Monday, April 11, 2011

Free markets and efficient allocation

I've got to apologize for such a long blogging hiatus! It's been difficult to keep up with schoolwork and write, especially since writing about economics without a PhD and a Nobel Prize can sometimes make me feel like a bit of a fraud. To that end, please read the following disclaimer pertaining to all my posts, past, present and future:

Economics is freaking complicated. Sometimes people who think they know what they're taking about actually know nothing. And I am no exception.

Moving on. As I passed by a gas station on my way home today, I noticed a pretty sweet economics lesson in progress. The Red Sox had a home game, and a gas station near Fenway had converted into a parking garage in lieu of selling any gasoline.

This is interesting because the gas station's profit motive has led to the most efficient use of property; despite the fact that their pumps are full and ready to spew $3/gallon liquid gold into SUVs completely devoid of necessity in an urban setting, the owners saw the opportunity to make more money by selling parking spots to baseball fans (in SUVs completely devoid of necessity in an urban setting). That is, the station's owners saw that the opportunity cost of operating a gas station today was parking revenue and that it was worth more to convert their place for the day.

It's pretty telling how flexibility and "greed" lead to optimal allocation of resources. When shop owners see an opportunity for profit (which, in economic terms, includes opportunity cost and is therefore different from accounting profit), they change tacks. Since on aggregate people are willing to pay more for the new use of the property, we call this efficient -- consumers and producers get the highest net benefit through price signals. It's part of the invisible hand that Adam Smith talked about during the birth of modern economics: left to their own devices, participants in competitive markets will allocate resources efficiently.

Tomorrow, the gas station will be a gas station again, fulfilling its destiny as the most efficient use of land for that particular moment.


Xerographica said...

As somebody that understands the opportunity cost concept...what are your thoughts on allowing taxpayers to directly allocate their individual taxes? The public sector would be funded like the non-profit sector with the exception being that taxpayers would not be able to choose to pay taxes. If they did not wish to directly allocate their taxes then they would just be able to give their taxes to congress.

In other words...what would the value be of forcing taxpayers to consider the opportunity costs of their tax allocation decisions?

Robert Fisher said...

Thanks for the comment, Xerographica.

To me, this type of solution seems an arbitrary place to stop along the spectrum of taxation which, given some initial axiom, generally tends to lead logically to one or the other end.

For instance, if you suppose that taxes are taken by force and therefore akin to theft, then having a hand in their allocation is, while perhaps a step in the right direction, somewhat meaningless. For someone who has just been robbed, the ability to help determine the thief's purchasing decisions is small consolation. Proponents of this initial viewpoint are likely to support not compulsory taxation but voluntary charity.

On the other hand, if you suppose your civic duty requires you to relinquish some fraction of your wealth to the central authority, you're likely also to conclude that the government has authority to determine the best use for the money. After all, the argument comes down to the money's true owner. Allowing a taxpayer to choose the destination of funds taken from compulsory taxes is a policy that relies on the ambiguity of individual ownership and so, I think, would not hold for long as an equilibrium.

Xerographica said...

Imagine if somebody shows up at your door and asks you how much you're going to pay them. It would be pretty reasonable if your response was, "to do what?"

It seems kind of useless to debate the tax rate before establishing what the government is good at doing. We can establish what the government is good at doing by allowing taxpayers to directly allocate their taxes. Chances are pretty good that taxpayers wouldn't pay the government to do something that it's not good at doing. This process would reveal the proper scope of government.

For the anarcho-capitalists their consolation would be the freedom to boycott the government organizations that violate the non-aggression principle. It seems like a pretty big consolation to me...but not big enough to the anarcho-capitalists I've discussed the idea with.

For the civic duty minded...they would still have their freedom to give all their taxes to congress. I wonder what percentage of taxpayers would do so.

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