29 May 2010

Flashback: 23 -- 29 May 2009

Posts from a year ago that deserve another look...

BEST: Simulations vs. Reality, a background post on why academic simulations are often unrealistic. From this, we go Somewhere in the Middle, where I reconcile different estimates (Howitt, Michael) for job losses from reduced Delta water exports. (DWR's failed management of the drought water bank didn't help.) Then we get ACWA's lobbying for more exports, another version of astro-turfing.

But don't think that California is alone in mismanagement, Ground Water in Texas is a disaster.

BEST: Slandering Your Competition -- Vandana Shiva doesn't know economics. Neither does MWD. Their Water Pricing FAIL is based on a bureaucratic overcontrol that often always turn out to be wrong. Better to use auctions.

At the retail level, we get water managers who deliver Justice for Water Hogs. Neither fair, nor efficient when you make it cheaper to use more.

It Takes Money to Make Money -- an example of corporations paying fines and then getting them back, and Pork Fest, an example of their plan to get more, via the draft cap and trade bill. The new edition, I think, is not much better.


  1. Please talk about commercial supply and demand versus the bureaucratic version of supply and demand.

    I have a guess that they do not converge to the same point in supply and demand space and that they evolve differently when supply and demand are not in balance. My guess is that the forces to bring supply closer to demand are very different inside a company and inside a state bureaucracy.

    Quantitative examples of your reasoning would be useful.

  2. bureaucrats set price and q by fiat. In a market, they emerge from competing supply and demand. Compare auctions for US treasuries (market) to congestion on a bridge with tolls (bureaucracy), ad infinitum.

  3. I do think some clarifying language as well as an understanding of market types can clear things up here, too.

    First, "bureaucrats" is not the proper term. Perhaps you mean "government", because a bureaucrat can be private or public.

    David, second, not all markets set by competing supply and demand are summed up by your example. You can also compare, say, private security to the U.S. Army's protection, or air quality regulation.

    David, you answered the question, "how are prices set by government vs. set by the market?", not the distinction between, "commercial supply and demand vs. the 'bureaucratic version' of supply and demand."

    Eric, most typically, products and services are provided within the marketplace, where demand drives supply to try to fill the demand. Due to the factors of demand and supply, opportunity cost and benefit, &etc., prices are created. These prices typically fluctuate as supply chases demand, but in general it is fairly efficient. It doesn't solve the basic problem of economics, but nothing will.

    In addition, production and consumption may have externalities (good and bad), or their markets may be so distorted (through monopoly or monopsony) that they become highly inefficient.

    My example above shows a market failure. We simply cannot trust a private entity to protect our country, so we do so through the public sphere.

    Although many economists believe we should only have government to enforce contracts and step in when a product or service is both non-rivalrous & non-excludable (maybe air quality?), the social boundary of government is the Constitution, specifically a few important clauses in the Federal one, (the Preamble, the 'elastic' clause, interstate trade, etc.) but many parts of each State's. Among these other issues are places where we have decided a public intervention is warranted to mitigate market failures - the Civil Rights Act, for one, or the Clean Air Act.

    This is a short answer to the distinction I think you were searching for. If, however, you were looking for a short 'hear! hear! gov't. is bad!' answer, then you've got David's, above.

    Happy Memorial Day weekend.

  4. Josh,
    I did mean bureaucrats within government.

    I did not want a 'Hear, hear, government is bad;' I wanted to learn something.

    On a bit more thought, I think my question should have asked when supply is less than demand what are similarities and differences in the behaviors of private companies, bureaucrats within private companies, government, politicians withing government, and bureaucrats within government.

    My hypothesis is that each of these classes respond different when there is not enough supply.


  5. @Josh -- I was not talking about particular markets, but the generic versions. It's easy to find markets that fail as well as governments that fail. The difference between a bureaucrat -- public or private -- and the market is that a bureaucrat makes a p/q decision while "a market" has no centralized thinking.

    As Eric pointed out in his followup, there's a 2x2 to look at. I'd say that bureaucrats everywhere face weaker incentives to pay attention to S <> D (shortages, eg) but the gov't bureaucrats face the weakest incentives. They do not go out of business; they just raise prices/taxes. There is no such actor as "private companies" or "government" only individuals - pols and bureaus -- within these orgs. Private company actors face upside (profit) and downside (bankruptcy) disciplines.

    Pols vs. bureaucrats? I'd guess that pols are more responsive; they can change rules and directions. Bureaucrats everywhere are concerned with "by the book."

    My preference, btw, is for a maximum of decisions by the person who bears the costs/benefits of the action. That's libertarian, but it's also efficient, and it allows for externality to be integrated.

  6. I had not thought of it quite that way, but if many agents are concerned with 'by the book' and the book is not correct (does not lead to an efficient solution for the current problem)then by the book fails until the appropriate parts of the book are redone.

    Failure of 'the book', usually because the book is a solution to a previous crisis, seems common.

  7. Thank goodness we have a book we can at least help to re-write then, eh? Also, thank goodness that public-sphere bureaucrats don't have fiat to just change it.

    David, you say, "There is no such actor as "private companies" or "government" only individuals - pols and bureaus -- within these orgs."

    I say, right on!

    I do think that there are few generalities in this, that it really depends upon the market type and the particular good/service being rendered. Oftentimes, the nature of the government-controlled good/service makes it a monopoly, and so a public participation requirement is better than a consumer vs. producer relationship by which markets work. Other times, the costs/benefits of externalities borne by society justify a public-sphere regulation, such as air quality controls, military, and nuclear pollution.

    When market equilibria occur, the market type largely dictates the decisions made by individuals. In perfect competition, producers tend to ramp up qS and receive a price increase very close to the increase in the cost of production; in oligopoly, they tend to raise P more than ramp up qS, etc. This is why people would rather be the CEO of Kraft than a wheat farmer.

  8. Eric, also, I loved your "failure of the book" comment. Very cool.


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