Wednesday, March 17, 2010

Taxonomy of Political Economy

Just playing with numbers and looking back at last week's news that the Pittsburgh to Paris flight is not doing well and will require payment a full $5 million in subsidies for its first year of operations. 

I didn't quite think about what that subsidy meant per trip.   So my math starts with this:

52 weeks in a year
8 segments each week (4 outbound, 4 inbound)
186 passenger capacity for 757 per Seatguru
68% reported capacity utilization

Which gives me 52,615 passenger-segments that wound up being covered by the guarantee.  Have I missed anything?

Divide $5 million into that and you get $95 per segment, or $190 per RT purchase on average.   For a ticket the same news reports as averaging $800 or so RT that is a quite a level of market intervention in an American market whether the subsidy was needed in the end or not.

Some have  heard my personal taxonomy of political economy.  Basically it comes down to your view on whether market failures exist.   If you think market failures exist but are quite rare, you are probably a conservative.  If you think market failures exist, but are more common than that then you are someting of a liberal.  If you think market failure is a tautology then you are akin to being a communist and if you think market failure is virtually an oxymoron then you are libertarian.

So given that level of subsidy, where in that range of possibilities would you characterize this particular project subsidizing flights to Pittsburgh?


Blogger EdHeath said...

Market failure, as I understand it, is classically either something like pollution, where the lack of ownership of air or water allows companies to pollute indefinitely and create a bad condition for society as a whole, or something like a monopoly or oligopoly that arises from either barriers to entry or just some market aberration that allows the monopolistic/oligopoly to be created. I will say that, for example, I believe health care/insurance in the US now constitutes a case of market failure, which probably classifies me as either an anarchistic or European.

I don't think the conditions that necessitated a guarantee of subsidies if the transatlantic flight did not reach a certain capacity is a case of market failure at all. At best it was a government attempt to manipulate the market to achieve a certain development/growth target. The fact that the flights did not achieve that target is an indication there was not need for those flights (as judged by market forces) in shrunken Pittsburgh. There are at least reasonably good alternatives (flying to other US cities that have the international flights). This is one of those situations where the "If you build it, they will come" thing just didn't work out. Better to spend the money on local buses.

Wednesday, March 17, 2010 9:05:00 AM  
Anonymous MH said...

where the lack of ownership of air or water allows companies to pollute indefinitely and create a bad condition for society as a whole

That's called a negative externality. Presumably, the point of subsidizing the Paris flight is to create a positive externality. I have no idea if that happened or not. On the whole, I'd rather see the money on the buses also.

(My personal view is that market failures exist and are very common. Which would make me liberal, except for my well-founded belief that local officials are less useful than any market this side of the Bradford Exchange*.)

*For those who don't remember basic cable ads from the 1980s, that's the one that sold collectable plates.

Wednesday, March 17, 2010 9:25:00 AM  
Anonymous johnnyg said...

You're probably a little off on the numbers. Until October 1, the flight ran 5 days a week. But, I get your point.

I don't know. "Market failure" in the context of a perverted market like the airlines is a though call.

While not an apples to apples comparison, the Erie Canal took massive public investment and lost money for years before becoming successful. In the meantime, it established New York City as the center of global trade for the United States and of finance for the world. The creative financial instruments developed to fund the canal allowed New York banks to leapfrog Philadelphia banks. They never looked back.

The question of positive externalities is an important one. I think, to a degree, that it is a commons problem. Does the subsidy create greater economic benefit for the region as a whole that justifies a relatively small subsidy to keep it going? I don't know the answer, but I suspect that the answer is yes.

Finally, can we stop with the oranges to apples comparison? The assumption that the subsidy could be used for "more busses" is laughable. Even if all the money ($5 million--private and public) was put to the Port Authority (and I doubt that even the public money could be earmarked in this fashion), it would be a drop in the authority's $347.5 million budget, and even a small portion of its projected FY2010 deficit of $31.5 million.

Wednesday, March 17, 2010 10:16:00 AM  
Anonymous MH said...

The assumption that the subsidy could be used for "more busses" is laughable.

I know that. It's just that I go to Oakland at least five days a week and I've been to Paris once in my whole life.

Wednesday, March 17, 2010 10:27:00 AM  
Anonymous Anonymous said...

I think there was a revenue threshold per flight. if the flight was under, Delta could recoup up to that amount. Threshold was a fixed dollar amount per flight which would ensure Delta doesn't loos money on the flight, I think it was corresponding to 2/3 capacity based on ticket prices when agreement was made. Tickets where closer to 1200$ back then ( compare to current 800$). This is why the post gazette article mentions that if prices had remained around original the level, with 68% capacity they would have exceeded the target threshold.
So you'd really have to know for each flight how much tickets were sold for and how short of the threshold each flight was to calculate how they came to claim the 5M$.

Wednesday, March 17, 2010 12:34:00 PM  
Blogger Mike Madison said...

Whether or not you believe in market failure (as the old joke goes, believe in it? I've seen it done!), I don't think that the Paris flight is a good example, or to put the point differently, the goal of the Paris flight is positive externalities, but the market failure premise probably isn't a helpful starting point. It isn't really a commons problem, either; it is, to borrow a theme from some of my non-IP work, an infrastrucutre problem, i.e., a special case of a public goods problem. (Some people would say that this is a market failure problem in a different vocabulary; I just don't think that it's helpful to prioritize the idea of the market as an analytic baseline.)

The economic problem in the infrastructure area is that measurable demand (people who actually use the resource - in this case, people who fly to and/or from Paris) doesn't accurately account for the expected social value of the resource, which is greater. (In other words, there is an un-accounted-for positive externality.) I'm not saying that there really is that bigger social value out there; there may not be. But that's the model that I think we should be looking at.

If that's the model, then the question is the most effective way(cost-effective, or efficient, or something else - you can use different standards) to provide that infrastructure. In many cases, "the market" can do that, because the gap between demand and social value is relatively small, or because American social and political values declare that it does, or that it should, or some combination of those things. (In other words, "the market" is a solution, not a premise.) In at least some cases, it cannot. The solution then might be some kind of public subsidy (the Paris flight), government provisioning (e.g., public defense; here, the ACCD could just buy or charter a plane and sell seats), or some kind of crowd-sourced or peer-produced solution. That last idea sounds like it wouldn't map onto the air travel case at all, though some kind of commons/market/subsidy blend isn't an impossibility.

So long as the deal is simply that the ACCD buys seats and offers them to us at a discount - that's what is happening now - then the deal is doomed to fail. It's supply side only. A solution needs to blend supply side at reasonable cost with pumping and priming and coordinating the demand side.

The same thing applies, btw, to the Port Authority.

Wednesday, March 17, 2010 1:00:00 PM  
Blogger C. Briem said...

Lots of ways to get to market failures and their redress and they are not all Coasian in nature.

To focus my thoughts a bit. The premise of the subsidy must have been in some form a belief that there was a market failure in terms of the airlines knowledge of the market here.. or maybe in our market's appreciation of the value offered by an international flight. So a knowledge discovery problem in itself. Thus the subsidy is there to artificially induce a flight. The intention I hope was a goal that once its potential was made known and could sustain itself in the future. If it had worked (and still might, not trying to be that negative) then it would clearly have been a market failure that was fixed by a temporary subsidy and the flight would continue once the subsidy went away.

If that is not the case, and the real argument is that there is a uncounted social benefit (some positive externalities) to the flight that the market price does not and will not account for... that is a bigger issue and a bigger failure. It also would argue for maintaining the subsidy indefinitely which would I don't think anyone was planning for.

Wednesday, March 17, 2010 1:36:00 PM  
Blogger Mike Madison said...

We can combine the two points: I'll grant that the actual thinking had to do with a kind of market failure that reflects an information asymmetry. The subsidy was designed to cure that; having done so, there would be a new equilibrium that would not require the subsidy.

The question then would be - what's the nature of the information asymmetry? That's both empirical and conceptual, empirical in the sense that we want to know what happened (or we should want to know, anyway), and conceptual in the sense that if we jump ahead too quickly with the premise (what I've granted above), then the remedy may be mistaken.

Is the information asymmetry (i) individuals want/need to get to Europe but aren't/weren't sufficiency aware of the value (to them) of a direct-from-Pittsburgh flight; (ii) parts of the Pittsburgh economy (investors, banks, firms, research institutions) want/need links to Europe that are fed partly by in-person contact that supplement other contacts, and those economic players aren't/weren't sufficient aware of the value of a direct-from-Pittsburgh flight; (iii) neither; (iv) some/all of both.

Wednesday, March 17, 2010 1:46:00 PM  
Anonymous Vannevar said...

I'm loathe to pop out of my hole into this high level discourse, but if I may: Is this an issue of market failue or rather an indicator of government/NGO inability to lead markets to places they don't want to go?

And the secondary question I wonder about is: If a successful airport is a blend of various economic activities, is it reasonable to spend $5M a year to move closer to the point of viability? I wonder if $5M is that much in the scheme of things.

Wednesday, March 17, 2010 4:10:00 PM  
Anonymous MH said...

The airport is well past Robinson. It's clearly too far away from anybody to be viable.

Wednesday, March 17, 2010 4:34:00 PM  
Blogger C. Briem said...

The ACCD as an NGO... I guess that is right though the semantics sure sounds funny. Makes me think they are working on refugee resettlement or something.

But why would the market (airlines or passengers) not value the flight as it 'should'? Realize economics took a century to really admit that information was not perfect in markets to begin with.. which is why the world invented marketers. So I have not been trained to answer.

But it does lead one to Vannevar's comment that it may all have been trying to lead the market where it did not want to go. My version of that is that if there was some real value to the convenience of a flight like we are talking about, my inner libertarian says that must mean some folks would be willing to pay a premium for it which would support the flight.

Which leads me to wonder if it's not more of an inability to price discriminate type of issue.

Wednesday, March 17, 2010 5:01:00 PM  
Blogger C. Briem said...

and for those just here for the airline discussion... see the previous comment thread on the proposed soda tax to get MH's Robinson comment.

Wednesday, March 17, 2010 5:02:00 PM  
Blogger Mark Arsenal said...

"If you think market failures exist, but are more common than that then you are someting of a liberal. If you think market failure is a tautology then you are akin to being a communist and if you think market failure is virtually an oxymoron then you are libertarian."

I've been thinking about this.

Market failure is a tautology if you wish to live in a society.

Market failure is an oxymoron if you wish to live in a market.

Aside from that: Airlines are a declining industry due to the fact that few technologies exist to make mass transit by air viable after fossil fuels are gone. I think we should subsidize more long-lived public goods.

Thursday, March 18, 2010 2:20:00 PM  
Anonymous MH said...

The 61c is pretty long lived. Not may bus lines have been around long enough to get a coffee shop named after them.

Thursday, March 18, 2010 3:39:00 PM  
Anonymous MH said...

And the 61c is of more use to painted chickens trying to escape from drunken CMU pranksters.

Thursday, March 18, 2010 4:07:00 PM  
Blogger C. Briem said...

Bring back George Aiken's!

Thursday, March 18, 2010 4:15:00 PM  
Anonymous MH said...

Did he do better farm animal pranks?

Thursday, March 18, 2010 4:21:00 PM  

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