The Price of Garbage

My good friend Piet responded to my old post on solid waste by recounting the waste reduction scheme used in Switzerland. In a nutshell, it involves making residents pay a per-bag charge to have their garbage hauled away. The results are that people make a serious effort to reduce the amount of garbage they produce and that the costs of providing trash service are imputed to users according to how much garbage they actually produce. It is a beautiful example of how prices act as signals to influence behavior.

It's so beautiful, in fact, that I wonder why we don't take advantage of price signaling more often. Consider, for instance, all the cities that are experiencing water shortages. Typically, water is provided as a public utility with prices set by local government. If the local government can't provide enough of it, why not charge more? Ideally they would set the marginal cost of a gallon of water at whatever level that would allow them to provide adequate water infrastructure. You could mitigate the effect on the poor by subsidizing usage up to some reasonable level, but after that everybody pays the actual cost for the water they use. The net effect should be that people with large lawns or otherwise wasteful habits would either cut back, or they would fund the construction of greater capacity. Either way, the problem would be solved, and local governments would not be in the odd position of begging people not to buy the product that government itself is supplying.

Similar arguments apply to other utilities that are stretched for capacity. By having people pay for the actual costs of providing those utilities we could fund upgrades and encourage conservation all at the same time. It, too, would be a beautiful thing.

I Read the News Today, Oh Boy

I noticed in the Washington Post today that pessimism about the economy is at its highest in 17 years. However, I can't help wondering how much of this sentiment reflects real weakness in the economy and how much is a reaction to the news media's endless predictions of DOOM! If you tell people ghost stories for long enough, eventually they'll get scared, and we've been telling some wicked ghost stories.

Every day we're served up a feast of statistics cataloging the latest terrifying trends. It's messing up the stock market, doncha know, and politicians tell us we need stimulus (and change!), and we need it fast, lest the DOOM! overtake us. Perversely, it seems the best way to get economic news with some perspective is to include the word "doom" in your search terms. Apparently professional doomsayers don't actually like to use the d-word. Go fig.

Meanwhile, last month I found this Gallup Poll on personal satisfaction in an article on Cafe Hayek. How to reconcile pervasive pessimism with general contentment? Apparently, people are pretty satisfied with their own lives, but they figure, what with all that DOOM! going around, that everybody else must be having a pretty rough go of it.

Free Trade and Fair Trade on EconTalk

This week's EconTalk sees the return of my favorite guests, Mike Munger, to talk about Free Trade and Fair Trade. Munger has the best quote of the podcast (arguably any podcast) when he says, "I'm a big coffee drinker. Sometimes I apply it topically."

Apart from Munger's offbeat sense of humor, the interview is one of the best discussions I've seen in a while of the mechanics of how trade creates wealth for the parties involved and why attempts to channel extra wealth to one of the parties through Fair Trade premiums don't always work out as expected. They also address the common misconception that trade is a zero-sum process in which nations compete to capture as much as they can from a fixed-size pool of jobs. It's well worth a listen, if you have 58 minutes to spare.

What price, voting?

At the Freakonomics blog, Ryan Hagen asks, Is it Smarter to Sell Your Vote or Cast It? A recent poll asked students at NYU whether they would sell their right to vote either in the next election or in perpetuity for a variety of proposed compensations. It turns out that over 60% of them would sell their 2008 vote for a year's tuition, and around 50% would sell their vote in perpetuity for $1 million.

What is a vote really worth? The poll questions seem to concentrate solely on the supply side (i.e., what would students sell their votes for, irrespective of whether there is anyone actually willing to pay that), which would suggest that we're trying to get at voters' personal valuation of their voting rights, all else being equal. So, let's assume that this opportunity is being offered to me only. The effect of my individual vote on the election's outcome is for all practical purposes nil, so from the standpoint of influencing the results of the election it is worth nothing. However, I do derive some personal satisfaction from voting that, on reflection, I'd value at a few tens of dollars; $50 would be a reasonable estimate. So, I should be willing to sell my vote for anything more than $50 (although I'd try to get the best price I could, of course). To sell my vote in perpetuity I'd want the discounted value of all of those future $50 votes. At first blush I might want some sort of risk premium, in case there might be some election in the future that I really want to influence, but since my probability of successfully influencing such an election is so small, that component is basically negligible. Depending on what discount rate you assume, that works out to about $2000 (assuming only one vote per year; if you include primaries and such it could come to several times that). Considering how many people voluntarily abstain from voting for no compensation at all, that seems like a reasonable number.

If we consider the possibility of the same deal being offered to everybody, then it gets a little harder to calculate a reasonable price. It's not too difficult to come up with our buying price for such a scenario. One or another candidate is bound to favor policies that will either cost us money directly or eliminate some benefit that we previously enjoyed. With a little work we could attach a value to those policy differences. To use myself as an example, my interaction with the government is primarily through taxes, but some policies might affect the costs of things I use. Let's say, for the sake of argument, that the present value of the benefit comes to $20k (although the fact that I would have a hard time telling you which side provides the benefit suggests that the number is actually much smaller than that). Suppose it takes about 5M votes to change the results of a large election. Then we're looking at about half a cent per vote. Clearly vote buying isn't a good strategy for little old me. For someone more entangled with government the total would be higher; someone standing to gain a billion dollars from having his candidate elected should be willing to pay $200 per vote in our example.

Clearly a rational selling price should be higher than the buying price, but how much? The total benefit from the preferred candidate winning provides an upper bound, since that price fully compensates the seller for having the unfavorable candidate win, but should he be willing to accept less? That depends on the probability that the seller and others like him will actually change the results of the election through the sale of their votes. For example, if you think there are 10:1 odds against your vote sale affecting the election, then you might be willing to accept $2000 for your vote. The exact odds calculation depends on who's buying and what their motivation is, but something in the $1k - $10k range seems plausible. One of the commenters at the Freakonomics site opines that the bid-ask spread in vote-buying is likely to be large. Evidently, this is borne out by our analysis.

For selling your vote in perpetuity in this scenario, risk comes to the fore. You may be fairly confident that the value of this election to you is small, but what about all future elections. What if Dr. Evil decides to run in 2024? In this case the risk premium you would have to assign is large enough that the practical answer is "not at any price".

My takeaway from all of this is the result that although the right to vote is precious to residents of a democracy, the act of voting itself is of little value to us. This result seems curious, but it makes a kind of sense. The right to vote ensures that in a broad sense candidates are aligned with the will of the voters in a way that they generally aren't in nondemocratic governments, so voting rights serve a useful purpose. Once that is established, however, the purpose of democracy has been served, and actually going to the polls to vote serves no further purpose.