14 Jun 2012

Some ideas from Mike Young

Mike -- an Australian economist who's been working on water issues for well over a decade -- and I discussed these a few months back:
  1. If you want to encourage a community to innovate locally, from the ground up, then have them design a scheme to hit a quantifiable target and pay a reward for that WHEN it works, not before...

  2. If you want to lower barriers to implementation, then find the winners and losers and negotiate from there. Note that new policies change the mix of winners/losers.

  3. For policy analysis, one can spend time analyzing the laws, players and their interactions in an attempt to understand its implications (a "structural form" model of cause and effect), or one can trace money flows (a "reduced form" model). The latter is easier to do and drives at the political heart of most policies: a redistribution of costs and benefits among interest groups.

  4. People don't like change, so a message of change needs to be carefully presented.

  5. Command and control is more predictable than markets (e.g., C&T vs. carbon tax), even if hidden costs and skewed benefits make C&C less efficient. Watering regulations, for example, may say "20 min per day, 3 days per week: without acknowledging the transaction costs of adjusting sprinkler timers, ripping out lawns, anxiety, water cops, etc. Prices and markets deliver only estimated benefits (via elasticity), but it's easier to change prices to hit the target than C&C.

  6. Revenue from higher prices can create transfers from heavy to light users (no net cost increase).

  7. We need to make the opportunity cost of a bad policy relevant and clear (e.g., the lack of water markets meant that Westlands Water District engaged in lobbying and media battles).

  8. Stop playing politics with water (populism leads to shortages and special interests can capture rents). Design policies to treat water like a commodity, not a gift to an interest group (per Part 1 of TEoA).

  9. When trying to attain a number of goals (fiscal balance, water conservation), design one instrument for each goal. Don't change the goal. Here's the right way to design IBRs, but both Mike and I prefer to set a single, volumetric price based on costs and scarcity.

  10. Volumetric pricing ALONE will drive innovation to improve water efficiency (bulk or retail).