...the President drinks Coke, Liz Taylor drinks Coke, and just think, you can drink Coke too. A Coke is a Coke and no amount of money can get you a better Coke than the one the bum on the corner is drinking.
Saturday, 24 October 2009
One of the problems we face in economics is that our theoretical solutions do not always work in the real world, because the key assumptions of liquid markets, no transaction costs etc often do not hold. In these cases, we have to spend time working out second-best solutions. But even the second-best may still hold surprises.
Here's an example. Does it make sense for Bill Gates go to the trouble of disposing of his own litter?
So Bill drinks Coke just like the rest of us. He finishes it and needs to get rid of the can somehow. But, as it happens, he's spending the afternoon in Sixty Acre Park near Redmond, and the nearest trashcan is half a mile away (amusingly, the description starts with "Sixty Acre Park is a 93 acre park...").
Of course, the civilised thing to do is walk to the bin and throw it away. But walking there and back will take about 15 minutes (depending on how fit Bill is). Despite his recent unemployment, Bill's annual income is still $175 million in dividends, and up to $5 billion in stock appreciation, depending on how the market goes. So that 15 minutes walk will cost him between $5,000 and $142,000.
(This calculation partly inspired by Brad Templeton, who generated the famous 'what size of bill should Bill Gates not pick up' index a few years back).
Clearly it would make more sense for Bill to pay another park user $100 to throw the can away for him. Surely almost any tourist would be happy to accept $100 for 15 minutes work (not to mention the story you'd be able to tell for the rest of your life). If not, then would $1000 do it? It's still easily worth Bill's while.
But this is where illiquid markets cause a problem. First, there might not be any other tourists around at that precise moment. Second, the cost of negotiating the price will impose its own overhead on the transaction. Third, Bill surely wouldn't be so crass as to actually offer money to someone to pick up his trash. That would just be rude. In fact, politeness only allows us to pay poor people to clean up after us via a psychological distancing mechanism called "local government".
So Bill may end up just carting his own can to the bin. But he does have an alternative, and here's where the second-best solution comes in. He could just toss it on the ground.
Surely not, you cry! What a terrible thing to do. Bill isn't like that! He is a humanitarian, after all. He's fixing malaria!
But as an intelligent utilitarian, maybe he should do exactly that. If he can earn an extra $5,000 in the 15 minutes, he'll pay around $2,000 in taxes which will easily cover the cost of a municipal employee picking up the can. If we use the $142,000 figure, taxed at capital gains rate instead of income rates, he'll pay $21,000 which is even better.
Whatever is left over after paying the cleanup cost can go to healing sick children, paying for cancer research, reducing crime, increasing Social Security, fighting the Taliban, or even educating new economics researchers - whatever you think is a worthy use of public resources. And whatever's left after taxes he'll spend in the private sector, providing someone else with a wage.
So if it applies to Bill Gates, does it apply to you? How much - or little - do you have to earn before it becomes better for society for you to toss your trash on the ground instead of putting it in the garbage yourself?
Well, let's work it out.
First, assume that street sweepers are paid around 60% of the average national wage (US figures appear to be around $32,000, in the UK £11,100 - which is about half the average UK wage but perhaps more than half in Birmingham). It isn't a highly skilled job, and I suspect due to contracting out of council services it's not as unionised as it would have been in the past.
Next, assume it takes the street cleaner twice as long to get rid of your rubbish as it would take you. There are many factors involved here: asymmetric information (you know where the rubbish is - it's in your hand - while the street cleaner has to look around and find it); the balance between the fixed costs of a street sweeper patrolling the roads and the marginal cost for them to walk to your can and pick it up; the extra efficiency of a specialised employee, with their own portable wheelie bin, compared to you having to go to the fixed trashcan, and the reduced frequency of emptying the bins on the street.
Finally, assume a marginal tax rate of around 33% (this is a conservative estimate in the UK and US, when you include income, payroll, state and local taxes - it's certainly higher at higher incomes).
For ease of demonstration we'll assume it takes you one minute to throw away a can (though this figure disappears in the calculation so it does not affect the end result).
Then, for each can you throw on the ground, you impose a cost on society of 2 minutes at 60% of average wage, or about 23p. In return, you are earning 1 minute of extra income and paying tax of 33% of that. If you earn more than 68p a minute, you are contributing more to society by throwing the can on the ground than by putting it in a bin. This works out to about £41/hour or £82,000 a year.
So anyone in the UK earning more than £82,000 should toss their rubbish onto the pavement and use the time saved to make some extra money. In the US, the figure is around $115,000.
If you tweak the assumptions a bit, so that street sweepers are just as efficient at cleaning up as you (in the City of London where there are almost no bins on the street, this may well be true) and assume a marginal tax rate of 40% (which is definitely true in the City of London) then you only need to earn 1.5 times the average national wage to justify tossing your cans. And don't forget, as soon as you earn anything above this threshold, you aren't just paying the cost of collecting your rubbish - you are also contributing to all the other functions of the public good!
So I call on all high earners across the world to do their bit for society: dump your waste on the street and let someone else sweep it up.