Potomac Fever is the blog of the Hamilton College Semester in Washington Program.
Peter, we're outta this city in less than a month = not my problem ;)
Sorry, Hollywood, some of us plan on living here later on.Also, don't you think in these times when we are trying to make government more efficient, government employees should be getting to work/meetings/hearings on time? Seems like a pretty big waste to be paying thousands of government employees to be stuck for 20 minutes on a red line train, or for 20 minutes a day walking up broken escalators.
I don't know the economics of monopoly transit systems at all. And I know they typically need government support for some reason, but I don't understand why, after initial government investment a system such as the metro could not be economically sustainable on its own. Is there a theory behind it?
Basically a metro system has a ton of postive effects that most cities consider valuable enough to justify subsidizing a metro systm. I'm sure there's other stuff I'm missing, but here are some examples: The government might recoup the money spent subsidizing an efficient metro system from the increased revenues collected as the metro system increases tourism and the relative attractiveness of the city to businesses. Also, a metro system has important positive effects for a city's business community regardless of its overall impact on the government's budget. Plus reduced space used for parking garages and such, reudced car use in the city which improves air quality/health/reduces medical costs/improves city attractiveness/reduces $ need for road maintanence/etc. (I'm sure there are some I forgot). With a metro system people are more willing to live and spend there money in a center as they are better able to get around it. A metro system increases the amount of transportation alternatives, which in economics creates additional value (like adding a mute button to a remote increases the value of said remote). A metro system might be considered worthwhile for equity notions- increasing the options for affordable public transportation for low-income individuals.
But shouldn't we insist that it be well managed?http://washingtonexaminer.com/opinion/editorials/local/2011/03/examiner-local-editorial-metro-riders-have-already-sacrificed-enoug
Like Patrick said, public transit is considered a positive externality and is subsidized for that reason. Without subsidies, the Metro COULD operate, but prices would increase and it would no longer be an affordable option for many. Third parties who benefit from the metro (which is, in this case, everyone) essentially pay for those benefits through their tax dollars, which the government uses to subsidize the metro. The money, then, that the government spends subsidizing the metro is well spent because it achieves a socially optimal outcome.
Yes TJE, it should be well managed. But some mismanagement is no reason to cut off all funding.
In the Cato post, it said “Coase pointed out that markets failed to operate effectively only when property rights and rules of liability are not well defined, or when transaction costs restrict exchange.” I’d also want to include information asymmetries in this discussion, and I think the Cato article ignores the many relevant insights on this topic from the institutional, political, and behavioral economics streams.The Cato article is also far too flippant in its discussion of public goods- using the lighthouse example to make it seem easy to structure markets to provide these types of goods and services. In the lighthouse example, it’s pretty easy to determine which people directly benefit from the service and seek to eliminate free riders. Assuming you have a perfect market, you can then place fees on those direct beneficiaries (ships and traders), who can then pass on those costs to indirect beneficiaries (for instance, citizens of a town who benefit from the trade enabled by the lighthouse). That way everyone who benefits from a public good pays for part of it, eliminating the moral hazard of people mooching off the system. But that’s an easy case. How exactly do you get a private market to handle something like public safety services including police and firefighters? I can’t even think of a public good so easily and quickly solved in a modified-market structure like the lighthouse example- most public goods are much closer to the difficulty and complexity of providing adequate public safety through a free market. I just worry people after reading the Cato article would in the future see the justification “public good” and think- “oh, that’s not worth anything- in the lighthouse example it was easy to solve without turning to the government.” So I just want to dispel that notion. But if you seek to define the source of market failures as Cato says Coase does- inadequate definition of “property rights,” “liability rules,” and restrictive “transaction costs” – just know those violations are quite frequent (in not always present). I’m worried the use of “property rights” and “liability rules” might make people think that these conditions are easily met, when that couldn’t be further from the truth. It’s not as simple as thinking- “oh, if only the government did a better job defining and enforcing property rights.” For many goods and services, it is implausible that you could ever sufficiently define and enforce property rights to result in a perfect or near-perfect market. The invention of the internet has only made this problem worse. Similarly, there will always be transaction costs. As George Mankiw once said, you might object to Pigovian taxes if “perhaps you think you live in a Coasian fantasy world where people bargain without transaction costs to reach efficient allocations. (Note: I am not suggesting that Coase himself thought we lived in such a world—he considered it only a useful thought experiment.)”
Finally, no one argues for Pigovian taxes thinking we could ever get the exact ratio down just right. It’s obviously a political impossibility, as Pigou and anyone with a brain can realize. It’s also a policy impossibility- once again, perfect information is a requirement which is almost never met! Instead, people (and the vast spectrum of economists, excluding radicals like the Austrians and psuedo-Austrians which are so heavily represented in the Cato Institute) argue for Pigovian taxes that would move us in the DIRECTION of better capturing negative and positive externalities. Just look at all the people who support Pigovian taxes (http://gregmankiw.blogspot.com/2006/09/rogoff-joins-pigou-club.html )and you’ll realize that many smart people, all aware of the political problems, still favor pigovian taxes because they can be extraordinarily beneficial. Generally people argue for setting conservative-levels in order to prevent over-compensating for externalities. However, even if you went overboard with your compensation for externalities there’s still the possibility that the market would still be more efficient than if you didn’t have any attempts to control for externalities. Surprise, surprise. Cato’s real (but sh....- top secret!) problem with Pigovian taxes is that they can be used to fund government activities- which in their extreme order of libertarianism qualifies as a mortal sin. On this topic, they go up against the vast majority of economists, policy experts, and political scientists who know that Pigovian taxes are economically elegant and useful, practical to implement, and easily outweigh the costs and limitations resulting from the involvement of politics in policymaking.
Yes, there are limits to how far you should take Pigou's insights (becuase they can be extended infinitely)...that's a critique trying to compensate for all externalities perfectly. Is anyone proposing that? No- people like Mankiw and thousands of other economists and policy experts argue for specific instances like raising the gas tax. Basically these "rebuttals" hve just being pointing out the Pigou's ideas are imperfect. Do we then reject it entirely out of hand? If we did that, we wouldn't have much now would we.
With the last sentence, I was referring to the idea that we work with the imperfect but best tools and options (like democracy) available.
Mr. L, do you agree with Robert Bork that externalities justify strict regulation of pornography and depictions of violence?http://world.std.com/~mhuben/bork.html
I would support the efforts (that our government currently does) to restrict children's access to these materials. However, free speech and individual liberty concerns would override a government's interest (based on externality effects) in blanket censorship.
Like almost everything in life, the goal is to find a good balance of the competing interests (liberty vs. externatlity costs, or... what you find in our Constitution).
So reasonable people can disagree about the implications of externalities?
But isn't finding balance more of a matter of politics than economics?
Economics deals a lot with balancing. Look at the whole concept of addressing externalities- what is that but seeking to balance how real-world limitations create inefficiencies because individual choices don’t result in socially optimal outcomes? A perfect free-market might not require any balancing, but since the conditions for a perfect free-market are almost never met (regardless of government involvement), economics studies constantly how you balance the incentives and structures that people face in a market. Very few economists solely study perfect markets where balancing might not be needed- these perfect markets might exist on an imaginary island with just two people, but they just don’t exist that often in the real world. Economics has to deal with balancing constantly. Also, this discussion is about policymaking- not strictly “economics.” I've already pointed out how it’s impossible due to practical limitations to identify the precise balance point for compensating for externalities, but that doesn't prevent economics from clearly demonstrating which direction the scale should be weighted towards, and it doesn’t prevent policymakers from implementing those policies. I really want to respond to the point that politics and policymaking (the actual topic, not economics itself) might be differentiable because only politics should or does deal with balancing- but I’m having a hard time figuring out what to say because it just seems so self-evident to me that both deal with balancing. Look at taxes- clearly some are needed to provide a variety of services everyone supports- public safety, national defense, clean air and drinking water, public goods, etc. So even those who believe in the most limited form of government support some government and taxation because they think the economic and social benefits of these programs outweigh the costs, economic distortions, and reduced growth incentives from taxes. In this case, small-government people like a certain balance of these partially opposing, partially reinforcing forces. Democrats favor a different balance. So thinking about this example, I just think it’s obvious that policymaking, or economics, deals with balancing just like politics, and so it’s perfectly acceptable to use Pigou’s insights in making policy choices.
Reasonable people can disagree on how far you take externalities into account when considering other concerns like free speech- but reasonable people would fall within a reasonable spectrum. I’m just not sure that most people would consider the Cato institute and Bork falling within a reasonable range compared to everyone else- especially if they knew the full extent of their positions? I’m not speaking for myself on this- I’m just pointing out Cato and Bork have very different views on many issues than most Americans- and that they both depend on ideologies and philosophies that aren’t really mainstream at this time. Cato seems to be arguing that you shouldn’t seek to use Pigou’s insights because you will never get the balance exactly right. Bork is arguing for the use of social externalities from pornography and depictions of extreme violence to justify government censorship, either ignoring or heavily discounting free speech and individual liberty concerns. Sorry if my answers aren’t relevant or useful in your mind, but I really struggled trying to craft responses because I just feel like your points take the debate away from the original issue of using Pigou’s ideas to justify certain policies, and shift the debate to the extreme fringes of what’s theoretically conceivable. I, like others, argue that Pigou’s ideas can be applied because they are economically elegant and useful, practical to implement, easily outweigh the costs and limitations resulting from the involvement of politics in policymaking, and can be balanced against competing interests like individual liberty concerns. I’m not arguing that they can be used perfectly; I’m not arguing that we should use them universally, and I’m not arguing that we should use that without taking into consideration other things we value. So I just really struggle with seeing how Cato’s or Bork’s ideas really cut against my position. Like I’ve said before, clearly Pigou’s ideas aren’t infallible or a silver bullet that needs to be applied to every situation. That doesn’t mean we don’t use them in a variety of situations where they seem particularly helpful and can be balanced against other things we value or place importance on.
I'm suggesting that we need to be cautious about using perceived externalities as trump cards--"There's an externality here so we must do X." Going back to our original case (DC Metro), not sure a compelling case for massive government operating subsidy can be made on the grounds of externalities.
Haven't read this entire argument, but the rationale behind oil subsidies is also externalities..just sayin. Sorry for this generalization and repeating of Republican talking points (because I'm briefed on the GOP talking points daily by John Boehner AND watch Fox News all the time), but it seems to me that programs reliant on the government are way less efficient and well-run than programs hoping to make a profit (and it makes sense why). I don't have data on this right now because I don't feel like looking for it, but it seems pretty logical that government dependence equals less efficiency.
And I think the suckiness of the Metro is evidence of this (NOT evidence that it needs more funding)
As evidence by my comments, the desire to be cautious and limited in using externalities is noted and shared. On the metro example, I’ve already listed just some of the increased positive externalities and reduced negative externalities from a metro system. However, people clearly don’t think that’s enough to justify continued subsidization of the metro system’s operating costs. Just know that without continued government subsidization (in addition to the initial government subsidies that largely comprise the cost of a metro system to government), a metro system could not exist in America. It is economically impossible!Why? Economics. Maggie already gave a good intro to this argument, pointing out that a private system would have to charge higher prices that would make the system unaffordable or unattractive to many riders- who would turn to other means of transportation. With reduced volume, the private company would have to raise prices again and start the cycle all over again. There is no amount of private-sector efficiency which could compensate for the government’s current 25% subsidization of the D.C. metro system’s operating costs. In order to not have to raise prices, a private system would have to run the equivalent system at 75% of the current funds used for the D.C. system (see subsidy per ride figure at http://www.wmata.com/about_metro/scorecard/index.cfm). That is very difficult for several reasons- the system’s input costs are largely fixed (due to very competitive input markets like the labor market) and so a private company would be unable to significantly reduce them. A firm would then have to achieve massive increases of productivity that via comparative evidence look unlikely to be achievable. The only prominent example of a feasible metro privately-run metro system in the world is in several cities in Japan (note that these systems still often work in-sync with government-run lines). The economics of a metro system in Japan are quite different than conditions found in the U.S. Japan’s cities are much more densely populated and they rely on incredible volume levels on a public transportation system that aren’t achievable in U.S. cities. Also, how many Americans would settle for being pushed so densely into a train? Also, the transportation alternatives in America are much more heavily subsidized in a comparative sense in the U.S.- i.e. the entire road system. I love how metro-haters complain about the government’s subsidization, ignoring how much of the low cost of road’s is an artifice of government intervention. For evidence, see:
http://transportation.nationaljournal.com/2011/01/taking-aim-at-mass-transit.php#1866059 http://publicola.com/wp-content/uploads/2011/01/Do-Roads-Pay-for-Themselves_-wUS.pdf http://www.gcbl.org/system/files/Texas+DOT+-+Do+roads+pay+for+themselves.pdf If you don’t take externalities into account, you can’t justify continued government subsidization. As a result, you can’t have a viable public transportation system (note that Metrorail is far less subsidized than buses). Why aren’t no-government operating subsidized metro systems viable? U.S. cities aren’t nearly as densely populated as the only cities in the world with successful private metro systems (that work in conjunction with public systems), and alternative forms of transportation (i.e. cars/roads) in the U.S. are also heavily subsidized so that the costs consumers face are low and distorted. I’m not arguing that you couldn’t have a privately-run system, but I find the economic evidence very suggestive that all systems, privately or government-operated, would still need government operating subsidies. Also, oil subsides are not justified by externality arguments. Economists who argue for addressing externalities think we need to eliminate oil subsidies and dramatically increases taxes on carbon-emitting products like oil to take into account for their huge negative externalities. The only people who argue for oil subsidies are oil companies and politicians from oil-producing states.
And some relevant RFF reports for those interested (I haven’t cited or used them so far, I just thought they might be relevant to our discussions- so I might use them in the future if we continue with this topic):What’s good about D.C.’s transit system http://www.rff.org/documents/rff-dp-06-21.pdf Shows why road-transportation systems are now so subsidized (as fuel taxes decline in compensation-level) : http://www.rff.org/RFF/Documents/Resources-175_WPC.pdf Should Urban Transit subsidies be reduced? (P.S. The answer is no!) http://www.socsci.uci.edu/~ksmall/transit_subsidy.pdf (was published in the American Economic Review btw, no small feat). Negative Automobile externalities http://www.rff.org/rff/Documents/RFF-DP-06-26-REV.pdf (Published in the Journal of Economic Literature, another very prestigious and rigorously quality-controlled journal).
Mr. L: Most of the benefits you mention accrue to residents of DC, VA, and MD. Why shouldn't those governments (or some regional taxing authority) pay for subsidizing WMATA? They certainly have the resources. Wouldn't a better geographic match between benefit and cost be more efficient?
http://en.wikipedia.org/wiki/Washington_Metropolitan_Area_Transit_Authority "jointly funded by the District of Columbia, together with jurisdictions in suburban Maryland and northern Virginia."see http://www.wmata.com/about_metro/docs/history.pdf
60% of construction costs paid for by feds. 40% of capital improvements in last 10 years paid for by feds.http://www.gao.gov/htext/d05358t.html
Brookings study suggests that WMTA needs better dedicated *regional* source of funding.http://www.brookings.edu/~/media/Files/rc/reports/2004/06metropolitanpolicy_puentes/20040603_puentes.pdf
I’m glad with the Brookings post that the debate has accepted the need for dedicated revenue sources (i.e. continued government subsidization in the way of taxes). And many of the options Brookings suggest are Pigovian, including gas taxes, congestion charges, parking taxes, and land-value capture.
Yes, but with the federal government broke, why should it be giving money for local/regional projects with mostly local/regional benefits?
I think there's reason for some federal government financing, but you're perfectly correct that it should mostly come from local governments- since local communities are the ones who receive the most benefits. I don't see any disagreement here.We should apply this principal to many things the federal government does, including oil subsidies, ethanol subsidies, etc.
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