30 Sep 2014

Free riding on Ebola drugs?

Jente A writes:*

The WHO has declared that, of the almost 6,000 reported Ebola cases, death rates have exceeded 2,800. Predictions range between 20,000 and hundreds of thousands more deaths before the outbreak is under control. However, the free market has until now failed to provide an effective and largely available drug to fight Ebola.

The challenge that we are facing is to get these drugs developed and produced, and then to get them available on a large scale for patients in West Africa. In order to achieve this, pharmaceutical companies will probably need to invest more that $2 billion in research and development. The market on which these drugs would be sold, however, does not give a prospect of covering these costs and making profits. Ebola drugs will be sold for a relatively short period (during the epidemic) as compared to markets for other diseases, and West Africa is seen as a ‘poor market’. The price for which companies would have to sell the drug to make profit would be so high that most Ebola patients cannot afford to buy the drug.

This 'poor market' is the problem that we need to reconsider. Assuming that those who enjoy the benefits of the drug should also pay for it, which is ideally the case in a market economy, the core question that needs to be addressed is: who actually benefits from an Ebola drug?

Evaluating the benefit of Ebola drugs on a larger scale, it is not just the patient that gets cured from the disease who benefits. Ebola drugs will increase the general level of public health of the people of West Africa, and these people are the same people that provide the labour which companies make use of. The mining industry, for example, has a large interest in healthy employees and thus in the production and availability of Ebola drugs. However, as of now they are not considered part of the market for Ebola drugs. Multinationals working in West Africa will benefit from the production of the drug, but do not pay for the costs: they could ‘free-ride’ on the benefits of the drug if it would be available on the market.

So what would happen if companies would get involved in the Ebola market? Such an idea is not new, but has successfully been applied in South Africa in the 1980s. The South African Chamber of Mines funded a large-scale campaign to curtail the spread of HIV. This campaign proved to be very effective and benefited both the people and the mining companies that wanted healthy workers. Consider the possibility of applying this idea to the market for Ebola drugs: if multinational companies would become part of the market and invest in the provision of these drugs for their employees, there would be more buyers able to pay the market price established on the free market. Pharmaceutical companies could then increase their sales on the market and it becomes profitable for them to start developing and producing the drug.

This is, of course, easier said than done. Companies will need to be convinced that their investment in the drug will eventually benefit them (which might just be a matter of time since share prices of heavily exposed companies have already started to plunge). The costs of investing in Ebola drugs are considerably lower than the potential costs that these companies are facing due to a damaged economy. The damage to the global economy of the SARS outbreak in 2003, with ‘only’ 800 deaths, was approximately $50 billion. Consider the damage that we are facing if the death rates indeed reach hundreds of thousands.

Bottom Line: The challenge that we are facing in the fight against Ebola is to get all those with interest in an Ebola drug involved in the market. This not only includes the patients, but possibly the whole global economy, starting with those companies working with the people of West Africa.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

Free apples!

Rosanne S. writes:*

It was a pleasant surprise for those doing their groceries at a Jumbo supermarket two weeks ago: Jumbo offered every customer an Elstar apple – for free! The supermarket launched its newest stunt in order to show that not only they, but also the Dutch consumer itself could support Dutch farmers, who are having a hard time keeping their heads above the water due to the Russian boycott. I wondered how that free Elstar apple would taste.

Dutch farmers are facing serious problems indeed. The EU decided to take economic sanctions against Russia this summer to punish it for its involvement in the Ukrainian conflict. Yet, Russia decided to retaliate by boycotting many European products, including Dutch products such as apples, pears, bell peppers and dairy products (cheese, of course). As CBS statistics show, the Netherlands will lose exports worth over 500 million euro’s, leading to a total loss of 300 million in earnings for the Dutch economy. Consequently, this puts 5,000 jobs at risk.

Jumbo’s generous free-apples stunt to stimulate the Dutch economy seems to convey the message that the Dutch can support their own economy and make up for the lacking Russian demand if they simply eat more Elstar apples (not just the free ones), onions, bell peppers and cheese (preferably bought at the Jumbo, of course). Or can they? As Anna Vossers writes in NRCQ (Dutch), that would oblige us to completely adapt our food menu to Dutch farmers’ products and eat about 3 kilos of cheese a day, preferably with pears.

Besides this being a practically impossible menu, there is another problem to this. The prices of Dutch fruit and vegetable products will not decrease in Dutch supermarkets, as they have contracts with Dutch suppliers in which purchasing prices have been fixed on the long run. If we decide to increase our demands drastically, this will create a Valhalla for other European producers who also face the boycott, but who can sell at much lower prices. It is unlikely that we would still buy the much more expensive Dutch Elstar instead of the cheaper German, French, Italian or Polish equivalent. In other words, the menu of cheese and pears and increased Dutch demand would not be a success.

Once we turn back to the local Jumbo store and see their profits rise, we should realize that Jumbo’s free apples are most juicy for Jumbo itself, but not for us, nor for Dutch farmers. Its strategy is a cunning one, as the supermarket benefits from its new image as a generous supermarket supporting the Dutch economy and its farmers.

Thus, the support-Dutch-farmers-by-eating-a-free-Elstar-apple should taste more sour once we realize that the free apple is a delusion. Of course, a consumer appreciates free food, but contrary to what Jumbo implied, there is little we can do in order to support our Dutch farmers, let alone to save our economy.

Bottom Line: Dutch farmers must not expect the Dutch take over the lacking demand of the Russians, whilst the Dutch citizens must realize that they themselves face economic downturn and job risks. In this case, the only one truly enjoying the tastiness of the Elstar, is Jumbo itself.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

29 Sep 2014

Monday funnies

Business, or politics?

Speed blogging

  1. This Brazilian artist is raising awareness of urban water pollution

  2. "Invest" in preventing climate change because it makes good business sense

  3. Tomorrow! There's a webinar on water and sanitation in Africa's media at 12:00 GMT. More info here.

  4. Pre-1990 projections of global water demand overshot reality, while post-190 projections undershot the mark [pdf]. Maybe it's better to focus on local supply and demand? Speaking of scary projections, world population "should" hit 11 billion by 2100.

  5. No, water utilities do not need subsidies to "find" cheaper ways of providing water. Subsidies steer innovations in the "planned" -- rather than the efficient -- direction

  6. Property rights: The northern Aral Sea is recovering because Kazakstan has build a dam to protect "its share." Uzbekistan continues to sacrifice the rest of the Aral for its criminal cotton program (farmers are forced to sell to the government, which keeps revenue for cronies)

Uber going under?

Raven H. writes:*

Uber is often viewed as a cheap platform for ridesharing. Uber started as a response to increasingly high taxi prices. The taxi market had little to no entry. To be a legal taxi driver you have to have a license, also called a ‘taxi medallion’. In 2013, a pair of medallions was auctioned for $2.5 million. Not everyone can afford this, which makes entry barrier for the market really high. It is Uber’s goal to assist individuals who aren’t able to afford this. Drivers only need a driver’s license, an Uber-approved car, which implies it has to tick certain boxes (e.g. right age, size, brand, insurance etc.) and via an app they are linked to thousands of customers. Which makes Uber the middleman that connects demand and supply.

Without Uber there was relative inelasticity, which means that taxi drivers can increase the price without losing many customers, because people do not have many other options (monopoly). These things are the reason that taxi drivers can increase their rates greatly. They do this in order to maximize their profits. Consumers are therefore disadvantaged by the monopoly.

Uber is currently breaking the taxi monopoly. They do this by seducing customers with their low fare rates. However, during times that the demand is high Uber increases fares. They do this to attract more drivers (supply) and so they reach equilibrium. This is because drivers react to higher prices, as they will have a bigger incentive to work. As a consequence, more people can get a cab, albeit for a higher price. Nevertheless, Uber is still a cheaper option in comparison to a regular taxi because the profit margin for the driver is lower and taxi drivers keep the prices up so they can have more profit. This is also why some taxi drivers make a detour, which is not transparent.

Last week, the conservative taxi world fought back. They brought out their own app, and chanted that Uber was unfair competition and an illegal, unsafe practice. In Germany and France, Uber is already prohibited. It is illegal because anyone who’s over 21 and has driver’s license can be a taxi driver. This is, according to judges in France and Germany, unsafe. Nevertheless, Uber is still active in over 40 countries and is still expanding. Their low prices still attract many consumers.

Bottom Line: Uber has reached its peak and cab drivers are fighting back. Although prohibited in Germany and France, Uber is still effective and used because of the low prices and transparency of prices causes consumers to choose Uber over conventional taxis.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

Crispy thoughts, salty concerns

Carolina M. writes:*

Some days ago, I entered a fast food “restaurant” with a friend; we were both on a very tight budget that day and while time was not precisely our main concern, we were definitely quite hungry. “Let’s go to ‘X’!” my friend said, “it’s super cheap and really close by!”, “Yeah that’s true, - I replied - it’s literally a couple of steps away but is it really that cheap? Aren’t the deals around 6-7 euros?” “No, you can get a 2-3 euro deal which includes a burger, fries and something to drink”. Well isn’t that impressive? A relatively filling lunch (since I’d personally go for a bit more food) for what one usually pays just to get coffee or a muffin, or both if you’re lucky enough. In any case, it sounds like a pretty good deal, but is it really? What’s wrong with falling for a super salty, crispy, fast food meal if it makes you happy and saves you time and money?

From an economics perspective, fast food can solve a couple of problems. On the one hand, a student budget tends to be quite constrained and 2-3 euros for a meal is certainly hard to beat, at least when it comes to eating out. On the other hand, time saving can be a key incentive: can we really wait 20 minutes at a restaurant everyday to get a delicious meal taking into consideration all the time needed for attending class, studying and of course socializing? During week days it’s probably better to save that time do the best next alternative, such as studying for that test or doing the readings for that class, and save the nicer, more expensive and time consuming meal for the weekend. Now, when it comes to taste and the amount of satisfaction fast food brings us, this can clearly be debated but all in all we can probably agree that buying fast food is very good as a short-term fulfilling transaction.

However, the problem is that there are many downsides to this kind of food and these become harder to ignore as one becomes more socially conscious and environmentally aware of the impact this industry has on our health, the environment and society as a whole. Obesity, high cholesterol, malnutrition are undeniably related to fast food but so is the ever increasing environmental problem – fast food companies are one of the main drivers of mass production of potatoes and livestock farming which bring consequences such as overgrazing, extra methane production, air and soil pollution as well as animal cruelty. In addition to this, workers in the fast food industry receive really low wages, which brings other socio-economic problems with it as well.

So, on the one hand we have a good short term fulfilling deal, which saves money and time and brings satisfaction to many consumers while, on the other hand, we have many negative spillovers from its consumption, which are both social and environmental. Are these powerful enough to make us stop consuming anything related to this industry? It certainly has changed the perceptions and habits of many but probably not enough since fast food restaurants still seem to overpopulate our planet. Could there be an intermediate solution, where healthy fast food chains arise? Or is that a contradiction in itself? I'm not sure if we're going to make any progress there.

Bottom Line: I propose we make our visit to fast food “restaurants” the exception to the rule, the seldom guilty pleasure, and focus our attention on finding easy healthy options that can adapt to our lifestyle.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

26 Sep 2014

Friday party!

Young and old swap clothes :)

Why our insecurity costs us money

Judith B writes:*

Classic microeconomic theory teaches us that prices are determined in markets (which, at their best, are assumed to be perfectly competitive). Thus, what I pay for my pair of jeans depends, on the one hand, on how much it costs to produce it and, on the other hand, on how much I am willing to pay for it. The producer should just make enough money to cover expenses and I should just pay as much as the value, which this pair of jeans adds to my clothing ensemble.

In the real world entrepreneurs have found an astute way to sell you pretty much the same exact jeans but make you willing to pay more for it: branding. Nowadays, if you’re buying a pair of jeans is not just the jeans you’re getting – you’re buying a feeling, a feeling of adventure, a bit of sex appeal and maybe some independence too. If you buy a car, it is not just a vehicle that transports you comfortably and safely from A to B. It’s a way of life, of roaring freedom and power. In terms of what they do, the jeans are still the same jeans and the car is still the same car. Yet, we are willing to pay significantly more because we think that we will be happier, socially more attractive and maybe even more successful, if what we buy has just that little brand tag on it.

I’m intentionally careful in not calling the “added value” an illusion. It’s not. Feelings are not illusions, they are real and they are important to people, otherwise they would not be willing to pay for them. Brands have become recognized social symbols, which have a value beyond their physical characteristics. They are used as information shortcuts, whether to identify high quality products or identify social group affiliation. At a time when other recognizable signs of social standing are vanishing, brands help us structure how we view the society.

What worries me is that branding often preys on the most basic human condition of insecurity. Yes, we all want to be accepted and loved and belong to the group and deep down we worry all the time whether we are “good enough” to be part of the group. We are striving for a status, physical attractiveness, career success and all those other values that we are told we need to achieve in order to be accepted by others. Companies tell us that we can actually buy our way in, that we can be better if we just buy their products. And that I think is an illusion. The new jeans might make us feel better for a couple of weeks, and even get us some compliments. Yet, we ultimately stay the same insecure person, even if we buy a hundred brand jeans.

Bottom Line: Whatever advertisement might tell us, we cannot buy a better self. Learning self-acceptance and improving our self-perception requires serious mental work. However, in the end investing in ourselves is probably cheaper than compensating for our insecurity by buying another pair of Levi’s jeans.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

What to do with underwater leftovers of war?

Rob H writes:*

In the past weeks I have been involved in an NGO called the International Dialogue on Underwater Munitions (IDUM). IDUM is an NGO in The Hague to work on furthering the development of an international strategy on the issue of underwater munitions dump sites.

Throughout and after world war I and II large amounts of munitions were dumped in seas both territorial and extraterritorial waters (here's a video). Ranging from conventional munitions, such as bombs, bullets and mines, to chemical and nuclear waste and weapons. These dump sites are ticking time bombs, as they can literally blow up in someone's face when discovered and because they slowly leak toxic materials into the environment. Studies have yet to confirm the full extent of the problem but on specific sites such as in the Northern European seas there is evidence of toxic materials leaking into the marine ecosystems.

Operations are being undertaken to clean up these side effects of war but far too little is being done. Firstly, because finding and clearing the dump sites is a difficult and costly task. But the foremost reason is that the dumping of these munitions and the sites themselves are a politically sensitive topic which states don't want to bring back to the surface.

So who's to pay? Cleaning up this mess is estimated to cost billions of dollars. The direct victims are mostly fisheries that see fish stocks depleting and people being harmed by munitions while the responsibility lays with the states. Moreover the dumping itself was done by secretive military agencies so there are no clear records. So should states be responsible for their previous governments' war leftovers? Or should we assume that those responsible were not well informed on the potential danger of such dumping?

A good example for this problem are landmines. The demining and related programs depend on private and public voluntary donations but have a strong base of multilateral agencies and NGO's. This has been much more successful because of international recognition of the problem and the commitment of states mobilizing clearing efforts.

To reduce the number of underwater munitions there has to be international commitment and recognition of the problem. Firstly an internationally binding treaty has to be signed specifically condemning underwater munitions. This will open the way for more funding and technical development to clean our seas of underwater munitions.

Bottom Line: When the world faces a problem collectively and responsible parties don't clean up their mess there is need for open international commitment to kick start investment in solutions.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

25 Sep 2014

The founder of the EU's agricultural policy renounces it

Sicco Mansholt was a key player in Dutch and EU (EEC at the time) agricultural policy. I visited an exhibit on his career a few weeks ago that described how his initial enthusiasm for industrial agriculture and free trade turned to horror as overproduction wasted money and resources and damaged the environment.

In his original (1950) proposal for the EU's Common Agricultural Policy, note that he wanted to regulate (guarantee) prices to overcome farmers' resistance to free trade within the EU.

Years later, he came to regret that "temporary" price subsidies had become permanent and that taxes had never materialized to offset subsidies. He also regretted the resulting overproduction -- leading to "butter mountains," distorted markets and environmental degradation. The 1972 report, Limits to Growth, had a profound impact on him, and he drafted a new memo on sustainability that focused on growing food (incl. "unprofitable" crops that served different needs), replacing consumption of goods with human services, reducing capital churn, and tackling pollution. (Note his caveat "supposing stable world population," which was 3.85 billion in 1972.):

These goals make sense from a sustainability prospective, but there has been no "progress" on population, consumption or capital. Food production has risen, but only to feed people (hunger is still a problem) and non-food crops have increase agriculture's footprint. Some progress has been made on local pollution, but global pollution (carbon, much of which is linked to people, industrial ag, and consumption) has turned into a much bigger threat.

Mansholt died in 1995, still upset about the EU's unsustainable policies. The EU, ironically, calls him the "founder of green Europe" at the same time as it has censored his critique of EU policies.

Bottom Line: Subsidies encourage overproduction and overconsumption, and they have a way of persisting far beyond any initial justification (cf. ethanol, renewables, freeways, ag irrigation, etc.). Mansholt had the opportunity to see his plans abused for private profits but the opportunity (and honesty) to denounce them. It would have been better to allow markets evolve at their own pace.

Technology steals your job!

Mathijs writes:*

I am a techno optimist! For me the technological revolution is begun, it is unstoppable, and it will bring us to an utopian kind of society soon! Although before we can enjoy the utopian life we have to deal with some problems. In this blog post I will address one of these problems, that, because I’m a humble student, I will NOT solve! This problem is with the increasing influence of technology on the labor market. Simply stated: the machines are taking the jobs of low skilled laborers, and we choose to make them the victims of this.

Andrew MCAfee has an interesting TED talk in which he discusses the influence of technology on the labor market. He is able to show that we are making more money with less people, and relates this to technological progress. Of course, this increase in labor productivity is good thing. Laborers working with technology can make more, when laborers make more, society becomes richer. The problems with it, is that other figures show that we don’t need those laborers anymore! And the projection is that we need laborers less and less. Their jobs are being replaced by machines, and there are no other jobs to replace them.

This will go as followed: A factory owner is confronted with a machine that can do the job of one of her employee cheaper than her employee. The factory owner, that rightfully seeks to maximize her profit, has two options. Which are the following: replace this employee by a machine, or ask her employee to work for less money. In the Netherlands where the majority of employees with these jobs have a minimum wage, the factory owner has only one option: fire the employee. When this scenario is repeated again and again, low skilled laborers will get less and less money, or lose their jobs again and again. They are victims of the development.

The last thing I like to emphasis is the urgency of the problem. Information technology progresses with an exponential rate, jobs will therefore be replaced faster and faster. Today already, in cities all over the world, autonomous Google cars are driving. Predictions are that in 2020 the first autonomous cars will enter the commercial market. How long will it take to replace truck drivers and taxi drivers!? How many jobs in this one example will be taken by machines, and never be replaced!? My message is therefore simple. It is time to think about solutions for the people that can’t compete with new technologies, and that are victims of this beautiful development.

Bottom Line: Jobs are taken by new technology and not replaced. This happens more and more and faster and faster. It is time to have better solutions for the people that lose their jobs than unemployment offers today.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

Information aggregation: the key to rational decisions

Joes N. writes:*

Although I personally believe that given enough time, education and information, people can make rational decisions, and often will do so, I ultimately think rationality is an assumption that is made too easily and too often in economics. Bounded rationality seems to be a safer bet in many scenarios, as supported for instance by Kahneman in Thinking, Fast & Slow, who argues the brain works with two functions, one being intuitive, the other rational. I think looking at the crisis simulations of historical events organized by students at LUC the Hague through the lens of bounded rationality might actually provide some useful insights. Although these simulations only provide some anecdotal evidence, they might offer insight into the importance of institutions which aggregate information in case of political, but also of economic crises.

Last weekend some of my fellow students and I organized a crisis simulation of the Vietnam War. It included several committees, such as the Senate, the National Security Council, the North Vietnamese Politburo and the Government of (South) Vietnam. I think we were highly successful in 'throwing' sufficient amounts of information at people to make them stop being rational actors, and lapsing into their 'system one' decision-making modus. Rather than taking their time to look at the rules of procedure we provided them, and basing their actions on these rules of procedures, they used their intuition. It could be argued that a rational actor would first take the time to find more information, or should even be assumed to be in possession of all necessary information. However, in a situation in which time is a scarce resource and rational actors do not have all information, they simply have to start following their biases, something also argued by Herbert Simon, in "Models of Bounded Rationality: Empirically Grounded Economic Reason."

This also appeared from the reactions of the participants, for instance, a fellow student of mine noted that he was completely stressed out, leading him to say: “Wow, this was so intense. I never thought it would get this intense.” This does not sound like a cold rational actor, it sounds like someone who was very near to collapsing in despair because of an overload of information. While not presenting any conclusive evidence, this simulation does confirm Simon's theory that if we feed an individual sufficient amounts of information at the same time, he will follow his biases and intuition. Rational decision making takes time, and time was a scarce resource during the simulation.

For me it showed the importance of, firstly, reflection on the intuitive choices I make and, secondly, well-ordered decision-making structures, in which decision makers receive as much relevant information as possible from a pre-structured system set up to provide information (which is the official task of the US National Security Council, one of the Councils we simulated). Whereas in a market with repetitive transactions, people can probably act rationally and base their assumption on previously done statistical research and experiences (for instance Mikhail Myagkov and Charles R. Plott argued in 1997), in less often occurring events, like economic crises, we might expect people to behave according to their intuition, as Kahneman argues and was confirmed by our simulation. Governments and large companies thus need a 'crisis' team which can be assembled in case of an economic crisis, which can aggregate information (which due to the crisis can no longer be taken from the markets or other usual sources), in order to ensure that decision makers have the information necessary to overcome their biases and make an assessment of reality as possible.

Bottom Line: Human beings are inherently flawed, so we need institutions which prevent and mitigate the negative consequences of our biases and flawed intuition as much as possible.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

24 Sep 2014

From Amazon to Zola

Iris G. writes:*

In the past week, Amazon, the online warehouse, was in the Dutch news since it might finally come to the Netherlands. For the past years, persistent rumours of this possibility have sparked debates about what this would mean for Dutch retail stores, particularly those specializing in books or home office supplies. There are concerns that the introduction of Amazon in the Netherlands could not only form some serious competition to its Dutch equivalents, but might also lead to the downfall of many small, local businesses since they would not be able to compete with Amazon's low prices. On top of that, the Amazon working environment is questionable at the very least, according to many articles and stories describing the experiences of employees, which certainly does not win the company any sympathy votes. The question is whether Amazon, with all its pros and cons, would truly pose that much of a threat to small, local or specialised businesses.

"Au Bon Marché": the inspiration for Zola's novel
This discussion is, of course, nothing new. In fact, it is already over a century old. A great early example is given by Émile Zola, the famous French writer, in his book 'The Ladies' Paradise' ('Au Bonheur des Dames') which was originally published in 1883.** The book describes the rise of a large department store, revolutionary at the time, in which all kinds of goods are sold: fabric and clothing, but also accessories and furniture. The customers are seduced by the great wealth of choice, the discount-deals, the convenience of having everything under the same roof and the option of home-delivery. At the same time, the employees have to work long hours under harsh conditions, and there is an outrage amongst the local retailers, who see their sales dwindling and fear for their business since competing with the mighty warehouse is almost impossible. Sounds familiar?

Even though the story is fictional, it was modelled after existing organisations and captures the concerns of that time. As it turns out, those concerns are still very relevant. However, it is obvious that the rise of large organisations did not lead to the absolute end of the individual, small-scale retailers, who still exist in the Netherlands (and elsewhere) after decades of competition with large companies. They may not dominate the Dutch streets like they did in the time of Zola's writing, but that is only to be expected since the population of the Netherlands tripled since that time and demand has grown with it.

It is true that large Dutch online retailers and Amazon look-a-likes (such as bol.com, or wehkamp.nl) would have to step up their game in order to survive, but competition in itself is not a bad thing. Amazon is the revolutionary department store of our time, and while there are unpleasant sides to the company, as mentioned above, it has been a game changer to the market of online retail to which aspiring competitors will have no choice but to adapt. The beautiful, fun, quirky and original stores, on the other hand, will persist exactly because they differentiate themselves from this market and do not aim to reach the largest audience possible.

Bottom Line: By catering to a specialised customer base, providing personalised service, or simply offering an unique experience, small retailers have withstood large, cheap and profit-maximizing organisations for over a century. They will survive Amazon, too.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

** Zola's book is an easy read and a timeless classic -- and available on Amazon.

Market Failure and the Ebola Virus Epidemic

Margot M writes:*

According to a recent update from the World Health Organization (WHO) the Ebola Virus outbreak, believed to have originated in Guinea in December of last year, has infected more than 5,800 people and claimed 2,793 lives so far. With a death rate of 70%, WHO researchers issued a dire new forecast this week, one that anticipates 20,000 deaths by November (10,000 in Liberia alone). The urgency of the issue has been clear for months now, but it has only recently begun to pick up traction and illicit international response in which aid commitments have been stepped up. Why has it taken this long? How is there still no effective and widely accessible vaccine for Ebola? Well, it probably has something to do with market failure.

Image from The Economist
Prof. Adrian Hill, an Oxford professor leading research into a candidate vaccine for Ebola attributes three main reasons to why big pharmaceutical companies like GlaxoSmithKline, Novartis or Pfizer have been reluctant to produce an effective vaccine as of yet: firstly, because of the nature of the outbreak; secondly the estimated number of people to become affected was thought until recently to be quite small; and finally, that the affected people are in some of the poorest countries essentially unable to afford a new vaccine. For an “orphan disease” affecting the impoverished in poor countries, “there is no market”.

Despite a widespread tone of moral indignation towards “Big Pharma” companies, which have essentially monopolized the commercial vaccine supply, the fact remains that there is a lack of profitability from a big market and thus a lack of incentive to produce for those who need it most. This clearly constitutes a market failure whereby the market underprovides a good, which has the potential for vast public benefits. The economic incentives (profits) for the production of these vaccines fall short of public health needs. Yet, if there were to be intervention in the market, which would encourage producers to supply closer to the socially optimal level, demand would be met and the epidemic could be contained. The figure below illustrates the forecast of three different scenarios as predicted by a research team at Columbia University further elucidating the urgency of the matter even in a best-case scenario:

The private benefit of getting the vaccine would be less than the marginal social or public benefit and thus carries with it positive spillover, which goes beyond the obvious health benefits. Said public benefit would not only consist of the lives saved throughout the region by the containment of the virus, but also the prevention of complete economic downturn and further hardship. Strict trade and travel restrictions have already dampened West African economies, but if Ebola is not controlled soon, the World Bank estimates that the long-term effects will be crippling. At its current rate, the virus would cause Liberia’s economy to contract by 4.9% and reduce economic growth in Sierra Leone from 11% to approximately 2%.

It is disillusioning to see that the moral imperative to help those suffering is far weaker than that of the profit incentive. It has been almost 40 years since Ebola was discovered in 1976, yet there is still no cure, despite its medical feasibility. The alignment of incentives is crucial in order to correct for the shortage of a widely accessible and effective drug in the market.

Bottom Line: The Ebola virus has spun out of control and now, the necessity of multi-lateral action is more pressing than ever.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

Student posts are back!

We'll have guest posts from my microeconomics students over the next few weeks. They get an "A" for posting. The learning comes from the give and take of civilized discussion, so please help with comments on unclear analysis, other perspectives, data sources, etc.


23 Sep 2014

Rational waste -- my new paper on desalination

I started this paper in Riyadh, where I was trying to understand the government's policy of providing ridiculously cheap water.

Please read it and tell me what you think (where I'm unclear, what ideas are useful, data corrections, etc.)

Title: Rational Waste: The Political-Economy of Desalination

Abstract: This paper explores the economic and political dimensions of responding to water scarcity by increasing supply rather than reducing demand with examples from San Diego (US), Almeria (ES) and Riyadh (SA). Each case explains how leaders benefit by obscuring the costs of desalinated supplies. In San Diego, marginal costs are diffused among customers. In Almeria, they are absorbed by a government eager to reduce unsustainable groundwater use. Rulers in Saudi Arabia, meanwhile, absorb costs in exchange for political quiet. Each case discusses potential means of extending current policies (greater regional trust, improved groundwater condition, and reduced agricultural irrigation, respectively) as well as reforms to facilitate the adoption of policies with lower economic and social costs.

You can download a copy here

Anything but water

  1. A Dutch student photoshops her holiday to "prove" how easy it is to lie about reality on Facebook

  2. Peter Thiel (Paypal, Facebook, etc.) explains the difference between a good monopoly that innovates to make excess profits and a bad one that counts on protection for excess profits. This essay, meanwhile, backs Amazon in its quest to drive down book prices, even if publishers get screwed -- like scribes were

  3. An excellent podcast on the abuse of economic models (something that's annoyed me for ages) that every graduate student (and connoisseur of bullshit) should listen to. Related: Academics review papers more quickly when they are paid, either because they like the money or respect for their effort it represents

  4. ...and then they came for the computers: don't believe governments claiming that limits on technology will protect us from piracy, viruses, terrorists, etc.

  5. "Poverty" is not the same in developed countries. Inequality is the real -- and actionable -- problem
H/Ts to RM and anon

22 Sep 2014

Monday funnies

Conference calls in (painfully) real life


I met a traveler from an antique land
Who said "I have seen the work of man:
Vast with pumps, dams, and machines;
Covered with pictures of fruit-and-nut dreams.
I saw a land stretched into dust,
Where men had labored and planted with trust.
They said the water would always be there,
Sucked from ground, chopped from river, pulled from air.
That water, abundant, was spent on crops
Taken far away, save occasional drops.
It took a century to replace Nature's share
With dead engines, cracked cement and dusty air.
The poor lost jobs, the rich drained pools;
The fish were already dead, sacrificed by fools.
I traveled the world but found none to care;
California killed itself, somewhere over there."
Inspired by this New Yorker piece, "Paradise Burning": "Mother Nature is teaching us a lesson. Whenever you have an abundance, don't spoil it."

19 Sep 2014

Friday party!

What kind of accents would you hear at a London party? This guy will help you tell them apart:

Speed blogging

  1. Me on Yahoo Canada: "The Water Wars: Conflicts over water sources continue to grow"

  2. About 20 percent of people (in this sample) often pee in the shower

  3. A very interesting podcast on water infrastructure with Marshall Davert of MWH Global, a good reddit thread on how pipes stay clean (or get clogged) and a nice photo essay on a big NYC wastewater treatment plant

  4. The US Patent system is so broken: patents pending on systems for monitoring, marketing and analyzing water rights?!?

  5. China's S-N water transfer may stunt regional growth. No duh

  6. Delusional mayors plead for subsidies because "local governments pay for 98 percent of infrastructure improvements," but water-system failure would harms the national economy. Their economic illiteracy is exceeded only by their weak grasp of cost-benefit analysis: payment in proportion to benefits. I don't see any benefit to someone in Indiana for a water project in San Francisco.
HTs to RM and LV

18 Sep 2014

What can a state employee do to fight corrupt policy?

I got this email from a little bird (LB):
After 3 years of having my head deep in ecosystem restoration and coming the the conclusion that our program is just chasing its tail (not addressing the real problem, but doing lots of hand waving so that it looks like progress on the surface), I want to know how to push the debate towards the real issues of water over use, farming in inappropriate soils, depletion of ground water, political corruption, etc.

In terms of the CVP & SWP, Westlands Water District (and other junior water right holders farming in salty soils on the west side of the San Joaquin Valley), Federal Biological Opinions for the pumps in Tracy that address environmental symptoms instead of the cause (over-allocation), and subsidized water deliveries to billionaire farmers who are very cozy with state and federal politicians... What can someone like me -- a CA State Government employee working to protect our natural resources -- do to fix a system that is, well, already "fixed" for the benefit of special interests?
In reply, I said:
Thanks for your insights. I'm surprised that I don't hear, more often, from state employees...

You're in a tough spot. There's a bit of robber barons going on here -- they stole the gold and laundered it into mansions, etc. How to get it back?

I agree with you that many policies (and employees) focus on details while missing the big picture, e.g, WHY are we sending water in huge aqueducts to huge farms?

Perhaps the best way to push back on the current system is to imagine -- and project -- two different futures: (1) with business as usual (collapsing aquifers and ecosystems; dust bowl, etc.) versus (2) with changes in flows, smaller farms, etc.

The vision thing can help people grasp an alternative which can THEN result in huge policy overhauls. It's like busting a dam and seeing a river revive. People THEN understand the point.
LB wrote back:
I think a reason why you don't hear from state employees more often is because they are either too busy in their specialized tasks to have time to come up for air to see the big picture or following the "state worker golden rule," i.e., don't make more work for yourself.

I agree that vision is a powerful tool. I'm not sure how to apply that in a department that is reactionary and can't keep employees long enough to build institutional knowledge to see the vision through.

I've often joked to colleagues that only Oprah can save the environment due to her ability to sway the masses and plant the vision... but then this is a conversation about water, fish, farms and money, not sexy celebrities. We ecologists are not allowed to contact elected government officials. They can ask for information from us, but it's not to be given unsolicited. It is very "chain of command" here, and I'm still figuring out how that end of the machine functions.
Can any of you offer advice, sympathy or ideas to help LB do their job and/or cope in an environment that is designed to minimize innovation and feedback?

17 Sep 2014

Anything but water

  1. A really good backgrounder on the origins of ISIS (goes back to 570AD) and the influence of poorly-chosen borders. (Obama should send the bill to France and Britain)

  2. Don't waste your money on vitamins. They do nothing for your health (exception: folic acid for expecting mothers)

  3. A really fascinating website to explore people's priorities (healthcare, reliable energy, honest government, etc.) around the world

  4. Were we happier in the Stone Age? Perhaps, yes, when you consider the perverse impacts of consumerism

  5. An inquiry into social isolation and unhappiness: "Commute time should be offset by higher pay or lower living costs, or a better standard of living. It is this last category that people apparently have trouble measuring. They tend to overvalue the material fruits of their commute—money, house, prestige—and to undervalue what they’re giving up: sleep, exercise, fun."

16 Sep 2014

The practical ways in which laws are undermined

A water bureaucrat (WB) explained to me how laws that sound good in theory may be worthless in reality.

Water users in his state can pump groundwater with permission, without permission (exempt), or in excess of their permission (illegal).

Problems result from exempt or illegal pumping, so WBs (who want to represent/protect the public) should either monitor everyone (assuming adequate resources) or go after the largest abusers (prioritizing given a lack of resources).

WB told me that neither of these strategies are pursued. Politicians have withheld funding to monitor all uses, and they have directed WBs to monitor permitted uses. Given that most permits (say 90 percent) go to small users, these instructions mean that WBs spend 90 percent of their time on users who may account for 10-20 percent of total use (and very little abuse). WBs do not pay extra attention to large users, and they entirely ignore exempt users. The upshot is that the WBs are busy but useless.*

Bottom Line: Vague regulations and mis-prioritized enforcement can lower bureaucratic impact to zero, even with hard working, qualified staff. Pay attention to outcomes, and pay more attention to politicians who talk about sustainability but then hinder its pursuit.
* We would predict this result if we knew politicians condone over-use of groundwater. We can assume they do condone such over-use, given the predictable and known impact of their instructions.

15 Sep 2014

Just sayin'

"The people of the state of California are more or less destroying themselves to give cheap almonds to the world." -- me, in The Guardian

Monday funnies

Snow has hit the US and Canada at the earliest point in over 100 years, which obviously* proves that the earth is cooling instead of warming. This good news should encourage the fossil fuel community to step up production so we can use more energy. 

If the greenhouse effect is true, then we will save ourselves from icing over; if it's not true, then we can enjoy all the cheap energy. Win-win!

Just another summer day in Calgary, Alberta

* Well, not actually, since climate change is about greater volatility (e.g., snow in Sep) more than higher temperatures.

Cooked -- the review

I'm a big fan of Michael Pollan's writing. I read and enjoyed The Botany of Desire and The Omnivore's Dilemma.* I read his most recent book, Cooked: A Natural History of Transformation about six months ago.

This book makes you want to cook and experiment with food chemistry in your own kitchen. I did a few recipes with a crock pot (mac cheese was meh; brisket tasted metallic), a lot of oven roasting ("paella," mac cheese and roasted veggies were all yummy), and got much deeper into the pickles section (new favorite: green peppercorns).

Cooked also makes you think about the process of cooking and the social dimension of food. (I just bought an apartment with an open kitchen that will make it easy to talk while cooking for guests.)

These ideas are worth repeating:
  1. People who see preparing food as wasted time fail to connect with the natural world and appreciate the amazing cooperation necessary to bring food from a distant farmer to your plate
  2. Cooking may not show up in GDP, but it's definitely a source of happiness for the chef and guests
  3. "Barbecue has the highest bullshit-per-calorie ratio of any cooking method, either because barbecue is so straightforward or because it's done by men" [p 68]
  4. The "slow" dimension of southern cooking probably dates from an era (=slavery) where cooking used time that was worth nothing
  5. By cooking and eating garlic and onions, we convert their chemical defenses into ours
  6. Fire cooking is as wasteful (of heat and ingredients) as pot cooking is conservative. The English had plenty of wood and meat to waste; the French needed to economize in their cooking, hence their mastery of sauces and other ways of improving dodgy food
  7. "Time is the missing ingredient in our recipes -- and our lives." I sometimes feel I lack time to cook but never regret spending time when I do
  8. The move to processed foods was not pulled by demand from busy housewives but pushed by supply from food corporations that wanted higher profits**
  9. "Most of the increase in obesity in the US can be explained by food preparation outside the home" [p 191]
  10. There's strong evidence linking "western diseases of affluence" (cancer, heart disease, stroke, etc.) to refined grains and sugars (I agree)
  11. Most commercial "whole wheat flour" has had the germ and bran taken out and added back (perhaps in a different ratio), which may explain why the flour I milled at home was so much better than store-bought flour
  12. The explosion of research into the microbiome appears to justify the value of fermented foods that most cultures have integrated into their traditional diets
  13. Fermented foods are an "acquired taste" because they define our cultural loyalties
  14. The quest for "clean" foods and "antibiotic" environments may be undermining our health
  15. Cheeses do not just remind us of sex, death and animals; they connect us to life when we eat them
  16. It's not implausible to see fermenting grains into alcohol as a rationale for moving from a healthy hunter-gatherer lifestyle to farming, i.e., people sacrificed weight and height to get drunk
  17. Different cultures treat alcohol and drunkenness in different ways, which makes alcohol use acceptable while allowing alcohol to "open up new possibilities" in different ways
  18. Make your own beer or bread if you want to appreciate good bread or beer
  19. Yes, it's cheaper to buy bread, but baking allows you to be a producer, rather than just an empty consumer. Steaming hot bread reminds us of the joy of friendship and gifts of nature
  20. Pollan tends to criticize the over-industrialization of life that can -- like Adam Smith's pin factory or Chaplin's Modern Times -- erode our humanity. I agree with him on this, and I agree that alienation from production can depress people. I am lucky to have a VERY creative job (teaching, writing, making up ideas), but I think that everyone can do a little more producing, no matter their day job
  21. "Cooking is one of the more beautiful forms that human generosity takes... the very best cooking is a form of intimacy" [p 415]
Bottom Line: Food isn't fuel. Food is life and civilization. It is the string connecting us with others' minds and bodies. I give this book FIVE STARS for its fun and interesting exploration of food, cooking, eating and life. Read it, then cook something for someone.

* Botany describes how apples, tulips, marijuana and potatoes "use" us to extend their genetic footprint. Dilemma explains how Americans without a tradition of eating certain foods have a hard time choosing how to eat well.

** I'm routinely disgusted to see the variance between a food package's label and its ingredients. For a simple example, look at any carton of "banana-mango juice" (or similar) where you see that apple or grape juice -- or NO juices -- are the primary ingredients

12 Sep 2014

Friday party!

This drone's-eye view of Burning Man captures some of the scene, but not the people (sample):

H/Ts to KC and CC

"Israel's clear cut discrimination is our responsibility"

Yoav Kislev sent me his 2008 report on water in the Palestinian territories [pdf] in which he discusses the intertwined relations between Israeli and Palestinian engineers, farmers, administrators and citizens. The report confirms some known facts (settlers get more water than Palestinians) while adding some useful details (Palestinian water use has tripled; it's hard to collect money to pay for the system).

In my opinion, Yoav misses one point when he asserts that Merkot (Israel's water company) is filling a role the Palestinians could not easily replace. I'd argue that the Palestinians -- should they take over from Merkot -- would do a better job (collecting revenue, fixing leaks, etc.) because they would be responsible for results. The current situation in which Palestinians "depend" on Merkot allows incompetents to blame Israel -- just as Cuban leaders blame the US embargo for the people's poverty.

Bottom Line: "The technical difficulties Mekorot poses and the restrictions we impose on the committee were intentionally made in order to limit the supply to the residents of the territories... In the areas the State of Israel controls a growing number of Jewish residents live who receive a free water supply, to households, gardens, public parks, swimming pools as well as agriculture -- as well as Palestinians, to which the supply is limited and irregular. That is clear-cut discrimination and it is our responsibility."

11 Sep 2014

Does fixing a mistake make it worse?

EC writes from Florida:
One of the big questions staring me in the face is... as we reach the limits of sustainable use without “significant harm” to the environment and reuse more and more wastewater, what happens to the systems that have adapted to the volume of discharge provided by our waste stream outfalls?

We have looked at many issues to determine if there is extra available water in our basins, but the amount of “freeboard” available for additional human use may be equivalent to the volume projected to go into reuse -- purple pipe systems here -- in the future.

Reuse is fantastic for farmers recapturing and reusing fertilizer runoff, cities looking for less regulated water sources for esthetic irrigation, and water quality improvements in general. It is terrible for salinity intrusion up rivers with lower discharge volumes, groundwater recharge areas fighting salinity intrusion, hydroperiods in flat wetlands, migratory species looking for a critical water depth, and other water volume dependent issues.

Have you looked at that?

Also variability in the demand for water reuse is a big issue. Spray fields used to help discharge extra water exceeding reuse storage volume, almost always occurs on rainy days or after the soils are saturated. That is when lawns don’t need to be watered and spray fields are least effective at handling the runoff. It seems to be when reuse water managers run the spray field pumps 24-7. What is your experience with the expense of reuse water storage?
As all of you know, I am not a scientist, and therefore unqualified to comment on the size of the impacts from these changes in use, but I wrote this back:
I agree with your general points, that (1) "efficiency" may leave nothing for nature (eg, the Jordan River) and (2) human centric changes may tip systems into collapse.

But those dangers are often ignored by humans. My "end of abundance" thesis is that we've exceeded limits that we've been able to ignore for ages.

What are our choices, now that we're seeing the impacts of our behavior? We can either step back and rethink our habits or drive ahead and off the cliff.

It seems you've described the manifestations of failure to reform. The question is whether policy "leaders" will act on those bad outcomes
Can any scientists comment on the these issues? Can any policy wonks give examples of where science feedback is driving policy reform?

(The EU's Water Framework Directive is an attempt to improve environmental water quality and quantity, but it's top-down and resisted by many national governments.)

10 Sep 2014

It's my well and I can pump if I want to?

In my Reddit AMA, hobbers wrote:
So I was imagining how you would price water when someone has their own well. Sure, it's the same aquifer or whatever. But people will still moan and complain - "it's my land, I can do whatever I want, what gives the government the right, etc". All of which still makes sense, except for the common resource problem. But couldn't you influence their behavior by offering a water market? In a similar way to solar? People can pipe water back into the system at market prices. That sets a cost for them watering their lawn, while not forcing the government to inspect their well or otherwise. When water is abundant, market prices are low, people can water whatever they want. When water is scarce, market prices are high, and people have incentive to not water their lawn, instead piping the water back into the system where use can be prioritized.
I responded with:
I agree with these general outlines. The key for the well example is the degree of "shared" in the aquifer. Assuming it's worth the metering cost, it would be pretty easy to charge a "public goods extraction fee" based on extraction volumes and wellhead depth in a region (averaged over a year). Above average extractors would pay if the level dropped, since they are depleting the common pool resource. "Unconnected" people could do what they way (pay or not) with "their" water, which they have the ability and incentive to protect. (Aquifer science is VERY complex in the field.)

Speed blogging

  1. "Water Security in the Middle East" and "The Water Crisis in Iran" [pdfs] focus on the institutional and managerial failures that turn difficult physical conditions into the conditions of collapse. Related: Where Will The World's Water Conflicts Erupt?

  2. Interesting podcasts (here and here) on the roll out of smart meters (Advanced Metering Infrastructure) in San Francisco

  3. California pays too much attention to policing "correct" water use and not enough on pricing for scarcity and "How to Slake California's Thirst" (quotes me)

  4. This paper quantifies the importance of utilizing BOTH technology (efficient appliances) and techniques (awareness, habits) for conserving water

  5. The "Vulnerability Sourcebook" will help you assess a country’s vulnerability to climate change; the "Strengthening Aquatic Resource Governance" project relies on collective action to prevent conflicts around aquatic resources (like water and fish)

9 Sep 2014

If you can see it, you can understand it

If you haven't watched Hans Rosling's 2006 TED talk on visualizing data to understand development, then watch it now:

Related: His 2007 talk on understanding the inequality INSIDE countries

Anything but water

US laws "impede" transfers from Saudi to
NL but not to the US. Protectionist Fail.
  1. Amartya Sen puts some perspective on global warming, i.e., how shall we consider the plight of the poor who do not even have access to energy (or water)?

  2. I've said for years that US governance is troubled because a hetergeneous (decentralized) culture is being managed by a homogenizing (centralized) system. Francis Fukuyama says something similar in this essay, with WAY more theoretical and historical context. Bad news: "the decay of American politics will probably continue until some external shock comes along to catalyze a true reform coalition and galvanize it into action." Slightly related: US government raises fee for renouncing citizenship by 400+ percent, citing "excess demand" from soon-to-be ex-Americans

  3. No duh: Australia's carbon emissions rise for the first time in 8 years as its government dumps its carbon tax and renewable program in favor of Big Coal. A terrible blow for efforts to coordinate carbon reductions

  4. Yes, we should study history... if only to know how unpredictable history turns out to be. (I'd predict that Putin will turn out to be a huge failure -- like Chavez -- for his people. I'm wondering how climate change will affect different countries. I fear a future in which militarized police and feckless spies dominate the US.)

  5. UNC Chapel Hill adds more statistics to student transcripts, to help readers understand the difference between the easy A and tough A classes. This is a useful step towards a measuring system I'd prefer -- "curve grading" for every class -- that reduces the impact of "professor and major bias" on grades and focuses on relative student performance. Is this system "fair" for students taking art or chemistry? I think yes, because you want students to get degrees in the subjects they master, not degrees in which everyone gets an A and nobody is pushed to achieve
H/T to RM

8 Sep 2014

Monday funnies

Aha! I knew it!

Do academics understand how to fix water policies?

Long-time readers know I worry that "irrelevant academics" fail to connect their work to reality (example example). Michael Strong asked for my thoughts on this topic recently:

Q: To what extent are your perspectives [on water policy] mainstream within academia, outside of economics? (I expect your ideas are not too controversial within econ)

A: Actually, they are not very well understood within econ. I am finding this now, as I constantly need to remind my students that we are learning with play models (perfect markets, 100% private goods). Many academics bring this over-simplified view to water, e.g., forgetting the "public good" dimension of environmental water flows.

Q: Is it your perception that most professors in humanities and non-economic social sciences understand that pricing water appropriately is the best way to ensure water sustainability?

A: No. Their solutions tend to rely on (1) treating water with respect or (2) government intervention. (The worst solution -- just desalinate -- tends to come from engineers.)

Q: Perhaps more controversially, would most humanities and non-econ social science professors accept that privatization of water that required personal allotments of water for free might be a more socially beneficial arrangement than democratic governance of water supplies?*

A: I think they would buy this idea IF quota could not be permanently transferred, since sales can turn a bad decision into "a lifetime of (water) slavery." OTOH, "democratic governance" often means leadership by them (in their minds), which they may prefer to privatization that left water in the hands of citizens/a decentralized market that "leaders" could not control for the public benefit -- or leaders' biased priorities.

Q: I don't know if you are familiar with Dan Kahan's work, but he is a leading scholar on the issue of science communication. Kahan is interested in why some cultural groups are anti-vaccine, why some cultural groups resist global climatology research, etc. It strikes me that the basic science of water economics is fairly straightforward and yet that it remains relatively unrecognized in public debate. Is this a case in which some cultural groups are resistance to the science of water economics? And, if so, are the academic humanities and non-econ. social scientists among those groups?

A: Great question and the real barrier to improvement here. I think it comes from an assumption of "public-owned utility" = "serves the public" which is true in most OECD countries as well as a belief that "we need water to live" which is why we get it for free from fountains. Both beliefs argue against pricing as well as private participation, but those tools are useful. That's why I discuss the role of prices and private sector skills using example from other sectors. These paradigms can help address water scarcity and improve management at struggling utilities. OTOH, these "soft" academic really do have useful ideas on community management of resources and the importance of non-quantifiable uses and impacts of water. Over the years, I have definitely benefited from the diversity of useful and effective methods for sustainably managing water.

Bottom Line: Academics from all disciplines need to test their theories against realistic problems to find viable solutions. We should not let ideology get in the way of reliable water service and sustainable management of water resources.

* Michael: Regarding the latter I just came across this article that is clearly hostile to your message:
This article focuses on the arguments used to support private sector participation (PSP) in the provision of water and sanitation services (WSS) since the 1980s. It addresses the following questions: what was the historical evidence informing the claim that promoting PSP would be the best instrument for reducing water poverty? What are the principles that provided the foundation for this claim? And, what has been the empirical record of the resulting WSS policies? It argues that early neoliberal WSS policies since the 1980s were not intended to expand services to the poor. A pro-poor rhetoric was added to these policies since the 1990s, probably as a result of increasing citizen unrest in developing countries and the failure of privatized WSS projects in the Americas and Europe. However, the claim that PSP can provide the solution to public sector failure in extending coverage of essential WSS to the poor has little ground both in the theoretical literature and in the historical record. As could have been expected from the accumulated knowledge about the relationship between market-driven WSS and the poor, the recent experience with PSP projects has been disappointing. In practice these policies not only have failed to extend these essential services to the poor but have also contributed to deepening existing inequalities of power resulting in the weakening of state, local government, and civil society capacities to exercise democratic control over private water monopolies in most developing countries. Reversing this imbalance is one of the crucial challenges ahead in order to achieve the Millennium Development Goals. However, the article argues that the inertial forces set in motion by the neoliberal model of water policy based on market-centred governance of water and WSS remains the crucial obstacle for the achievement of the goals.
Me: This article is based on opinion, not fact, i.e.**
  1. Privatization in Buenos Aires definitely helped the poor, i.e.,
    Galiani, S.; Gertler, P. & Schargrodsky, E. "Water for Life: The Impact of the Privatization of Water Services on Child Mortality" Journal of Political Economy, 2005, 113, 83-120.

    Abstract: In the 1990s Argentina embarked on one of the largest privatization campaigns in the world, including the privatization of local water companies covering approximately 30 percent of the country's municipalities. Using the variation in ownership of water provision across time and space generated by the privatization process, we find that child mortality fell 8 percent in the areas that privatized their water services and that the effect was largest (26 percent) in the poorest areas. We check the robustness of these estimates using cause-specific mortality. While privatization is associated with significant reductions in deaths from infectious and parasitic diseases, it is uncorrelated with deaths from causes unrelated to water conditions.
  2. There's an ECONOMIC case for serving the poor, in terms of profits, because they are willing to pay more than the cost of service; see this report from Phnom Phen [pdf]

  3. Public companies fail the poor due to poor governance. It's not private that fails, but corrupt governments, as we saw in Cochabamba, Bolivia
** With all due respect to my geography colleagues, their discourses do not often include analysis or empirical evidence

5 Sep 2014

Friday party!

It was lovely to see soldiers respected as soldiers AND as members of the gay community at Gay Pride Amsterdam

Report from a functioning water market

Waterfind is a high-profile, active water broker in Australia. Their CEO, Tom Rooney, discusses their business -- and some developments in water markets -- in this short video:

I recommend that you read their annual report [pdf], which is full of market and price data. You may also want to read this post and listen to the water chats I did with Tom a few years ago.

4 Sep 2014

Time for a new boat

OM writes from California:
Have you thought or written about public purchase of water flows needed for the environment? We have a new water bond that includes a lot of funds for this sort of thing. It strikes me that it fits with the model of internalizing profits/externalizing costs. If there is not enough water in the river, that is because water users are not complying with permit term, flow requirements or other obligations. So why should the public pick up the cost of buying that water back? Does purchasing water needed for the environment with public funds tend to unjustly enrich those with unclean hands? Would resources be better spent on enforcement?
Here are my thoughts:

First, I would not pay to retire rights that were over-allocated, as the "right to use" (usufruct right) is not the same as the "right of ownership" in California.* I'd revoke overallocations by administrative fiat, as those allocations can not -- and will not -- be used.

Second, I'd redefine remaining allocations to exclude baseline environmental water flows. The Australians have done this in the Murray Darling Basin. The opposition to cut-outs will increase as their share of total flows rises, so it's probably best to set them lower and get them in place.

Third, I'd allow existing rights to be rented on an annual basis among all water rights holders as well as new users (environmental organizations, cities, etc.), to improve efficiency without destroying the value -- or definition -- of rights.

Fourth (rather first), I'd be sure that all water uses -- from rivers, groundwater, irrigation canals, etc. -- were tracked and perhaps regulated. California has weak or non-existant controls or reporting of uses from groundwater, riparian diversions, and pre-1914 rights. These holes will destroy nearly any system that does not close them.**

Bottom Line: California's water system is so broken that it needs to be radically reformed. This transition will upset a lot of entitled people, but some of them don't deserve what they never should have gotten.

* California Constitution, Article 10, Section 2:
It is hereby declared that because of the conditions prevailing in this State the general welfare requires that the water resources of the State be put to beneficial use to the fullest extent of which they are capable, and that the waste or unreasonable use or unreasonable method of use of water be prevented, and that the conservation of such waters is to be exercised with a view to the reasonable and beneficial use thereof in the interest of the people and for the public welfare.
Many current water users will claim that their use (e.g., almond irrigation) is "reasonable" and I'm inclined to agree, but that use must be "in the interest of the people and for the public welfare," which may exclude, e.g., irrigation of almonds for export. Put differently, the government has allowed uses and can disallow them -- as it did, very famously, in the case of Mono Lake.

** After I wrote this, California's Legislature passed a law requiring local groundwater districts to have "management plans" in place by 2020 (failure means the State will impose its own plan). This action, welcome as it is, does not seem to specify a target or penalty for failing to meet a target, i.e., it doesn't promise an improvement in groundwater conditions... assuming there's any groundwater left after another five years of unregulated pumping.

3 Sep 2014

A checklist for institutional reform

This post on how to manage water (from defining resources to management of rights, etc.) inspired me to write this general checklist:
  1. Identify who does what
  2. Determine starting point (and preconditions)
  3. Choose goal or direction
  4. Diagnose structure connecting (2) and (3) from perspective of (1)
  5. Choose routes/tools to get to (3) that respects (or bribes) the people in (1)
  6. Run a pilot to see if (5) works
  7. Evaluate, revise and repeat
I know that this is generalized, but please comment on incorrect, missing, or out-of-order steps.

Bottom Line: Change will come if you can find a way to persuade those with veto power to accept it.

2 Sep 2014

Time to rename the Rust Belt?

In End of Abundance, I wrote:
In 1840, Americans lived where it rained. By 1990, there was no connection between population and precipitation.* Why? Infrastructure projects brought water to arid regions, and people moved from wet cold areas to dry warm areas. Once they got there, they found that water was also abundant and cheap. Their demand for water grew to include lifestyle uses — for lawns, swimming pools, long showers and washing the car and driveway.

In other words, water projects increased population in dry areas (extensive demand), and cheap water increased water consumption in these areas (intensive demand).
It's pretty obvious to most people that the damage/threat/danger from the current southwestern drought is the result of too many people living in a region with vulnerable and variable water resources (JW Powell wrote about this potential problem in 1879!). It's also obvious that climate change is going to make matters worse in the future.

This metric means that people in the region have two choices: spend much more money to live with less water or leave the area for wetter places. I am sure that the former will happen -- one billion dollar desalination plant and crop disaster at a time -- but the latter intrigues me, as an option that will make environmental and economic sense.

So now I want to know how you would rename "the Sun Belt" that people are leaving for "the Rust Belt" that promises a better life. Ideas?
* Beeson, P. E., DeJong, D. N., and Troesken, W. (2001). Population Growth in US Counties, 1840-1990. Regional Science and Urban Economics, 31(6):669–699.