Liz: Ready?

Both: Rock, paper, scissors.

Liz: Oh, paper. Okay, you're up. Hey, I'm Liz Landau.

Ben: And I'm Ben Klemens.

Liz: And this is Pod, paper, scissors.

[Intro music: "You gotta make decisions..."]

Liz: Hey, Ben, how was your life is an undergrad at Chicago?

Ben: Yeah. So I had, I had a good time. The winters were cold, so you just spent a lot of time indoors, just talking about nothing with everybody.

Liz: That sounds great. But actually, I was thinking of what they call the Chicago School of Economics, or the Neoclassicists.

Ben: Oh, yeah, there were a lot of those too. It was interesting to see how they tick and to learn about how a lot of the mechanisms work.

Liz: Wait, let's tell people what we mean. So in the Chicago School, you have people like Milton Friedman

Ben Or, as we called him at the University of Chicago, I'm not making this up, Uncle Milt.

Liz: So Uncle Milt and his nieces and nephews are proponents of the idea that a market should be free, that all trades, if left unregulated, will benefit both parties, because people voluntarily enter into these trades, believing that they'll benefit them, so.

Ben: yeah, so let me give it to you in mathematical form. And if you understand this, you basically have a BA in economics from the University of Chicago. So you have some preferences, and you're searching for an optimum, given all the choices you have. So you pick out some optimum and you're happy with it. Now let's consider a counterfactual where instead, there's some constraint on the number of choices, you can pick from. Either the constraint didn't matter, and you keep picking the optimum you had before, or it does matter, and now you're at second or your third best choice. The constraint optimum is always going to be as good or worse off than, you know, a full optimum and unconstrained optimum. And so that sort of justifies that you should be free to choose, and you shouldn't have any constraints. But you'll notice in the last couple of episodes, we've been talking about situations where having constraints actually made people better off.

[2:20]

Liz: I can think of plenty of situations in which you really do need some kind of intervention to make things better.

Ben: Yeah, there are two kind of key critiques to that sort of storyline up there, you know, this constrained optimization thing. One is this presumption that people are hyper-rational that they're always perfect at guessing, at working out, at solving for their optimum.

Liz: Yeah, I mean, in recent years, a whole new field has emerged called behavioral economics, showing how people's cognitive biases actually make them make irrational decisions. Things like trusting the opinions of people, you know, over the opinions of experts, even though the experts have better advice. Or valuing things that you already own more than equivalent items that you don't own.

Ben: Yeah, if any of these sorts of things happen that you're just talking about there, then yeah, there is no one true optimum, and you're not necessarily going to find it even if there is. And the other refutation that we're going to talk about more here is about externalities,

Liz: right? externalities. That's when other people bear the cost of your action.

Ben: Yeah. Oh, man. So speaking of my life as an undergrad, I still remember, possibly even my first class, we were talking about goods, and 'then the teacher mentioned Yeah, and so the opposite of this would be bads." And I was just floored, like, yeah, we talked about goods all the time. Of course, there have to be bads.

[4:00]

Liz: Oh, so if you go to a candy store, you're buying goodies. If you go to a poison store, you're getting

Both: baddies.

Ben: Normally, if some action produces both goods and bads, if both of those happen to you, they're both internalities, meaning that you internalize both both of the effects. Well, it's up to you to balance out what's, what's better, or what's worse.

Liz: Oh, so like, if I eat ten candy bars, I get both the enjoyment of the sugar and the crunch. But I also internalize all of those calories.

Ben: Yeah, so that's, that's a decision you get to make and perhaps you're rational about it, perhaps you're not but that's on you. But if the bads fall upon other people, those are the externalities, they're external to you, and, you know, people are fundamentally kind of selfish and they're going to ignore the effects of their actions on others.

Liz: We're living through a time right now in which social distancing is the norm. So even going closer than six feet to a person is considered hazardous, and we all have to be super aware of our actions.

Ben: And yeah, the point of social distancing and why it's something that right now we're seeing all these campaigns about it, is that people want to be out. People, you know, like walking around the world, and they get some benefit from doing so. But there's the cost to others. So the unconstrained result is that people go to crowded bars, and they all you know, sneeze on each other, and then, [morose voice] everybody dies.

Liz: That's not the best outcome.

[5:44]

Ben: There was some social norm setting here. So in the last episode, we talked about the this Prisoner's Dilemma situation, where you might take a lower wage, and the result is that there's an externality on others, that now they have to take a lower wage too. And so in a union setting, those people might be called scabs, in a Prisoner's Dilemma setting where you have two prisoners, one might be called a snitch on the other, right, so we have some some amount of social norm setting, which can help to cause people to internalize those externalities. Now we see people who are being shamed for not adequately social distancing, which again, is an attempt to get people to internalize the effects that they have on others.

Liz: So tonight we went out to see the cherry blossoms.

Ben: Oh, down at the Tidal Basin, by the National Mall. Yeah,

Liz: Yeah. And actually, right before sunset, there was all this police tape that was preventing people from even approaching the path of the pink flower trees. Because the assumption is that so many people will crowd around these famous trees, that social distancing will be impossible.

Ben: So did you get to see the cherry blossoms?

Liz: I actually did. Because apparently, right before sunset, is when no one cares about police tape anymore. [laughs] So let me rephrase that. Right before sunset, the police released the barricades so that cars could go through again along the Tidal Basin path, which also gave a signal to pedestrians that it was okay to go and look at the trees.

Ben: So how were the trees?

Liz: The trees are amaaazing. Sounds good. And let me tell you that in years past, while the trees were just as beautiful, there were thousands of people at any given moment. And you could never take a photo of them without other people in it. But tonight, actually, I took many photos without anyone around.

[7:58]

Ben: Wow, that sounds pretty nice. In the Prisoner's Dilemma context, the NPS want you to cooperate and stay home—

Liz: The National Park Service.

Ben: Oh, thank you, the National Park Service asked you to coöperate, but you defected, and you went to admire the cherry blossoms.

Liz: That's true, the National Park Service has been saying to stay away from the cherry blossoms. So I guess it is like a Prisoner's Dilemma. Because if I go and you don't go, that I get to enjoy it and be healthy. And if you go, and I go also, I still enjoy it, but run some risk of getting the virus from you

Ben: Yeah, that's a perfect example.

Liz: So the National Park Service resolved this by just telling everyone to stay home.

Ben: So a less heavy handed way to do this might be a tax. Right? So we could we could quantify you, Liz, in proper Chicago manner. And say that you got, I don't know $20 in benefit from going. So if we impose a $20 tax for going so this could be an entry fee, or we could pretend it's a coughing tax, I don't know. So you pay that to the Park Service, we're going to see the cherry blossoms, then you get $20 in enjoyment for by, you know this quantification we just made up, and then you pay $20 in tax. So the game's changed. Before you prefer to go and now you're indifferent between staying and going.

Liz: A $20 entrance fee would give me pause. But these trees are so beautiful that I probably would still go. However, I think I would put the maximum price I would pay at $20. Let's say if the tax or entrance fee were $30 I think I'd stay home.

Ben: Yeah, so there exists some price at which it's not a Prisoner's Dilemma anymore. In the Prisoner's Dilemma you prefer to do something, but you know, the world kind of would prefer it if you didn't, but if you're indifferent between doing it or not, then yeah, it's not a Prisoner's Dilemma anymore. It's a pretty easy game to solve. So the way we do this, these sorts of, these sorts of disincentives are known in the industry as Pigouvian taxes.

Liz: Pigooooouvian?

Yeah, normally, it kind of annoys me when things are named after, you know, some dead white dude. But Pigooouu, it's such a good name.

[10:19]

Liz: It is a good name. In fact, I believe there is such thing as the Pigou Club of economists who really like these taxes. So if you have such a tax, what do you do with all that money?

Ben: Doesn't really matter. I guess we could just burn the money if we wanted to.

Liz: So I could show up at the cherry blossoms, give a ticket taker a $20 bill, and that person would just burn it

Ben: right in front of you, yeah, I would love to see that happen. It'd be such a good experiment.

Liz: And I guess in some sense, that is equivalent to that person just pocketing it. From my perspective, the point is that I paid.

Ben: Yeah. And once you paid, your incentives are different. And we've moved people off of this socially worse outcome where a million people show up to the cherry blossom festival to a better outcome, where I guess only the people who want to jump the police tape want to want to go to the festival.

Liz: You can also imagine taking the tax money collected, and actually using it for a good cause, like the preservation of the Tidal Basin.

Ben: Yeah, that that is really ideal. And I would prefer that over just burning it at the door. However, I really want to see that at least once.

Liz: So this kind of reminds me of so called sin taxes on cigarettes and alcohol. On the other hand, you could have tax credit for things that are positive behaviors like using solar panels.

Ben: Yeah. And with some of these things, there's some debate as to—it can go either way, you could read the smoking cigarettes as something entirely internal. Right, It's like eating too many cookies. You enjoy it. But you know, there are regrettable effects, side effects.

[12:10]

Liz 12:10 No, ah, secondhand smoking is very dangerous too.

Ben: Right. And there are also externality arguments that, Yeah, there's secondhand smoke. And if you wind up in the hospital, there's some reasonable chance that other people are going to wind up bailing, you are at least a little bit.

Liz: Yeah, it taxes that whole healthcare system.

Ben: Yeah. And there's so much evidence that cigarette taxes do save lives. So I was reading this one National Cancer Institute monograph yesterday. And it said the one of the main ways that cigarette tax to save lives is not that people who are addicted to cigarettes suddenly all stop because, I mean, they're addicted and another 10 cents a pack is not going to do anything to them. But kids who don't make a lot of money, and they don't yet have a habit, they're not addicted yet, they won't develop a habit.

Liz: Oh, that's great for this next generation. You know what else is like cigarettes smoke: pollution. You know, if you think about it, driving is like the cherry blossom dilemma. If I drive, I get the benefit of being in my car getting to where I need to go. But everyone around me suffers some harm.

Ben: To indicate some some small difference, now the harm is distributed. So far, we've been talking about, you know, two player games where you have you know, hoodlum number one or hoodlum number two. But the driver is interesting now with thousands of people in the neighborhood who are listening to the engine noise breathing in one or two more particles of smog each.

Liz: So it's like thousands of people in a prisoner's dilemma.

Ben: Yeah, which can be kind of the hardest problem to solve. But we can apply the same logic still, right? If we can work out that driving causes a thousand people a penny in discomfort each. So that's a $10 total to save you thae math, we can impose a Pigouvian tax and cause the driver to internalize all that discomfort and choose accordingly. So it's kind of like asking the drivers to inhale all the fumes of their own cars, except it's, you know, less horrifying.

[14:10]

Liz: Now wait a minute, I enjoy the cherry blossoms, but for some people, their livelihoods depend on their cars. So the level of tax you would need to discourage driving would have to be really high, high enough that it wouldn't be worth driving to their jobs. Our society is really dependent on cars.

Ben: Yeah, I would agree. I mean, I've, I've been outdoors. It's a question of extent, not of kind between the cherry blossoms story and the driving story. So for the cherry blossoms, I guess for 30 bucks, you would stay home. And you know, for a hundre bucks, maybe nobody would show up. But for driving, if we impose a hundred fee on every car, a lot of people would still drive they would have to because like you said it's their livelihood, right. So the and nobody's gonna impose a hundred dollar a day fee on cars, what we get instead is a disincentive. Something that will get a few more people off the road here and there. And of course, the higher the tax, the fewer people are going to go, and that's sort of the social debate to be had.

Liz: You know, what I really like as a proposed solution to make people internalize their contribution to greenhouse gases and climate change is a carbon tax.

Ben: Is that kind of like a gasoline tax?

Liz: So a carbon tax actually taxes per ton of carbon dioxide, everything that causes that emission, so not just gas, but also coal, electricity, everything. And, surprisingly, we have a really good understanding of exactly how much of each of these things produces one ton of co2, it would actually be relatively easy to implement, given the current US tax system, which is so efficient and so much a part of our daily lives anyway. Unfortunately, it's never quite gotten enough political support to be enacted in the US. However, some other countries have tried it and the province of British Columbia in Canada,

[16:30]

Ben: What you're talking about makes a lot of sense. It's not that people have suffered an externality because you bought gasoline, we suffer an externality because burning the gasoline causes co2 to expel into the atmosphere.

Liz: That's right. And in fact, Al Gore has proposed taking the revenue from that carbon tax and giving it back to the American people dollar for dollar by eliminating the payroll tax. However, even though there have always been people on both sides of the American political aisle, who have supported this idea, in theory, at the end of the day, it's still a tax. And tax is a very dirty word. People do not like taxes. And, as I mentioned, people really do depend on driving for daily living. So depending on how high that tax would be, it could impose a real hardship on people who have no alternative.

Ben: Indeed, almost any economic activity is going to involve expending energy one way or another. And in fact, if you look through the tax forms, you can actually find incentives for generating energy that happen at the same time as the disincentives from generating co2, which is the immediate result of generating that energy. So that's, uh, that's the tax system today. These Pigovian taxes are so common in the tax system, that, yeah, sometimes they'll actually go in opposite directions.

Liz: So I guess, while we kind of hate paying taxes, and we hate when things cost a little more, consider that no system is perfect. And sometimes the solution to a big societal problem might be paying a little more per person.

[18:25]

Ben: So it goes. We started off on talking about Prisoner's Dilemma, the Prisoner's Dilemmæ, right? And next time we're going we're going to focus on another aspect of Prisoner's Dilemma is in the form of trust, and we there are a thousand stories of trust that go back to a Prisoner's Dilemma form. Do you want to do the Game of Thrones theme song music here?

[She does so.]

Ben: Sounds great. So there's our foreshadowing for the next episode. Tune in next time for

Both: Pod, paper, scissors.