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...

Special interests vs. the public interest

Yesterday I blogged about experts and special interests groups lobbying for legislation to increase demand for their services.

A recent related example of this can be found in the regional newspaper Kouvolan Sanomat, where a health and construction expert suggested that all buildings should be subject to a inspection system similar to the one currently in place for cars.

This would surely be a great thing for the special interests the expert represents. Whether it would be it for the taxpayer and/or home owners is a different story. Mandatory car inspections can be motivated by the fact that car usage can impose consequences (externalities) on outsiders.  It is not evident that this is the case for houses.

On regulation and impact studies

Frequently papers and news sites report on various groups suggesting that various impact studies should be carried out when any new legislation or regulations are drafted.

Typically this takes the form of experts in the field, say environmental experts suggesting that any new legislation should be analyzed to see what impact the new legislation may have on the environment.

These kinds of impact studies may occasionally make sense. However, critical journalists should point out that calling for systematic impact studies really also (only?) serves the interests of the experts in the field. Mandatory impact studies carries a cost to the taxpayer, while the experts in the field benefits through higher demand for their services.

In order to mitigate this, my suggestions is that all new legislations and regulations should be subject to economic impact studies, or cost-benefit analysis. This suggestion is of course made only in the interest of the taxpayer. Any insinuations that I propose this because it would benefit me as an economist is cynical and daft.

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.

Letting them die and the importance of competition

Both the original blog post by Karls Smith, as well as The Economist's Free Exchange comment have much to commend. They are very insightful, and these insights have quite serious and broad implications, beyond that which is explicitly stated.

For one thing it supports Steve Yegge's long rant about Google and the importance of platformization - Don't think you can do everything yourself, but rather let other developer's try to add value to your product by opening up to them.

Also, it speeks volumes about the public sector, with the clear implication that outsourcing service production to multiple service providers will be much better than relying on a single monolotihic organization to come up with all the ideas. Further, it does cause a bit of concern when thinking about the planned changes in the municipal structure here in Finland. While I do see the potential for improvement, fewer municipalities will without a doubt lead to fewer organizations producing services, given the hesitation to outsource.