Tuesday, January 25, 2011

Film Subsidies, Coordination Problems, and Network Effects

A headline in yesterday’s International Herald Tribune read: “In a budget bind, U.S. states consider cutting film subsidies.”  And well they should—why should we taxpayers subsidize the cost of Hollywood (or even independent, although there is more of a case to be made here) films?

This is a case in which reducing choice can actually increase freedom.  State film subsidies started as a way to attract the well-paying, if temporary, jobs they bring.  Add a little inducement and reap the rewards of huge crews with big budgets.  But as more and more states adopted the practice, competition emerged, pushing up the subsidies beyond the point of reason.  A Massachusetts study in 2009 showed that film subsidies cost that state $88,000 per job.  Even California provides $100 million a year in film subsidies.

Now states would be better off just trying to attract films on their own merits and not resorting to the costly inducements.  But it is hard to get out of the game with everyone else competing (they are stealing our jobs!).  So, an agreement (or even law) that prohibited such subsidies would benefit those now freely participating in the competitions.

This is a sort of coordination problem or network effect, in the terms of economics.  A network effect is when the value of something depends on how many others use it.  Telephones are the classic example: the more people that have phones the more valuable it is to have one.  The internet economy has many examples (including the internet itself).  We generally think of the network effect in terms of “positive network externalities,” but there are down sides as well. 

Robert Frank has written about the subtle and profound network effects of status (and status income) competition (see his books Luxury Fever, The Winner-Take-All Society, and Falling Behind).  With positional goods, a goodly portion of their value comes from how many (or few) others possess the same of similar items, a network effect, if inverse to that of telephones and Facebook.  If everyone one knows has a 10,000 square foot house, that become the norm.  And in a social environment in which aspirations are to exceed the norm, positional competition pushes up average sizes well beyond what the material utility justifies.  In such cases, regulations can solve the coordination problems (I won’t do it as long as no one else does) without reducing satisfaction  

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