Note to reader: I am writing this post in response to an article I read recently regarding the prisoner’s dilemma, and why two completely rational individuals might not cooperate, even if it appears that it is in their best interests to do so. It got me thinking about some everyday scenarios in which we observe this and other types of social dilemmas (e.g. overconsumption of government goods or utility services when costs are shared in some condo developments).
Given the comprehensive problems we are currently experiencing in the economic supply-chain, and with rising inflation data, I thought this examination could help shed some light on why people are over consuming.
Social dilemmas in real life are costly
The tragedy of the commons is a very real economic issue where individuals tend to exploit shared resources such that the demand greatly outweighs supply, and subsequently the resource becomes unavailable for the whole.
Tragedy of the commons, Investopedia
Problems arise when too many group members choose to pursue individual profit and immediate satisfaction rather than behave in the group’s best long-term interests… Examples of phenomena that can be explained using social dilemmas include resource depletion, low voter turnout, and overpopulation. The collective action problem can be understood through the analysis of game theory and the free-rider problem, which results from the provision of public goods.
Collective action problem, Wikipedia
In the social sciences, the free-rider problem is a type of market failure that occurs when those who benefit from resources, public goods (such as public roads or hospitals), or services of a communal nature do not pay for them or under-pay.
Free-rider problem, Wikipedia
Government social spending by its nature, invokes these dilemmas.
In real estate, I confront these dilemmas when determining proper condominium investments.
The problem of shared utility costs
Problem; why do people who own and reside in condo developments with shared utility costs consume so much more utilities versus those who are personally responsible for their own utility consumption?
This is a variation of the tragedy of the commons. In particular, I have observed that the common charges of units with shared utilities are much higher than when compared to submetered condo development units with their respective utilities added back.
In other words, owners of condo units in developments that have shared utilities (e.g. electric and gas are in included in the common charges) tend to have much higher monthly costs than unit owners who are personally responsible for paying their utility consumption. These differences are usually so stark, that I rarely recommend anyone purchase a condo in a development with shared utilities. I only purchase and manage condos that have submetered units. I am not the only one who observes this phenomenon; most condo construction project developers recognize this failure and avoid it by submetering the units.
Keep in mind that these condo developments are non-profit establishments, so nobody is making any profit from the monthly assessments. Thus, there must be something else that places condo developments with shared utilities at such a costly disadvantage to those with submetered units.
While the issue of freeriding in shared utilities is non-existent, so to speak, since each unit owner does pay every month with his or her common charge, there is no longer any incentive to conserve. Each unit owner will attempt to get as much as it can from what it spends. Thus, they undervalue the utility’s true cost.
The problem is even more glaring as the percentage of units in a condo development that are turned into investment properties rises. Tenants have even less incentive to conserve, and these older developments with shared utilities can have total costs that are up to 100-150% higher than with submetered investment units.
These costs get fleshed out somewhere, and they show up in the lower capitalized value of the condo units. During the housing down turn of a decade ago, it was not uncommon to see older shared-utility condos with $800 monthly charges selling for as low as $25,000, while their submetered counterparts were fetching double and triple that amount. The delinquency rates of the shared utility condo developments were also much higher.
Bottom line; sharing the costs of utilities brings out the worst economic behaviour in people and causes so much long-term collateral damage to the development. So I ask, why does the government insist on socializing everything?
Socialized government resources are always in deficit; consumers always undervalue the resources they consume
The social dilemmas we list above go along way in explaining why these human shortcomings manifest. When any resource is socialized, it becomes self-apparent for any participant to consume as much of that resource as possible.
Moreover, when consumers are given government stimulus money in which they do not have to work to obtain it, they tend to spend more recklessly, with little heed to the prices they pay. All this socialized fiscal stimulus money has created a sense of moral hazard and it cultivates a mindset of overconsumption, while undervaluing the true costs of their consumption.
So why does the government insist on socializing everything? Based on the research of all these social dilemmas and their variations, it would make sense for the government to make each consumer personally accountable for his or her consumption. Economists widely believe that optimal allocation of resources in relation to public goods is not compatible with the fundamental incentives belonging to individuals. Therefore, concepts like the free-rider problem and the undervaluing of socialized goods consumed are expected to be an ongoing issue.
While there are a number of theories that have been developed over the decades to address these dilemmas regarding public goods and services, nothing has truly been feasible enough to help conserve on consumption. Moreover, the economists who seem to find fault with socialized consumption will normally recommend it when asked.
Given the obvious results of socialized anything, we know one sure constant; the more social spending, the more sovereign debt.