Most interesting answer to a test question

Students were asked an essay question on public goods and externalities. One student  provided some very notable examples of positive externalities: weapons and illegal drugs.

I sat back, pondering what kind of preferences it would take to imagine that guns and drugs were positive externalities. So far I'm debating if a Libertarian would agree. Most of them deny the existence of most externalities, though they might be sympathetic to the idea otherwise.

A little later, the student gave me a further example: the more crime there is, the more weapons we need, so each additional weapon benefits society. That does sound remarkably like the Libertarian argument for no gun control....

Have I just discovered externalities for Libertarians? Could this be connected to so-called "Libertarian paternalism?"

APPAM Panel: Community Development

Lewis & Knapp (Maryland) -- A study of housing renovation in Baltimore, whose population has been declining steadily for decades. The renovation program does increase likelihood of renovation, but not much (0.3%).

Schuetz, Kolko, Meltzer (USC) -- Is the 'shop around the corner' a luxury or a nuisance? -- How is income correlated with retail density? As income increases, density of retail and drugstores increases. Higher income doesn't affect supermarkets, clothing, or food services. Overall, high income neighborhoods have low density, but if you hold population density fixed, higher income increases the number and size of retail outlets. Mostly they are (supermarket and drugstore) chain stores catering to the rich while independents are not wanted. The idea is chain supermarkets and drugstores are higher quality and range. In other categories, chain or independent is not a signal of quality. Poor areas already have mom and pop shops but very few chains or supermarkets.

Aubourg and Good (IMFI) -- Do capital inflows contribute to capital formation, transfer of abatement technology, or encourage pollution haven behavior? The Environmental Kuznets Curve acts like a black box. Once you control for GDP, most types of capital inflows do not affects CO2 levels, but remittances and technical aid lower SO2. Portfolio aid is bad for both CO2 and SO2.

And then I snuck next door to where my friend, Paul Heaton, was presenting on the effects of repealing blue laws on crime in Virginia. In 2004, a handful of VA counties mostly near DC were permitted to sell packaged liquor on Sundays. Using dif-in-dif and triple-dif estimators, he found that low level crime (drunk and disorderly) increased 10% and high level crime increased 5%. Just counting the justice system costs of these crimes came to about the level of the state revenues from alcohol sales and taxes. DUI did not change appreciatively.

The Lighter Side: Food Policy Consequences

For any who can't read the pictures:

How governance develops

Chris Blattman is pondering different reasons for the state to exist:

European and Asian states provided police, military control, and access to justice (of a sort) long before they provided schools, clinics and electricity.

Donors, however, have encouraged developing countries go the other way 'round.

To borrow a phrase from Tyler Cowen: “Views I toy with but do not (yet?) hold”:

• State weakness in Africa may be exacerbated by attempting to graft the West’s idea of a 20th century developmental state onto structures not fully capable of providing the basic bits of law and order.
• The international system and aid can exacerbate the problem by pushing the state to build a public education and health system ahead of more core state functions.
• Conspicuously, there is no Millennium Development Goal for access to a court system, or freedom from crime and violence. Everyone has heard of UNICEF, few have heard of UNPOL.
• I would bet that more donors and non-profit organizations focus on microfinance than justice, by a factor of five to ten.

Among the questions to be asked are: to what extent does it matter? If the original social contracts of the West were built around providing security to the richest and worked their way down to poorer members of society, what prevents a social contract built around providing other public goods to the richest and working their way down to poorer members of society? Is the problem that the contract is between donors and government rather than citizens? Is the problem one of capacity: if it requires more capacity to provide education and health care than police protection and property laws, the one builds into the other. Is the problem that the rich do not need the government to provide the modern public goods and so are not on board while it is harder to get the poor into the social contract? Is the problem ethnic diversity or other lack of social capital that slows any contract formation? Is there no problem - it just takes a little longer?

On Wealth-Dependent Penalties

Greg Mankiw responds to Tyler Cowen's post of a news story, and I respond again. First, the news:

A Swiss court has slapped a wealthy speeder with a chalet-sized fine — a full $290,000. Judges ... based the record-breaking fine on the speeder's estimated wealth of over $20 million.

A statement on the court's Web site says the driver — a repeat offender — drove up to 35 miles an hour (57 kilometers an hour) faster than the 50-mile-an-hour (80-kilometer-an-hour) limit.

Mankiw's take:

Is it optimal to base fines on wealth?

My first thought is no. We fine activities that have negative externalities, such as putting others at risk. If X is the size of the externality, and p is the probability of being caught, then the optimal fine is X/p. That will give people the right incentive to produce the optimal quantity of the externality. Under this policy, the rich may choose to speed more, but that is optimal. If we have an optimal carbon tax, the rich will produce more carbon too. Optimal pigovian taxes do not eliminate income effects.

He then finds a "theoretical" exception for when externalities are very large [such as possible loss of human life] but there is also a risk of mistaken or malicious ticketing. That could introduce wealth-dependent fines: "Because the mistaken ticket is a proportionately smaller fraction of their wealth, we need to worry less about the uncertainty large fines impose. The result is larger fines for richer offenders."

I responded:
Where externalities are purely monetary, I agree. The rich can afford to clean up more of their own messes, so let them. When the externality involves actively endangering other human life, I feel a moral impulse that tells me the rich should have no more right than a poor person. Money can't make it all better when a child is run over or dies in an accident.

What would you think of the following proposition? In most of economics, we consider u=u(y) with positive first and negative second derivatives. When we pose fines without regard for wealth, we are implicitly fining a poor person more utility than a rich person for committing the same immoral, unlawful, or socially-suboptimal act. If fines are imposed in constant utility terms, the rich will pay more money than the poor, but feel the same punishment. This seems to me in this case a more egalitarian (and probably more effective) solution to deterrence.

Thoughts?