By Somya Barpanda
I stay in one of the residential complexes in Delhi. Something really interesting happened in our Housing Enclave last week. I could relate this real-life unfolding of events to one of the concepts we study in our Economics textbooks. Here goes the story:
Our Housing Enclave has 96 flats in total. There are 8 blocks and each block has 4 floors with 3 flats on every floor (The ground floor is for vehicles’ parking). Now, since this residential complex came up way back in 1992, its builder didn’t make a provision for an elevator in the blocks. (The old low-rise buildings in Delhi with 3-4 floors don’t have lifts.) Staircases are the only way up to the flats. No one had ever felt the need for a lift all these years. This was mainly because, initially, the average age-composition of all residents was in the range of 20-55. However, over the years, the society’s population greyed and climbing stairs became a pain for many.
Last week, a group of 42 senior citizens from different flats presented their proposal for the set up of elevators to the Society’s septuagenarian president. A notice was put up announcing the decision of the society office to implement the proposal. However, the regular society funds weren’t sufficient for such a big project and contributions had to come from the residents. The entire cost of installing lifts in all blocks was Rs. 38, 40,000. So, each household was requested to pay an equal sum of Rs. 40,000 (as Rs. 38, 40, 000/ 96 flats= Rs. 40, 000 per flat)
Many residents protested that it was unfair to make every flat pay an equal amount.
- The first-floor residents said that for them, it wasn’t worth paying so much to get lifts installed when they were happy using the humble stairs. They argued that the 2nd,3rd and 4th-floor residents should be made to contribute a higher amount, as they were the ones who would eventually use the lifts the most.
- The young and fit inhabitants of these higher floors said that they too could manage with stairs and that, they didn’t desire to pay so much for the lift-facility.
- Now, with most residents refusing to oblige with the equal-contribution-arrangement, the 42 aged flat-owners of the society weren’t that eager to shell out a major chunk of the total amount all by themselves. It was true that they wanted the lifts to come up but, there was a limit to what they wished to contribute for it.
The democratically elected Society Office didn’t possess powers strong enough to evict or take action against flat-owners who refused to pay the amount that they had dictated for all. Everyone’s views and concerns had to be taken into consideration. Thus, the president announced that each flat had to submit an amount that it was willing to contribute for the elevator-facility depending upon the extent of use-value or benefit its members expected to derive out of it, post its installation. It was simple- if the total cost was met, the lifts were to materialise. But the total contributions never summed up to the full expenses and thus, the lift never came up. Some flats even said that they don’t want to contribute anything as they were not planning to use the lift at all and stick to using the good old stairs.
What each flat was expected to do, in this case, was to reveal its true preference (based on the floor number, the intensity of the need felt by its members as per their age/health conditions) for the lifts and pay accordingly. But no flat had the strong incentive to honestly reveal its actual preference/utility as that would mean a higher contribution on its part. Each flat hoped to pay less and expected the other flats to pay sufficiently for the lifts to materialise. Most followed this line of reasoning, “I own just one flat out of the 96 flats in this society. Even if I pay nothing or pay a meagre sum, others-who are so insistent on the lift facility-would pay the required and the total expenses can be easily met. Once the lift gets installed, I can use it nonetheless.” This is how a ‘rational’ individual is expected to think. Individuals expected to free ride on the lift facility- i.e. use it without fully self-contributing for it. The scope for free riding existed here as the lift, once installed, was to become a public good- non-rival and non-excludable:
i) Once the lifts, after their installation, were to start operating, it was not possible to restrict its usage to only those residential members who had initially paid for the facility. Hiring security guards to check for the free riders would be too costly. Thus, the lifts were non-excludable.
ii) Also, after the lifts started functioning, there was no additional cost involved in letting an extra individual (even if it’s a free-rider in fact) use it (marginal cost was zero). (The electricity charge that was to come with the lift usage was a fixed cost). So, the installed lifts were non-rival.
But if one flat hoped to free ride, all others hoped the same and consequently, everyone’s revealed preferences were not in line with their actual preferences. Though, all were eventually going to derive some utility from the lifts (since, all the flats were located from the first floor onwards), none was ready to pay for that potential utility and yet hoped to use the elevators once installed on virtue of fellow-dwellers’ money)
Thus, the lifts never got installed even though everyone wanted to use them and benefit from them. All households had hoped to free ride on the facility and not contribute but, no free riding could take place without the lifts. Hence, the contributions fell short of the total cost and the old stairs remained the unrivalled means to the flats. All thanks to the free-riding problem associated with public goods and the problem of true-preference-revelations!
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