Externalities and location value per capita

When I wrote about how a profit-seeking entrepreneur might establish Jubilee, I ended by wondering where the extra value came from, to give the entrepreneur their profit. Today, I’m revisiting that question, and hope to describe a way in which it might be answered.

First, I mentioned the possibility that the extra value might come from “internalizing externalities”. So what is an externality, and how do you internalize it?

An externality occurs when a transaction creates costs or benefits for people who aren’t parties to the transaction.

So, for example, when you get a flu vaccination, you benefit, because you’re less likely to get the flu, and the nurse who gives you the vaccination presumably gets paid to do it; you’re both parties to the transaction. But other people also benefit; if you’re less likely to get the flu, then you’re less likely to pass it on to people you interact with, so they’re the beneficiaries of a positive externality.

Or if you join a queue, you impose a cost on people who join the queue after you; they have to wait longer to get to the front of the queue than if you hadn’t joined it, so they suffer from a negative externality.

Why does it matter? Well, suppose you decide you don’t want to get vaccinated against the flu this year, because the cost outweighs the expected benefit you think you’ll get. The problem is that your decision doesn’t take into account the full expected benefit to society.

Let’s throw some numbers around. Suppose it costs you $39 to get vaccinated, and you value your expected net benefit at $20; you won’t think it’s worthwhile getting vaccinated. But maybe one of your friends thinks it’s worth $11 to them that you get vaccinated, and another two friends think it’s worth $6 to each of them. The total benefit to society of you getting vaccinated would be at least $43, and the cost only $39.

What’s the solution? Well, you could get your first friend to pay you $10 to get vaccinated, and the other two friends to pay you $5 each. You could cover the remaining $19. Then each of you is, in each person’s own estimation, $1 better off than if you hadn’t got vaccinated. This is called internalizing the externality.

Similarly, if the people who join a queue after you could coordinate, they might be able to resolve the externality by collectively paying you enough money to induce you to leave the queue.

In practice, this is often difficult, which is why the externality remains. It can be difficult, not to mention socially awkward, to get people to put a dollar value on what it’s worth to them if you get vaccinated. But it does happen sometimes; my wife’s flu vaccination was paid for by her employer, because they estimated that her not having the flu was worth more to them than the cost of the vaccination.

The example of the queue could be even more difficult, though. When you join a queue, you might impose an extra three-minute wait on eveyone behind you in the queue. But not just the people who are behind you when you get to the front of the queue; if they have to wait three minutes longer before they’re served, then so does everyone behind them, and everyone behind them, until the queue finally empties. So, even disregarding the social awkwardness, the people who might have paid you not to join the queue might not even have arrived before you’ve been served and gone on your way. (Incidentally, I once heard an interesting talk given by Moshe Haviv on efficient queuing systems, but that’s really beyond the scope of this article.)

So, what’s this all got to do with Jubilee? Well, as I noted previously, people tend to be willing to pay more to live in bigger population centres. So when you choose to live in a particular town or city, making it a slightly bigger population centre, you’re making the people there better off. But their landlords know this, so they’ll simply charge more rent as the population increases. So the landlords are the beneficiaries of the positive externality you create by choosing to live there.

In Jubilee, though, you’re paid a guaranteed minimum income just for living there. If this is similar in value to the positive externality you create for others living there, then your decision about whether to live there will accurately reflect the benefit to you and to society of your choice. It’ll also mean that, even though the value of the land is now being split among more residents of Jubilee, your presence will have caused the value to rise enough that everyone’s guaranteed minimum income hasn’t actually diminished in value.

But there’s no particular reason that your guaranteed minimum income should match the positive externality that you create. It might be bigger or smaller.

If your guaranteed income is bigger than the extra value your presence creates for other people, then you might move to Jubilee too readily, causing a decline in the value of the hāora. If this is true of lots of people, Jubilee might grow too quickly, and become unpleasantly over-crowded.

If your guaranteed income is smaller than the extra value your presence creates, then you might not move there even if society as a whole would be better off if you did. If this is true of lots of people, Jubilee might grow more slowly than would be best for society. (If the income is enough to entice you to move there, but still less than the benefit your presence creates, then you might cause a rise in the value of the hāora.)

To find out which is the case, we need to consider the way in which the value of land (or, perhaps more precisely, location) varies as the population living on or near that land grows. I’m trying to find this out using New Zealand statistics.

Statistics New Zealand might be able to help me with population density, but I also need to find out the total location value of all the land in and around particular towns and cities. Although Statistics New Zealand gathers data on rent paid to landlords, such payments cover not only the value of the use of the location, but also the value of the use of the buildings and other improvements; it’s hard to separate these. QV might be able to help me with location values.

In the end, I hope to be able to calculate the location value per capita of specified areas around towns and cities, and see how this varies as population varies. Time-series data would be best, but a cross-sectional snapshot of New Zealand at a particular point in time would be a good start.

I’d appreciate any advice on how to obtain and analyse the necessary information.

2 thoughts on “Externalities and location value per capita

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