Okay I know we just talked about fireworks, at least indirectly, but I think we need to have another conversation since i’m not convinced that we’re doing them right:
PRIVATE FIREWORKS FOR EVERY FAMILY IS A BAD IDEA pic.twitter.com/jJvFD7ZXNd
— Andrew Heiss (@andrewheiss) July 5, 2018
I guess the good news is that my concerns regarding free riding leading to underprovision of fireworks are pretty much abated. The bad news is that I’m not sure people have caught on to the whole nonrival consumption thing. Here’s the basic idea: a good is nonrival in consumption (or has low rivalry in consumption, or is simply nonrival) if one person consuming the good doesn’t prevent others from consuming the same unit of the good. In this instance, this is a fancy way way of saying “you can all watch the same fireworks my eyes don’t somehow absorb them and prevent your ocular enjoyment.”
When goods are rival in consumption (the opposite of nonrival, as you would expect), we determine how many of the good the market wants via a process of “horizontal addition.” (This makes physical sense if you take a quick look at a demand curve.) Let’s say that there’s a market that consists of me and Mr. Econgirl, and at a price of $5 we each want to consumer 1 ice-cream cone. This means that market demand is 2 at a price of $5 since we can’t both fully consume the same ice cone. (Even if we physically could…well, ew. I guess my dad shared a Dairy Queen cone with our rottweiler once and didn’t die but I’m still not recommending it.) But, as I said, this isn’t how nonrival goods work.
Let’s say instead that Mr. Econgirl and I are each willing to pay $5 to watch a fireworks display. (He’s not, but let’s pretend.) This is sort of a hypothetical payment since obviously we would both try to free ride, so it’s more accurate to say that we would each get $5 of benefits from watching a fireworks display. This implies that the market values a fireworks display at $10 (arrived at via “vertical addition,” in case you’re curious), in which case it’s efficient to provide a fireworks display if it costs $10 or less.
This last point gets at why I”m so annoyed at the individual fireworks people- if you believe that a fireworks display that costs $10 is cooler than 2 fireworks displays that each cost $5 (I’m not an expert but am pretty confident that this is true), then having each house do their own fireworks is an incredibly inefficient use of resources. I mean, wouldn’t you rather all coordinate and have this?
I guess there are a couple of explanations for the outcome that we see. One is simply that the households don’t want to coordinate- either they just don’t feel like it or are worried about the free-rider problem creeping up. Another, more interesting, potential explanation is that the households get utility from producing the fireworks, whereas I’ve been assuming that only consumption is enjoyable. (probably related: I have no desire to set off fireworks myself) In general, economic models don’t take this possibility into account, but they probably should, at least in some cases. For example, if we take into account the fact that musicians specifically like producing music, a lot of what we see in the music industry coincides far more nicely with our economic models. Unfortunately, one of the things that becomes explainable is the fact that prices pretty quickly get driven to zero. But yay, free* fireworks at least?
* do not start with the “there’s no such thing as free fireworks here” since the thing about nonrival goods is they do in fact have zero marginal cost