ECON 439: Public Policy Analysis

The weekend is coming again. My girlfriend asked me to go to Silver Fall State Park. I immediately made some excuses such as the trip is long, and it is raining day. Finally, my girlfriend told me that at least we should go to one of the parks at Portland this weekend. With little reluctance, I asked her that can we go to somewhere else but not parks? She said that why not going to parks, and do you know why does the government need to build so many public parks? Well, as a lazy, low-GPA, foolish and poor undergraduate economics student, this question rouses my interest. Because of the higher land cost in big cities, the city is filled with more and more higher building. With the convenience of the high developing technology, we are all surrounded by those reinforced concretes all day and all night. One result of urbanization is that human are keeping away from the nature gradually. This is our choice, and also the restriction of the economics environment. However, the human nature of being close to nature and returning to nature hasn’t changed yet, and it will not change. Thus, there are public parks in the city. And therefore, the prices of the houses with natural landscapes are always expensive. Because the human nature hasn’t changed, and the desire of interpersonal communication strengthens, from the metropolitan city to the small town, there are many public parks that are built by the governments. This shows that as the landscape planting, the public parks are not only people’s need for leisure and entertainment, but also the passageway to be close to nature. Therefore, we have to say that where there is a city, there are public parks. The public parks make the city a better place for all of humanity.

Image there is two companies in an oligopoly competing with homogeneous goods. In this case, lets use Shell and Exon mobile gas companies. Lets imaging that these are the only two gas companies in America and that they are a cartel. The two companies have full control of the market and are working with each other. The game theory comes into this example because what is best for the gas industry as a whole is not best for the individual firms. If both firms have a contract to produce the same output at the same price, each firm’s total profit would be less than if they cheated in the contract and produced more output. The dominate strategy nash equilibrium in this case would be a profit of $2000 for each firm. Each firm has an incentive to cheat because if Firm 1 cheated and produced more output, then their total profit would be $3000 and Firm 2 total profit would be $500. So why wouldn’t firm 1 produce more if they would get more profit? Because the profit they would get if Firm 1 cheated is not worth the repercussions of what Firm 2 would do to retaliate. An example is called the trigger strategy. If Firm 1 did not cooperate in the past, this triggers a more competitive response from Firm 2 today and forever after. So each firm actually has an incentive to keep their agreed output at the dominate strategy nash equilibrium because the total profit all-together is greater for each firm in the long-run.

As the school year begins to wind down, I have begun to hear seniors discuss their future beyond OSU. A friend of mine, a computer science and mathematics double major shared with me an experience he had applying for a job. The firm he applied to was in Portland, and works frequently on billion   dollar government contracts. Their work requires a great deal of linear algebra, which was this friend’s specialty, so he applied. The recruiter for the firm wrote him an email back, that they would be interested in him after he had acquired some more education. He posted a link to an article where the company’s president stated that even the firm’s secretaries had PhDs. That seemed like an incredible waste to me, having secretaries who have incredibly specialized training in an academic field answering phones and scheduling appointments. After thinking about it though I came to the conclusion that through the lens of economic theory, it wasn’t as odd as I thought. If these individuals adhered to microeconomic theory, then they would disregard any sunk costs into their  specialized education and pursue a course that brought them the most utility. Even though they might not be working in their fields, they were probably receiving a good deal of utility from the six figure paycheck that the firm offers to even their secretaries.

When you go to Starbucks to get 5-dollar drink and sit down to do some homework you don’t think about the WiFi being slow. That is until it slows down enough for you to get frustrated. Public wifi is not a pure public good. Wifi that doesn’t have a password can be consumed by anyone in the vicinity. This is a non-excludable good however it is not exactly a non-rival good. Even though you can connect to the wifi it doesn’t mean the wifi is going to work fast. The wifi would be working fast if say only a few people were in the area connected to the wifi, but then say 10 people are using the wifi and someone is trying to download a large file. Then you could still consume the wifi, but it would be extremely slow. Everyone gets frustrated with the speed of his or her wifi. Nothing is ever fast enough for people now. However, when you go somewhere to use the wifi, like the library, you expect the wifi to be fast since it is public the company paying for the wifi should be paying for the fastest there is. That’s what people assume anyway. Wifi will never be a pure public good because of the different speeds people receive once more people start connecting.

Let’s think of the Oregon State University as it’s own community with its own public resources.  Resources such as the Valley library, Dixon recreation, Football tickets, CAPS, office hours, and so on; all of these are available to all Oregon State University students. These goods are non-excludable to OSU students but they are not non-rival. Often times I will go to Dixon expecting to hop on my favorite machine and come to find all of the machines are in use. While I am “paying” for this good in my tuition, these resources still operate on a “first come first serve” basis. While space at Dixon is a problem, the most relevant case I see this is when I attempt to go to the Valley library to study. Unless you go to the library at some odd hour of the day, have a friend save you a table, or get damned lucky and find someone leaving, you will not find a free table to study at. This is a reoccurring issue because of Oregon States growing student population, many of the facilities are not fit to accommodate so many.

We can relate to this the tragedy of the commons scenario we see so often when looking at public goods. If there are 10 or even 100 people at the gym or at the library, my ability to use the facilities is hindered very little; but when but when you up this number to 600 or 800 at one given time in a day I have a much harder time using these spaces. We don’t see much of the “free-rider problem” here because we all are forced to pay tuition for this “public good”, but something more could be done for provision of these facilities. Besides just building larger/more of these facilities the university could enforce the 30 minute rule per machine at Dixon, individuals could register for their desired allotted time at either the gym or the library. While I understand both of these are time consuming and costly, something should be done to accommodate our growing student population.

Most discussion of policy analysis and economics centers around two things: inequality and the distribution of efficient market outcomes, and market failures or instances where markets fail to operate efficiently.  In all of this, however, we assume that one economic agent’s payoffs is independent of other agent’s decisions.  In other words we assume that the consumption choices do not directly affect the payoffs of others.  They may indirectly affect them, as in the case of externalities, and agents may fail to account for these effects when they make their decisions but we generally assume that these decisions are not strategic, they are simply made in isolation.

But what about situations in which such decisions are strategic? In other words, what about situations where one agent’s decisions directly affect another’s payoffs and thus they other agent takes the actions of the first into account when making their own decisions.

Robert Frank of Cornell thinks this was a failure of policy when it came to the banking crisis of 2009:

FRANK EV.09.13.09

Once we are in a situation where strategic behavior is important we need new tools to analyze situations – we need game theory. Here is a case that I thought about a few years ago when thinking about transportation policy.  [And, by the way, the “Idaho Stop” rule is in discussion again in the legislature]:
The recent attention to the so-called “Idaho Stop” bill that would allow bicyclists to slow but not stop in residential intersections with stop signs got me thinking about this and about the uncontrolled intersections present in many Portland neighborhoods. How should we think about human behavior in the face of such incentives? In these cases, since the problem is inherently about more than one vehicle (or pedestrian) the interactions are strategic in nature, so game theory is the appropriate modeling framework which to employ.

Before we get to that however, Joseph Rose in The Oregonian claims that having an “Idaho Stop” law is actually safer based on incident data from Idaho pre and post law. [Note to Mr. Rose: correlation is not causation, and even if you think this law is good, please explain how such a law could be responsible for an immediate 14.5 percent reduction in bicycle injuries? I think we are dealing with spurious correlation here] But the rationale for the Idaho stop is the same for cars: if there are no other cars around, why stop fully? Sure a bike is human powered but the physical concept is identical, it takes more energy to stop and start than to maintain momentum, and if we care about climate change why not let cars do it too?

Which brings me the the topic of today: non-controlled intersections. These are intersections without any traffic restrictions – anything goes. Well not really, the right of way goes to the vehicle that gets there first, which is precisely the problem. [By the way, do you know who goes if it is a tie? Yep, the vehicle on the right, just like a 4 way stop] Anyway, most of the intersections around my son’s elementary school are uncontrolled even though there are many kids walking to school crossing at these intersections. And if you ever want to see good examples of dangerously aggressive driving, all you need to do is show up at an elementary school at drop off times. These are parents who should be most attentive to child safety, but hey their kid isn’t walking so they have nothing personal at stake except for getting to work on time. Anyway, I am constantly amazed at the reckless driving exhibited by these parents and what I have found most striking is that on the rare days that I drive my child to school and slow almost to a complete stop at these intersections to be sure there are no cars or kids around, a car from half a block away will almost always bomb right through at 30 mph. If I had asserted my right of way, we would crash and so this reckless driving is kind of like a credible threat in game theory and the logical thing for me to do is to wait until the car has passed.

I imagine that traffic engineers think that these intersections are actually traffic calming. They force all cars to slow down and proceed cautiously through the intersection. But when you think about the game cars are involved in, it is not at all clear that this is the equilibrium. Here is a depiction of a normal form game (single shot, simultaneous, non-cooperative) that I think describes the incentives. Car 1’s payoffs are the first number of the pair and Car 2’s payoffs are the second number.

Each car has two strategies available to them: be cautious or aggressive when entering the intersection. If both cars are aggressive, a fender-bender occurs and they both loose 10. If they are both cautious, they have to slow down, but no accident occurs so they both get 0. If one is aggressive and the other cautious, the aggressive one gets to go fast and first through the intersection and gets 10 while the cautious gets 0 again. Economics students will immediately recognize the Nash equilibria – where each car is playing a best response strategy to the other. They are the two aggressive/cautious pairs. The problem is of course when both think its the other that is going to be cautious and both end up aggressive… But anyway, this actually describes pretty well what I observe around my son’s school: some drivers being aggressive and bombing through the intersections and others being cautious.

This is not what I believe the traffic engineers think and what’s worse it means there are aggressive drivers bombing through intersections when lots of little kiddies are running about. Makes me wonder why, of all places, are the intersections around schools not controlled? And, by the way, if you really want to calm traffic, a four-way stop seems to do a good job.
What do you think?

I will post on Game Theory and Policy here Monday or Tuesday.

I read an article in Forbes last week about new EPA regulations that ban wood burning stoves that put out more than 12 micrograms of particulate matter per cubic meter of air. As a point of reference, the article notes that 2^nd hand smoke from smoking in a closed car puts between 3000-4000 micrograms of particulate matter in a cubic meter of air. The new 12 microgram limit eliminates the use of most wood stoves currently used in the U.S. When I think of externality producers in need of government regulation, the household heating their home with a wood burning stove doesn’t seem like it should be very high on the list. I’ve not seen empirical research that the EPA used to reach their decision that such regulations were necessary, but I wonder if maybe the regulation wasn’t the result of pressure from outside environmental lobbies. For some groups, any amount of pollution should be eliminated no matter the cost imposed on producers (in this case Bob and Mary heating their home) or the environment’s assimilative capacity. That families can’t afford to use alternative methods for heating, or can’t afford new stoves that meet the new 12 microgram limit may not matter. More puzzling to me is scope of this particular regulation. It’s incredibly broad affecting populated areas where pollution may be a problem as well as vast open areas like in Alaska where the air is cleaner. Meanwhile, in China a new coal plant is being built every week…

We’ve all seen them, and there seem to be a large number of them around Corvallis particularly.  I’m talking about houses that are painted ridiculous colors.  Not only do these neon green or blue trimmed houses cause an eyesore for everyone unfortunate enough to drive by them but they also cause a negative externality on the houses and housing market in the neighborhood by driving market values down.  Since there is (usually) no home owners association in these neighborhoods, the owners that go crazy with their choices of housing color don’t bear any of the costs of their decision, and as such these costs are passed on to society.  Essentially these off colored houses can be viewed as an unregulated pollution on the housing market, although the home owners have to pay to paint the houses, the neighbors and the neighborhoods in the surrounding area also have to pay for the issues caused.  Some examples of the issues caused can be reduced neighborhood aesthetic appeal, and a lower return on investment on their current home.