This Document Contains Chapters 18 to 19 CHAPTER 18 Modern Principles of Economics: Labor Markets Facts and Tools 1. In Chapter 3, we listed six important demand shifters. Since the demand for labor is like the demand for any other good, those same factors apply here. Let’s look at factors that might shift the demand for janitors at the McDonald’s we discussed. For each of the following cases, state whether labor demand will rise or fall, and also state which of the six factors seems to be causing the shift in demand. a. A new junior high school opens up across the street from the McDonald’s. b. Customers become much more concerned about clean restaurants: They’ll walk out if there’s dirt on the floor. c. As robots like the Roomba vacuum cleaner become cheaper, the McDonald’s buys some robots to do half of the janitors’ work. Solution 1. a. Demand will rise because of a rise in population, an important demand shifter from Chapter 3. b. Labor demand will rise because of a shift in tastes, an important demand shifter from Chapter 3. c. Robots are substitutes for cleaners, so as robots become cheaper the demand for cleaners will fall. 2. Now let’s do the same with shifts in Joe’s labor supply from Figure 18.2. We listed five important supply shifters in Chapter 3. For each example state whether you think Joe’s labor supply will tend to increase or decrease as a result of the change, and state which of the five factors seem to cause the supply shift. a. The government raises Joe’s income tax rate, so now he pays 20% of his wages to the government instead of the old 10%. b. The price of comfortable work shoes falls dramatically. Now, his feet won’t ache nearly as much after a full day of work. c. While in Las Vegas for the weekend, Joe wins a $1 million jackpot. Solution 2. a. Taxes will reduce the supply of Joe’s labor, shifting it up/left. (Technical note: This is even true if the supply curve is backward-bending.) b. This is really a story of opportunity costs. With better shoes, the opportunity cost of working falls, so Joe is more willing to work. Supply increases. Technological innovation would be a somewhat reasonable answer, but the innovation only matters because it lowers the opportunity cost of work (and raises the opportunity cost of leisure). c. Again, opportunity costs: Leisure has become much more attractive for Joe, and the opportunity cost of work is now higher. Before Joe won one million dollars, the alternative to working might have been staying at home and watching television. Now the alternative is flying to Hawaii and spending time on the beach. With one million in the bank, he could go for years without working, and if he lives modestly and invests conservatively, he might even be able to live off the interest. This is a wealth effect. 3. Let’s apply the idea of compensating differentials to janitorial jobs. Suppose there are two quite similar restaurants in the same town, OrangeBee’s and the City Inn. Both have the same demand for janitorial labor. But all the janitors in town know that it’s much more fun to work at City Inn. a. Which restaurant will pay a higher wage for janitors? Why? b. Which restaurant will hire more janitors? Why? Solution 3. a. OrangeBee’s will pay a higher wage. The supply of workers there is lower, so with the same demand curve, they have to pay more. b. City Inn will hire more janitors than OrangeBee’s because they can hire janitors at a lower wage. As a result the restaurant that is more fun to work at will probably be cleaner, as well. 4. According to the theory of compensating differentials, which low-skilled jobs in the United States will tend to pay the most: a. The safe jobs or the dangerous jobs? b. The fun jobs or the boring jobs? c. The dead-end jobs or the first-rung-on-the-ladder jobs? Solution 4. a. Dangerous jobs. b. Boring jobs. c. Dead-end jobs. 5. As mentioned, OSHA fines companies for unsafe workplaces. At the same time, the labor market also “fines” companies that give their workers dangerous jobs. The market’s fines are larger than the U.S. government’s fines by about what factor: A factor of 10, of 100, of 1,000, or of 10,000? Solution 5. A factor of 1,000. The market’s “fine” is $245 billion, while OSHA fines are $150 million. One billion is a thousand times more than one million. 6. The director of human resources at ToyCo is hiring new engineers. She’s got a stack of 250 applications, and she’s going to do a little research. She sits down and does a little cyber-snooping on all 250, and she finds the following: i. Of the 150 who have Facebook pages, 50 are holding a bottle of beer in their profile photo, and 100 aren’t. ii. Of the 100 who have their own Web sites, 20 have more than two typos. iii. Of the 150 who have Facebook pages, 25 have at least two friends who have apparently spent time in prison, according to a quick check of public records. a. Each of these are cases of sending bad signals. In each case, describe what you think these might be signals of. b. In each case, is the bad signal 100% correct? For example, is every applicant with three or four typos on their personal Web site worse than every applicant with an error-free page? c. In each case, is the bad signal probably better or probably worse than having no signal at all? In other words, should the bad signal get at least a little bit of weight in the balance if the HR director’s only goal is to hire the best workers? Solution 6. a. i: General unruly behavior, lack of concern for one’s public image. ii: Lack of attention to detail. iii: If it is true that “birds of a feather flock [often] together” then this may be a signal that these applicants are not trustworthy. b. The signal is never 100 percent correct. Sometimes the beer is just an innocent drink, a few typos don’t mean much if there’s a lot of content (like a textbook!), and some people with friends in prison are more honest than average. c. A reasonable HR director would put at least a little weight on the bad signals, especial¬ly if the other candidate characteristics are even. Statistical discrimination usually pays. 7. It is commonly said that women earn 80 cents for every dollar that a man earns, even when doing the same job. Let’s assume this is literally true in order to see how an entrepreneur would respond to this fact. a. Netrovia, a battery manufacturer, has an all-male workforce. It pays $10 million per year in salary to these men, and has annual profits of $1 million. You’ve just been hired as an outside consultant to help Netrovia raise its profits. Your advice is to fire all the men and replace them with women. If Netrovia followed your advice, what would Netrovia’s salary costs fall to? How much would this decision raise Netrovia’s profits? b. After your success at Netrovia, you start getting a lot more consulting jobs. You give the same advice to all the companies looking to boost profits: Fire your men and hire an all-female workforce for 20% less. What will this do to the de¬mand for female labor? And what will this tend to do to women’s wages? Solution 7. a. This would cut the salary costs from $10 million to $8 million. This would raise annual profits by $2 million dollars, so profits would triple. b. Once many firms start doing this, it will raise the demand for women’s labor. This will tend to raise women’s wages toward men’s levels. 8. Michael Lynn, a social psychologist in Cornell’s School of Hotel Administration, has spent years studying tipping (his home page has well-tested advice on how to increase your tips). He finds that men tip more when they have a female server, while women tend to tip more when they have a male server. This sounds a lot like discrimination by customers. a. If this is a fact, who will tend to apply for jobs waiting tables at truck stops: Mostly men or mostly women? b. If this is a fact, who will tend to apply for jobs waiting tables at steakhouses: Mostly men or mostly women? c. If this is a fact, who will tend to apply for jobs waiting tables at vegetarian restaurants: Mostly men or mostly women? d. In these three cases, does your experience match up with what this simple theory predicts? If there’s a contradiction, what do you think the simple model is missing? Solution 8. a. Mostly women (most truck drivers are men). b. Mostly women (steakhouses have more male than female customers). c. Mostly men (most vegetarians are women). d. Students will have varying answers for b and c, but all will agree that almost all servers at truck stops are women. Anecdotally, there seem to be about equal numbers of male and female servers at steakhouses: Perhaps male customers associate high-status restaurants with male servers. 9. True or false? a. The marginal product of labor is the amount of extra profit that a firm will earn if it hires one more worker. b. The benefit of having a college education has increased since the 1960s. c. The wage gap between high school graduates and high school dropouts is insignificant. d. By definition, a labor supply curve cannot have a negative slope. e. Compensating differentials is a government program that pays injured workers. f. The main reason that an immigrant earns more when he moves from Algeria to France is because the French have strong labor unions. g. If customers are racist and sexist, then self-interest will tend to push entrepreneurs to engage in racist and sexist hiring. h. If some employers are bigots but others are not, the bigoted employers will be able to hire good workers for less money and will tend to drive the fair-minded employers out of business. Solution 9. a. False: The marginal product of labor is the amount of extra revenue from hiring one more worker. To find the extra profit from hiring one more worker, you have to subtract the worker’s wage. Thus, a firm will hire so long as MPL > wage, which means, if we think about hiring in very small increments, that a firm will hire until MPL = wage. b. True. c. False. d. False: Backward-bending supply curves for individuals are common at high wages. e. False: You’re thinking about “worker’s compensation.” f. False: It’s because overall, French workers have access to more capital and technology. French workers are more productive on average. g. Usually false. True only if customers know who the workers are. For most products, the customers don’t know much about the workers. It is true for restaurant workers and sales staff, however. h. False: The bigoted employers will likely have to pay higher wages to get the kind of employees they want. Bigoted employers are like the baseball teams that were slow to hire black players: They lost profits as a result of their bigotry. Thinking and Problem Solving 10. Construction jobs in New Chongqing pay $20 per hour. The job isn’t that safe: a lot of sharp objects, a lot of ways to fall off a building. The city council of New Chongqing decides to set some job safety regulations for the construction industry. Let’s assume that the government enforces these new regulations effectively and fairly, so that half as many workers get hurt on the job. Let’s also assume that the city council makes the taxpayers pay the cost of making these jobs safer, so there’s no noticeable shift in the labor demand curve. a. After these new job safety regulations come into effect, will workers be more willing to take these jobs than before or less willing than before? b. Is that like a rise in the supply of labor or like a fall in the supply of labor? c. Let’s put it all together: What will these job safety regulations do to the wage for construction jobs in New Chongqing? d. What principle from this chapter does this illustrate? e. In the United States, OSHA doesn’t make the taxpayers pay the cost of making the jobs safer. Instead, OSHA requires employers to spend the money themselves to make their firm’s jobs safer. Thus, OSHA requirements work like a tax on la¬bor demand. What would this probably do to the demand curve for construction labor: Would it increase or decrease construction labor demand? Solution 10. a. Assuming workers are aware of the safer working environment, they will be more willing to take the now-safer jobs. b. This is a rise in the supply of labor. c. This will push down the wage for these construction jobs. d. This is an example of compensating differentials. e. This implicit tax would tend to decrease construction labor demand. 11. One way to think about wages for different jobs is to see it as another application of the law of one price. We came across this law when we discussed speculation in Chapter 7, and it came up again when we discussed international trade in Chapter 9. The basic idea is that the supply of workers will keep adjusting until jobs that need the same kinds of workers earn the same wage. If similar workers earned different wages, then the workers in the low-paid jobs would reduce their labor supply, and the workers in the high-paid jobs would face more competition from those low-paid workers. Let’s look at 100 computer programmers who are trying to decide whether to work for one of two companies: Robotron or Korrexia. To keep things simple, assume that both companies are equally fun to work for, so you don’t need to worry about compensating differentials here. The marginal product of labor (per additional hour of work) is in the following table: a. These two firms are the whole market for programmer labor. In the next table, estimate the programmer demand curve by adding up the quantity of programmers demanded at each wage. For example, at a wage of $80 per hour, Robotron would hire 50 workers (since the first 50 workers have a MPL ≥ 80) and Korrexia 20, so the total demand is 70 workers. b. The programmers in this town are going to work at one of these two places for sure: Their labor supply is vertical, or in other words perfectly inelastic, with supply = 100. So, what will the equilibrium wage be? Just as in Figure 18.1, the numbers may not work out exactly—so use your judgment to come up with a good answer. c. Now, head back to the first table: About how many programmers will work at Robotron and how many at Korrexia? Again, use your judgment to come up with a good answer. d. Suppose 50 more programmers come to town. What will the wage be now? And how many will work at each firm? Solution 11. a. b. Total quantity demanded is 90 workers at $60/hour and 110 workers at $50 per hour, so it’s reasonable to think that there will be a demand for 100 workers at $55 per hour, give or take a couple of dollars. c. About 65 from Robotron and about 35 from Korrexia, which adds up to 100. d. The wage will fall to $20 per hour now, and there will be 90 workers at Robo¬tron and 60 at Korrexia. 12. We’ve seen what happens when job safety regulations are imposed. Now let’s see what happens when they’re taken away. a. If a radical free market, antiregulation government comes to power in the land of Pelerania, and it begins dismantling job safety regulations, what will this tend to do to the supply of labor for dangerous jobs in Pelerania: Will it increase or decrease? b. Will that push wages in dangerous jobs up or down? c. What will this do to the supply of labor in safer jobs? And to the number of people working in safer jobs? d. Overall, will employers have to pay for their decision to offer dangerous jobs, or will they have a free lunch handed to them by the new government? Solution 12. a. This will decrease the supply of labor in dangerous jobs. b. This will push up wages in dangerous jobs. c. Some of the leftover workers will shift to the safer jobs, increasing the supply of labor for safer jobs. All else equal, this increase in the supply of labor to safer jobs will increase the number of people working in safer jobs. d. Employers have to pay for their decision to offer dangerous jobs in the form of higher wages. Remember, however, that this analysis applies only if the workers are aware of how risky a job is. If workers are unaware, then firms can offer unsafe working conditions and low wages. 13. As we saw, unions can raise wages in a sector of the economy by restricting the number of workers in that sector. Let’s see what tends to happen to the workers who don’t get jobs in those favored unionized sectors. We’ll recycle the computer programmer data to illustrate: a. As before, there are 100 workers. In 2084, after decades of complaining about low wages, the programmers at Robotron have a secret-ballot vote and form a union. Their new union bargains for a wage of $80 per hour, and the newly unionized programmers are very excited. How many workers will Robotron hire at the new, higher wage? b. How many Robotron workers just got laid off? Compare your answer to part a against the answer to question 11c to find out. c. A natural choice for the other programmers is to look for work at Korrexia: As before, the remaining workers have perfectly inelastic labor supply, so all 100 workers are going to work at one of the two firms. What’s the wage for the nonunion Korrexia workers? How many programmers work for Korrexia? d. You might think that one solution is to unionize both firms and lift wages for all the programmers. If the unions negotiate a high-wage contract and unionized wages rise to $110 at both firms, how many of the 100 workers will have jobs? Solution 13. a. In 2084, Robotron will hire 50 workers at $80 per hour. b. About 65 workers were there before, so 15 workers just got laid off at Robotron. c. At a wage of $40 per hour, 50 workers are going to work at Korrexia. d. Now 50 workers will have jobs: The other 50 will be unemployed or will work in some other sector. At this high wage, these extra 50 workers just aren’t profitable at these two firms. (By the way, UCLA economists Harold Cole and Lee Ohanian argue that much of the high unemployment during the Great Depression was caused by these kinds of high-wage, strong-union policies. Their academic work can be found at Harold L. Cole and Lee E. Ohanian. 2004. New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis. Journal of Political Economy 112 (4): 779–816. An accessible popular article by Cole and Ohanian is “How Government Prolonged the Depression,” in the February 2, 2009, issue of the Wall Street Journal. 14. Suppose that we tax CEO salaries very highly, as some are proposing in the United States. What is your prediction about CEO perks, such as jets and in-house chefs? Solution 14. If the government taxes salaries at a higher rate, perks will probably increase. Take a look again at Figure 18.7, the balance, but instead of balancing accounting and music think about balancing before and after the tax, with before the tax (on the left) and after the tax (on the right). In other words, the laws of supply and demand are hard to defeat even by the laws of Congress. If Congress pushes down wages, you can expect that competition for CEOs will push compensation back up, only compensation will be pushed up by increasing “fun” rather than wages. 15. a. The average person doesn’t like working the night shift. According to the theory of compensating differentials, are night shift wages probably higher or lower than day shift wages? b. Most companies do their high-skilled work during the day: The big meetings, the major deliveries, the crucial repair work gets done during the day. As a result, firms prefer to hire workers with more human capital during the day, and they prefer to hire less-skilled workers at night. According to the theory of human capital, are night-shift wages probably higher or lower than day-shift wages? c. Just based on these two theories, will night-shift work pay more than day-shift work on average, will it pay less on average, or can’t you tell with the information given? d. Economist Peter Kostiuk, in a 1990 article in the Journal of Political Economy, wanted to see whether the theory of compensating differentials was true for U.S. workers. He had information on the wages, education backgrounds, and work experience of U.S. workers, and he knew whether they worked the day shift or the night shift. On average, those who worked the night shift actually earned about 4% less than workers on the day shift. Is this probably because of compensating differentials or is it probably because of human capital differences? e. Kostiuk then used statistical techniques to simulate how much a typical low-skilled worker would earn if he were switched from the day shift to the night shift. The answer? The low-skilled worker would earn 44% more money on average. Is this 44% wage increase caused by lower supply of night-shift labor or is it caused by a higher demand for night-shift labor? Solution 15. a. Night-shift wages are probably higher to compensate for the unpleasantness. This is caused by a lower supply of night-shift labor. b. If day-shift workers have more human capital than night-shift workers, day-shift workers probably earn higher wages than night-shift workers. c. We can’t tell: Compensating differentials push the wage up for night-shift work, but human capital differences push the wage down. This is a useful reminder that the theory of compensating differentials is a theory about wages and working conditions, holding all else equal. d. It’s probably because of human capital differences. e. It’s caused by a lower supply. Thus, careful statistical analysis that holds worker quality equal finds a big compensating differential for night-shift work, as expected. 16. True or false? Morticians are paid lower wages than other workers because very few people want to work with dead bodies. Solution 16. False. If very few people want to work with dead bodies, morticians must be paid higher wages. 17. One way that Jim Crow segregation laws operated was by providing worse government schools for black students. This widened the human capital gap between black workers and white workers (this human capital gap has narrowed dramatically since the successes of the 1960s Civil Rights Movement). Would this form of government segregation tend to increase statistical discrimination on the basis of race or lower it? How can you tell? Solution 17. If the government segregates black students into bad schools, that would tend to increase statistical discrimination on the basis of race. During the Jim Crow era, being “black” meant “you almost surely went to the worst schools, schools that the government gave little money to.” A rational employer trying to guess who would be the best worker for the job would keep that fact in the balance when deciding whether to hire a black job applicant or a white job applicant, even if the employer held no racist feelings. Today, an applicant’s race tells an employer less about the quality of an applicant’s education, since there is more integration (but not complete integration) in the educational system. 18. In the United States, it’s legal to work for free: We call this an “unpaid internship.” a. Why will college students take these zero-wage jobs when they could get a minimum wage job instead? b. Which idea in this chapter does this sound like? c. Just for thought: Why do you think federal law allows people to work for free, but not for $1 per hour? Is it just an oversight on the part of government, or do you think there’s some grand design at work? Solution 18. a. They’ll take the zero-wage job because it gives them experience that will help them earn more in the future. b. This sounds like human capital investment: An internship is a lot like school in that respect. You can also think of the lower wages at an internship as a compensating differential for valuable training or just for the excitement of working a more professional job. c. A lot of politicians care about making sure that workers earn the minimum wage, so it’s probably not just an oversight. Perhaps the government thinks that the kind of people who apply for internships usually have a promising future ahead of them, so they’ll be able to earn much more than the minimum wage over the course of their lives. Interns thus don’t “need” the protection of a minimum wage law. It’s also possible that politicians believe that internships really are a form of education, where you almost surely earn real job skills that would make you more productive in the future. Of course, this is also true of many low-wage jobs, but perhaps politicians believe that if a job has the word “internship” in the title, the employer will make an extra effort to build human capital. Other stories are certainly possible: This question is understudied. Note that the first explanation is about the nature of the interns themselves (they don’t “need” the minimum wage law), while the second is about the nature of employers who hire interns (they’ll “play nice”). Challenges 19. In the decades after the Civil War, most streetcar companies in the South discriminated against a class of citizens: smokers. Customers who wanted to smoke had to ride in the back of the car. Around 1900, many governments in the South passed laws mandating segregation by race instead. As Jennifer Roback documented in the Journal of Economic History in 1986, many streetcar operators protested against this new form of segregation. Assuming that these entrepreneurs were driven by self-interest alone rather than a desire for equality, why would they do that? Solution 19. One way to get an answer to this question is to look at Roback’s article, which contains interesting quotations from the era. But just using the tools of the chapter, a student should be able to guess that the streetcar company found it more profitable to segregate by smoking than by race. Even a racist white customer might prefer sitting next to a black passenger rather than next to a smoker. Presumably, that’s what these entrepreneurs thought; that’s why they wanted to keep segregating on the basis of smoking. A self-interested, profit-seeking business owner would want to keep the nonsmokers happy, and as long as the streetcar is moving forward, the smokers’ fumes shouldn’t bother the nonsmokers. Based on Roback’s work, it seems that white customers’ desire to pay for their racism, while high, was still smaller than nonsmokers’ desire to pay for a smoke-free ride. 20. We mentioned that “a [college] degree signals . . . something good about the job candidate, namely that they have enough intelligence, competence, and conscientiousness to earn a college degree.” This view, put forward by Nobel Laureate Michael Spence, is unsurprisingly known as the signaling theory of education. Taken to the extreme, signaling theorists say that you suffer through college not because you get valuable job skills, but only because it’s a good way to prove that you were already smart and capable before you started college. a. Suppose you want to prove this theory wrong: You want to show that college courses really do make you a better worker, just like the human capital theorists say. How would you go about proving that? Remember, just showing that college graduates earn more isn’t evidence! b. If that’s too difficult, at least explain why the following plausible-sounding tests of human capital vs. signaling aren’t very good tests at all: i. Looking at wages of people with degrees compared with those of people without degrees ii. Comparing wages for people whose parents can afford college with wages for people whose parents can’t afford college Solution 20. a. This is very hard: Almost any evidence for human capital can be reinterpreted as a signaling story. Knowing that someone is “educated” almost always solves a statistical discrimination problem. There are obvious counterexamples, however, like medical school or engineering school or learning arithmetic, where people really learn some valuable skills that you can’t just pick up by watching TV. b. i: It could just be that people with degrees were smarter already: All those art history classes didn’t make them better bank managers. Or, it could be that the art history classes did help. Regardless, this test does not separate the human capital explanation from the signaling explanation. ii: The kind of parents who can afford college might have given their kids the skills to succeed in life well before college began: Good nutrition, a stimulat¬ing environment, and good genes all might play a role much larger than four years of partying and intermittent studying. 21. In a market economy, firms with more workers can make and sell more output— that goes without saying. The marginal product of labor tells you how much extra revenue each extra worker generates. Economists tend to use one particular equation a lot to sum up the link between workers, revenue, and the marginal product of labor: We call it the production function. Let’s practice with it just a little here. a. At Dunder Mifflin, the hourly revenue production function works like this: Revenue = 100 × √(Number of semiskilled workers) This is a way of saying that in order to sell product, you actually need workers to do work. Use this formula to fill out the “Total Revenue” column in the next table. b. As we mentioned in the chapter, the marginal product of labor is the extra revenue that’s generated by each extra worker. It’s the change in revenue from adding one more worker. Fill out that column, as well. c. If the market wage for semiskilled workers is $25 per hour, how many workers should Dunder Mifflin hire? Solution 21. a. and b. c. They should hire four workers; the fifth one isn’t worth the money. 22. In Chapter 8, we analyzed a minimum wage in the usual way, as a price floor, and we showed that a minimum wage creates unemployment. Now suppose that firms must pay the minimum wage but they can adjust the working conditions, such as by increasing the pace of work, reducing lunch breaks, cutting back on employee discounts, and so forth. Will the minimum wage create (as much) unemployment if firms adjust in this way? (Hint: Think of the balance in Figure 18.7.) Solution 22. Imagine that firms can pay workers $7 an hour and work them at a hard pace or they can pay $5 an hour and make the work easier. It’s possible that both workers and firms could be indifferent between these two jobs. In this case, a minimum wage that raises wages from $5 to $7 will make the work harder but will have no effect on either employment or profits. It’s like the balance in Figure 18.7; if the wage goes up, the fun goes down and these two effects could balance. More generally, we would not expect an exact balance, but if firms can adjust to a minimum wage by increasing the pace of work or reducing other benefits then we would not expect a large increase in unemployment. Of course, in this situation even the workers who get the higher-wage jobs would, on net, be no better off (since they are indifferent between the low-paced $5 an hour and the high-paced $7 an hour). 23. Using the FRED Economic database (https://fred.stlouisfed.org/) find the median weekly earnings of high school graduates (no college) who are 25 years of age or over. Click Edit Graph then Add Line and add the median weekly earnings of people with a bachelor’s degree or higher who are 25 years of age or older. a. In the first quarter of 2016, what were the weekly earnings of high school graduates without a college degree? What were the weekly earnings of college graduates? b. What accounts for the different weekly earnings? Solution 23. a. $679; $1250. b. College graduates have more human capital than high school graduates and that human capital makes them worth more to employers. Some of the human capital may have been created by education and some of it may be due to the fact that people with more human capital choose to get more education; thus, education is a signal of human capital. CHAPTER 19 Modern Principles of Economics: Public Goods and the Tragedy of the Commons Facts and Tools 1. Take a look at the following list of goods and services: Apples Open-heart surgery Cable television Farm-raised salmon Yosemite National Park Central Park, New York The Chinese language The idea of calculus a. Is each item on the list excludable or nonexcludable? Sometimes the border is a little fuzzy, but justify your answer if you think there’s any ambiguity. b. Rival or nonrival? c. Based on your answers to parts a and b, sort each good or service into one of the four categories from Table 19.1. d. How do you exclude people from a park? Solution 1. a. The first five are all excludable: apples, open-heart surgery, cable TV, farm-raised salmon, and Yosemite. The rest (Central Park, the Chinese language, and the idea of calculus) are nonexcludable. b. Apples, surgery, and salmon are all rival. Cable TV, Yosemite, Central Park, Chinese, and calculus are nonrival. c. Apples, open-heart surgery, and salmon are all private goods. Cable TV and Yosemite are nonrival private goods (also known as “club goods,” after James Buchanan’s 1965, “Economic Theory of Clubs,” published in Economica). None are common resources! Central Park, Chinese, and calculus are all public goods. They are nonrival and nonexcludable. Of course, if Central Park gets very crowded it turns into a common resource: Too many users will reduce the amount of “park” available to others. d. You exclude people from Yosemite at the entrance: There are gates at every entrance (for cars) and they can and do require hikers to use permits. In principle, you could do this at Central Park, as well, but it would be very expensive—Central Park is wide open to the rest of the city. By contrast, the fact that Yosemite Valley only has one convenient entrance (at the west end of the Valley) makes it easy to exclude visitors from the best part. 2. Which of the following are free riders, which are forced riders, and which are just people paying for public goods? a. In Britain, Alistair pays a tax to support the British Broadcasting Company. He doesn’t own a radio or TV. b. Monica pays her local property taxes and state incomes taxes. Police patrol her neighborhood regularly. c. Richard, a young boy in 1940s Los Angeles, jumps on board the streetcar without paying. d. In the United States, Sara pays taxes to fund children’s immunizations. She lives out in the forest, has no family, and rarely sees other people. e. In Japan, Dave, a tourist from the United States, enjoys the public parks. Solution 2. Options c and e are free riders (literally in case c). Option b is a case of paying for a public good: Most people like having the police patrol their neighborhood, so we can just assume Monica is typical. Options a and d are forced riders: Alistair gets no benefit from the tax he must pay and the main reason for immunization is to avoid getting diseases from others, but Sara probably doesn’t see enough people to make it worthwhile. 3. a. Is education—a college course, for instance—excludable? b. Is education a rival good? That is, if your class has more students, do you get a worse education on average? Do students (and parents) typically prefer smaller class sizes? Do professors typically prefer smaller classes? Does it usually cost more for a school to educate more students? c. According to the standard economists’ definition of a public good—the definition we use in this chapter—is education a public good? d. Into which of the four categories from Table 19.1 does education seem to fit best? Solution 3. a. Yes. It’s easy to keep people out of class, and even easier to make sure they don’t get a grade for the class on their transcript. b. Yes, both on the demand side and on the supply side, education feels like a rival¬rous good: Students, parents, and professors all prefer smaller class sizes. It’s more expensive to provide smaller classes, and it’s more expensive to teach more classes. c. No, education is not a public good. d. It sounds like a private good, perhaps with some external benefits. 4. Emeril says, “In my economics class, I learned that the only way to fund public goods was to have the government tax citizens to pay for those goods. Is that what you learned?” Rachel responds, “Actually, in my class, we used Modern Principles, and we learned that there are other ways to fund public goods, like __________.” Complete Rachel’s statement. Solution 4. Advertising: Advertising pays for radio and TV, two public goods. Some public goods are also supplied as free tie-ins, like the Panera Wi-Fi. And some public goods are artificially made excludable, so they become nonrival private goods, like airport Wi-Fi, iTunes music (with copy protection), and high walls surrounding baseball stadiums and outdoor concert halls. 5. The Patagonian toothfish is a large, ugly fish that can weigh 200 pounds. In the 1990s, it became very popular under its new name, the Chilean sea bass. Soon, it almost became extinct. a. Why was the Chilean sea bass almost driven to extinction? b. Some top chefs boycotted the Chilean sea bass in the hope of increasing the stock. Why was this unsuccessful? c. Australia now enforces limits on the catch. Why would this tend to be more successful than the boycott? Solution 5. a. Chilean sea bass was not an owned resource. b. Some chefs boycotting Chilean sea bass will not make any difference because there is still a very big remaining market for the fish, which means that there are still big profits for fishermen. c. Enforcement of limits means that the supply of fish is no longer unlimited for the fishermen; similar to the boycotting scenario, the market is still there but prop¬erly enforced government regulation will limit the catching of Chilean sea bass. 6. a. The nation of Alphaville has been hunting their deer population to extinction. The government decrees strict limits on the number of hunters, and on the num¬ber of rounds of ammunition that each hunter can take into the hunt. Hunters, like fishermen, are a creative lot: What will “capital stuffing” look like in this case? b. What would an individual transferable quotas (ITQ) system look like in this case? c. Do real governments use quotas like this to control deer populations? If you don’t know the answer, just ask your classmates: There’s probably a hunter or two in your course. Solution 6. a. They’ll use powerful laser scopes and laser sights, more powerful bullets that go farther and hit harder, and they’ll use more accurate, more expensive rifles. b. It would be simple: It would only allow each hunter a fixed number of deer. Perhaps a “two-deer limit” per hunter. c. Yes, such per hunter limits are common in the United States. 7. This chapter noted that chickens and the “chicken of the sea” (tuna) are fundamentally different in terms of population though they are both food. Indeed, chickens are eaten far more than tuna, and chickens are abundant compared with their ocean-living cousins. a. What difference between these two species does this chapter identify as the explanation for this seemingly strange puzzle? b. As population and prosperity has increased, the demand for chicken has increased. What happens to the price of chickens as a result? Why? c. Because of the rules humans have concerning chickens, what happens to the number of people raising chickens as a result of the price change? Why? What happens to the number of chickens? Why? d. What happens to the price of tuna as population and prosperity increase? Why? e. Because of the rules humans have concerning tuna, what happens to the number of people harvesting tuna as a result of the price change? Why? Solution 7. a. Chickens are an owned resource; tuna is not. b. The price of chicken goes up as more people bid for the same number of chickens (all other things being equal). c. The increased price encourages more people to raise chickens; the number of chickens increases. d. The price increases because more people bid for the same number of tuna. e. More people harvest tuna to take advantage of the higher price. But because they are not encouraging more tuna to be born and raised, the total amount of tuna falls. 8. a. Why did the fish catch increase in New Zealand after the amount that each fisherman could catch was limited by a quota? b. Given your answer to part a, would an individual fisherman in New Zealand want to catch more fish than he’s allowed, if he knew no one would ever catch him? c. So given your answer to part b, does the New Zealand system depend on government enforcement to work, or will individual fishermen agree out of self-interest to abide by the ITQ? Solution 8. a. Limiting each fisherman to a quota allowed the stock of fish to grow so that after a few years the total catch could actually increase. b. An individual fisherman will still want to cheat and take more fish. If all fishermen act in this way, we know that their actions will be self-defeating, but it is not self-defeating for an individual fisherman to increase his catch. (It is possible for one fisherman to deplete the entire stock of fish, but, in practice, his cheating merely facilitates everyone else’s cheating.) The tragedy of the commons is very similar to a prisoner’s dilemma—when each individual acts in his or her self-interest, the result is a situation (the extinction of the fishery) that is in no one’s interest. c. Solving the tragedy of the commons problem requires the creation of enforceable property rights, so in this case it relies on government enforcement. Thinking and Problem Solving 9. In 2008, Jean Nouvel won the Pritzker Architecture Prize (the highest prize in architecture). One of his most notable works is the Torre Agbar (pictured), a breakthrough skyscraper that lights up each night thanks to more than 4,000 LED devices—a pricey but purely cosmetic feature. a. Many people enjoy looking at the Torre Agbar. Just considering that enjoyment, how would you classify the Torre Agbar: rival or nonrival? Why? b. The Torre Agbar is the third-tallest building in Barcelona. For the purposes of enjoying its illuminated façade, would you classify the building as an excludable or nonexcludable good? Why? c. Based on your answers, is the LED façade a public good? d. Companies often hire architects like Nouvel to create beautiful buildings that are expensive to design, build, and maintain, yet they cannot charge people to look at them. This chapter offered one possible explanation for this puzzle. What’s the explanation and how does it help justify the construction of a widely enjoyed building? (Hint: The building is the headquarters for Grupo Agbar, a company dedicated to the distribution and treatment of water in countries all over the world. For most of you, this is the first time you’ve heard of this company.) Solution 9. a. It is nonrival because one more person viewing the building does not detract from other people’s enjoyment of it. b. It is nonexcludable because it is functionally impossible to prevent people from enjoying the building. c. It is a public good. d. The chapter mentions the role of advertising to solve public good problems. This edifice is a form of advertising for the company. It’s also possible that it’s an advertisement for Nouvel. Perhaps he takes lower fees when he’s allowed to design a particularly showy building, and then charges higher fees on more routine buildings. 10. a. “A public good is just a good that provides large external benefits.” Discuss. b. “A tragedy of the commons occurs when using a good causes massive negative costs.” Discuss. In parts a and b, compare the definitions from Chapter 10 with those from this chapter. Solution 10. a. This is roughly true. A positive externality is a benefit that can’t easily be excluded, and that externality is usually also nonrivalrous. Just compare immuni¬zations, which we discussed in Chapter 10, with mosquito protection, which we mentioned in Table 19.1. If I get a flu shot, that protects everyone in my town a little bit (nonexcludable) and if it helps prevent one neighbor from getting the flu, that doesn’t raise the chance of someone else getting the flu (nonrival). To the extent that there is a difference, with a public good there are large positive externalities and very small private benefits relative to costs, so we expect greater underprovision of the public good than the private good with externalities. Some people do get flu shots, for example, because the private benefits still exceed the costs for some individuals, but there is zero private provision of asteroid protection because even for someone very rich the private benefits of protecting their home (the world) are less than the costs. And if you compare this chapter with Chapter 10, you’ll see that the same attempt to “manufacture excludability” takes place in both cases: The Coase theorem looms large, as when beekeepers release their bees close to fruit trees. b. Again, roughly true. Taking that fish out of the sea imposes a cost on every other fisherman, present or future, so if fishing is completely unregulated, then each fisherman is just imposing a negative externality on all other fishermen. A small number of fishermen might work out a private bargain (the Coase theorem again), but if there are too many, a government-imposed solution might be the best way to prevent the big externalities. 11. a. Has the rise of the Internet and file sharing turned media such as movies and music into public goods? Why? b. Taking your answer in part a into account, would government taxation and funding of music improve social welfare? In your answer, at least mention some of the practical difficulties of doing this. Solution 11. a. Movies and music are nonrivalrous but they used to be excludable, making them nonrival private goods. Today, however, the ease of copying makes digital movies and music nonexcludable. (Although certain technologies may discourage free riding by some, especially older users who can’t figure out how to copy, they are still nonexcludable to many people.) That allows movies and music to transform into public goods for a large portion of the population. b. Government funding of music would be a classic way to solve a public goods problem, but the government would face the difficult problem of figuring out whom to fund. Would government-funded music be boring and committee-driven? Would the government ever have funded the Rolling Stones? Or would it be too fancy for most listeners to enjoy? Or would it strike a good middle ground of pushing the boundaries of music, without wasting taxpayer money on music that only five people like? Perhaps the government can just subsidize music education (e.g., pay for more music schools) and leave most decisions in private hands. Of course, most governments, including the United States, already spend money encouraging the production of music skills and music production. So, we would have to check and see if the current amount of government subsidy is above, equal to, or below the optimal level already. 12. We mentioned that the tragedy of the commons is a form of prisoner’s dilemma, something we saw back in Chapter 15. As is so often the case in economics, the same model can apply to many different settings. Let’s recycle Facts and Tools ques¬tion 5b from Chapter 16 just to emphasize the point:
Player B
Left Right
Player A Up (100, 100) (600, 50)
Down (50, 600) (500, 500)
a. We have given you very generic strategies: up, down, left, right. Relabel the matrix so the game applies to fishermen and the tragedy of the commons. b. Which set of strategies would give the fishermen the highest joint payoff? c. Which set of actions would be equivalent to the following choice: “One fisherman decided not to conserve and instead to catch more than his fair share.” (There are two right answers here.) d. Which set of actions is the one and only Nash equilibrium? How would you describe it in terms of these two fishermen? Solution 12. a. Up and Left strategies should be relabeled with words that indicate that the fisherman catches as much as possible, does not cooperate, does not conserve, or similar terms. Down and Right strategies should be relabeled in a way that indicates the fisherman is limiting the catch, cooperating, showing restraint, conserving, or similar terms. We will use the terms Do Not Conserve and Conserve.
Fisherman B
Do Not Conserve Conserve
Fisherman A Do Not Conserve (100, 100) (600, 50)
Conserve (50, 600) (500, 500)
b. (Down, Right) or (Conserve, Conserve). When both fishermen conserve, the stock of fish grows and the catch is maximized, which generates the highest joint payoff possible. c. Either (Down, Left)/(Conserve, Do Not Conserve) or (Up, Right)/(Do Not Conserve, Conserve). d. (Up, Left)/(Do Not Conserve, Do Not Conserve) is the only Nash equilibrium. It’s very similar to the tragedy of the commons: They both fish as much as they want and deplete the fish stock horribly. 13. As already mentioned, the line between “public good” and “private good” is genu¬inely blurry. Electronic tolls on roadways are making excludability a little bit easier every year. In your view, should we continue to think of roads as public goods? (To be more accurate, we really should say, “Should we continue to think of travel on uncongested roads as public goods?”) Solution 13. This comes down to how hard it is to exclude: The electronic toll recorders are still just expensive enough to run that it’s apparently only cost effective on traffic-heavy highways. In the future, however, every car will have a GPS device making it possible to charge road users per mile. In Germany, such devices already are mandated for trucks. So today, it’s reasonable to think of travel on a major highway as a “publicly provided private good (or service),” much like Medicaid, food stamps, Social Security, and public schooling. Yes, there may be positive externalities for these goods and services, but they fit naturally into the “private goods” category. Technology is likely to make roads more excludable over time, so private roads become more viable with better exclusion technologies. 14. The massive stone faces that pepper Easter Island puzzled people for centuries. What happened to the civilization that erected these faces? A clue is that the island currently has no trees. Trees would have been necessary to make the boats to bring the stones to the island and to then roll those stones into place. Archeological digs have discovered that the island did have trees very long ago but it’s thought that the natives used up all the trees until they had no choice but to leave. Can you think of an explanation for why people would behave in this way? The following questions may suggest an answer. a. Who bore the cost of planting new trees? Who benefited from planting new trees? b. As the population of the island grew, what happened to the number of trees? Why? c. Biologist Jared Diamond, writing on the subject of trees in Easter Island, asked, “What were they thinking when they cut down the last palm tree?” What do you think the person who cut down that last palm tree was thinking, if he acted like a person facing a tragedy of the commons? Solution 14. a. It’s likely that the trees were unowned, so the planter would bear all the costs of tree planting even though the whole island benefited from the tree planting. b. As the demand for trees increased above the natural replenishment rate, the number of trees decreased because no one had the incentive to plant trees although everyone had an incentive to harvest them. c. He was thinking “It’s a tragedy, but if I don’t cut down this tree, someone else will.” 15. Economists typically remind people to weigh the costs of an action against the benefits of that action. Let’s invent some examples where it’s just too expensive or too risky to solve the very real problems discussed in this chapter. a. It’s possible that it would just cost too much to defend the earth from asteroids, where the best option, all things considered, is just to hope for the best. Invent an extreme example where this is the case—your example might take place in a world with different technology, different types of government, and so forth. b. What about saving the tuna? Invent an example where the best option is to just let the fishermen do what they want, even if tuna go extinct. Solution 15. a. The easiest example would be any time before spaceflight became possible: If the technology just isn’t there to deflect asteroids, then “hope for the best” is literally the only option. Of course, if it cost tens of trillions of dollars to mount a good asteroid defense—costing us perhaps one-third of GDP every year—then we might just hope for the best instead of mounting a defense. b. If there are millions of different species of fish, and if tuna were just one unimportant kind of fish, then it wouldn’t be a big problem if tuna went extinct. Also, if it were really hard to monitor fishermen—if stealth fishing boats were inexpensive, say—then it might be too expensive to prevent overfishing. And of course, government distrust could be a reason to leave the tuna to the ravages of the fishermen: If you lived in an island country, and if the government antifishing police also tended to hassle people who wanted to emigrate by boat away from your island country, then you might not want to create a government agency to police the waters. Challenges 16. a. Two girls are sharing a cold chocolate milk. How long do you think it will take them to drink all the milk? How long would it take if each girl had their own glass and half the milk? Can you see a problem when the girls drink from a common glass? b. What is going on in this picture of the East Texas oil field in 1919? Can you see the problem? c. Why did we put these two questions together? (Hint: A speech from the movie There Will Be Blood gets at the same question—it’s based on a 1924 speech by U.S. Senator Albert Fall of New Mexico.) Solution 16. a. They’ll drink quite quickly if they are drinking out of just one glass. They’d drink more slowly and more enjoyably if they each had “private property” over half the milk. b. They’re pulling out petroleum from the same underground pool, a common pool. They’re probably pulling it out too quickly and too inefficiently. Plus, it’s wasteful and inefficient to have so much capital equipment devoted to pulling oil out of the same pool of oil: It’d be more efficient to have fewer derricks operating at a more measured pace. c. According to a USA Today interview with director Wes Anderson, Senator Fall said, “Sir, if you have a milkshake and I have a milkshake and my straw reaches across the room, I’ll end up drinking your milkshake.” That’s what’s happening in both pictures: multiple people drawing from the same resource pool. 17. Some media companies (especially in music and movie industries) run ads claiming that downloading or copying media is the same thing as stealing a DVD from a store. Let’s see if this is the case. a. Is a DVD a nonrival good? Why or why not? b. Suppose someone stole a DVD from a retail outlet. Regardless of how that person values the DVD, does the movie company lose any revenue as a result of the theft? Why or why not? c. Suppose someone illegally downloaded a movie instead of purchasing it. Also suppose that person placed a high value on the movie (they valued it more than the price required to purchase it legally). Does the movie company lose any revenue as a result of the theft? Why or why not? d. Suppose someone illegally downloaded a movie instead of purchasing it. Also suppose that person placed a low value on the movie (they valued it less than the price required to purchase it legally). Does the movie company lose any revenue as a result of the theft? Why or why not? e. How is illegally downloading media like retail theft and how is it not? Solution 17. a. The DVD is a rival good because one person owning a DVD means another person cannot own that DVD. b. They lose revenue because someone could have bought that DVD. c. They lose revenue because if that person did not download the movie, he would have bought the DVD. d. They did not lose revenue because if that person did not download the movie, he wouldn’t have bought the DVD, anyway. e. When you value the movie more than the price, downloading it is like stealing because you are denying the company your patronage. If you value the movie less than the price, you will never buy the movie, so downloading it does not make the company worse off but it increases your utility. Thus, stealing DVDs is not quite the same as downloading. In the first case, the thief ’s gain always comes at the expense of the producer. In the second case, the thief can gain without the producer losing. 18. The economic theory of public goods makes a very clear prediction: If the benefits of some action go to strangers, not to yourself, then you won’t do that action. Economists have run dozens of experiments testing out this prediction. (You can find a readable article by Nobel laureate Elinor Ostrom summarizing the results in the summer 2000 issue of the Journal of Economic Perspectives.) A typical “public goods game” is quite simple: Everyone in the experiment is given, say, $5 each, theirs to take home if they like. They’re told that if they donate money to the common pool, all the money in the pool will then be doubled. The money in the pool will then be divided equally among all players, whether they contributed to the pool or not. That’s the whole game. Let’s see what a purely self-interested person would do in this setting. (Hint: A public goods game is just like a prisoner’s dilemma, only with more people.) a. If 10 people are playing the game, and they all chip in their $5 to the pool, how much will be in the pool after it doubles? b. So how much money does each person get to take home if everyone puts the money into the pool? c. Now, suppose that you are one of the players, and you’ve seen that all 9 other players have put in all their money. If you keep your $5, and the pool money gets divided up equally among all 10 of you, how much will you have in total? d. So are you better or worse off if you keep your money? e. What if none of the nine had put money into the pot: If you were the only one to put your money in, how much would you have afterward? Is this better or worse than if you’d just kept the money yourself? f. So if you were a purely self-interested individual, what’s the best thing to do regardless of what the other players are doing: Put all the money in, put some of it in, or put none of it in? (Answer in percent.) Do the benefits of donating go to you or to other people? g. If people just cared about “the group,” they’d surely donate 100%. In part f, you just said what a purely self-interested person would do. In the dozens of studies that Ostrom summarizes, people give an average of 30% to the common pool. So, are the people in these studies closer to the pure self-interest model from part f, or are they closer to the pure altruist model of human behavior? Solution 18. a. $100: 10 × $5 × 2. b. $10: $100/10. c. There will be $90 in the pool, so your share of the pool is $9. You get that $9, plus your own $5. That means you get to keep $14 total. Compare with your answer to part b. d. You are better off if you keep your money. e. If you were the only one to put money in, your $5 would turn into $10, which would be divided up among all 10 players. You’d get to take home just $1. That’s clearly worse than keeping the original $5 all for yourself. f. In both the case in which nine players gave and the case in which nobody but you gave, the best option was to keep your money for yourself—put noth¬ing into the common pool. In fact, no matter what anyone else does, the best thing for you to do is to opt out: To keep all $5 for yourself, and just hope that other players are foolish enough or altruistic enough to donate their money. You should donate 0 percent. The benefits of donating go to other people. g. People are closer to the pure-self-interest model: 30% is closer to 0% than it is to 100%. Ostrom, a political scientist, won the 2009 Nobel Prize in Economics for her work in discovering which real-world institutions encourage solutions to public goods problems. Her widely read book Governing the Commons is highly recommended. 19. Canada’s Labrador Peninsula (which includes modern-day Newfoundland and most of modern-day Quebec) was once home to an indigenous group, the Montagnes, who, in contrast to their counterparts in the American Southwest, established property rights over land. This institutional change was a direct result of the increase in the fur trade after European traders arrived. a. Before European traders came, the amount of land in the Labrador Peninsula far exceeded the indigenous people’s needs. Hunting animals specifically for fur was not yet widely practiced. What can you conclude about the relative scarcity of land or animals? Why? b. Before the European arrival, land was commonly held. Given your answer in part a, did the tragedy of the commons play out for the indigenous Montagnes? (Remember, air is also commonly held.) c. Once the European traders came, the demand for fur increased. Do you expect the tragedy of the commons to play out under these circumstances? Why or why not? d. The Montagnes established property rights over the fur trade, allocating families’ hunting territory. This led to rules ranging from when an animal is accidentally killed in a neighbor’s territory to laws governing inheritance. Why did the Montagnes create property rights only after the European traders came? Solution 19. a. Land and animals were not scarce as the supply of them exceeded the demand. b. The tragedy did not play out because, given their demands, their animal resources could not be exhausted. c. Yes, the increase in the demand meant that more animals were killed than were naturally replenished, putting the tragedy into action. d. The danger of resource exhaustion (and the increase of the value of furs) generated the incentive to forge property rights. The benefits of property rights exceeded the costs. The Montagnes established property rights to avoid the tragedy of the commons. 20. It’s one of the ironies of American history that when the Pilgrims first arrived at Plymouth Rock, they promptly set about creating a communal society in which all shared equally in the produce of their land. As a result, the Pilgrims were soon starving to death. Fortunately, “after much debate of things,” Governor William Bradford ended the corn commons, decreeing that each family should keep the corn that it pro¬duced. In one of the most insightful statements of political economy ever written, Bradford described the results of the new and old systems. [Ending the corn commons] had very good success, for it made all hands very industrious, so as much more corn was planted than otherwise would have been by any means the Governor or any other could use, and saved him a great deal of trouble, and gave far better content. The women now went willingly into the field, and took their little ones with them to set corn; which before would allege weakness and inability; whom to have compelled would have been thought great tyranny and oppression. The experience that was had in this common course and condition, tried sundry years and that amongst godly and sober men, may well evince the vanity of that conceit of Plato’s and other ancients applauded by some of later times; that the taking away of property and bringing in community into a commonwealth would make them happy and flourishing; as if they were wiser than God. For this community (so far as it was) was found to breed much confusion and discontent and retard much employment that would have been to their benefit and comfort. For the young men, that were most able and fit for labour and service, did repine that they should spend their time and strength to work for other men’s wives and children without any recompense. The strong, or man of parts, had no more in division of victuals and clothes than he that was weak and not able to do a quarter the other could; this was thought injustice. The aged and graver men to be ranked and equalized in labours and victuals, clothes, etc., with the meaner and younger sort, thought it some indignity and disrespect unto them. And for men’s wives to be commanded to do service for other men, as dressing their meat, washing their clothes, etc., they deemed it a kind of slavery, neither could many husbands well brook it. Upon the point all being to have alike, and all to do alike, they thought themselves in the like condition, and one as good as another; and so, if it did not cut off those relations that God hath set amongst men, yet it did at least much diminish and take off the mutual respects that should be preserved amongst them. And would have been worse if they had been men of another condition. Let none object this is men’s corruption, and nothing to the course itself. I answer, seeing all men have this corruption in them, God in His wisdom saw another course fitter for them. (Source: Bradford, William. Of Plymouth Plantation, 1620–1647. Edited by Samuel Eliot Morison. New York: Modern Library, 1967.) a. Imagine yourself a pilgrim, under the communal (commons) system. If you worked hard all day in the fields, would that increase your share of the food by a lot or a little? Describe the incentive to work under the communal system. b. Under this system, what type of good was the pilgrims’ harvest? c. According to Bradford, the communal system “retard[ed] much employment that would have been to their benefit and comfort.” Why would the communal system reduce something that would have been to the pilgrims’ benefit? How would you describe this using the tools of economics? d. According to Bradford, what happened to the amount of food produced and the amount of labor after the communal system was abolished and workers got to keep a larger share of what they produced? e. Read Bradford’s statement carefully. What other effects did the communal system create? (Note that economists typically ignore these kinds of effects.) Solution 20. a. Under the communal system, hard work would increase your share of the food by only a small amount since the food was divided among all the Pilgrims. As a result, the incentive to work was low. b. The harvest is a “common resource”—the food is rival but by law the food is nonexcludable. c. The communal system meant that the produce of land was consumed in common, creating a tragedy of the commons. Although it was in the interest of the Pilgrims as a group to work hard to grow corn, it was in each individual Pilgrim’s interest to free ride, and let the others do the work. As a result, the Pilgrims starved. We could also say that communal property put the Pilgrims into a prisoner’s dilemma. d. More food was produced and the private property system made “all hands very industrious.” e. Bradford argued that collectivism failed not only as an economic system but that even among godly men “it did at least much diminish and take off the mutual respects that should be preserved amongst them.” In other words, far from encouraging good will among men, the communal system made people distrust and dislike one another. Imagine, for example, that someone is sick. Under the communal system people might have suspected that person of faking their sickness in order to be a free rider. Thus, the communal system made people suspicious and think the worst of their fellows. Moreover, anyone who didn’t work was harming the community and thus could be considered a menace. Notice also that Bradford thought about what it would take to get people to work hard under the communal system. He says it would have required “great tyranny and oppression.” This is exactly what happened in the twentieth century in communist China and the Soviet Union. Solution Manual for Modern Principles: Microeconomics Tyler Cowen, Alex Tabarrok 9781319098766
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