Exercise 6 Final Draft

A Proposal to Increase the Efficiency of the Leach Recreation Center By: William Bright, Kyle Campbell, Julian Falgons, Carlos Graterol, Aaron Locke, Jeremy Moore, David Ramos, Diana Saenz, Nathan Smooha, Elizabeth Woodruff The Leach Recreation Center, known simply as “the Leach” is the gym and general recreation center provided by Florida State University to serve students. Currently, the Leach Recreation Center is financed by revenues from the Student Activities Fee. This is a general tax fund that provides for all student activities, so the Leach must compete with other student activities for its share of the collected revenue. This setup provides open and free access to all current students. However, access is offered to non-student members of the community for a fee, which is a fixed user charge, allowing unlimited use of the facility for a specified period of time. The inefficiency caused by a general tax placed upon students and the serious congestion of the leach; especially during peak hours, presents the Leach with some major problems. Our group believes that a more efficient finance plan, such as a mixture between earmarked taxes and user fees, could be implemented to provide better incentives for the efficient use of the Leach Center. Economically, it is always inefficient for an individual to pay a general tax based on a share of total benefit received from a public good. Students are obligated to pay the student activities fee; which is charged and included in their tuition, even if they do not use the Leach. The cost of the Leach to these individuals is greater than the benefit they receive from the facility, and this is inefficient. So, enacting a user fee on direct consumers of the Leach would eliminate some of the inefficiency caused by the general tax. However, the existence and operation of the facility does confer some marginal external benefit on non-users. They derive benefit knowing that the facility is available and that they have the option of using it should they ever choose to do so and also from the increased health quality of some students.

Since this external benefit is widely dispersed among a large number of non-users, it is still efficient to finance their share of marginal operating and capital costs from taxes. For that reason, a combination of both taxes and user fees should be enacted to make the funding of the Leach more efficient. Moreover, the taxes received by the Leach should be earmarked and separate from the general tax of the student activities fee. To explain, if the Leach currently receives a different amount from the general tax every semester, then the user fees will change accordingly to cover the balance of the capital and operating costs. Instead of having the Leach compete with other organizations for the revenue to cover part of its costs, it should receive the same amount every semester, so that the user fees can stay consistent. The earmarked tax should be equal to the benefit that non-users receive from Leach, be charged to all students, and cover only a portion of capital and operating costs. The balance of the remaining costs will then be charged to all the direct users of the Leach. Therefore, the overall amount of taxes that students have to pay should decrease. Remember that a majority of the current costs are covered by the general tax. If only a portion of these costs were to be covered by an earmarked tax, as stated above, then the student activities fee would fall by a substantial amount. The earmarked tax for the Leach would be less than the share of the general tax it now receives. Hence, efficiency will increase as the total amount of taxes that students pay is reduced and will be closer to amount of marginal benefits they receive from the use of the Leach. Also, to increase the efficiency of the utilization of user fees, there will be an hourly charge placed upon all patrons instead of the fixed rate that Leach charges non-students. With fixed user charges, people pay a fee upfront, and then they have unlimited use of the facility for a specified amount of time like a month or a week. Even with this setup, people still have the

incentive to over-consume their time at Leach. On the other spectrum, the fixed fee may exclude those people whose marginal benefit of using the Leach is positive, but is not equal to the charge. This is inefficient because the cost of this additional consumer is relatively low. Thus, a charge based on hourly usage seems to be a more efficient option. This type of fee would grant the ability for people to make decisions based on the margin easier, and it may also bring the fees that people pay closer to their marginal benefit. To elaborate, if a student wanted to work out for thirty minutes, he may be reluctant to do so if he has to pay a fee that is greater than his willingness to pay for the that time. Conversely, if he only has to pay per hour, then he may be more inclined to pay the fee. Furthermore, a congestion fee will also be included with to help resolve the major problem of overuse and overcrowding. It is important to note that the demand for the Leach fluctuates by time of day. Efficiency requires higher charges during the peak periods than during the off-peak periods even though the operating costs are the same in both periods. Charging an elevated price during these high demand periods provides incentives for efficient use of the facility. This type of user charge is efficient because it includes a component to cover the operating costs and a component to compensate for the congestion costs. Even with the efficient user charge, there will still be some congestion. However, the amount of congestion is “optimal” or efficient because the marginal benefits of using the Leach during its busy hours outweigh the marginal cots of congestion. Next, it could be possible to increase the amount of hours Leach is opened. To elaborate, the congestion charges generate surplus revenue since they are in excess of any operating costs. If the surplus revenue is greater than the cost of additional hours of operation, then that is a signal that the value to users of additional capacity exceeds the cost, so an increase in hours is efficient.

Finally, the implementation of the user fee would be based on existing technology currently in use; yet there needs to be added measures, which includes another card swiping machine at the exit and an employee to monitor it. Whenever individuals enter and exit the Leach, a time stamp would be placed on their card. So, new software is required that monitors people’s time there, and then sends them a monthly bill for the user charges via email. Nonstudents will be able to purchase a Leach Center membership card on a semester basis, with the cost being equivalent to the earmarked tax that the students pay. Even with these additional procedures, the costs associated with collecting users would be relatively inexpensive. In this case, the user fee can serve the functions of prices in a private competitive market; it can be used to help ration the demand for Leach, provide information about its consumption, and provide incentives for more economical use by its patrons. Lastly, this user fee is efficient because specific identifiable individuals obtain most of the benefits of Leach, collection costs for the user fee are low, the demand for the facility is relatively elastic, and the user charge will be based on the marginal benefit of the individual. We think that all these measures together would increase the efficiency of the Leach Recreation Center and in turn lower both the positive and negative externalities of the Leach center. With the Leach Recreation Center being more efficient, more students and non-students will be able to reach their preferred amount of exercise and it will only further benefit all of FSU.