Guggenheim, externalities, public goods and game theory

Former journalist and city councillor Nils Torvalds wrote a column last sunday in the newspaper Hufvudstadsbladet on the debate on the planned Guggenheim Helsinki museum. A major motivation for building the museum has been the alleged increase in tourist inflows that the museum would bring to Helsinki. Among the beneficiaries of this we presumably have restaurants and hotels.

Torvalds thinks it shortsighted of these private beneficiaries to free ride by not willing to contribute towards the costs of Guggenheim. In terms of moral, this might be the case. Nevertheless, a lot of investments have similar kinds of externalities, ie. they benefit somebody else than the decision maker (ie. the City of Helsinki in this case).

In theory, it would be good if you could make the beneficiaries of these externalities pay for the benefits they receive. Nevertheless, this is often not feasible. To see why, consider the decision making of an individual restaurateur. His benefits from the Guggenheim is not enormous. And even if it was, what are his incentives to pay for it? Is everybody else's investment in Guggenheim really conditional on his investment? That is, if he were not to invest, will the project falter, and if he is to invest, will it really be build? It would seem unlikely.

Due to these kinds of externalities, investments with this kind of public good features are often financed with tax funds, as the costs are then covered by the general public, who also receives the benefits. And mind you, those greedy, short sighted restaurants are also paying taxes.

Nevertheless, even if we ignore what is practical at the moment and think in moral terms ("The restaurants should pay") we still have some problems with the suggestion. Let's say that the current restaurants and hotels pay for the Guggenheim. Even if we somehow could convince every single restaurant in Helsinki to pony up exactly the sum by which they benefit from the Guggenheim, would we then have arrived at a equitable solution?

The answer to the question must be no. Even if we can force the currently existing restaurants to pay, the alleged influx of new tourists would probably lead to new restaurants being started. New restaurants which wouldn't have started if their older competitors hadn't paid for the Guggenheim. So we're back at the free riding problem. Which really is solved using the public purse. That is of course, provided that it makes sense for the public sector to invest in the project...

Culture vs. health care – On conflicts and priorities

Today the report on the Guggenheim’s Helsinki project will be published.  Rumors suggest that the report will find that Helsinki is a suitable place for a Guggenheim museum. A museum that the city of Helsinki should pony up a few hundred millions of euros to build. Spending this much taxpayer money on a museum may seem preposterous to some.

Some have suggested that in a time when the public sector has to save money by cutting down on funding for health care, building a brand new museum for 200-300 million euro is a bad idea.

However, inevitably an argument far too often heard has also been made suggesting that pitting health care against culture is populistic and a false conflict. City council member Laura Kolbe was quoted in the local newspaper Hufvudstadsbladet on January 3^rd as saying exactly this.

Her argument was that since the money for a museum comes from the city’s budget for culture, while the money for health care, comes from another part of the budget. Thus, no conflict between the two!

Charming as this argument may seem to some, this is really not that sensible. Fundamentally, the money comes from the same source, that is the taxpayer. Just because fraction X of the budget this year is devoted to culture and fraction Y to health care doesn’t mean that these fractions have to be the same for all eternity. It’s not as if these fractions were some law of nature that man cannot change.

Thus, as long as the proponents of the museum cannot show that it really is a profitable investment for the city, in the sense that it will bring in more money to the city than it costs, then they should really be honest and acknowledge the conflict.

This is not to say that the museum shouldn’t be built if it’s not a profitable investment from a economic point of view. But if it’s not, then the argument should be made clearly why it is more important than say health care. Anything else is intellectual dishonesty.

On allocating costs

A debate about who should bear the cost of building parking spaces has flared up in Helsinki. When new houses are built, they are required to build a certain amount of parking spaces. This amount is some quota based on the number of apartments built. In downtown Helsinki and the inner-city suburbs this means in practice building underground garages under the houses. This is not a cheap exercise, studies put the average cost per parking space at 40 000 euro. This cost is typically borne by all the apartments in the house, irrespective of whether the inhabitants have a car or not. 

Lately this has lead to some discussion as to whether this is a good system. Today's Helsingin Sanomat interviewed the chairman of the Helsinki City board on the issue. He claims that it would be unreasonable to demand that only those who use the parking spaces would pay for them. Why? "A civil servant or teacher couple cannot afford to pay 40 000 euro, buyt they may still need a car." So therefore the cost of the parking space should be split among all the inhabitants. 

This is a very interesting argument, especially coming from a representative of the main right of center Coalition party. Personally I'd be tempted to extend his argument. 

Consider a house with apartments of two sizes. The larger apartments might be too expensive for the civil servant or teacher couple described by the chairman. The obvious solution is for the owner of the smaller apartment to subsidize the cost of the larger apartment, so that the teacher and civil servant can afford to live there.

Another solution would of course be for those who want a parking space to pay the actual costs of it, and if they cannot afford it, either move to somewhere cheaper, or get rid of their car, if they don't consider it to be worth the cost.