24 July 2014

Ronald Coase, institutons and water

A LONG time ago, TS sent this:
Ronald Coase died this past week at age 102. I think many people continue to misinterpret/misuse his core ideas and theories, i.e., the hard core right using his stuff to support the argument that any government regulation or intervention is bad. As you know, he advocated for property rights (which government would facilitate) to help us efficiently manage our environmental challenges, among other things.

I think you've applied some of his insights to your writing on water, e.g., setting up water rights for people so they could sell some of their unused allocation to people who need water (example, farmers to urbanites).

I'd love to see a post applying Coase's ideas to water management.
I'll leave the summaries of Coase's work to Wikipedia, the Nobel Committee, Encyclopedia of Economics, this podcast, and this application of Coase to environmental issues. Go read more if you want a better view of one of the more original minds in economics.

Now why was Coase original? First, because his formal education only extended to his BSc in Commerce. Second, because he insisted on looking into the "real world" for problems and solutions. Third, because he brought a clean ("outside the box") perspective to economics.

Coase was an accidental iconoclast who used common sense to make a difference.

So, how can we apply his ideas to water?

Let's begin by defining the words that he used to establish entirely new dimensions of economics:

"Transaction costs" occur in the course of finding a trading partner, making and completing a deal. Economists who assume "zero transaction costs" have never bought a used car or gone on a date. Matching takes time; information is buried or obscured; some deals cannot be pursued to their conclusion.

"Property rights" don't just define who owns what in terms of private goods. Their absence or mis-specification affects club, public and common pool goods. Many problems, Coase would argue, arise from poorly-specified property rights.

"Institutions" are the informal norms and formal rules that affect our interactions. Good institutions clarify property rights and lower transaction costs. Outdated or missing institutions mean that property is mismanaged (inducing anything from litter to war) and transaction costs are high -- often leading to "missed opportunities."

I use Coase's ideas everyday. Sometimes, I decide it's not worth "spending" more time to get slightly cheaper fruit (maybe). Sometimes, I leave my bike unlocked because I am among property-respecting types (or community-minded types that will catch out thieves). Sometimes, I wonder why my roommates leave dirty dishes in the sink.

I can also apply Coase's ideas to water. You cannot have a water market without clear rights, low transaction costs, and an "institutional" acceptance of trading commodity water.

You cannot police water pollution without assigning the right to pollute (or be free of pollution). Even with those rights, you cannot enforce them when the transaction costs of finding the polluter or measuring pollution are too high. These will be even higher if there's no authority in charge of measuring pollution, since an individual may not have the incentive (costs>benefits) of measuring pollution that affects other people. Coase, thus, codified "the logic of collective action."

Taking Coase from a different angle, you might oppose over-complex water tariffs that require lots of measurements (transaction costs), violate property rights (lawns versus people), or fail to integrate with systems handing water before or after it's diverted into taps.

All of these examples have the same things in common. They bring a pragmatic, problem-solving perspective to issues that cannot be "solved" with the same global algorithm. Coase always began with the foundation of how things really worked (or failed) -- not an academic "simplification" that threw out the baby with the bathwater.

Bottom Line:It doesn't matter what Coase said. It matters that you apply his pragmatic perspective to identifying and removing the barriers to outcomes you want.

23 July 2014

Booze, cigarettes and sweets?

We regulate the sale and consumption of alcohol and tobacco to under-18s for their own protection, but why do we allow unlimited sales of candy bars, soda, energy drinks and so on?

Those concentrated sources of sugar lead to cavities (I've got plenty), obesity, immuno-suppression, learning problems, etc. They do little or nothing positive for someone's health.

I'm proposing a regulation that limits the percentage of calories from sugar in prepared foods, not a ban on sugar, home baking, etc.


Speed blogging

  1. Five things hippies get wrong about water -- a guest post I wrote for the (leftie) Angry Bear blog, featuring many disagreeing comments...

  2. Nice post on Israel's water complication (Palestine)

  3. We will not reach "the technical potential for water savings [on farms, in homes] without significant institutional and political change". Related: institutional inertia and the difficulty of change

  4. Miami: home prices up, sea levels up. Can growth overcome facts? Related: The Atlas of Loss and Death tracks an increasing frequency of natural disasters

  5. Reasonable: The US government may start to tell states to manage stop mismanaging their water

  6. A VERY useful paper [pdf] "reviews the cost of different water supply and water treatment options around the world"
H/T to BG

22 July 2014

So what about Detroit?

I have followed Detroit's fall with interest, mostly because I am hoping that an entrepreneurial government will allow a thousand flowers to bloom in the hollowed-out city (population has dropped by 60 percent; 200,000 properties are vacant). That process will take time, even if it's going in the right direction.

In the meantime, the city is bankrupt, and one-third of its debt ($5 billion) is linked to the Detroit Water and Sewerage Department (DWSD), which is trying to collect $175 million in past-due debt from its customers.

This action is sensible but controversial in two ways. First, DWSD is cutting service to customers who do not pay their bills. Second — and far worse — DWSD is going after debts of as little as $150 from 150,000 residential customers even as it waits for repayment from 11,000 larger customers who owe half the total.

These actions have led to a petition from the human-right-to-water crowd, asking the President to declare a human health crisis, i.e., to prevent DWSD from charging customers. That's a terrible idea because it undermines the utility's finances now AND later. Why would anyone pay for water they can get for free?

My opposition to the petition does not mean I oppose financial help for the poor or their continued access to drinking water. Here's how I'd handle the situation:

  • Drinking water SERVICES should NOT be a human right (=free) because they — like electrical services — cost money
  • Detroit has mismanaged many dimensions of life, including poverty, jobs and water management
  • The utility MUST continue to operate, and it needs money for that
  • Past debt may not be customers’ fault, since the utility may have over spent, etc.
  • Therefore:
    1. The poor should income support to pay for food, rent and water. They should NOT be given free water
    2. The utility should go after biggest customers FIRST, as the cost per $1,000 of debt recovery will be MUCH lower
    3. The government may face a welfare burden, but welfare works through income transfers, not cheap — or free — water
Bottom Line: The government (and taxpayers) should bail out the poor. Bigger customers should be chased for repayment. All customers should pay their future water bills.

H/Ts to BB, DC and RM

21 July 2014

Monday funnies

Why are people taking selfies in ALL the wrong places?

Anything but water

  1. If you want a great introduction to institutions (the ones that determine the difference between economic development and stagnation, for example), then read this 1991 paper [pdf] by Douglass North, Nobel Laureate

  2. I'm happy to find that Simon Kuznets (inventor of GDP)...
    ...was inclined to include only activities he believed contributed to society’s wellbeing. Why count things like spending on armaments, he reasoned, when war clearly detracted from human welfare? He also wanted to subtract advertising (useless), financial and speculative activities (dangerous) and government spending (tautological, since it was just recycled taxes). Presumably he wouldn’t have been thrilled with the idea that the more heroin consumed and prostitutes visited, the healthier an economy. [Unfortunately,] Kuznets lost his battle. Modern national income accounts include both arms sales and investment banking services.
    It's sad that his fears of distortions came true, as I described in "Economists owe ecology an apology"

  3. Read this very insightful article on monopoly regulation. The earliest laws encouraged diversity and competition. Later laws "harnessed" the efficiency of monopolies... until the monopolies took over politicians, regulators and markets. Too bad for the US

  4. Best way to invest $1? Read these deep -- and shallow -- responses

  5. Read this interview with a 15 year old who's been to Burning Man 12 times:
    What about the people who say that Burning Man is not as cool as it used to be?
    A: There’s a lot more people recently who have been going just for the party, and not for the art. It’s an ART FESTIVAL. If you just come to party and get wasted, that’s not what Burning Man is about. If you’re seeing it as a big party … it sort of is, but it’s an ART party. It’s not just for coming to drink.

    Is there anything else you’d want to say to people attending Burning Man?
    A: Take risks. Don’t take BIG risks, but take … a good amount of risks. If you’re going to go to Burning Man, be open-minded. Push your boundaries. If you’re not comfortable with something, try it anyway. Explore, experiment, try new things. Get to know yourself.

19 July 2014

Flashback: 14-20 July 2013

A year later and still worth reading...
H/T to CD

18 July 2014

Friday party!

Not exactly my favorite music but pretty awesome hooping!

Five thousand blog posts!

My first blog was called "another brilliant idea," but I was not regularly brilliant.

My second blog ("sex, drugs and water utilities") lost me a few job interviews.* I ended that theme when I took a UC Berkeley postdoc that focused on water.

I copied one-third of the posts (~170) from sex/drugs to aguanomics, which launched on 26 March 2008.**

This is the 5,000th post on aguanomics. I wrote most. Damian Park wrote ~25 and guests -- mostly students -- wrote ~280.***

Looking back, I can say a few things:
  • I really enjoy blogging
  • Many posts from past years are still fun to read
  • Many critiques (water is too cheap, etc.) are STILL relevant :(
  • I've learned a lot from different people's perspectives on water
Bottom Line: Nobody sets out to do anything 5,000 times, but it's possible when the activity is fun and interesting.

* Bonus points if you see their common element :)

** Six months of aguanomics, One year, Eighteen months, Two years, Thirty months, Three years, Four years, Five years and Six years of aguanomics. Check out the photos!

*** I forgot to mark his posts when I removed him as an author :(

The Quest -- the review

I was eager to read this book (subtitle: "Energy, Security, and the Remaking of the Modern World"), Daniel Yergin's follow-up on his brilliant 1990 book, The Prize.

The energy industry has changed a lot in the past 25 years, but this book was disappointing. I'm guessing that two factors are driving my disappointment. The first is that Yergin did not have (or could not find) a strong narrative arc for this book. The Prize jumped from discovery to exploration to nationalization, but The Quest lacked that momentum. Yergin's histories of non-oil sectors (electricity, cars, renewables, etc.) did not always overlap or respond to the same forces. The reader thus needs to ignore (or enjoy) loose ends until they bind together. (Electric cars were a big deal 100 years ago and today; the middle era was very well connected to events in the automotive or oil sectors.)

The book is really a collection of briefs: The New World of Oil (since 1990), Securing the Supply (unconventional fuels), The Electric Age (and nuclear), Climate and Carbon (and failed treaties), New Energies (from sun to efficiency), and Road to the Future (batteries, biofuels and e-cars)

The other drag on the book was its over-broad, over-vague lack of focus. Although it's easier to see trends with decades of hindsight, it's a challenge to see them in current events where many people in many places are trying many actions in response to many beliefs. A book that summarizes the mish-mash of current energy policies is going to be a bit mashed-together itself.

These observations do not make for a bad book, as it may not be possible to write a "good" book that describes so many current, overlapping and confusing trends. Taking this positive perspective as a starting point, I will say that Yergin does a great job at summarizing many complex issues clearly and without noticeable faults or bias. You can hear the voice of a man (and a large consultancy) that has worked for decades on all three frontiers of energy: conventional, innovative and fantastical.

Here are some notes I took while reading:
  • Yergin describes several missed opportunities on energy policy. Kyoto (1994) could have brought in emissions caps for LDCs, but that topic was verboten. Years later, it's even harder to raise the issue with countries that have shot way beyond the "stretch" targets debated in the 1990s.
  • Cheney and Bush (like Reagan before them) really killed international momentum for agreements.
  • Nuclear power also had several "bad luck" events (Three Mile Island, Chernobyl, Fukushima Daiichi) that damned a good technology.
  • It's not just sad to see international disagreements on "save ourselves" issues; it's sad to see them fail for the same reasons. The most common is a reluctance to increase the price of energy that's seen as a cheap way to get economic growth and political stability. The first is not true (cheap energy is used -- wasted -- instead of other inputs or techniques). The second is short-lived and short-term, since voters with cheap energy habits take it for granted and increase their exposure to future supply shocks. Then you need to consider the negative feedback loop from climate change.
  • In both of his books, Yergin borrows Churchill's definition of energy security: many suppliers. This definition still makes sense, even as America defies it with friend/foe diplomatic policies towards oil producing countries that seem similar. It's hard to see why Iran is an enemy if Saudi Arabia is a friend, just as it's strange to see the US importing so much oil from Nigeria, Venezuela and Russia. Are we interested in liberty and justice or cheap oil?
  • Hubbert (of "Peak Oil" fame) was a good geophysicist but poor economist. He missed the impact of incentives and innovation on the "economic" supply of oil.
  • Canada's government helped develop the oil sands, but I'm not going to believe the government was either necessary or sufficient. Oil sands -- like horizontal drilling and fracking -- would be developed when profits made it useful. Government spending may have sped up development, but it's not clear if more speed was good for industry, the environment, citizens or consumers. ("Cheap energy" is not all win-win.)
  • The OECD established the International Energy Agency after the 1970s oil shocks to defend consuming countries against OPEC and other producers. It's a pity that the OECD cannot devote 10 percent of IEA resources to an International Water Agency, as water flows -- real and virtual -- are getting pretty important.
  • The natural gas revolution got started in 1978, when the Carter government deregulated gas prices.
  • The deregulation of California's wholesale electricity markets failed "by design," since fixed retail prices impeded the interaction of supply and demand.
  • Japan's "top runner" energy efficiency regulation requires that ALL products sold x years from the present use as little energy as the most efficient product on the market today.
Bottom Line: I give this book FOUR stars for its overview of developments in the energy industry since 1990. It has enough background, context and explanation to give anyone a good idea of how trends have emerged and interacted, but you'll need to roll your own dice if you want to know where it's going.

17 July 2014

Pricing tap water for efficiency and fairness

I've opposed increasing block rates for some time, but I don't think I've got a simple post on how I WOULD price water.

This is from Living with Water Scarcity:
Reliable service and fair pricing

Utilities should collect fixed and variable revenues in direct proportion to fixed and variable costs so their finances are stable. All customers should pay the same volumetric prices to be fair. A surcharge can be added when water is scarce and demand needs to fall. Excess revenue from that surcharge can be rebated to each household --- without respect to their water use --- to ensure that the utility uses higher prices only as a temporary means of preventing shortage.

These ideas are summarized on the next page below, which illustrates how utilities can price water services for fiscal and environmental stability. The figure shows how water costs usually arrive (left column), the way that water is typically mispriced (center column), and how to price water correctly (right column). The light grey areas show the lopsided impact of conservation: A 50 percent drop in use reduces variable costs and revenues by 50 percent each, but total costs fall by much less than total revenues because variable costs are a small share of total costs while variable revenues are a much larger share of total revenues.

Copy, snip and distribute this sheet [PDF] at your next cocktail party. People love talking about realistic ways to live with water scarcity.
Bottom Line: Forget fancy pricing structures with dozens of customers classes. Recover costs to protect the utility's financial stability. Raise prices when water -- the cost of which is usually zero -- is scarce.

Anything but water

  1. Brazil has reduced poverty via cash transfers (Bolsa Familiar), but more education and access to jobs (for those educated workers) has played a bigger role

  2. Save the US... by modeling its government on the socialist, gun-free, scientific, anti-racist, anti-war, anti-spending US Military

  3. Academic economists are useless to students and society

  4. An investment adviser "realizes how stupid we are" when it comes to believing our biases and wasting money on financial BS

  5. NB: Expats in Saudi Arabia (KSA) are paid a lot to (1) compensate for poor living conditions (weather and culture), (2) enable them to get to nicer places (Rome, Dubai) and (3) find ways to coping with poor service and expensive goods delivered by unmotivated monopolists. What's worse is that singles cannot meet. Expats wait for weekly parties that cost $70 to enter. Saudis take many risks to talk or have sex. I have no experience in romance in KSA, but I'd worry about bad matches and matches-gone-wrong