Tuesday, March 29, 2011

Do I File This as "Markets in Everything"? Or "Arbitrage Opportunity"?

The Wichita bureau is amused by a WSJ story on fare-dodgers on the Scandinavian subways. Their solution: they insure, and the insurance.  Evidently it is actuarially sound--premiums match payouts.  Then as any Econ 1A student could tell you (yes?)--let F=Fine; let p=probability of getting caught; let D=premiums at the insurance scheme. Then if the aggregate F*p is less than D, it all adds up. Norwegian scofflaws complain that the fare is too high but of course this is incomplete. You could just as well raise F or p and bring on the traffic police.

[Minor annoyance: I can't figure out how to use the "less than" symbol in text; Blogger wants it to be an HTML tag.]

The Wichita bureau notes a second transport angle that I (and others?) had missed:
Odd that the Republicans aren't targeting the Amtrak subsidies as outrageous support for rich democrats in a part of the country they've all but abandoned.
He's right on that, yes? Is this because K street lobbyists take a lot of Amtrak?


Anonymous said...

Try using an entity for the left angle bracket:

ampersand l t semicolon

&lt; becomes <

Ken Houghton said...

Anonymous beat me to it on <

Isn't there an adverse selection problem (only scofflaws buy insurance)? If the premkium is really lower than F*p, the insurance company will go broke.

The reason it works in Health Insurance is that while the premium is higher than the expected loss, it's lower than the overall Utility gained—effectively, I buy the insurance for its indirect benefits (e.g., income certainty allowing consumption smoothing).

Here, that would be time saved being a scofflaw--which to be realised in the discontinuity of subway service, requires actions that are more likely to raise suspicion/law activity.

I can't see the market continuing to clear for any length of time.

Ebenezer Scrooge said...

The Amtrak subsidies largely go to support economically absurd routes in red states. I don't meet many Congresscritters opposed to local goodies paid by other taxpayers. Maybe Ron Paul?

IIRC, the Amtrak East Coast corridor makes money on the operating budget, although it doesn't cover its capital budget.