usually municipal services, whereas food and medical care are usually secured through the market? Can you suggest a better explanation to account for these cases?

It's hard to prevent the free rider problem in the case of parks. Keeping non-payers out might ruin the experience of the payers. And then no one would pay. Access to libraries can be more tightly controlled (because they are indoors), so this might be more of a case ofpandering to voters desire for a free lunch than anything else.


Eco 200: volunteer fire-fighting

(group) Should the members of a volunteer fire department refuse to put out a fire in the home of someone who has refused to contribute to the fire-fighting service? (Assume that no property of subscribers is in danger.) What damage would they be doing by putting out the fire?

If they do not, they will be looked at as businesses look on the mob shaking down residents for protection money. They will lose business. If they do, they will lose business as residents determine their homes will be saved whether they pay or not. Basically, they have to hope fires at non-subscribers places happen very infrequently compared to subscribers places, or they will lose lots of business. Or find a different business model.


Eco 200: future generations

(group) Do the decisions of people now living take any account of the demands of future generations for natural resources? Do these decisions take adequate account of the demands fo future generations? Is government likely to take better account of the demands of future generations? Evaluate the contention that government must serve as the steward of natural resources for future generations.

They do not. According to economic theory, people seek to maximize their marginal gain and minimize their marginal cost. While most people take into account their immediate family's future needs for psychological reasons, there is much less incentive to help their great-great-grandchildren and even less to help the children of other random human beings they've never met. It turns into a classic prisoner's dilemma. If everyone contributes to the stewardship of the environment, one family can maximize their gain by not contributing. Their children reap the same benefits as everyone else, and they don't pay a penny. But if everyone behaves as such, there is no stewardship. Even for one's own children, there is little to gain in the classic economic model because there is no economic benefit to an individual to have a better environement 5 years after his death, except in the sense that if his children know he didn't contribute to their environmental well-being, they might not help him in his old age.

Only a government can protect the environment adequately, given the innate spillover effect. However, this does not mean that a government will. Because democratic governments need to allocate scarce resources toward short term projects in order to get elected, long term projects like environmental stewardship will frequently not receive the dedicated resources they would under a good cost/benefit analysis.


Eco 200: regulation

(group) Read, analyze and evaluate the letter on regulators by Bonner.

Make Regulators Stop and Think

Illinois Sen. Dick Durbin is concerned that Harvard University's John Graham (President Bush's nominee to run the office of regulatory affairs at the White House budget office) might want to discuss proposed rules with regulators before they are cast in stone ("Graham's Cracker," Review & Outlook, June 27).

Drawing regulators' attention to the unintended consequences of their proposed actions can be a sobering experience, particularly in light of past mistakes. After examining the data on deaths and injuries caused by passenger-side airbags, Mr. Graham told the National Transportation Safety Board (NTSB) in 1997 that he was "stunned and appalled by the harm they have inflicted upon small children."

"They appear to kill more children than they save," Mr. Graham added, "with the best estimate being a net 33% increase in death risk to children." Once a strong supporter of passenger-side airbags, Mr. Graham told the NTSB that "We should be mature enough to re-examine what we have done and work hard to clean up the mess we have made."

Far better to have someone review proposed rules and regulations that have seen well intended but ill-conceived schemes go awry than to have someone rubber-stamp every bureaucratic compromise that comes across his desk.

Senior Fellow
Lexington Institute Arlington, VA.

Reviewing proposed regulations for unintended consequences is not a bad thing. Everyone's work should be checked. However, presumably the regulators job includes looking for unintended consequences. When they fail to do so, either they missed something despite their job, or they have biases that cause them to miss it. However, there's nothing to prevent the white house budget office from having biases of their own. So who will regulate them? And in fact, the white house budget office has a different mission than any regulatory agency. While it is part of the regulatory agency's mission to look for unintended consequences, the white house budget office's mission is not of promoting public benefit, but of cutting costs and promoting the president's policy priorities (which will be geared toward getting him re-elected). So I doubt the office of the budget will truly be looking for unintended consequences.


Me summarizing

I'm the summarizer for my group this week for a couple of questions. Notably, the problem on regulating. The group pretty much all jumped on the party line that having someone review regulators regulations was an unqualified good thing™. One of the more lucid responses read as such:

His comment is reasonable – have an independent party discuss and review regulations with regulators before the rules are implemented. This would allow for certain regulations to be examined from new perspectives and would hopefully point out strengths and weaknesses in the regulations. I imagine that Senator Durbin, a Democrat, was concerned about this because the Republican White House was doing the “independent” review. It would seem that Senator Durbin’s real concern was not the examination of regulations per se, but rather the examination of regulations by Republicans with whom he disagreed.

So, my summary read like this:

The group felt it is a good idea to have a political operative looking for the unintended consequences of regulators actions. If we can have some regulation of regulations to reduce unintended consequences, we are all better off.

I think I neatly summarized the responses and yet still, my own thoughts on the matter might possibly come through…