Saturday, November 08, 2003

Free Bazaar Economics

Democracy, schmemocracy. If we really wanted to do the Iraqi people a favor, we would do this. Read the whole thing.


Friday, November 07, 2003

Exploited by Subsidies

On Monday, the CSUN Economics Association and the CSUN Associated Students (i.e., student government association) had a public debate on the subject of the recent tuition increase. Up until recently, CSU students had paid about $1500 per semester in tuition, but recently the tuition was hiked to about $2000 in light of the state’s budget troubles. Naturally, this angered a lot of students, and only students from the Econ Association were willing to defend it.

My intention here is not to disparage any of the participants, because all of them did a credible job of defending their positions, especially once you handicap them for their lack of experience (only one student was a seasoned debater). But when it came to the substance of the debate, I could hardly listen to the AS students without wincing at their raw sense of entitlement. As far as they – and apparently many students in the audience – were concerned, they were owed an education by the state, regardless of the cost. Both AS speakers threw out the word “exploitation” repeatedly as a description of the fee increase.

The CSU system costs more than $6000 per student per year to run. And that’s considering only variable costs for the present year; if you include capital costs, the figure rises to as much as $10,000 per student per year. During the Q&A period, I pointed out that taxpayers were giving CSU students a big fat present of at least $6000 a year, and I asked the lead AS speaker to explain by what logic that made her “exploited.” Her response was essentially, “I don’t think of it that way. I think exploitation is out there, and I’m just getting what I deserve back from the system.” (I’m paraphrasing, but that was definitely the gist.) When I asked how low the price would have to be in order for her not to be exploited, she and her partner said that $0 sounded reasonable to them. Much of the audience appeared to agree.

This attitude of entitlement is, I think, one of the best arguments against state subsidization of higher education or anything else. Once people start receiving handouts from the state, they begin to think of the handout as their property. If public university students were actually grateful for the gifts they receive, I would feel happier about the system. But if the attitudes expressed at Monday’s debate are any sign, they are not grateful – they are indignant that the gifts are not even more munificent. It was enough to make me shudder.

But I’ll give the AS students this much: at least they realize the state is spending money on them. Many students apparently do not. One department chair in the business school told me that many students try to justify dropping their classes by saying, “I paid for the class, why can’t I drop it?” The problem, of course, is that they didn’t pay for it; the taxpayers did. When students register for classes and drop them later, they waste resources and deprive other students of the opportunities they could have provided. And for every student who registers and then tries to drop, there are three others (a conservative estimate) who register but make no effort to gain anything from the course. They just show up (sometimes) and expect to get a grade, typically an A or B, whether or not they actually learn anything. And therein lies the problem: people often fail to appreciate what they don’t have to pay for.

(For more on the cost of higher education to taxpayers, read this op-ed by Neal McCluskey of Cato.)


Wednesday, November 05, 2003

The Devil in the Details

Chris Bertram of Crooked Timber poses the following little gem of a thought problem:

You are in hell and facing an eternity of torment, but the devil offers you a way out, which you can take once and only once at any time from now on. Today, if you ask him to, the devil will toss a fair coin once and if it comes up heads you are free (but if tails then you face eternal torment with no possibility of reprieve). You don’t have to play today, though, because tomorrow the devil will make the deal slightly more favourable to you (and you know this): he’ll toss the coin twice but just one head will free you. The day after, the offer will improve further: 3 tosses with just one head needed. And so on (4 tosses, 5 tosses, ….1000 tosses …) for the rest of time if needed. So, given that the devil will give you better odds on every day after this one, but that you want to escape from hell some time, when should accept his offer?
I briefly thought this problem was going to be a paradox with no answer. But then I proved to myself that there is, in fact, a definite answer, so long as one discounts the future relative to the present, as human beings generally do. (More on that below.)

Suppose that d is your one-day discount rate, which tells you how much you value utility tomorrow relative to utility today. E.g., if d = 0.95, then tomorrow’s happiness is worth 95% of today’s happiness, from today’s perspective. Then if the following condition holds, you should take the bet on day N rather than waiting one more day:
(0.5)^N < (1 – d)/(1 – 0.5d)
(Here's the proof, if you really want it.) For instance, if d = .95, then the right-hand side of the condition is 0.095. On day 1, the left-hand side is 0.5, which is greater than 0.095, so you wait. On day 2, the left-hand side is 0.25, which is greater than 0.095, so you still wait. On day 3, the left-hand side is 0.125, so you still wait. But on day 4, the left-hand side is 0.0625, which is less than 0.095. Therefore, you should take the bet on the fourth day.

The more you value the future, the longer you should wait. If d = 0.99, then you should wait until day 6. If d = 0.999, you should wait until day 9. If d = 0.9999, you should wait until day 13.

Tyler Cowen, admitting he hasn’t gone through the math, guesses that you’d wait a very, very long (possibly infinite) time. But as you can see from the above, even if your valuation of the future is extremely close (0.9999) to your valuation of the present, you’d still take the bet within a couple of weeks. One of the commenters on Chris Bertram’s original post says, “The rational answer to this question is obviously that it depends on your discount factor, your relative utility for being in hell or not, and the extent to which you trust the devil.” But it turns out that your relative utility for being in hell or not – i.e., the disutility of torment – actually doesn’t matter. (I was surprised by this; the parameter representing how bad hell is canceled out of my calculations.)

There is a way to squeeze a paradox into the problem. If you do not discount the future at all relative to the present, then the condition above never holds, meaning you’d stay in hell forever. This outcome is mentioned by a couple of Chris’s commenters, and one notes that this is allegedly a paradox of rational choice: “The punch line was that if you were completely rational in the economic sense of the term – maximizing your expected utility – you’d spend forever in hell.” But it seems to me that this is not really a paradox brought on by rational choice, but by the general weirdness of infinity. In the calculations that produce the condition above, you have to divide by (1 – d) at some point, which means dividing by zero if you don’t discount the future. So you can’t really use the condition above. When you look at the original comparisons that led to the condition, it turns out that you get infinite terms on both sides, meaning that you’re indifferent between taking the bet and waiting at any point in time. This happens because no matter what you do, there’s a chance you’ll be in hell forever, and that’s an infinite amount of suffering. The probabilities don’t matter, because anything times infinity is still infinity. In any case, the correct conclusion is not that the rational non-discounter must remain in hell forever, but that he’s indifferent between doing so and taking the bet.


Tuesday, November 04, 2003

Swimming with Sharks

This is truly a tragic story:

The water was clear and there was no indication of danger when a 13-year-old surfing star went out on the waves with her best friend and her friend's father.

But while Bethany Hamilton was lying on her board off Kauai's North Shore, a shark bit once and then disappeared, taking off her left arm just below the shoulder.
Gruesome. But take heart: if they find that shark, I'll bet they sue the hell out of it.


Monday, November 03, 2003

Explain This to Me

A hectic schedule and blogger’s block joined forces to make me neglect Agoraphilia for most of the last week. But a number of things have yanked my chain in the last couple of days, so the block has vanished.

For now, I’ll limit myself to a minor TV-related complaint. I understand the value of broadcasting movies in the widescreen format. The usual pan-and-scan format cuts off the edges of the picture, and I would rather tolerate the black strips on the top and bottom of the TV screen in order to see everything I would have seen in the theater.

But can anyone explain to me why some TV shows are broadcast in widescreen format? “Angel” is regularly filmed in widescreen, and some other shows like “ER” run special episodes in widescreen. They even advertise this like it’s a benefit, as though the viewer is getting something extra. But in fact, the viewer is getting less. These shows are not originally filmed for the big screen. The directors could choose to film them in a way that fills the whole TV screen. Instead, they give us big black strips without any compensating gain. What a gyp!