Thursday, May 03, 2007

Economics, California-style

So this whole MacArthur Maze collapse has put a wrench into the commute plans of tens of thousands of Bay Area residents.

The curious step, though, was Governor Schwarzenegger authorizing free public transit the Monday after the collapse. First off-- if that's the solution, why only one day?

But more importantly-- is making it free the answer? Demand for public transit shot up; shouldn't the price rise? Then administrators shrug their shoulders when parking lots overflow, acting as if there was nothing they could do about it.

The same thing happens during natural disasters; price caps accompany any number of "essential" goods, and then policy-makers are left baffled as to why no one can get anything.


Thomas said...

I think that this (and possibly rationing) are a pretty clear case of externalities that the market can't adjust to fast enough. For instance, in this situation, people may not adjust their behavior quickly enough. If they continue to use their cars, they'll get into work much later, and businesses could experience significant productivity declines.

The case of rationing after natural disasters is probably similar. If prices were allowed to rise, there would be individuals who would be unable to afford the basic goods which they would need to survive. Making a large number of people less well-off in the short term (by rationing goods) could allow greater long-term good (because more people are alive to experience that good).

Matt E. Ryan said...

It shouldn't be mistaken that rationing gets the goods to the people that "need" them; the government has no way of being able to determine this. The market does, however, have a way of determining who values goods the most and can distribute them accordingly. The choice the governor was faced with was either a) let people who value the rides the most purchase them, or b) make the rides free and let people compete for these rides on margins other than value.

It should be noted that a) is a bit of a nirvana situation; I doubt that BART would have raised prices at all (perhaps at the consequence of being sued). Nonetheless, making it free just worsened the scenario.

I would have loved to see entrepreneurial activity--sans Arnold-- at work in finding out how to get people to their jobs.