Plain Sense Economics

In my principles of microeconomics class next week we will take up the idea of public goods. This week, however, the city of Ashland votes on a special levy to support activities in our local school district. This is too good an opportunity to pass up – to reflect on voting for public services. The mail-in votes are due tomorrow evening and the results will be announced later that night. By Oregon law the levy requires passage by more than 50 percent, plus at least 50 percent of the registered voters have to vote. We call this the double majority rule for tax issues. In essence we are voting on financing a public good.

I’ll write a longer description of public goods later. Here’s the quick version…

Public goods have three important characteristics:

• They are a good or service that has wide appeal in a community
• They are non-exclusive, which means that anyone can benefit from them – no selling of tickets
• They are non-rival, which means that if one person “consumes” or benefits from a public good, nothing is used up in that good and others are free to continue using it.

The classic example of a public good is a lighthouse protecting a harbor. Many people benefit from it; everyone can use it, and it doesn’t get consumed or used up in the process. And yet no one person would value the lighthouse enough to pay for it privately. And an informal collection taken from those who benefit has the free rider problem – someone who benefits but declines to chip in.

So, usually we turn to government to finance public goods. Government can levy taxes, with appropriate voter approval, and enforce contributions from everyone.

There’s an inherent problem, though, in voting for taxes for public goods. It is hard to gather enough “yes” votes.

Here’s why…

We can construct a demand curve for a public good, by adding the individual value each community member places on that good. To keep it simple let’s say there are 7 people in our community, and they are expressing their interest in a public good. Each person sets a dollar value for that good – that is how much they would be willing to pay to see the good provided:

• Person A: $100
• Person B: $200
• Person C: $300
• Person D: $50
• Person E: $0
• Person F: $50
• Person G: $0

For a public good we would add these values (it is called adding demand curves vertically) and come up with $700. In an informal system, where everyone chips in, we could pay $700 towards the public good.

Now, though, we need to vote, and if the vote passes everyone will have a tax of $100. As each voting citizen considers their vote, they will compare the value of the public good to them against the potential tax of $100. In this example there are 3 people who value the public good at $100 or greater. Presumably they vote “Yes”. There are 4 people who place a value lower than $100 and they will vote “No”. In the simple averaging method used here for the tax the people who value the public good strongly have no stronger voice than the people who are only mildly opposed. The result is voting that will likely tilt “No”.

Real public good issues and their votes and taxes are more complicated, of course. Still, there is an inherent bias against approving these levies.

School levies are complicated, indeed. Only a portion of the community will benefit directly – those with children in the schools. Broader minded citizens without children in the schools will realize that there is added value in the community for good schools – expressed as better property values, lower crime rates, etc. And in simple majority voting situations, the committed parents can engage in a get-out-the-vote campaign among parents and bring in a strong vote in favor. In Oregon’s double majority situation the challenge is greater – the proponents have to find not only parents but enough other interested voters to reach the 50 percent participation rate. And on top of this they face the inherent bias against the proposal that I’ve described.

Throw into the mix a confusing and misinformed editorial (in opposition we think..) in the local paper, and a strong sense of community-school identity and it’s tough to predict the outcome.

Election Results: the day after…

I should keep my day job, sticking to economics. I called the state-wide initiative results exactly the reverse of the actual outcome. The tobacco tax-supported option to pay for an expanded child health insurance program failed. The measure to restore some teeth to land use planning passed.

Pertinent to this post, the school levy proposal in Ashland passed the double majority hurdles – almost 60% of registered voters submitted a ballot, and 65% of those who voted supported the school levy.