Tuesday, January 6, 2009

An economist's take on Brett Favre and municipal budgets

In economic theory there's a notion called deadweight loss, or market inefficiency, which impacts a consumer when the value of an item's utility is less than the price paid for it. What does that have to do with Brett Favre? According to Stephen Dubner, one of the co-authors of Freakonomics, people who bought Brett Favre Jets jerseys earlier this football season are likely experiencing deadweight loss now, as Favre failed to get the Jets into the playoffs.

Dubner asks:

So how do all those people who paid $80 for Favre Jets jerseys feel today? Do they wish they’d spent their money elsewhere? How much would they pay for the same jersey today? Did they derive $80 worth of pleasure from it up to this point — i.e., was the thrill of the first two-thirds of the season worth the pain of the last third?
But this a particularly New York point-of-view (Dubner is a reporter for the New York Times). Here in Wisconsin, the question to Packer fans should be: Was it worth $80 to see Brett play one more season? (Or, for some Favre fans: Were you thinking it would be worth $80 to wear a Favre jersey and cheer the Jets during playoff season in protest of the Packers letting him go?)

But the concept of deadweight loss applies to more than expensive football jerseys. It is a concept that can apply to budgeting decisions as well. For example, what is the true price when the county keeps swimming pools open, but no one comes to swim? Arguably, the county's costs of maintaining and operating the pools are compounded by the deadweight loss in value due to the non-swimming taxpayers. In another example, MPS spent over $100 million to build and remodel neighborhood schools that now have classroom after classroom of empty desks--parents obviously don't value these schools to the extent the district anticipated they would. A final example, from the city's budget: what's the true price of a citywide free wi-fi network failing after the vendor discovers there's no money to be made in it? The risk of deadweight loss in this case was transferred to the vendor, but taxpayers with patchy wi-fi coverage were still the ultimate losers.

Favre fans are likely to recover their loss when Brett retires and is inducted into the football Hall of Fame; his one-season Jets jersey will become a collector's item. Local taxpayers, on the other hand, will find themselves continuing to struggle under the deadweight of lost value when short-sighted or uninformed budgeting decisions continue.

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