Govt 6: When the markets need fixing (Market Design)

Summary

Planet Money Summer School Govt 6: When the Markets Need Fixing (Market Design)

Podcast: Planet Money Summer School
Host: NPR (Robert Smith, Jess Jiang)
Guest: Prof. Alex Teitelboim, University of Oxford
Date: August 13, 2025
Summary by: [Your Summarizer Name]

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Overview

This episode explores what happens when markets—normally celebrated for their efficiency and fairness—break down or need a nudge. Centered on the field of "market design," it illustrates how economists (and sometimes governments) step in to fix or optimize poorly functioning markets. Two vivid case studies are featured: Alaska's dangerous halibut fishing derby and the intricate FCC spectrum auction, each highlighting the perils and possibilities of market mechanics gone awry. The episode threads in expert insights from Prof. Alex Teitelboim, who breaks down why some markets "go bad"—and how to redesign them for safety, fairness, and efficiency.

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Main Themes

• How and why markets fail
• The art and science of market design
• The role of government intervention
• Efficiency vs fairness in economic systems
• Real-world case studies: fisheries and spectrum auctions

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Key Discussion Points & Insights

What Makes a Market Work?

• Robert Smith: "In economics, a market is a place, even virtual, where buyers and sellers interact to exchange goods or services. And economists love markets."
• Alex Teitelboim: “All happy markets are alike, but all unhappy markets are unhappy in their own way.” (02:12)
• Markets work best with:
  • Competition
  • Well-informed participants
  • Rules against collusion
  • Simultaneity in transactions (everyone meeting "under the same roof") (04:07)

Market Failures: Asymmetric Information & Collusion

• Case: Buying in foreign or unfamiliar markets (like Istanbul’s bazaars)
  • Buyers can be at an information disadvantage
  • Sellers may collude, raising prices unfairly (03:30)
• Classic second-hand car example: Sellers know more about the product than buyers, risking the latter getting "a clunker." (02:43)

Case Study 1: The Deadly Halibut Derby – Alaska’s Fishery Failure

Segment Starts: 06:29

The Problem: Tragedy of the Commons

• Sudden, very short halibut fishing windows (“derbies”) led crews to risk lives, often fishing in deadly weather (08:09).
• Notable Quote:
  • Carcass, Deckhand: “It was a very stupid system. It was murder by government, you might say.” (10:52)

How Bad Did it Get?

• 3 in every 1,000 fishermen died each season (10:45)
• Old system rewarded the most reckless risk-takers, causing resentment and economic divides (12:09)

The Solution: Tradable Quotas (ITQs)

• Fisheries council shifted from "race for fish" to individual quotas: Each boat owner/captain got a share of the catch, fished any time in season (13:14).
• Enforcement: Federal agents policed docks (14:32)
• Short-term backlash: Deckhands felt left out, mass protests, even violence in fishing communities (12:47)

Results

• Over time, fishermen could fish more safely, take breaks, lease out quotas (15:19)
• Number of fishing boats dropped (efficiency up, overfishing down) (15:41)
• Fish quality improved; death rate for fishermen plunged (17:04)
• Ongoing fairness debates: Distribution of quotas privileged owners over laborers

Economics Concepts

• Tragedy of the Commons: Collective rationality leads to collective ruin unless rules change (18:04)
  • Teitelboim: "People are acting in their reasonable self-interest. ... But their individual actions turn out to be against the long-term interest of the fishing community." (18:51)

Case Study 2: The Spectrum Auction – When Auction Design Goes Wrong

Segment Starts: 22:51

The Problem: Scarcity and Inefficient Allocation

• TV and radio stations long had free or lottery-based assignment of valuable radio spectrum.
• Cell phones demanded growing bandwidth, creating scarcity.

The Solution: The Double Auction

• The FCC designed a "two-sided simultaneous incentive auction" to free up spectrum, using complex rules and computer algorithms (27:04)
• TV stations secretly stated their lowest sale price; cell companies bid for frequencies

What Went Wrong?

• Private equity firms realized they could buy strategically crucial TV stations, then leverage their importance to drive up auction prices.
• Notable Quote:
  • Glenn Weil: “What do you mean it can't be gamed? One of my friends is making a bunch of money exploiting the auction.” (30:02)
• Private equity made hundreds of millions by holding out and bidding up prices, despite the market’s “perfect” design (32:10)

Results & Lessons

• Government made $7 billion, but much value was siphoned off by strategic players (33:08)
• Surface efficiency masked underlying fairness issues

Wrap-up: Market Design Principles & Vocabulary

Segment Starts: 34:09

• Double auctions are everywhere: stock markets, electricity, etc. (34:29)
• Market Power: When a single player can skew results for everyone else (35:13)
• Strong competition, full information, and anti-collusion rules are all needed for healthy, fair markets (36:03)

Final Vocabulary Roundup

• Tragedy of the Commons: When self-interested participants deplete a shared resource (36:55)

• Market Power: When actors can sway market results to their benefit (37:22)

• Teitelboim: "It's not just efficiency that really matters… If the market allocations are really unfair, often people might say that this design is no good and not wish to participate." (36:47)

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Notable Quotes & Memorable Moments

• Carcass on Derby Days: “It was a 1912 old wood boat... we're in like 45 to 50 footers... and I'm going, I'm going to... pretty nice.” (08:15)
• Clem Tillian: “Young men loved the action, the excitement. It was going like Las Vegas... you caught all you could catch.” (10:16)
• Jess Jiang on transition: “It took 20 years for the fishermen to get used to this system, and they still grumble.” (17:04)
• Robert Smith on Auctions: “This new auction would need to be a mashup of all... The most glorious thing anyone had ever seen.” (27:31, 29:41)
• Glenn Weil on being gamed: “What do you mean it can't be gamed? One of my friends is making a bunch of money exploiting the auction.” (30:02)
• Teitelboim on Fairness: “Market participants need to accept what the market design ultimately is. And if it's unfair, people might say this design is no good.” (36:47)

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Key Timestamps

• 01:51: Prof. Alex Teitelboim introduces market design perspective
• 06:29: Alaska fishing derby story begins
• 10:52: "Murder by government" – Carcass on fisheries death risk
• 13:46: Quota system’s impact in practice
• 18:04: "Tragedy of the commons" explained
• 22:51: FCC spectrum auction case study begins
• 29:41: Spectrum auction incentives dissected
• 32:10: Private equity's auction hack revealed
• 34:09: Market design wrap-up with Teitelboim
• 36:03: List of what makes a great market
• 36:55–37:22: Core economic vocabulary explained

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Tone

The conversation is lively, sprinkled with dry wit, real-life color, and memorable analogies—yet stays rooted in clear, accessible explanations of important economic concepts. Guests and hosts alike combine storytelling, expert analysis, and practical wisdom, often in a tone that's both breezy and gravely serious.

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Conclusion

Through real-world stories of fishers braving death and finance whizzes gaming billion-dollar auctions, this episode makes the invisible hands of the market—and the people trying to tame them—vividly visible. It reminds us: perfect markets are rare, and the rules matter as much as, if not more than, the players.

Final thought from Robert Smith: “When you see something wrong in the world, rather than getting upset, you can say: we should just redesign this market.” (37:31)

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For Teachers and Students

• Use this episode to spark classroom discussion about collective action, incentives, equity versus efficiency, and the unseen hands (and designers) behind the markets shaping everyday life.
• Vocabulary quiz and diploma at the end of Summer School!

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Transcript

[Robert Smith]

This message comes from Square. Your favorite neighborhood spots are using square to do everything from covering cash flow gaps to expanding to new locations. Wherever your business is growing, Square meets you there. Go to square.com go NPR to learn more.

[Jess Jiang]

This is Planet Money from NPR.

[Robert Smith]

Welcome back everyone to Planet Money Summer School Government edition. The only economics degree you can get at one point. Normal speed, very efficient, saves a ton of time. Today we boldly go into the arena of competition known as the market. In economics, a market is a place, even virtual, where buyers and sellers interact to exchange goods or services. And economists love markets. It's like all of our supply and demand graphs have come to life. People buying, people selling, shouting out prices. Wherever humans have congregated, markets have have formed. Thousands of years ago, it was trading wheat and shells and copper. Hundreds of years ago, stock markets formed. Everything you buy goes through some sort of marketplace. Your cup of coffee came from trading in the bean markets. Your spouse might have come from the dating marketplace. On the apps, even kids will tell you one Snickers is worth at least two Twix. It's a law of nature. But sometimes, as we'll see today, markets can go terribly wrong. Greed can run out of control. Lives can be at risk. That's when the government often steps in. It gives the market a little nudge to work better. This is class number six market design. This is such a cool and interesting area. We wanted not just a professor to help us along, but a market designer. The invisible hand made visible.

[Alex Teitelboim]

My name is Alex Teitelbaum and I'm a professor of economics at the University of Oxford in England.

[Robert Smith]

I bet in England you don't need to say the in England part.

[Alex Teitelboim]

Not every time.

[Robert Smith]

So, Alex, as a market designer, you are often brought in to look at a particular market and see if it can be run more efficiently. So what are you looking for?

[Alex Teitelboim]

Well, you might say that all happy markets are alike, but all happy, unhappy markets are unhappy in their own way.

[Robert Smith]

Very literary of you. Yes. So let's think a moment about making sure that a market works effectively. Let's just say I'm in Istanbul and I go into their famous market there where they spot me immediately as a tourist, and the negotiations begin. What can go wrong in a market for an individual?

[Alex Teitelboim]

Well, in this particular market, what might happen is that you've got no idea what it is that you're buying. One of the things that makes markets work badly is that some participants have the information about what's being traded and others don't. So a really Famous example that economists love is buying a secondhand car. The guy who tries to buy the secondhand car has no idea really how good the car is. And of course, the seller does. And economists like to point out that this can be a real problem because anybody you really end up trading with might be selling you a clunker.

[Robert Smith]

There can also be collusion in a market. As I wander in looking for the rug I want to bring back from Istanbul, all of the sellers could have agreed. Hey, the moment you see a tourist, make sure you double the price.

[Alex Teitelboim]

Exactly right. So if these traders can get together and they can watch each other and can make sure that nobody's going to undercut, and they can all agree to offer you a really high price.

[Robert Smith]

So we have these things that can go wrong in markets, and they get way more complex than the ones that I've brought up. How can you design a market so bad things don't happen?

[Alex Teitelboim]

Well, we try to make sure that the things that make markets work well work well. So we often try to encourage competition. We try to make sure that the participants are informed.

[Jess Jiang]

We.

[Alex Teitelboim]

We try to figure out ways of preventing collusion. We try to make sure that the participants actually get together at the same time. That amazing bazaar you talk about in Istanbul, one of the things that makes it work really well is everyone is there at the same time under the same roof. That makes a market work better than if the traders were scattered all over Istanbul and you would have to go around and look for one or the other. So that's the kind of thing we tried to do. We tried to get everyone under the same roof. We've got to make sure that there's enough competition, and we try to make sure that everyone is as well informed as anybody else.

[Robert Smith]

Is it fair to say that a good market maximizes the number of people who are happy at the outcome? Is happiness involved?

[Alex Teitelboim]

Market participants being happy is very important because in the end, most market participation is voluntary. If a market doesn't work well, people can leave. And markets that work well, they attract more people to come and join them. So often the proof is in the pudding. You can see a market working well when the participants are happy being in that market.

[Robert Smith]

But of course, it wouldn't be an exciting episode of Planet Money if everyone was happy all the time. Today we will have two case studies of markets that are not working quite right. One involves a secret flaw that allowed some smart people to make millions of dollars. The other case study is a market that quite literally killed some of its participants. We will take you fishing after the.

[Carcass]

Break.

[Robert Smith]

On the Throughline podcast from npr. Immigration enforcement might be more visible now, but this moment didn't begin with President Trump's second inauguration or even his first, a series from Throughline about how immigration became political and and a cash cow. Listen to Throughline in the NPR app or wherever you get your podcasts. A lot of short daily news podcasts.

[Jess Jiang]

Focus on just one story, but right now you probably need more on up first from NPR, we bring you three of the world's top headlines every day in under 15 minutes, because no one story can capture all that's happening in this big crazy world of ours on any given morning. Listen now to the upverse podcast from npr.

[Robert Smith]

And we are back in the marketplace of knowledge, happiness guaranteed. But I hope you have your rain slicker with you because we are headed next to Alaska, specifically to the fishing fleet based in the town of Homer. Working on a fishing boat in Alaska is one of the most dangerous things you can do for a living, and today we will see why. Alex tatelboim what should our students be paying attention to in this story?

[Alex Teitelboim]

As you listen to this, just think about what rules are in place that are encouraging this very dangerous behavior by the fishermen.

[Robert Smith]

This episode Originally aired in 2015. It was hosted by Jess Jiang and me, and it told the story of how in Alaska, experts were worried about overfishing of halibut. So they had a great limit, the number of days you can legally fish. The windows for fishing got shorter and shorter until they would open fishing for only 24 hours. They nicknamed it the derby because you competed to get as much fish as you possibly could in just 24 hours. What kind of person would go out in a tiny little boat in miserable, dangerous weather to catch fish for 24 hours straight? Everyone just Jiang told me that most everyone in Homer, Alaska, wanted to do this.

[Jess Jiang]

You can pretty much grab anyone on the fish dock. And they would tell you these crazy stories about the derby. Dave Like I met Kirk Van Doren. He goes by the name Carcass.

[Robert Smith]

Carcass?

[Jess Jiang]

Yeah, he kind of looks like a Carcass. He's wiry, thin with crazy hair. And he's a deckhand. He works on other people's boats. And Carcass told me the reason the derby got so dangerous was because the government chose what day it was months in advance way beforehand.

[Robert Smith]

They didn't know the weather when they chose the day.

[Jess Jiang]

And that meant the weather could be really bad and you would still go out. Carcass remembers one really bad Day.

[Carcass]

Well, I was on watch and I'm just sitting up there thinking, man, it was a 1912 old wood boat. How nice the boat was taken. These waves, we're in like 45 to 50 footers and I mean they're huge and It's a little 52 foot boat. We got big curlers, you know, and we're going up and going. I'm going to pretty nice.

[Jess Jiang]

Feeling pretty good.

[Robert Smith]

Oh yeah.

[Jess Jiang]

He's feeling so good because the fishing had been really, really. And that meant he was going to get a share of that catch and he thought he could get about $15,000. He had even picked out what he was going to buy, a new truck.

[Robert Smith]

So that's what he's thinking.

[Jess Jiang]

But the next wave came.

[Carcass]

All of a sudden we took one and we're not coming back up rail buried water's all over deck and I'm like, mark, get up, we're going down.

[Jess Jiang]

Carcass grabs the crate with the life raft and pops it open.

[Carcass]

And a big wave came and washed the life raft overboard, the brand new one.

[Jess Jiang]

The wind was blowing 100 miles per hour and they decide to jump swim for that lifeboat that was being swept away. They hauled themselves inside.

[Carcass]

Then we hear it's the Coast Guard airplane. And I'll tell you, the most beautiful sound in the world is a C130. That's when you really think you're going to survive.

[Jess Jiang]

You know, Carcass and the three other guys, they all make it back. They all survived. They just don't have the fish anymore. They don't have the money. And Carcass was not getting a new truck. But the crazy thing about Carcass is he goes back every year. He's told me he sank five times.

[Robert Smith]

Five ships have gone down under Carcass.

[Jess Jiang]

Five ships have gone down and he still goes back.

[Robert Smith]

Man. The lesson is, do not go out with carcass.

[Jess Jiang]

I will never go out with Carcass. I know that for sure.

[Robert Smith]

You know, I've been to Alaska and you talk to these guys and the bravado really is stunning. The ability to just keep going out and out and out again.

[Jess Jiang]

It amazes so many people. And even old time fishermen like Clem Tillian, he's 90 years old now and he fished for decades. He was looking at all these sinkings and just wondering why.

[Carcass]

Young men loved the action, the excitement. It was going like Las Vegas. You went roaring out into these storms and you caught all you could catch.

[Robert Smith]

Clem was on the Fisheries council at the time. His job was to help protect the fish population. And the 24 hour derby was, in fact, really good at protecting fish because the catch was limited by the number of minutes in a day. No one was overfishing. But he started to worry that the rules the government had set up were basically encouraging all these young men to.

[Jess Jiang]

Take risks, and there were real consequences. For every thousand fishermen that went out, three didn't make it back.

[Carcass]

It was a very stupid system. It was murder by government, you might say.

[Jess Jiang]

Murder by government, yes.

[Carcass]

And a few of us were looking at other ways of doing it.

[Jess Jiang]

There was an idea out there, a way to protect the fish and make fishing safer. Instead of limiting the amount of time people fish, limit the total amount of fish that could be caught if you were a fisherman.

[Robert Smith]

Instead of having to fish in these 24 hour sprints, this crazy race, Clem wanted a system where it would be basically leisurely because each fisherman would be guaranteed a certain amount of fish at the beginning of the season.

[Jess Jiang]

It was this simple solution, but anytime you distribute something valuable, you know people are going to fight over it.

[Robert Smith]

Clem thought that the catch should be distributed among boat owners and captains. And his thinking was, those are the people who have invested a lot of money in boats and gear, and so they should reap the reward.

[Jess Jiang]

But when guys like Karkus heard about this plan, they got pissed. Carcass didn't own a boat. He was a deckhand. He worked on someone else's boat, hauling in the fish and risking his life.

[Carcass]

And it was a real ridiculous thing that each one of us crew members shouldn't have got our share of it. You know, it's like the owners knew what was going on. The owners kept it to themselves.

[Robert Smith]

You could see why they would be so upset. Under the old 24 hour derby system, the, the fish went to the people who worked the hardest. The fish went to the people who took the most chances. That sort of frontier mentality. But now the government was coming in and saying, you are winners and you are losers. The boat owners, clearly the winners, the boat owners were gonna be rich, and.

[Jess Jiang]

The deckhands like Carcass, they weren't gonna get anything. They were being left out of the system. They could fish and they could still work, but they weren't gonna get a guaranteed share of the catch.

[Robert Smith]

So you can understand why. The losers, the deckhands basically confronted the fishery Council. They confronted Clementilion.

[Carcass]

There were mass demonstrations in some towns and my niece had her tires slashed and my kids got beat up in the playground. I mean, it was violent.

[Jess Jiang]

Your kids got beat up?

[Carcass]

Yeah, because, you know, they were Chilean's kids, you know, and that was just one of the things that happened. When people don't like something, they can get pretty mad about it, especially when it's their livelihood. And I was rearranging their whole livelihood.

[Robert Smith]

Now, Clem and the fisheries council did look at other ways that could be considered more fair. They looked at a lottery system where everyone gets an equal chance of getting.

[Jess Jiang]

The fish, or an auction where the permits went to the highest bidder. But no one wanted to pay for something that they had always gotten for free.

[Robert Smith]

And so, with no better option, Clem drafted the proposal. Here's what they were going to do. Fish scientists would estimate how many halibut there were in the sea, how many could be safely caught. Then the boat owners would each get a share of the fish. No more race, no more derby. It went into effect in 1995, and.

[Jess Jiang]

When I visited Homer harbor, you could see how different it was compared to those derby days. When I wanted to go out fishing, I didn't have to wake up super early. I didn't have to race. I just called up a boat owner and she said I could come anytime. No rush. So this is the boat. This is us.

[Alex Teitelboim]

This is our little boat.

[Jess Jiang]

This is Christy and David Fry, and they tell me they have 1700 pounds of halibut to fish. That's their quota for the whole year.

[Robert Smith]

And that's very specific. 1700? How'd they come up with that?

[Jess Jiang]

The government looked at how much fish the fries caught in those old derby days, and they took an average and used that to calculate their share.

[Robert Smith]

Now, it's easier to enforce a time limit, 24 hours than it is to enforce a very specific number, like 1700 pounds of halibut. How do they enforce it?

[Jess Jiang]

David says there would be these federal agents from NOAA and they would police the docks.

[Robert Smith]

When they implemented this system, they just.

[Carcass]

Figured everybody was going to be a criminal, I guess. So that brought the feds into it. So that mean there had to be guys with flak jacks on and guns and like, you know, come down to my boat on my boat with a damn gun and a flap jacket. You're lucky you didn't go in the water, man and boy. It just pissed me off. They're damn lucky. I was afraid of them.

[Robert Smith]

I know Alaskans are big into their freedom, and I'm sure at first this fishing quota seemed like this, like straitjacket on what they did on the whole freedom swashbuckling fishing vibe.

[Jess Jiang]

It did. People were not into it at first, but soon fishermen saw the advantages. If the weather was bad, they could just stay at home. If you don't want to fish all season, you can take a break and lease out your quota. You can have someone else fish it. That sounds like a good sound.

[Robert Smith]

When it starts.

[Jess Jiang]

The fry's drive the boat out of the harbor. You don't see another commercial fishing boat for the whole day. And that, by the way, is the whole point of the new system now that people can trade or sell away their quotas. Some boat owners have taken this easy money. They've given their fish to someone else and have totally gotten out of the business. The number of fishing boats is only a third of what it was before. And the theory is the only people left are the best and most efficient fishermen.

[Robert Smith]

Slow down, baby. You beat that with a club.

[Jess Jiang]

No, they're like one big muscle and they're just trying to, like, get out of the boat. Oh, he's a fighter.

[Carcass]

They're lively.

[Jess Jiang]

When it's shallow water, it's gigantic. Christy puts a knife through the gills and then quickly removes the guts. She says in the past, during the derby days, she didn't have time to take care of the fish like this. She just threw all the fish on ice and hoped everything stayed fresh.

[Robert Smith]

So it's better to gut it on the boat.

[Jess Jiang]

It is so much better. She says. It's more delicious.

[Robert Smith]

Okay, so the halibut quota system seems to be doing exactly what it was designed to do. The fish are more delicious. It's preventing overfishing, and the death rate for fishermen has plunged.

[Jess Jiang]

The key question is fairness, and you can see from the Alaska case the that it is really hard. It took 20 years for the fishermen to get used to this system, and there was only a couple thousand of them. And they still grumble about how it all shook out.

[Robert Smith]

I mean, it's still, at its core, a really difficult job.

[Jess Jiang]

When I went out with Christy and David, they only caught six fish the whole day long. The whole day. The thing is, now they can go out tomorrow.

[Keith Romer]

I guess we'll see what happens.

[Robert Smith]

Fishermen are eternal optimists. That was Planet Money editor Jess Jiang out on the fishing boat in 2015. We're back now with our professor, Alex Teitelboim. Professor, the fishing market is interesting because the problem is so obvious. A totally unregulated market wouldn't work. They would just catch every last halibut. There would be none left. This is the classic collective action problem. We Always talk about here on Planet Money.

[Alex Teitelboim]

Well, it's a fishery. And so the problem that often happens in fisheries is what we call the tragedy of the commons.

[Robert Smith]

Ah, famous one.

[Alex Teitelboim]

That's right. And the tragedy of the commons happens when individuals, fishermen here, they're acting in their own self interest. They're trying to catch as much fish, make as much profit, but they end up overusing and depleting a shared resource, which is the fishery. So when I go out to fish, I get as much fish as I can, but that slows down how much fish is able to reproduce. And so that means that you, Robert, who might also be a fisherman here, is not able to catch as much fish.

[Robert Smith]

And one of the important things about the tragedy of the commons is it's not because people are terrible. Right? It's not because like I want to hurt everyone else.

[Alex Teitelboim]

Absolutely not. People are acting in their reasonable self interest. These fishermen are commercial fishermen, they're trying to make as much profit as possible, but their individual actions turn out to be against the long term interest of the fishing community. So they could all be better off by fishing less, but it requires all of them to coordinate and fish a little bit less.

[Robert Smith]

So we have this great example in the fisheries, but we see this in our everyday life. I mean, this happens everywhere, right?

[Alex Teitelboim]

Yeah, we see it in everyday life. I have two kids, one is four, the other one is almost three and they go to nursery and during break time they go out into the little yard and they play. And there are a lot of different toys and, and some of the toys are really nice and some of the toys are not so good. But what you often see kids do is that they end up fighting over or because they're British kids, they often queue up for the really nice toys. And at the end of break time, some of the kids end up not playing with any toys at all.

[Robert Smith]

This must break your heart as a father and as a market designer. You're like, there need to be rules here.

[Alex Teitelboim]

Absolutely. So every time I go and see them play, I just think, hey, it would be so much better if we just shared out the time. Everyone could get a bit of time on each toy. You wouldn't have to queue and wait quite so long. You could all have a really good time playing with some of the toys. But they're so keen to get this one particular toy, they all end up hurting themselves.

[Robert Smith]

They always ignore the economists, even as toddlers.

[Alex Teitelboim]

That's exactly right. It really doesn't help having a dad who's an economist.

[Robert Smith]

So in The Alaska story, when the Fisheries Council realizes how dangerous the market is, the they step in and do two things. They allocate the resource. They say this is how many fish you can take, but then they make that share transferable. And it seems to me like this is the key thing. If, if someone like me, Robert Smith, got the quota, it would take me weeks just to catch one fish. But if I can sell my quota to someone else, like carcass, maybe then he can in theory, catch the fish much quicker than I can.

[Alex Teitelboim]

That's right. And this is what we've seen in the practice of using these kinds of transferable quotas is that in markets where they have been introduced, you end up with much bigger boats, with a lot fewer people fishing, and you often end up catching fish at a much lower cost.

[Robert Smith]

This principle, of course, can be seen in all sorts of markets. There are tradable quotas for water in some places in the west, for instance, so that farmers and cities can balance out who can most effectively use water from a limited source. And we've seen governments cap pollution but allow factories to trade the quotas. So there's an incentive to clean up your smokestacks. We'll be back with our professor after our next case study that brings us into the world of auctions. In fact, it is the mother of all auctions and some people figured out how to hack it after the break. Hello, can you hear me? If you can, it means you and I were left behind. The Christian rapture was predicted to happen this past week. It didn't. But that doesn't change the fact that a lot of you all feel like we're living in the end times. And on it's been a Minute I'm getting into what, regardless of religion, your doing with that feeling. Listen to It's Been a Minute on the NPR app or wherever you get your podcasts.

[Jess Jiang]

Short Wave thinks of science as an invisible force showing up in your everyday life, powering the food you eat, the medicine you use, the tech in your pocket. Science is approachable because it's already part of your life. Come explore these connections on the Shortwave podcast from npr.

[Robert Smith]

Welcome back, students. A market is a place where buyers and sellers interact. And one great way to do that is through an auction. And boy, do we love auctions. Here at Planet Money. We've been out to farm equipment auctions, Christmas tree auctions. We even considered auctioning off eggs a few months ago. But this next case study is perhaps the largest, most complicated auction we have ever talked about. And it had a fatal flaw. Keith Romer and I told the story in 2020.

[Keith Romer]

Ron Bruno worked in TV his entire life.

[Robert Smith]

I used to work at a CBS affiliate right here in our hometown of Pittsburgh, which was when Ron decided he might as well start running his own TV station. He partnered with a woman named Debbie Goodworth and built 11 stations. And hence we became the Bruno Goodworth Network. WBGN. Ron Bruno was the president. He prided himself on broadcasting local events.

[Keith Romer]

They showed reruns of Cagney and Lacey in a show called US Bounty Hunters. On Saturday nights, there was a horror movie show called It's Alive. The local commercials were incredible.

[Robert Smith]

This portion of It's Alive is brought to you by Ralph's Army Surplus. Ralph's Army Surplus. Located in the center of Monroeville, Pennsylvania. As soon as you enter the store, you'll be facing one of the area's.

[Carcass]

Largest selections of new and used army apparel, including the new digital camo design.

[Robert Smith]

Oh, digital camo. Is that all?

[Carcass]

But that's not all.

[Robert Smith]

Ralph's has camping equipment, tents, sleeping bags, knives. So much to choose from.

[Carcass]

You'll be blown away.

[Keith Romer]

Was it a fun job? Did you like the job?

[Robert Smith]

Oh, yeah. TV's in my blood. But seven or eight years ago, Ron got a mysterious phone call. It was from a broker representing an unnamed buyer. The broker asked, was there any chance you might consider selling wbgn?

[Keith Romer]

Did they say why they wanted to buy your stations?

[Robert Smith]

No, no, no, of course not. But Ron had heard rumors from other small TV station owners across the United States. Private equity firms, Wall street guys, were buying up mom and pop TV stations.

[Keith Romer]

Ron was not going to be lowballed on the price by some finance guy in a fancy suit. He haggled with the broker. They finally settled somewhere north of $7 million. Ron didn't want to tell me exactly how much. And that was it. Ron was done with wbgn.

[Robert Smith]

Normally, private equity firms specialize in buying up poorly run businesses, fixing them up, and selling them again. But that is not why the buyer wanted Ron station. They didn't want the high school football games and that sweet, sweet ad money from Ralph's Army Surplus. They wanted something much more valuable, a chunk of the electromagnetic spectrum. Allow me to explain. The airwaves around us are like a superhighway. Each radio station gets its own frequency, its own lane on the highway. Also, TV stations like Ron's, they get their own lanes, their own frequencies. Now, in the old days, you could just apply for a frequency and the fcc, the Federal Communications Commission, would give out radio And TV stations. Using a lottery system, a dentist could win the TV frequency in Boston and then end up selling it for a lot of money. It was not an ideal system.

[Keith Romer]

Then an even bigger problem starts to crop up for the fcc. Because the airwaves, the superhighway in the sky, it was becoming more and more crowded. They were running out of lanes.

[Robert Smith]

The reason was the object you might be holding in your hand at this very moment. The cell phone. The cell phone uses the same frequencies as TV stations, and for years, the cell phones sort of squeezed between other people's frequencies like a motorcycle through a traffic jam.

[Keith Romer]

But cell phones, as you may have noticed, started to demand more and more bandwidth.

[Robert Smith]

1G, then 2G, 3G, 4G, LTE, 5G. Where were all the cell phone signals going to go when the airwaves were crowded with Cagney and Laci reruns and high school football games? There wasn't room for everything.

[Keith Romer]

Eventually, the problem got so bad that the FCC decided they had to figure out a way to. To basically tear down the superhighway with all the TV stations and all those lanes and just build a new one from scratch.

[Robert Smith]

This is a classic problem in economics. How to reallocate a scarce resource to the people who will make the best use of it. Ladies and gentlemen, may I introduce you to the solution. An auction. For decades, the FCC had been playing around with auctions to sell the TV frequencies instead of just giving them away to dentists. But in order to really free up a lot of room in the air for the cell phones, they were going to need the mother of all auctions.

[Keith Romer]

And there is this branch of economics called auction theory. And they have all these cool little variations on the basic auction format. Some auctions are blind. You don't know who's bidding what. Some auctions are not for buyers, where the price goes up and up and up, but actually reverse auctions for sellers, where the price goes down and down and down until there's only one seller left.

[Robert Smith]

This new auction would need to be a mashup of all of these. An auction that would coordinate between hundreds of TV stations who had frequencies they might consider selling, and all these cell phone companies that might just want to buy so many different transactions.

[Glenn Weil]

It was a complicated problem to solve because they decided they wanted to do everything all at once.

[Keith Romer]

This is Glenn Weil, former professor at the University of Chicago. Big time auction enthusiast.

[Robert Smith]

Glenn says that this new auction needed to completely reimagine the spectrum superhighway.

[Glenn Weil]

And that requires writing some like Enormously complicated computer code to like, do all of that Rubik's Cube solving.

[Robert Smith]

So each owner of, let's say a TV station had to decide if they wanted to sell it for how much. Like a secret. A secret number, is that right?

[Glenn Weil]

Exactly the minimum amount that they would require to sell it.

[Robert Smith]

Okay. And then these telecommunications companies, the cell phone companies, they had to decide what frequencies they wanted and how much they were willing to pay.

[Glenn Weil]

Exactly. That sort of creates a kind of supply and demand. And if those sort of intersect and leave enough money for the government, then you say that the auction is over. And it worked out.

[Keith Romer]

To pull this off, the FCC turned to a team led by maybe the greatest auction designer in the world, an economist named Paul Milgram. It was so complicated that it took years to set up the rules and all these super powerful computers to run the calculations.

[Robert Smith]

They called it a two sided simultaneous incentive auction. Two sided because there was an entire market of players buying and selling simultaneous, because everyone was bidding at once and incentivized, because it was designed to bring every last TV station to the table.

[Keith Romer]

And it was the most glorious thing anyone had ever seen.

[Robert Smith]

There were all these built in incentives for both buyers and sellers to just set their prices based on how they actually valued their licenses. It was market efficiency, impossible to outsmart.

[Keith Romer]

Glenn Weil says he was at work when he figured out that was not in fact the case.

[Glenn Weil]

I have a very, very clear memory. I was in a seminar at Microsoft Research where I worked at the time, and there was a presentation by someone who was a colleague of mine and who was involved in the auction design. And he was saying, oh, this auction can't be gamed in the following ways and so forth. And someone in the audience raised their hand and said, what do you mean it can't be gamed? One of my friends is making a bunch of money exploiting the auction.

[Robert Smith]

The players who were exploiting the auction were private equity and the smart people they hired to figure out how to make a lot of money. My name is Coleman Bazelon and I'm.

[Alex Teitelboim]

An economic consultant with the Brattle Group.

[Robert Smith]

During the big Spectrum auction, the two.

[Keith Romer]

Sided simultaneous incentive auction, let's just call.

[Robert Smith]

It the super bowl of auctions. Coleman was advising one private equity firm, although he won't use that term and he won't say which one. I worked for a bidder that was on the television station side that bought television stations to bid into the auction. Somebody who bought TV stations for the sole purpose of selling them into this auction.

[Keith Romer]

Yes, he may have been the one who advised the private equity firm that bought wbgn, Ron Bruno's station in Pittsburgh. Coleman didn't say. He's very discreet.

[Robert Smith]

We've been using this metaphor of a superhighway in the sky. And you know how whenever someone wants to build a highway in the real world, there's always some rundown farmhouse in the way that doesn't really want to sell. And the government has to pay way too much money for that farmhouse. The private equity firms, they essentially bought all these key farmhouses, these key pieces of the spectrum blocking the new spectrum superhighway.

[Keith Romer]

But the plan was not to stop the highway, to block the auction altogether. It was just to make it more expensive. Private equity and their consultants figured out which frequencies the FCC's computers valued the most, the frequencies you really needed to make the whole reorganization work. Once you had those, you could drive up the prices for all the TV stations which private equity happened to own.

[Robert Smith]

A lot of the game was on March 29, 2016, the start of the most complicated auction in the history of humanity, and one of the longest. By the time all the buying and selling and bidding wrapped up, a year had gone by, and it mostly looked like it worked. TV stations sold their frequencies. The cell phone companies bought them up. The US government made a profit of $7 billion. But when economists went back and looked at the numbers, they found that the private equity firms had grabbed hundreds of millions of dollars extra for themselves by spotting that flaw in the auction. By holding out on the superhighway, they had bid up the price of their TV stations. Was that fair?

[Keith Romer]

I asked a version of that question to Ron Bruno, the owner of the long departed and sorely missed wbgn. And in, in retrospect, do you like knowing everything that you know now? Would you still have made that deal?

[Robert Smith]

You know, that's the magic question, and I ask myself that all the time.

[Keith Romer]

By the way we looked it up, those Wall street guys sold the frequency of five of WBGN's 11 stations into the auction for $74 million, more than 10 times what they paid. Ron.

[Robert Smith]

Keith Romer reported that story in 2020. After the break, we'll ask the market designer how to spot people messing with our markets.

[Jess Jiang]

Here at Life Kit, we take advice seriously. We bring you evidence based recommendations. And to do that, we talk with researchers and experts on all sorts of topics because we have the same questions you do. Like what's really in my shampoo? Or should I let my kid quit soccer? Or what should I do with my savings in uncertain economic times. You can listen to NPR's Life Kit in the NPR app or wherever you get your podcasts.

[Robert Smith]

We are back with Alex Teitelboim, professor of economics at the University of Oxford. Our story told us about something called a double auction. So, in other words, there were a lot of sellers, TV stations and a lot of buyers, telecommunications companies. It sounds exotic, but there are actually a lot of examples of double auctions in our lives, right?

[Alex Teitelboim]

Absolutely. So think of the New York Stock Exchange. So in the New York Stock Exchange, the buyers submit bids to get shares, and then sellers submit asks to sell those shares. And there's transactions happening all the time. So there's many examples of double auctions. Another one's the electricity market. Generators offer to sell electricity, and utilities bid to buy this electricity from them.

[Robert Smith]

What can go wrong in these double auction markets? And we sort of hinted at it a bit in this story.

[Alex Teitelboim]

Well, what can go wrong in this market is that some market participants would have what we call market power, and it's their ability to skew market outcomes in their favor at the expense of efficiency.

[Robert Smith]

So an example of that in the stock market, say, is there are occasions when one giant buyer wants to accumulate a position in one company or one company wants to dump a lot of stock that can influence the stock market. And at that point, their actions can actually just change the price of one stock.

[Alex Teitelboim]

It doesn't happen in stock markets very often, but that's exactly the sort of thing that you might worry about. We usually think of markets working well and being competitive when no single participant can really meaningfully influence the price.

[Robert Smith]

So what can you, as a designer, what can we as a society do to make sure that there aren't large, powerful players that are skewing the beauty of the market, the efficiency of the market.

[Alex Teitelboim]

So one thing that we often do is we encourage competition in the market directly.

[Robert Smith]

So the more participants in the market, the better. Alex, I feel like we've been assembling a list of what makes a great market. You want plenty of competition. Everyone should have the same information. You want rules against collusion, and. And I guess it leads to something.

[Alex Teitelboim]

Efficient, to an efficient and to a fair outcome. It's not just efficiency that really matters for a lot of market design. And the reason is that market participants need to accept what the market design ultimately is. And if the market allocations are really unfair, often people might say that this design is no good and not wish to participate.

[Robert Smith]

We're coming to the end of our class. So, Alex, it's Time for our vocabulary words. We talked about tragedy of the commons. What is that again?

[Alex Teitelboim]

The tragedy of the commons happens when market participants who are acting in their self interest deplete a shared resource in a way that means that's against their own community outcomes.

[Robert Smith]

So we talked about two sided auctions like the stock market or the spectrum auction we talked about and there's something that can ruin those kind of markets and it's called market power. What is market power?

[Alex Teitelboim]

Market power is when a single market participant can influence the outcomes of the market in their favor at the expense of everyone else.

[Robert Smith]

Our students can take these words with them and that way when they see something wrong in the world, rather than getting upset, they can say we should just redesign this market. Alex Teitelboim, professor of Economics at the University of Oxford in England thank you so much for coming in.

[Alex Teitelboim]

Thank you so much, Robert. It's a pleasure.

[Robert Smith]

Okay students, only one class left before final exam and graduation ceremony. Start studying now. We'll have an online quiz and if you pass, you will receive a diploma suitable for social media bragging and legally not much else. And for those of you in New York up to see on August 18th for our live show, if there are tickets left, if you can get them in the show notes, Summer School is produced by Eric Metal and edited by Alex Goldmark. It was fact checked by Emily Crawford. Devin Meller is our project manager and the show was engineered by Santa Lofredo. I'm Robert smith. This is NPR. Thanks for listening. Every year in the U.S. about 1,000 people die in jail, many of them awaiting trial.

[Glenn Weil]

This isn't a problem that someone else.

[Keith Romer]

Has has to deal with. We all are at risk for dying in jail.

[Robert Smith]

In a special series, we'll look at why people are dying in jail and how to prevent it from happening on Here and now Anytime. A podcast From NPR and WBUR on.

[Jess Jiang]

NPR's Wild Card podcast, actor Matthew McConaughey says it's important not to over commit creatively.

[Carcass]

What can happen and where ambition is led me astray is you end up with a bunch of perspectives, campfires and no bonfires.

[Jess Jiang]

Listen or watch that wild card conversation on YouTube, the NPR app or wherever you get your podcasts.

[Robert Smith]

These days with all the information coming at you, it can be hard to know what's accurate, what's not and what's worth your time. Here to help you navigate It all is 1A five days a week, the 1A podcast provides a forum for curious minds to explore different angles on the biggest headlines and give you a more balanced take on what's happening. Listen to the One, a podcast from NPR and wamu.