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The Dumbest Words I Read Today, And A Lesson On Public Goods…

February 23rd, 2010 · 13 Comments
Econ 101 · Markets · Policy

Apparently the town of Tracy, California has decided that its revenue shortfall should be relieved by charging people for making medical 911 calls. Before I get into the absurdity of this particular plan, let me give you a refresher:

Goods and services can be classified along two dimensions: excludability and rivalry in consumption. A product is excludable (or has high excludability) if its consumption is limited to paying customers. For example, an ice cream cone has high excludability since I can’t get one unless I pay for it. (ignore the possibility of me batting my eyelashes and asking nicely for the sake of this example) A (non-toll) road has low excludability, since I can drive on it whether I’ve paid my taxes for the year or not. A product is rival (or has high rivalry in consumption) if my consumption of a particular unit of the product inhibits your ability to consume that same unit. Again, if I am consuming an ice cream cone, this pretty clearly prevents you from consuming that same ice cream cone. (My dad used to share ice cream cones with the dog- gross, I know- but even then they weren’t both consuming the entire ice cream cone, so high rivalry in consumption was still present.) On the other hand, if I am consuming (watching, in non-econ speak) a fireworks display, this doesn’t really impede the ability of the person next to me to watch the same fireworks.

This gives us four possibilities:

Most goods that we typically buy and sell each day fall into the private goods category, and these are the sort of items that we talk about in our supply and demand diagrams. This is because markets by themselves typically work well for private goods. But what happens in the markets for the other types of goods?

Consider public goods and common resources, where consumption isn’t restricted to paying customers. These goods suffer from a free rider problem where people who want the public good wait around for others to pay for it (so they can enjoy it for free) rather than paying for it themselves. However, because everyone is waiting around for someone else to pay, the item never gets purchased. You can think of these types of goods as the market equivalent of people waiting awkwardly around a restaurant table at the end of the meal for someone to be generous and pick up the entire check- rather than getting out of the restaurant on time, the people upset the restaurant and might even end up washing dishes for a night.

The moral of the story is that, because of the free rider problem, markets are bad at providing enough of public goods. Since most of us would rather be driving on roads than cowpaths, for example, the government can organize the provision of public goods and common resources and make everyone better off than they would be otherwise. (This is true since the taxes that people pay to get the public good can be made less than the value they get from the good.)

This solves the coordination problem that surrounds public goods, but common resources have another issue to contend with called the tragedy of the commons. (Commons, common resource, get it?) Orignally, this problem very literally referred to cows grazing on a common green (like Boston Common, for example), where people would let their cows graze more than was socially optimal because it didn’t cost them anything to do so even though it imparted a cost to the system. There are two solutions that are typically proposed for such a problem:

  • Charge a fee for use of the green equal to the cost that the grazer imposes on the system. Note that charging a fee would require the green to be made excludable, so a gate or something would have to be installed.
  • Divide up the common into individually owned plots to better align the incentives of the grazers and the system.

(Sidenote: Elinor Ostrom won the 2009 Nobel Prize in Economics for her work in analyzing how organizations mitigate the tragedy of the commons.)

Coming back to the motivating example…what box does medical 911 service fit into? The service is generally not restricted to paying customers, but, since calling 911 for a medical emergency sends an ambulance and such out to your house and ties up resources, it has high rivalry in consumption. These characteristics put it in the common resource category. As described above, it’s likely that people overutilize this service because it doesn’t cost them anything, even though it costs local government money to have the ambulances running and such. (Perhaps they call 911 when they have a weird rash on their arm or soemthing.) The government of Tracy has chosen to turn 911 service into a private good by granting access to paying customers only. I said above that this was one of the ways to solve the tragedy of the commons, so what’s the big deal?

The plan is to allow people to opt in to 911 service for a fee of $48 per year, or to charge them $300 per call if they have not opted in. (Out-of-towners will be charged a flat $400. I am curious as to how this is going to be determined in the land of call phones with out-of-state area codes and such.) The $48 acts as an insurance premium in that it safeguards against any of the $300 charges. That said, which of these options is a better deal? It depends on how often you think you’re going to call 911. For example, I don’t think I’ve ever called 911 for a medical emergency in my…er, enough years on the planet to tip the tradeoff in favor of the $300 gamble. However, when people are posed with this option, they are likely to see the possibility of the $300 as much more scary than the guaranteed $48 per year and are even likely to overestimate how often they will need medical 911 services. Let’s say that the average person calls 911 once every 10 years- in this setup, they will have given the town of tracy an extra $180 in revenue if they choose the $48 per year option. Some economists would likely argue that the town was smart in their framing of the two options in terms of revenue generation, but it’s not necessarily in the consumers’ best interests. Furthermore, there is evidence that people use goods and services more when they’ve explicitly paid for them ahead of time than when they appear to be free, so this could even be counterproductive from a cost control side. (Think “Dammit, I prepaid for my 911. If I want to have them come out to help me with this splinter I’ve got in my hand, that’s how it’s gonna be.”)

The larger problem in all of this comes in the fine print, wherever that may be found. I don’t know about you, but if I’m having a heart attack or getting hit by a bus, I’m not likely to be the one making the 911 call. Furthermore, in this day and age of cell phones, whoever makes the call on my behalf is not even likely to be doing so from my phone account. In economic terms, we say that the consumer and the purchaser of the item are not necessarily the same person, which leads to misalignment of incentives. Personally, I don’t really want whoever would be making that potentially life-saving 911 call to be sitting there and wondering whether it’s worth $300 to them to do so. I would certainly prefer that my lifeline receive a fruit basket as opposed to a $300 bill for helping me out.

I don’t see the details here, so maybe it is the case that the receiver of medical treatment also receives the bill, though this seems complicated to implement. I can also envision people being too stubborn about the cost to do what is ultimately best for themselves in the long term. More importantly, can you imagine the potential for prank calls that this opens up????

My guess is that this town opened up a whole can of worms that they did not anticipate ahead of time, but that a little thoughfulness coupled with an understanding of basic economcs could have easily prevented.

Update: This issue reminds me of something that Alex Tabarrok wrote about a couple of years ago:

“Over the weekend a crew came round my neighborhood offering to paint house numbers on the curb. Large bold curb numbers, they pointed out, make it easier for emergency service workers to find houses in the dark. Good argument. The price was good too. Then I noticed my neighbors were having their numbers painted. So of course, I declined.”

In a similar fashion, the 911 charge replaces one form of free riding wth another. I mean, I could just wait for my neighbors to sign up for the service and then yell really loudly if I have a heart attack, right?

Tags: Econ 101 · Markets · Policy

13 responses so far ↓

  • 1 Patrick // Feb 23, 2010 at 8:09 pm

    Cool article. Behavioral Economics is really interesting stuff. I would like to see Tracy try to implement this, just to see the reverse effect they intended haha

    If they pay $48 a year, for 10 years wouldn’t the town of Tracy get $480? not $180?

  • 2 Sprout // Feb 23, 2010 at 8:52 pm

    @Patrick

    The $180 is the difference between the one-time fee of $300 and the accrued $48 over 10 years ($480).

    I love how the free market always works … except when it doesn’t.

  • 3 econgirl // Feb 23, 2010 at 9:31 pm

    Exactly, on both counts. From an economics perspective, it’s very helpful to understand when markets are going to work well and when they aren’t.

  • 4 econgirl // Feb 24, 2010 at 12:25 am

    A friend said that I should have included this with the post:

    http://www.youtube.com/watch?v=R-y7f6no-_8

    (911 Is A Joke by Public Enemy)

  • 5 hardcorpssfor // Feb 24, 2010 at 7:40 am

    I have a friend who is an EMT and he has previously mentioned to me that there is a woman in town here who is unable to drive to her doctor’s appointments at the hospital each week…perhaps for her kidney treatments. She simply calls 911 and complains of chest pains and the abulance (by law) must come and transport her to the hospital when a patient complains of chest pains…..and she saves the cab fare. Not sure if this type of event played in the decsion to enact this fee system.

    Perhaps a better solution would be to allow each address to have the first 911 emergency response to be free of charge, and then each successive call to be charged at a progressive rate. This would ensure most emergencies are quickly acted upon without the caller deciding if the greater tragedy…the emergency situation or the $300 charge.

  • 6 Michael L. // Feb 24, 2010 at 10:49 am

    You completely missed the point of this program. The problem probably was out-of-towners were coming in, getting hurt and using the services. People who don’t pay taxes. I don’t see why someone who’s using something shouldn’t have to pay for it.

    This is internalizing the cost, another economic term.

    If you’re in an accident or life threatening situation, I don’t anyone would wait to call 911. People aren’t stupid, and if they were then maybe we shouldn’t allow people to do anything themselves such as voting or buy their own food.

    Good economics. You just applied them horribly, horribly wrong.

  • 7 Jonathan P. // Feb 24, 2010 at 2:41 pm

    To Michael L.:

    Reading the articles in question and not just the blog post would have been useful.

    You state: “The problem probably..”

    The news articles available state (with certainty, not probabilty) that the charges were to help with a $9-million budget gap.

    You suffer from the same problem the elected leaders of the town do; failure to do the proper research to come to the appropriate conclusions.

  • 8 Federico // Feb 24, 2010 at 4:03 pm

    Wouldn’t a two-part tariff be suitable for the problem? They could set an entry fee to be paid by everyone to cover for most of the cost of the service and then a per-usage fee. They could also discriminate between emergency calls and “convenience” calls with the help of physicians.

  • 9 JohnofCharleston // Feb 24, 2010 at 5:57 pm

    For what it’s worth the MR post you linked is by Alex Tabarrok, not Tyler.

  • 10 Michael L. // Feb 24, 2010 at 11:37 pm

    John P.-

    Perhaps the budget gap came as a result of these incidents happening. People were calling the fire department for things they maybe could drive to the hospital for or even stupid behavior. Also, notice that out-of-towners are charged a higher fee.

    I don’t suffer from not doing research. I merely think a little further than the surface of a problem to come up with solutions or reasons. That is what scientists do, including economists.

  • 11 econgirl // Feb 25, 2010 at 1:35 pm

    @ Johnof Charleston: You’re right, and I changed the post accordingly.

    The articles don’t say why the budget gap is there, but I would have to imagine that if there was evidence that the local government specifically thinks that abuse of the 911 system is to blame that they would have explicitly said so so as to not seem nearly as crazy as they currently do.

    I love how so many of the comments here and on Facebook and such are of the form “wouldn’t it be more reasonable to…” In most cases, yes, it would, which is kind of the point. This city seems to be saying “ooooh, how do we get money” without giving a whole lot of thought as to what is reasonable.

    It’s also important to keep in mind that emergency services aren’t exactly like ice cream comes- the market for ice cream cones functions well because no one sees a problem with some people being able to afford and thus consume ice cream and others to not consume. We as a society have decided that having some people able to consume emergency services and others not is unacceptable, which means that markets left to themselves do not address the situation adequately. This is not altogether different from the complications that we see regarding healthcare.

  • 12 Time-crunch blogging | Your resources for online investment needs and information // May 13, 2010 at 6:56 pm

    […] It with Models, you really should. Two recent posts I particularly liked were on the stupidity of charging for 911 calls (with an excellent explanation of public goods and common resources) and the opportunity cost of […]

  • 13 Gilberte Bazzell // May 26, 2011 at 9:39 pm

    Nice points…I’d note that as someone who really doesn’t comment to blogs much (actually, this can be my first put up), I don’t suppose the time period “lurker” is very flattering to a non-posting reader. It’s not your fault at all, however perhaps the blogosphere could provide you with a better, non-creepy identify for the ninety% of us that enjoy studying the posts.

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