Positive Externality

This will be the first in a series of articles which I preface with “The High Cost of” and the line of discussion is meant to stimulate thinking about the true costs of various things in real life. One of the most interesting concentrations in economics is cost-benefit analysis – not necessarily the formal methods of applying it, but the more abstract way of deciding which costs and benefits should be quantified.

One of the most overlooked costs in policy decisions seems to be the aggregate time loss spread across thousands or millions of citizens, even though each citizen incurs a low cost on an individual level. The tendency to not consider low-in-amount but widespread costs is a more widespread issue that many people do not properly analyze in policy decisions. Economists can point to the natural breadth asymmetry of costs and benefits in globalization/free-trade as a perfect example of this.

Road work is a great example of an action by the government that causes relatively small losses in time by citizens – but spread across a large number of citizens. The policy question that I’d like to put forth, and a question I think rarely gets properly analyzed, is what accommodations road work should provide to the public to reduce the burden of their lost time from congestion (this doesn’t even consider the statistical cost of increased accident rates as a result of the congestion, which could be a high cost in and of itself).

What bothers me about this and related issues is that people seem to be overly complacent with the status-quo without even stopping to consider that the status-quo may be grossly inefficient. A necessary trade-off for improving our roads is one thing, but an inefficient allocation of resources related to it is quite another. As an amateur economist it is in my interest to ensure scarce resources are being optimally allocated as best as possible to squeeze every ounce of efficiency out of what we have to work with.

The trade-off at stake here is this: Ultimately the government has a decision as to when to perform road work. To simplify matters, lets consider a model with only two times: day, and night. During the day the government has to pay a labor rate of w-day and at night a labor rate of w-night, where w-night > w-day, perhaps by a large amount. Whenever I start in on this issue discussing it with someone else they immediately point out “but construction works can’t work at night – you are being impractical!”. My response is that you can never categorically dismiss something like that – there is a price to everything, and there is certainly a price (a high one) on paying construction workers to work at an inconvenient time.

Clearly doing road work at night would cause significantly less congestion on the road, yet the differential in doing this is w-night minus w-day. The policy question here is whether or not the cost of lost time measured across the predicted population affected is more than or less than the wage differential between day and night time labor work.

I keep referring to “cost of time”, yet many non-economists do not even accept that this concept exists, which I find absurd. Time is, in fact, one of society’s most valuable resources. To pose this issue in a more practical manner, consider that you are faced with two decisions given that you are stuck in traffic for an estimated hour due to road work in the morning:

1. Wait in traffic for the hour and pay nothing. Get to work an hour later.

2. Pay $5 to have your car teleported around the traffic jam and back into regular traffic, saving you an hour.

That $5 is essentially the value of one our of your time at that particular moment. The marginal value of time depends a lot on the time of day and what your current situation is. The fact is that some very successful people would pay $50 to save one hour in the morning, others would barely pay $1. But the concept of time and the theoretical ability to compensate people for lost time shows that the concept exists and is very real.

I’m not a full-time economist and if I was I’d do more research into this interesting topic (well.. interesting to me!), but my intuition tells me that if a full cost-benefit analysis were conducted in the manner of reasoning that I have outlined above with such projects, significantly more road work would be done at a higher cost to the government and tax payers, but a net lower cost once the lost time value is factored in. In other words, we citizens should be less bothered by road work!

This is the kind of stuff that the government needs to be doing on a regular and rigorous basis to ensure that resources are being optimally allocated. Non-thinking or making assumptions about what is possible or reasonable without critically analyzing the situation is a disservice by the government to taxpayers.

Welcome to my new blog! To kick this off, I’ll start with an introduction and an overview of my philosophy:

My name is Ben Hughes and I’m currently a senior at Rochester Institute of Technology, finishing up a double major in Information Technology and Economics. I’m a Ruby on Rails web developer, jazz musician, tennis player, and amateur economist interested in policy issues. I am philosophically libertarian and believe that the free market works better than most non-economists assume. Capitalism, or the free market, often deserves more “respect” than most people grant it, hence the name of this blog.

Let me be clear that the opinions presented and analysis of issues discussed in this blog are based on pure armchair reasoning of issues that do not necessarily represent “hard science” with empirically provable results. I am not a Ph. D. economist and am not interested in publishing research papers backed by hard data and mathematics; I am far more interested in “thinking outside the box” and putting seemingly non-economic issues into an economic light. Some of the most interesting books I’ve ever read followed this direction.

I strongly believe in greater public understanding of economics as a thought process, or “thinking like an economist”. Economics is not business and it is not finance: it is the study of scarcity and how resources are (hopefully optimally) allocated, a fact rarely acknowledged by non-economists. I think it’s a shame that many high schools require four years of study in literature while requiring virtually no study in economics, statistics, or probability – all issues that better-enlighten the public and through democratic voting have drastic consequences on the well-being of millions of people.

Part of my drive for writing this blog arises from the seemingly widespread misconceptions of economic cause and effect that spread like wildfire throughout the popular media, but are seldom properly addressed by journalists. With all the time being dumped into research of dubious practical merit, I think economists should take a more active role in policy issues by aiding in greater understanding of the “dismal science”.