Question

In May of 2019, Elon Musk’s Space X project launched Starlink telecommunication satellites. The initial launch included 60 satellites out of a potential 1200 satellites to orbit the earth in pursuit of providing a world-wide ultra-fast internet product. Astronomers, however, are not so pleased with this new project. In fact, the American Astronomical Society (AAS) issued a statement of concern that these satellite constellations will create “the potential for substantial adverse impacts to ground- and space-based astronomy. These impacts could include significant disruption of optical and near-infrared observations by direct detection of satellites in reflected and emitted light; contamination of radio astronomical observations by electromagnetic radiation in satellite communication bands; and collision with space-based observatories.” Suppose now that Elon Musk has two ways of dealing with the problem of his satellites interfering with the observatories: 1) to limit the number of his satellites to 100 which would cost him (in reduced profits) $5B, or 2) to shut down the project entirely for a total cost of $20B. The AAS, on the other hand, has two ways of dealing with this problem: 1) to raise funding to increase the number of their satellites, which would cost a total of $8B, or 2) to shut down all astronomical observatories, which would cost a total of $40B (when accounting for the value of the positive externality created by the research). Suppose now that there are no courts or third-party arbitrators to resolve this dispute; and, further, that Elon Musk places a value on his public image and reputation in the amount of $15B, which he loses if the conflict continues with the AAS. Suppose that you were hired to consult Musk on this issue. Using transaction cost analysis, what contractual agreement (if any) do you think would result in this case? (5 points) What might you advise him to ultimately do and why? (5 points)

Answer 1

First, I would compare the relative cost of both options of 2 parties involved in this case-Elon Musk and AAS, and note that shut down cost of AAS is the highest among all 4 options and hence it should not be pursued by AAS.

Second, I would also recommend AAS to reject the first option of AAS to raise $8B funds to launch more satellites to compete with Elon Musk since this would contradict the stated opposition of AAS to Elon Musk’s project. Moreover, AAS is also not comparatively more competent than Elon Musk’s SpaceX to launch such satellites and hence it would be wasteful project for public

Third, I would note that although the total cost of both options of Elon Musk are same, i.e. $20 billion, however while the cost of shutting down Starlink project is direct, known and cannot be reduced but the cost of first option can be reduced by undertaking suitable actions by Elon Musk in regard to Starlink project such as:

a) Limit satellite launch to 100 until some specific time say 6 months and assess their adverse impact as per apprehensions of AAS

b) During this time, highlight the positive social externalities of Starlink project to AAS and public at large

c) After 6 months, highlight no or negligible evidence of negative impact of Starlink project to AAS program and assure AAS and public to undertake corrective actions to avoid any reported negative impact in future

d) Engage with AAS in the spirit of cooperation and mutual advancement of each other’s interests highlighting that both of them have different goals, competencies and organization structure and that the benefits of independent but coordinated functioning are much more than the cost of competition for them and for public