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#1
06-06-2007, 05:01 PM
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It\'s a shame about my street
I live on street with 100 houses that are worth 1 million dollars each. Unfortunately, scientists have just discovered that the river near my street, previously though to have a 0% chance of flooding, has a 100% chance of flooding and destroying all the houses on the street in the next year unless a damn is built on the river. The dam will cost 75 million dollars to build, but no one seems to want to pay for it. Wouldn't we all be better off if we each paid $750,000 to build the dam? It's a damn shame that I don't live on Borodog's street:
http://forumserver.twoplustwo.com/sh...age=0&vc=1 where free riders and positive externalities don't exist. Why isn't my street like Borodog's street? What I'm getting at here is that Borodog's post is an intellectually lazy or dishonest attempt to write off the economics of free riders and positive externalities. Borodog's neighbor may not understand economics, but she does not need to. All she needs to know is that she values a clean street enough for her to clean it herself. No economist would say that Borodog's neighbor is dumb or irrational for cleaning the street. The issue of free riders comes into play when a group of people as a whole value a good or service enough that it would be efficient for them to purchase that good or service collectively, but they cannot come to agreement on doing so. Such cases occur when the cost of the good or service is less than the total value of the service to the potential buyers, but greater than what any one buyer or group of buyers is able to agree ob paying, such as in my dam example. In Borodog's example, the service is still performed because his neighbor values a clean street more than it costs her to clean it. However, that will certainly not always be the case. Don't mistake my post as necessarily saying that someone should go around with a gun forcing everyone to pay $750,000 to build the dam. I'm merely pointing out the laziness and deceptiveness of Borodog's earlier post. I'm picking on Borodog, but this is a larger problem in this forum as well as in any setting for debate. People often get lazy and make and use dumb examples and anecdotes to support their arguments. There are many good arguments that could be made for why government should not intervene to solve free rider problems, but to suggest, as Borodog's post does, that free rider problems don't exist is just flat out wrong. 
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#2
06-06-2007, 05:03 PM
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Re: It\'s a shame about my street
Insurance and HOAs FTW
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#3
06-06-2007, 05:08 PM
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Re: It\'s a shame about my street
[ QUOTE ]
Insurance and HOAs FTW [/ QUOTE ] Insurance does not solve the problem at all. When I purchased the house, there was to the best of everyone's knowledge a 0% chance of the river flooding, so insurance would have clearly been -EV. Once the flooding problem has been discovered, no insurance company would insure my house for less than 1 millions dollars. So we would still all be better off building the damn for $750,000 a piece. Not to mention the fact that we wouldn't have to go through the hassle of having our homes destroyed, then collecting a million dollar check. HOA wouldn't necessarily solve the problem either. What if instead of threatening to flood just my street, the river threatened to flood an entire county? I really doubt that such massive HOAs would ever exist. Or what if the area threatened by the flood subsumed several different HOAs?
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#4
06-06-2007, 05:11 PM
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Re: It\'s a shame about my street
[ QUOTE ]
[ QUOTE ] Insurance and HOAs FTW [/ QUOTE ] Insurance does not solve the problem at all. When I purchased the house, there was to the best of everyone's knowledge a 0% chance of the river flooding, so insurance would have clearly been -EV. Once the flooding problem has been discovered, no insurance company would insure my house for less than 1 millions dollars. So we would still all be better off building the damn for $750,000 a piece. Not to mention the fact that we wouldn't have to go through the hassle of having our homes destroyed, then collecting a million dollar check. [/ QUOTE ] The only way there can be a 0% chance is if it's actually been proven that it's impossible, and that's certainly not possible. Either way, there's still a second option, not to mention options that haven't been thought of. edit-To expand on the insurance thing, it seems obvious that the insurance company in question would have offered some type of flood insurance. Being that we've already established that the chances of this was small, and thus the price for flood insurance is small anyway. If like almost anyone in the world, the homeowners in question value their homes, it seems entirely likely that they'd buy that insurance, (even if -EV, being that nearly all types of insurance is -EV). Also, to respond to this part: [ QUOTE ] Not to mention the fact that we wouldn't have to go through the hassle of having our homes destroyed, then collecting a million dollar check. [/ QUOTE ] It's very possible the insurance companies could decide to create the dam. They'd rather pay $7.5 million then $10 million, right?
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#5
06-06-2007, 05:15 PM
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Re: It\'s a shame about my street
[ QUOTE ]
[ QUOTE ] [ QUOTE ] Insurance and HOAs FTW [/ QUOTE ] Insurance does not solve the problem at all. When I purchased the house, there was to the best of everyone's knowledge a 0% chance of the river flooding, so insurance would have clearly been -EV. Once the flooding problem has been discovered, no insurance company would insure my house for less than 1 millions dollars. So we would still all be better off building the damn for $750,000 a piece. Not to mention the fact that we wouldn't have to go through the hassle of having our homes destroyed, then collecting a million dollar check. [/ QUOTE ] The only way there can be a 0% chance is if it's actually been proven that it's impossible, and that's certainly not possible. Either way, there's still a second option, not to mention options that haven't been thought of. [/ QUOTE ] I addressed HOAs briefly in an edit. Regardless, my main point was not to prove free rider problems are 100% insurmountable without coercion, but that Borodog's post was intellectually dishonest for just completely writing off the issue with one little anecdote. And fine, let's say the probability of flooding was 10%. Insurance would still have been -EV at the time we would have purchased insurance, unless the insurance company had mistakenly based their rates on a lower probability.
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#7
06-06-2007, 05:25 PM
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Re: It\'s a shame about my street
[ QUOTE ]
HOA wouldn't necessarily solve the problem either. What if instead of threatening to flood just my street, the river threatened to flood an entire county? I really doubt that such massive HOAs would ever exist. Or what if the area threatened by the flood subsumed several different HOAs? [/ QUOTE ] It seems very likely HOAs would have contracts over any type of scenario that could involve multiple HOAs. [ QUOTE ] I addressed HOAs briefly in an edit. Regardless, my main point was not to prove free rider problems are 100% insurmountable without coercion, [/ QUOTE ] That would depend on your defintion of insurmountable, but I suppose I agree. [ QUOTE ] but that Borodog's post was intellectually dishonest for just completely writing off the issue with one little anecdote. [/ QUOTE ] If I'm not mistaken he later on goes into detail with TomCollins on alternative solutions (I'm going on memory though, that might have been a different thread). [ QUOTE ] And fine, let's say the probability of flooding was 10%. Insurance would still have been -EV at the time we would have purchased insurance, unless the insurance company had mistakenly based their rates on a lower probability. [/ QUOTE ] That doesn't make sense. Insurance rates take into consideration the chances of the event in question.
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#8
06-06-2007, 05:27 PM
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Re: It\'s a shame about my street
[ QUOTE ]
[ QUOTE ] but they cannot come to agreement on doing so [/ QUOTE ] What's stopping you from coming to an agreement? [/ QUOTE ] Well, say you have to chop down a neighbor's thicket to build the levee, but the neighbor likes the thicket and for sentimental reasons would rather let the river flood. I liked sneaking eminent domain into this argument.
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#9
06-06-2007, 05:29 PM
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Re: It\'s a shame about my street
[ QUOTE ]
If like almost anyone in the world, the homeowners in question value their homes, it seems entirely likely that they'd buy that insurance, (even if -EV, being that nearly all types of insurance is -EV). Also, to respond to this part: [ QUOTE ] Not to mention the fact that we wouldn't have to go through the hassle of having our homes destroyed, then collecting a million dollar check. [/ QUOTE ] It's very possible the insurance companies could decide to create the dam. They'd rather pay $7.5 million then $10 million, right? [/ QUOTE ] Yes, once the probabilities changed, the insurance company would build the dam rather than pay out. But the point is that buying insurance is -EV, as you admit. So yeah, we might have gotten lucky if we had purchased insurance before the probability of flooding changed, but that doesn't mean it was the optimal play. I could make a poker analogy here, but I think you get the point.
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#10
06-06-2007, 05:30 PM
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Re: It\'s a shame about my street
Let me know where your street is I'll set up a company and come round telling people the bad news about their river and offering them the opportunity to save their million dollar house for the low low price of $800,000 I'll guarantee satisfaction or their money back in writing and offer to hold all their money in a separate account till construction starts. This is obviously +EV for them and I'll make a tidy profit into the bargain. Ah capitalism saves the world again.
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