29 Feb 2016

The Dutch already do surcharge and rebate!

Long time readers of this blog will know that I recommend higher-than-cost water prices as a means of incentivizing conservation -- with rebates to customers (per household or per capita) of resulting excess revenues. Many people have asked "where is this also occurring?" but examples from the water sector are scarce. (Most involve "unexpected" high revenues.)

Well, the Dutch do not have such a system for water (they already have too much so cost recovery is their only target), but they do have such a system for gas and electric.

Last month, I reported my annual metered gas and electricity use to my energy company so they could reconcile my estimated payments against what I actually owed.* In this process, I learned of the "vermindering energiebelasting" (energy tax rebate), which the government gives to all households, regardless of use, on a flat rate (about €1 per day).**

This "pay for consumption, rebate per household" policy is exactly what I've been talking about all these years, and -- I'm pleased to report -- it has not affected my desire to use less energy at the same time as it makes my life more affordable.

Bottom Line: Sound policies improve efficiency without threatening fairness.

* Yes, indeed, this method is way cheaper than smart meters!
** Read under "Belastingvermindering energiebelasting" here.

26 Feb 2016

Friday party

It's not called waterporn for nothing...

Price discrimination and museum tickets

Why it makes sense to charge different prices for the same good

Robin writes*

Examples of price discrimination are all around us: college fees, flight tickets, movie tickets and so on, are priced differently for different consumers. How does price discrimination work? And is it desirable? Looking at the pricing of museum tickets can shed some light on these questions.

Price discrimination refers to the practice of charging consumers different prices for the same good based on their willingness to pay. Producers try to figure out the maximum price that different consumers are willing to pay and adjust their prices accordingly. They can identify groups of people with certain attributes that affect their willingness to pay (e.g. age, income), and directly raise or lower their prices for these groups. Producers can also set conditions in which consumers sort themselves into different market segments. An example of this is differentiating price based on quantity demanded (e.g. bulk discounts or selling 1 item for €5, 3 items for €10).

Museums, in a sense, use both methods of price discrimination. For example, a popular Amsterdam museum might charge a €20 regular entrance fee and a €10 entrance fee for students and pensioners. Based on their income it is expected that these two groups are not willing or able to pay full price. In order to still be able to sell them tickets, the price is lowered. The museum may also identify a group of people who are willing to pay more than the regular price, namely tourists. To extract this premium, they may choose to raise the price of a ticket during the high season. Most tourists are only in Amsterdam during a short period of time, and therefore have no choice but to pay extra (if they want to enter the museum, that is). Locals, however, will find a way around the price hike by visiting at a different time of year. Bulk discounts may also be offered to frequent visitors by giving them the option of buying a membership card. Museums thus identify groups with inelastic demand for museum tickets (tourists) and groups with elastic demand (students and pensioners) and adjust their pricing accordingly. Museum tickets are especially suitable for price discrimination because museums’ costs are almost entirely fixed. The marginal cost of letting in an extra visitor is almost zero, which means that they will try to sell them a ticket at whatever price they can to contribute to covering their fixed costs.

Price discrimination may seem unfair but it can be beneficial to a lot of people, especially in the case of museum ticket pricing. From a purely economic perspective, it allows museums (and any other producer who engages in price discrimination) to earn more revenue. Museums, however, have cultural and social value as well. The premium that most tourists will pay on their tickets can be seen as a transfer to locals, who receive it in the form of more affordable cultural facilities. The same can be said of the premium that full price paying visitors pay, compared to students and pensioners. Price discrimination allows the museum to be accessible to groups of people who wouldn’t be able to go if prices were the same for everybody.

Bottom Line Price discrimination, perhaps counterintuitively, can be desireable because it allows for more widespread provision of certain goods.
* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

25 Feb 2016

A business case for an online customer journey

Bo-Peter writes*

Picture this: a consumer enters a store with a question about a product or service they’ve paid for. Before not too long, a company representative approaches and offers to help you with your question and quickly directs you to the solution you need. When done correctly, this customer experience is what keeps consumers happy and keeps customer loyalty. Now re-imagine the above scenario, but instead the consumer enters the digital store or website, and undergoes the same process.

In the current state of the online landscape, the customer experience has not yet reached what it could be, even though the internet is the first place consumers go for their questions. Translating an effective customer journey to the online world reaps the same benefits as the in-person experience with the upside of what ICT offers, lower costs for producers and lower prices for consumers. Likewise, these online experiences can help eliminate a source of consumer panic: having to telephone the representatives of a company call center. One answer to increasing efficiency and customer satisfaction, as well as cut costs are online self-service solutions in the form of Virtual Assistants, or automated online assistants (see picture).

Such a self-service solution goes past the simple search bar or deference to a call center and enables consumers to easily find the answers that they are looking for in a fast and efficient manner while creating a positive business case for producers and service providers. Essentially what the online Virtual Assistant does for a business is replace the costs of staffing and maintaining a call center by adding the functionality of answering the most pertinent questions online. Designed properly and with a sufficient knowledge base behind the Virtual Assistant, a self-service solution is much more than an FAQ and can create a dialogue with a consumer. A great example of this can be found with the Dutch telecom provider KPN.

Several micro-economic concepts can be utilized to describe the positive effects that a Virtual Agent can have on a business. Cost reduction is accomplished by reducing the amount of calls, and thus labor to answer those phone calls, that need to be made towards a company’s call center. This means that the, the variable cost of labor has been translated into a fixed cost with the virtual assistant. Likewise, this reduces the marginal cost of production as an increase in quantity no longer has an increase in variable costs of staffing a call center. With a reduction in the average total costs of production, a firm can enjoy from some incremental factor of economies of scale. In the short term, the firm might be able to maintain the price of the product or service it offers and benefit from rent which it can invest elsewhere, such as to innovate new products. Additionally, lower customer support costs means a lower market entry barrier for new products or services the firm produce. Finally, a firm that supports its customers can build brand loyalty and enjoy the benefits of creating demand for its own products in the future.

Bottom Line Call centers are an expensive, but vital operation for companies guiding the customer service journey. Online Self-Service solutions such as a virtual/digital agent can mitigate these costs and even produce new consumer insights for a firm. Though harder to measure the beneficial effects of a positive customer experience on a firm, more productive operations should be able to benefit both consumer and producer. If all goes right, this lowers production costs, and thus hopefully the cost to consumers.

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

Why behavioral economics cannot predict behavior

Onno writes*

Everyone who pays a visit to the supermarket for their weekly shopping is confronted with the same ethical dilemma: do I buy organic food, or do I buy the more affordable non-organic counterparts? I’ve always felt this question to be extremely difficult to answer. Not because I have not yet decided whether or not buying organic is the right way to go, but rather because of the inner conflict this conclusion causes.

Hollywood has the tendency to depict an inner conflict with an angel on one shoulder, and a devil on the other. From the beginning on, it's obvious which choice is the right one: it's a given for me that the buying of organic food is the right decision, for many (ethical) reasons. But even with this clarity, the decision isn't any easier. The motto: “you can talk yourself into anything” seems to be leading my choice, and my decision thus ends up to be quite random and unpredictable: sometimes I go for organic food, sometimes I go for their immoral counterparts.

The field of behavioral microeconomics has a hard time accepting this unpredictability of the mind. For a long time it has assumed that people act in their self-interest and strive for wealth maximization: if you can buy an identical product for $10 and for $20, you will buy the $10 version. Because individuals that buy the expensive organic products in order to serve a moral duty hardly seem to be acting in this maxim of wealth maximization, self-interest has been redefined to “acting according to the preference of the individual”. These preferences can be anything, as well as paying more than necessary for a product, and thus the original statement “people act in their self-interest” has lost its real predictive value, and the assumption that people strive for wealth maximization should be dropped. Instead, we are left with the seemingly meaningless and uncontroversial statement: If people prefer to act in a certain way, they will act in a certain way.

Unfortunately, also this seems to hardly be the case. As Kahneman and Tversky have shown in their paper “Prospect Theory: An Analysis of Decision under Risk” [pdf], people often make choices that do not match their preferences. (i.e. taking irrational risks etc.). This paradox can be evaded by introducing the concept of bounded rationality, or other concepts such as heuristics, framing etc. It seems to me however, that this concept is desperately trying to fix an assumption of predictability which was ill-founded in the first place.

Back to the supermarket. Although my decision of this week might differ from my decision of last week, my preferences on the matter haven't changed: I do wish to do the good thing, but I do not wish to pay more than I have to. It could be said that I act according to my short term preferences when I buy the cheaper products, and that I act according to my long-term preferences when I buy the organic products. This however doesn’t explain why some days I pick my long-term preferences, and other days I don't. No concept of heuristics, framing or bounded rationality can make this prediction, as the situation or preferences haven’t changed, but my choice has.

Of course an economist would argue that they might not be able to predict on an individual basis, but rather on a larger, societal scale. It is however difficult to draw final conclusion about the prediction of larger societal patterns if individuals can’t be predicted; in the end society is made up of individuals. It is important for the branch of economics to realize that they can only indicate patterns of human behavior, rather than predict them, so there is no risk of conceptual overstretch.

Bottom Line If the principle of predictable human behavior can be refuted with a simple visit to the supermarket, it is time to let it go. The field of economics needs to prevent conceptual overstretch by realizing it cannot predict human behavior, but can merely indicate a pattern.

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

24 Feb 2016

Playing the lottery might be your smartest move

David writes*

Voltaire called it a tax on stupidity. People who buy lottery tickets are often seen as stupid, naïve, or at the very least, (economically) irrational. They are often looked down upon because buying a lottery ticket would be an economically bad choice. This common belief is a logical outcome of expected utility theory: if the probability of winning times the pay-off is lower than the utility you lose by participating, you should not participate [pdf]. The obvious pay-off in the case of the lottery would be the prize money, and in that case, the probability of winning times the prize money is of course lower than the ticket prize, otherwise the lottery would not make any profit.

It is important to note for this theory however, that the pay-off is an expected utility value: people can never know how happy or unhappy they are going to be after something has happened, so they have to make an estimate of what the pay-off is going to be. That means that an economically rational choice is not necessarily the choice with the highest utility value, but the choice with the highest expected utility value based on the information with which the people make the choice.

Now often, playing the lottery is justified by a psychological factor, such as liking the thrill or wanting to have that incredibly small chance of never having to work again. There are however two reasons why even purely economically, it might be a rational choice. First of all, an information asymmetry plays a role. The extremely high pay-off is thrown into the face of the participants (and sadly also the people that do not participate) all the time, up to the point where you see an orange whale with a number on his back swim on your screen every 10 minutes when you are watching TV. The low probability is however just ‘low’, but a value is never really put on it. That means that people only know that it is about a huge number such as 20 million euros, and know that the probability is ‘low’, but not more than that. That means that their (unconscious) economic calculation might not show that buying the ticket is a bad idea, just that the ticket prize is relatively low and that the pay-off is huge, which might make it seem logical for them to participate. If the extremely low probability was thrown into their face equally as much as the high pay-off, perhaps many people would not participate.

Second of all, Kahneman and Tversky have explained [pdf] why people put a disproportionately high weight on low probability risks. People might be incredibly scared of flying, terrorists, or sharks, even though the risks are miniscule. This disproportionate value changes the outcome of an (unconscious) economic calculation as well, up to the point where the risk times the pay-off plus the added weight might be bigger than the ticket prize. That means that the outcome of the calculation would be that it is economically interesting to play the lottery. Although this added value is not in any way paid back, the only thing that matters is that people add that weight when they make the choice, because as I explained in the beginning, rationality is not about the outcomes but rather the expected outcomes.

Bottom Line People might make an economically rational decision to play the lottery, because their lack of information and disproportionate weight of the choice cripple their (unconscious) economic calculation. This does not mean you should go out and buy a lottery ticket, just that people who are playing might not be as stupid as they are often made out to be.

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

The sugary sweet demand for soft drinks

Isabel writes*

What do cardiovascular disease, cancer and respiratory disease have in common? In addition to them accounting for most non-communicable disease related death globally, they share a common major risk factor: obesity. Obesity is caused by an energy imbalance in which more energy is consumed than burned. Globally people are physically inactive, and consume highly processed foods containing lots of fat and sugar. A major contributor to this are sugary, artificially sweetened drinks. In the US only, half of the population consumes these drinks daily, ranging from daily intake of 250-600 calories. For US teens soft drinks make up over 11% of their diets, making them the top calorie source for them. Consequently, I believe if we want to fight this obesity epidemic, a major cutback in soda drinking has to become a priority in government policy globally. Elasticity of demand for these drinks can be a useful tool to judge upon the possible approaches that can be taken towards reducing the consumption of sugary beverages. A recent study on the elasticity of major food groups has concluded the mean elasticity of demand for soft drinks to be 0.79. This makes soda an inelastic good, and its demand is thus not much affected by price changes. Hence, if a 1% tax would be implemented on soft drinks, a 0.79% decrease in the demand of the good could be expected. As the mean taxation rate is at 3.549% across the US, a 2.8 % reduction in the demand of soft drinks can on average be expected. Although I believe little decrease in demand is better than no reduction at all, tax rates are too low to have a significant effect on the demand of soft drinks.

Therefore, Mexico should be taken as an example. The Mexican government has implemented a 10% tax on soft drinks in 2014, and as a result sales declined almost 12%. This number was as high as 17% among low-income families. It appears that if the tax is of a sufficient magnitude, and assuming the elasticity of demand for sugary drinks is indeed somewhere near 0.79, taxation of these beverages can be an effective tool to lower the consumption of them. As to the US, a 10% tax rate on sodas can lead to a 7.9% decrease in the demand of the good. Consequently this could be the start of restoring energy imbalances, and obesity rates can be reduced among both teens and adults.

Bottom Line The elasticity of demand for soft drinks in the US tells us that the product is not very response to price changes. However, the average soda tax across the US is only 3.55%, which is too low to have a substantial impact. Therefore, taking Mexico as an example, increasing the tax rate to at least 10% would be an effective way of lowering the consumption of artificially sweetened beverages. This in turn could possibly serve as a mean to lower obesity rates among both teens and adults.

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

23 Feb 2016

Long term trouble for OPEC

Jori writes*

Although the recent fall of oil prices caught most of the world by surprise, soon a simple narrative emerged as to what was going on. Global demand is low, American shale has increased supply, prices fall. OPEC’s decision not to cut production neatly fell into this: the traditional oil producing countries are threatened by competition from the relatively expensive to produce shale oil, but sticking to low prices will destroy the American shale-industry and make the world return to the old status quo. The current price of a barrel of West Texas Intermediate is around $29, while the average production cost in America is $36.20. In countries like Saudi Arabia the cost is only $9.90, meaning it seems like production there can whether the storm unlike in the USA. Some of this scenario is indeed playing out: after years of growth, American crude oil production is very likely to decline in 2016 because many wells are no longer viable. Does this mean Saudi dominance, OPEC’s control of the oil market and high prices will soon return?

One of the big problems that is often pointed out about this story is that although production is still profitable in many OPEC countries, (unlike foreign competition) the whole state is practically built on redistributing oil rent. A bad year of American shale means bankruptcy and unemployment, sure. The risks for OPEC countries are a lot greater however, because it could undermine the legitimacy of the entire regime.

Even if OPEC survives these low prices and American production nosedives, it is vital to this narrative that competition is destroyed for good. In other words, it assumes inelasticity of supply after its gone down. This is very questionable. The economics of shale are very different from traditional sources of oil because although might not be as cheap to produce, “production can be turned on and off much more easily.” This means production will be more responsive to price signals than previous competitors. On top of this are America’s bankruptcy laws and and financial institutions which ensure that even if this generation of drillers goes bust, as soon as prices rise the next generation can step in to to scoop up their assets. All of this combined seems to point to, unlike before, market mechanisms instead of OPEC will be playing a role large in setting prices. Low prices now might not be not as detrimental to American production in the long run as often assumed.

This does not mean OPEC is definitely broken for good. The International Energy Agency has expressed skepticism over the the ability of American industry to remobilize and “argues that banks may be reluctant to fund more of their wells.” However, when betting on either the power of one of the last world’s global cartels or the market and the desire of a new cohort of entrepreneurs looking for profits, my money would be on the latter.

Bottom Line Although lower oil prices hurt American production, but because the shale industry has a higher elasticity of supply than traditional oil sources (both because of institutional and technological reasons) OPEC might not regain its market power.

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

Income inequality in tennis: a startling problem

Corneill writes*

Novak Djokovic. Andy Murray. Roger Federer. These three household names exemplify the glamour, fame and glory that comes with reaching the elite rankings of professional tennis, played by millions of people worldwide. However, in stark contrast to this, the majority of professional tennis players rarely even cover their costs of a year on the tour, regularly making substantial losses and being totally dependant on sponsors or their parents.

Income inequality refers to how evenly or unevenly income is distributed among a population. It is most commonly measured by the Gini coefficient, which, according to the World Bank, measures “the extent to which the distribution of income or consumption expenditure among individuals or households within an economy deviates from a perfectly equal distribution”. A Gini coefficient of zero indicates that there is perfect equality, whereas a value of zero suggest that there is total inequality (one person has all the income).

In tennis terms, there is increased participation competing for prize money, which on paper, is said to be growing. The body which runs the biggest and most lucrative tournaments, the ATP World Tour, announced that prize money would be increased over the coming four years. However, these would be biggest for the “500” and “1000” level tournaments which are normally exclusive to the top 50 ranked players (with increases of 50% and 54% respectively in 2018 compared to this year). The problem is that this is not uniform throughout the board — the lowest tier of tennis, the ATP Challenger Tour, has not been given an increase in prize money, which would insinuate that with the current rate of inflation (especially with the rising costs of travel) the players who compete more regularly in the Challenger Tour are actually worse off. This means that only the very top players stand to earn substantial money, and the gap between them and the rest keeps on growing. The governing body of tennis, the International Tennis Federation (ITF) revealed [pdf] that only 336 men and 253 women made a net profit whilst playing tennis in 2014. Relating this back to economic theory, it can be said that the distribution of income is beginning to have a larger deviation from perfectly equal distribution, with a gini coefficient closer to 1 than previously.

The ITF needs to find a way to counter this, in order to prevent talented players from leaving the tour prematurely due to unbearable costs. Other sports, such as Baseball and Basketball have apparently found solutions to this: the minimum salary in the MLB is USD 500,000; and the 350th player in the NBA still earns upwards of a million dollars -- more than enough to keep oneself comfortable.

Potential solutions for the tennis scene could include looking to reward emerging and upcoming players, and simultaneously start to make it harder for others who aren’t (for example, veterans playing below their level of competition).

Bottom Line Professional tennis needs to find a way to decrease income inequality throughout the tour, as an unreasonable number of players are not able to sustain the costs of competing on the tour and the governing body does have the power and money to do so.

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

22 Feb 2016

Monday funnies

I don't know about you, but this list of eligible singles in San Francisco is beyond parody:

Go to the site if you want to read more. Oh man.

The market of student orchestras

Simon writes*

Whenever someone goes to a concert by a student orchestra, they're usually struck by the enthusiasm of the young amateur players, all enjoying the opportunity to make great music together. Yet underlying this seemingly innocent enthusiasm is a fierce competition between orchestras, as they all try to outdo each other to get the most (and most talented) players.

One might wonder why I would describe the situation as a competition. Surely, making music is a friendly and convivial exercise enjoyed by all together? While that sentiment might ideally be true, the reality is simply that an orchestra needs quite a lot of members to perform the pieces they want to perform. The great works of the late Romantic repertoire, for example, all require triple woodwinds or more (meaning three or more each of flutes, oboes, clarinets and bassoons), and lots of string players to balance this woodwind onslaught. Whenever an orchestra plays such a piece, it ideally wants to get all required players as members; the alternative is hiring them, which is doubly expensive (the hired people do not pay membership fee and often ask for paid compensation). Moreover, the quality and atmosphere of the orchestra vastly improves if the orchestra is well-filled and balanced. And for those reasons, the student orchestras engage in a competition to lure members towards them in a competitive market.

How can we characterize this market? At first glance, it might seem that the market is not national at all, but rather consists of several fractured, regional markets. The student orchestras in Amsterdam, in that view, would only compete in the ‘Amsterdam market’. The different orchestras in that regional market would perform the role of oligopolists, each holding a large part of the market share. This view is to a certain extent correct, but also simplistic. Most members of orchestras are indeed from the city the orchestra is based in; however, a significant minority of the best orchestras is filled with students from other cities. Those orchestras have managed to capture a part of their competitors’ natural market. How have they managed to do so? Clearly, the benefits they offer to those members outweighs the transaction costs they incur (long travel time, less engagement with other orchestra members because you live further away, et cetera).

Several reasons come to mind. First, it is clear that these orchestras are dominant parties in the markets in terms of size and (perceived) quality. Related to this is a strong brand recognition and positive reputation. Even if smaller orchestras might be as good as those bigger orchestras, their relative anonymity and worse reputation prevents some from becoming members. The final reason is very interesting: major student orchestras have a lot of members from the ‘premier’ youth orchestras, which attracts people from those youth orchestras to them. In economic terms, we could think of this as firms successfully cornering early parts of the supply chain, thus diverting more goods (orchestra members) towards them.

Bottom Line Student orchestras engage in competition in what could be described as a market. Though this market is to an extent fractured in regional markets, the competition for the best talent is national.

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

Personalized online shopping is both good and bad

Esmee writes*

We’ve all been there. After creating an account on a website in order to search for a hotel room offer for your next holiday, you re-open the webpage and on the side of your screen you see advertisements with discounts for the exact same hotel.

The increasing possibilities for “personalized shopping” are becoming more popular. Websites suggest products based on search history and account information. This form of personalized shopping, which has increased in frequency in the past few years due to technological advances, is often praised as a good development that saves effort for people with little time.

However, it also has disadvantages. A recent study [pdf] conducted by researchers from Northeastern University has shown that online retailers customize the prices of certain products and manipulate the products that are being shown, based on personal characteristics, such as age, income, or purchasing history.

These actions maximize profits by so-called “price discrimination”: retailers charge different prices for different customers for the same product, based on their price elasticity of demand. This strategy is based on the fact that not every consumer has the same sensitivity to price changes. Students for example, who have a low income and live off their STUFI [student subsidy], might be more sensitive to price changes of hotel rooms and represent an elastic demand, whereas business travelers are less sensitive to price changes and represent an inelastic demand. Companies use this information to charge the maximum price a specific consumer is willing to pay.

The Northeastern study has shown that online retailers such as Orbitz, a travel company, use this strategy to, for example, show MAC users more expensive hotels than PC users, because they assume that MAC users are willing to pay more for hotel rooms than PC users. Similarly, they show discount prices solely to their members. The technological advances have made it relatively easy for such companies to do this, and such strategies have significantly boosted sales.

Such practices are often argued by consumers to be unethical, and some even think it should be illegal. However, companies simply argue that they use “all the tools” that are available to them, in order to find out which products are appreciated most by their customers. In that case, as long as technology keeps advancing, the best solution for consumers to avoid price discrimination might simply be to search for products in multiple ways, using different browsers, accounts, and devices.

Bottom Line Whereas personalized online shopping is often seen as a good development, it has significant disadvantages for consumers when online retailers use people’s personal information to price discriminate and raise their profits.

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

19 Feb 2016

Four billion facing severe water scarcity? I think not.

Update (18 March): My letter (the post below) has been linked to over at Science Advances. Mekonnen and Hoekstra have "declined to respond."
This article has got a lot of attention. I think the attention is undeserved,* so I wrote this e-letter (an online comment on a published article)

Dear Editors and Readers,

Mekonnen and Hoekstra estimate scarcity based on physical models comparing water flows and population densities. From these models, they conclude that "four billion people [are] facing severe water scarcity." This title has generated headlines in the media, but it is misleading to the public. Indeed, it is even misleading to readers of the paper because management and governance -- only mentioned in passing -- are important, and perhaps determinant, factors in converting physical conditions into actual risk of shortage.**

Singapore and Israel, for example, have some of the lowest levels of total renewable water resources (108 and 227 m^3/ per capita per year, respectively), but the populations of these countries are not known for suffering from water risk. That is because their governments have been extremely proactive in converting natural supplies into useful supplies.

In their 1994 book, Rules Games and Common Pool Resources, Elinor Ostrom, Roy Gardner, and James Walker note that a "common pool resource situation" can turn into a "common pool resource dilemma" if (a) current strategies are leading to suboptimal conditions and (b) institutionally feasible alternatives exist that can improve on those outcomes (pp 15-16). As a water economist, I interpret their framework to mean that a change in governance or management can remove the dilemma, i.e., reducing risk to an acceptable, non-harmful level. That's why I wrote Living with Water Scarcity (2014). I wanted to make it clear that poor physical conditions did not necessarily result in water risk.

Curious to know more? I ran a simple regression of "Access to an Improved Water Supply in Urban Areas" against Total Renewable Water Resources (per capita), Freshwater Withdrawal versus Total Renewable Resources (two measures similar to those used in the paper), World Bank data on Control of Corruption, Effective Governance, and Regulatory Quality, and GDP per capita. You can guess that the latter 4 variables control for governance and wealth. Access to an improved supply may be a flawed measure of actual risk of water shortage, but it seems to be the closest variable we can find to a problem like "facing severe water scarcity," so I used it.

In a simple regression of Access against the two water availability variables, both were significant but only explained 1 percent of the variation (R^2 = 0.01). When I added the governance and income variables, R^2 jumped to 0.34 (the variables, as a group, explaining 34 percent of of the data variation in "Access to an improved supply"). More importantly, the physical variables dropped into insignificance, and variables for income and effective governance were quite significant. This hasty regression is not the final word, but it should be an obvious hint to the importance of governance and income on water supplies people care about -- and a hint that physical water conditions have little impact on those outcomes. (Data and regression results available at kysq.org/docs/WaterGov.xlsx.)

Four billion people are not facing severe water scarcity any more than seven billion people are facing severe food scarcity. In both cases, the difference between initial and final conditions is determined by institutional competence, i.e., good governance and management. These points are made by authors cited by Mekonnen and Hoekstra. Rijsberman (citation 6) says, "water will be a major constraint for agriculture in coming decades and particularly in Asia and Africa this will require major institutional adjustments." Wolfe and Brooks (citation 7) say "perceiving scarcity mainly in physical terms limits opportunities for policy-making and approaches for capacity building." I would have liked to see more of these perspectives in the main article, which asserted "four billion people facing severe water scarcity" without very good evidence. Indeed, I cannot even type "physical water availability is a necessary condition for scarcity," as Cherrapunji -- famous for being "the world's wettest place" regularly suffers from water shortages. Why? Poor water management.

Mekonnen and Hoekstra conclude by advising that "proper water scarcity assessment, at the necessary detail, will facilitate governments, companies, and investors to develop adequate response strategies." This advice is followed by suggestions of raising agricultural productivity and measuring water footprints. Although these recommendations make some sense, the first is not known to reduce risk of shortage (saved water is also used), and the second seems to reflect the authors' affiliation with the Water Footprint Network more than other, arguably more important responses, e.g., limiting water use in basins, increasing food imports to stressed basins, and -- above all -- improving water governance. These first two responses are mentioned in the article but the last is not. I am writing with the hope that this option will receive more attention.

David Zetland, PhD
Assistant Professor of Economics
Leiden University College
Den Haag, The Netherlands

* For older posts on (often useless) footprinting, click here.
 ** Michael Campana calls attention to the paper's weak treatment of groundwater

Addendum: This article on bullshit in science strikes a chord with me on this topic.

Addendum (12 March): Here's a great comment [pdf] from an ecological economist on the missing elements in footprinting discussions

Friday party!

Self-inflicted child cruelty?

Love sells: the economics of Valentine’s Day

Lauren writes*

The 14th of February is a day feared by both singles and lovebirds. For singles, it’s simply a confirmation of their loveless existence. For couples, it is very stressful, as Valentine’s Day is, to some, the day of the year to decide whether your love is meant to be. However, except for a day to celebrate love, Valentine’s Day is often criticised as a holiday that has become very commercial. According to a survey by the National Retail Foundation, 55% of Americans planned to celebrate Valentine’s Day, and on average to spend $142.46 on it. What causes people to spend such a large amount of money on Valentine’s Day?

A lot of the fuzz around Valentine’s Day has to do with the pressure: does the other person like me or not? Valentine’s Day is the opportunity to show your partner how committed you are to the relationship. According to a survey by Discover, 75% of the people told their partner they did not bother with a gift, 47% would still be presently surprised to receive a gift. Therefore, the market of Valentine’s Day could also be explained as a game in which information asymmetry exists. Both partners could decide to buy a present, which shows their commitment, but does come at high costs. Optimally, neither of them buys a present. This shows that a gift on Valentine’s Day is not a necessity to show commitment in a relationship.

However, this outcome will probably not occur, as the risks are high. If only one person of the couple decides to buy a gift, it’s just plain awkward. Furthermore, the opportunity costs of this outcome are high. It can take months for a person to convince their loved one that he or she really cares about the relationship, which is more effort than this one time investment. Thus, the Market of Valentine has a high rate of uncertainty due to the asymmetric information about the other person’s preferences and romantic intentions. Therefore, consumers tend to go for the safe option of buying their loved ones a gift and show their commitment, but this does come at costs.

Namely, this causes large price inflation for goods on Valentine’s Day. Roses cost 30-50% more. Not only do the prices rise due to high demand, it is also a matter of elasticity. About half of the consumers spend their money on chocolate, and 38% is spend their money on flowers. Luxury goods like these are usually very elastic throughout the year. However, most significant others do not want to risk their relationship, making these goods a “necessity”.** The collective change in preferences for this date makes the goods more inelastic towards the 14th. Companies know this, and change their prices accordingly.

Bottom Line Don't feel miserable as you lay on the couch watching Netflix with your friends Ben & Jerry. Enjoy all the expenses you have saved by avoiding a game that often does not lead to an optimal outcome.

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

** DZ adds: More on what men and women expect... and give.

Tinder: Love and... Economics?

The Author's "research" bio :)
Geerte writes*

My first ever Tinder-date was a guy who on his profile claimed to be ‘obsessed’ with specialty beers. I, seventeen at the time, thought of this as a reassuring sign of undoubtable masculinity, and agreed to meet him at a small pub in Amsterdam. Two hours into the date I had solely counselled the boy through his family problems, while quietly sipping away four recommended types of beers – each price approximating my €5,66-an-hour salary at the Albert Heijn bakery. We split the bill. I deleted his profile from my phone that same evening.

Still, I wasn’t sorry. Laughing at myself with some friends I had informed about the Big Event beforehand, I concluded that despite the fiasco I had managed to enter a ‘mature’ new crowd – the Internet-Daters. What does Tinder do to our minds? Why do we endlessly rethink buying a €19 concert ticket that we know will give us pleasure but agree to go on dates that often result in the opposite? In other words, why do we decide that the tiny possible prospect of love is worth our money?

Thirty years before the birth of Tinder, Daniel Kahneman and Amos Tversky concluded that people do not weigh gains and losses linearly. As their theory of loss-aversion [pdf] shows, losing will often feel much worse than winning will feel good. When observing Tinder-daters, this notion of loss-aversion might lead to the radical idea that romance isn’t dead – people value the possibility of "winning" love so highly, they are willing to lose some money if they don’t succeed.

Luckily however, there are more rational souls out there. Like the guy who texted a girl to send him back his £3.50 after an unsuccessful date, because he did not like ‘wasting money.’ More direct tips to keep your cash can be acquired from a gentleman claiming to have ‘lost his wallet’ when seeing the bill, or, if you’d rather make a profit, a woman stealing her date’s car.

Keeping the above in mind, perhaps Kahneman, Tversky, Tinder and I together have just provided you with a great opportunity to test how much you value love yourself. How many €5 specialty beers does it take to regret your naïve, hope-fueled excitement? Without receiving a cent from its marketing team, I’d suggest you simply download the app and try. For apart from some money-hunters, Tinder has managed to create a fairly enjoyable market for people offering and searching for love. It is freely available, making time, energy and perhaps some self-esteem your only loss if you spend an afternoon swiping left and right.

Bottom Line As Kahneman and Tversky have argued, most people hate losing more than they love winning. Since the odds of a Tinder-date turning out very successfully are often small, internet daters seem to be more willing to risk ‘wasting’ money in order to find love than you’d perhaps expect.
* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

DZ's Addendum: The Economist says dating apps "thicken markets" (a good thing), and the BBC on people meeting in different ways (online may take over from "via friends").

18 Feb 2016

Are oil prices a threat?

Brian writes*

Oil prices have taken quite the tumble in the last 18 months. Falling about 75% from the $110 per barrel mark to $27. One might consider this to be highly beneficial from a consumer’s perspective. But, of-course the ripples of this oil shock are more far reaching then initial observation might communicate. It might seem as though the time has come for some oil producers to start “plugging their wells”. However, this would be to the detriment of the future rebound in oil prices. The benefits of which would go to those that have chosen to keep their oil production steadily flowing as long as they can cover costs.

The ripple effects of oil price drops can have lasting consequences on several levels. Firstly, it brings the possibility of political instability to already unstable parts of the world. Secondly, cheap oil makes it a very easily accessible source of energy. Exposing the world to more consumption and thus excretion of fossil fuels to the detriment of our increasingly suffering environment. Rendering an already threatening negative externality even more harmful as the spillover cost on society is ramped up. Thirdly, the steep drop in oil prices has caused a tumble in investment in the industry. Projects worth up to $380 billion have been put on hold. Countries such as Brazil are grappling with these effects because the oil industry is such a prominent component of the national economy. Saudi Arabia is also dealing with a increasingly threatening deficit.

The Main issue currently faced by the oil market is a production surplus in oil. The low prices are maintained by a production surplus, keeping the market over-flooded with oil. As this is happening, the consumption and production of oil rise to meet each other. In other words, the increased demand requires an increased supply. In order for the negative externalities, from dropping prices and increased oil consumption to be stemmed, the oil cartel OPEC must halt the oil shock. Something that they seem to be unwilling to do. If production is cut down, the prices can be stemmed. Hopefully halting economic strain. It is suspected that there is a possibility of political will behind this refusal. Primarily the drive of the United States and the Saudis to hurt the Iranian and Russian economies.  In the process, the effects are globally felt and threaten different economic facets in a wide range of countries.

Bottom Line High oil production has decreased oil prices, causing a surplus that has a wide range of negative externalities on an international scale.

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

Clean power forces utilities to accept a new role

John writes*

Historically, utility companies have planned operations on the basis of peak load from previous years. If they anticipate electricity demand will rocket on a hot summer day, they simply fire up a few more power plants. However, with the onset of an energy transition to clean power, companies will be forced to adapt to the technical barriers of “plugging-in” renewable resources.

Now, well oriented with the weather in the Netherlands, we are very familiar with the feeling of being deprived of vitamin D. Just as the sun isn't shining when we would like it to be, this resource and other renewables aren't always available during peak demand hours. When the wind is blowing at night and electricity demand is low, we must store the surplus energy that we do not immediately consume for when demand rises. Obviously, there are great capital costs associated with storing energy on such a large scale. However, these costs may be relatively small compared to the expected costs of our continued reliance on fossil fuels.

Nonetheless, most utilities, whose main objectives are safety and reliability, see these clean technologies as a threat to the grid. A grid dominated by renewable resources would require greater coordination on the supply side given how difficult it is to forecast the amount of energy renewable resources will produce days in advance. This would be a steep learning curve for utilities who are accustomed to increasing supply with the flick of a switch. Ironically, consumers have been paying coordination fees all along which often appear as “Ancillary Charges” or “Supplier Services.” Perhaps, these money collected from these fees should be put to better use to allow for the deployment of renewable energy technologies on a greater scale.

Though, given utilities are monopolies they can impose these charges, while the labor involved in coordinating the supply of power from a few conventional power plants is negligible. Unfortunately, when you purchase a house, you don’t get to choose which utilities power lines you want running to it. Nor, do you get to choose whether you want your energy from a wind farm or a coal power plant. We are yet to see people buy homes based on their utilities endorsement of renewable energy, but this may become a necessity for home buyers in the future - especially those who are looking to invest in rooftop solar panels.

Bottom Line In the United States we beginning to see conservatives ally with green party members in support of investment in renewable energy. In the near future, electricity companies must either accept a more limited role - allowing people to install their own power systems or a larger role - coordinating electricity supply from grid scale clean power plants.

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

17 Feb 2016

Cowspiracy -- the review

I watched this crowdfunded documentary a few weeks ago.

The doc, at its best, calls attention to the "lopsided" priorities of environmental groups that tackle lesser problems (e.g., plastic water bottles) while ignoring greater problems (animal food production and consumption). The movie has several painful "gotcha" moments.

Is it convincing in presenting the claim that animal food production (15%) is responsible for more GHG emissions than transportation (13%)? Yes. Is it convincing that animal food production is wasteful, polluting and cruel as well? Yes.

Is it convincing enough to turn you into a vegan? No.

I was a vegan for 4 years and a vegetarian for another 12 or so. I did it for my health first, the planet and cost later. I never too the "ethical" stance that meat was murder. (We are, after all, omnivores in a world where eating other species is common.) I stopped being a vegetarian after I decided that my impact on climate change wasn't going to matter and that there was plenty of good meat to eat.

This movie did not change my understanding of these issues, but it did call attention to the magnitude of the negative impacts from subsidizing animal production. (Pork would cost about 3.5 cents per kg [pdf] more if farmers adhered to Clean Water Act regulations from which they are now exempted because -- they claim -- compliance us too expensive.)

What the movie missed, sadly, was a discussion of producing fewer animals on less land, sustainably. That option was dismissed (implicitly) after showing how such production occurs, and then claiming "it was impossible" to produce sustainably because producing the same volumes would require a ridiculous amount of land.

I would have gone the opposite way, restoring marginal lands and then using less remaining land for animal production. I'm sure that prices would double, but higher prices would help us eat the "right" amount of meat and provide an appropriate income to farmers who were protecting, rather than destroying, ecosystems. (Speaking of which, watch this TED talk on how animals can restore deserts.)

Bottom Line I give this movie FOUR STARS. Conventional non-vegan diets damage the environment. Your job is to reduce that harm when consuming food as well as calling for more sustainable agriculture.

A critical look at LUC's selection of students

Martijn writes*

A Leiden University College Student (LUC) is highly motivated, ambitious and very talented.

At least, that is what the official website implies. This statement is defended by the fact that the selection process of the college is intense in comparison with other Dutch universities. It appears, however, that this is not the only criterion on which LUC is selecting. The selection process seems to accept a higher rate of progressive, liberal, and like it or not, (middle) left wing students rather than more conservative right-winged ones. In this blog I will argue two things, the first being that LUC’s selection process is a matching market instead of a price market, building on to that; matching markets are more prone to market failures.

Most markets balance their demand and supply with the price mechanism. Take the market for roses on Valentines Day. Demand shoots up, which increases the price and hence supply, creating a new market balance. Some markets however, do not have price as a balancing factor, these are known as “matching markets”. Two examples of matching markets are the market for finding a job and the market for finding a partner.

The example we are interested in is the selection process of LUC. Different potential students, as well as, universities have their unique weaknesses and strengths meaning trade-offs are needed to choose between them. Furthermore, both the university and potential student need to be eager for the match to happen. In a price market, the supplier does not show interest in who buys their product. This makes the matching market a much more complicated one being more reliant on information.

Information about LUC can be considered first-rate, with open days, student for a day experiences and interviews. Therefore we can assume that the prospective student is very aware of the student demographic. Conservative potential students are probably going to feel that this might not be the place for them. One could assume too that information about the student is sound with a selection process that involves sending a CV, motivation letter and study results. Lack of information is therefore not the cause for the lack of political diversity. Maybe instead, students who lean to the political right do not endeavour in voluntarily work or maybe there is slight bias in the interview part of the selection process. This would require much more in-depth research then a simple blog post.

What I have done, is a quick poll on the second floor. From this came out that 20 out of the 30 students asked considered themselves to be on the (middle) left spectrum while only 4 said that they were on the (middle) right spectrum. Although this does not fully prove anything, it does give an indication of the political demographics of LUC. What further came out of the poll was that 27 of the addressed would initially judge a right-winged student more badly relative to the middle and left-winged students. A university with ambitious and very talented students should also be one of political diverseness. From an economic standpoint, this means that there is something going wrong with the fairness of the selection market. Either information between the different parties is not good enough, which seems unlikely, or we are unknowingly biased in the selection process, which would call for revision and regulation, as acceptance of political diverseness is a must for the future ‘global citizens’.

Bottom Line Money on its own is never biased, matching markets may very well be. With the selection process of LUC being a matching market we should be more aware of the potential bias in order to ensure the college will remain its political diversity.
* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

Fire workers to stop the fall in oil prices?

Rocio writes*

The price of oil has been declining steadily over the last few months. Since November, the price of oil has decreased by 40 percent, as represented below by Figure 1. This has impacted all sectors of the economy. When the price of oils falls, it causes oil companies such as Shell to generate less profit, which dissatisfies the demands of their shareholders. The CEO is then left in charge to come up with a reaction to this unforeseeable event. Recently, the Royal Dutch Shell PLC (RDS-B) has announced that it will fire 10,000 workers due to the falling oil prices in order to “bolster margins.”

A firm’s total cost is made up of variable costs and fixed costs. Decreasing the number of workers in a firm, is seen as a way to reduce costs, as it is a variable cost (a cost that either increases or decreases depending on the firm's’ production). A firm can only decrease total costs, in the short term, by reducing its variable costs.

Reducing the number workers in a firm is intended to lower costs, however at times, the result can be more negative than positive. It can create a lower morale and distrust in the company, due to the remaining workers fearing the loss of their own jobs. Cutting down on workers also affects the production capabilities of such company which may, in fact, be counterproductive to the firm’s aim of increasing profit as it puts more pressure on the remaining workers.

One thing that Shell could have been done instead of laying off thousands of workers is reducing everyone’s salaries temporarily, as to account for the change in oil price. This exact same thing was done by the Canadian Natural Resources based in Calgary where all workers kept their jobs but everyone’s wages were trimmed.

Bottom Line Firing workers will reduce variable costs, but there are other ways to reduce labour costs. Decreasing every worker’s salaries would have worked as well and would have ensured that the production within the firm stayed the same as there would be no extra pressure put on workers and the fear of losing their own jobs would be reduced if not eliminated.

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

16 Feb 2016

The long-term Italian crisis

Federico writes*

The financial crisis that originated in the United States had a profound impact on Europe and questioned the stability of the Eurozone. In the first instances, Italy was considered to have a relatively stable economy and a contagion was not to be expected. Yet, the peninsula was hit first by the contraction of the interbanking loan market and then by a speculative attack on its public debt, where investors withdraw their financial capital from the economy. In this short essay I will discuss the fact that Italy already had long-term economic instabilities and that its current weakness is not only a result from the current crisis.

The 90’s were marked by an increase of new market economies and therefore of greater competition all throughout the world. Most Western European countries challenged the competition with high investments in highly specialized sectors, where capital is more necessary than a cheap labor force. This gave the rise of a high technological industry in Europe and an increase of the overall productivity. Italy did not experience this change and it barely specialized in high-tech sectors. Italy’s politicians preferred to protect the symbolic industries like Fiat, which at that point of time started to be artificially supported by the state. This was of course a big mistake, as other European countries would reap the benefits of the new sector. By the end of the 90’s, some reforms were introduced that aimed to restructure the labor market by making wages more flexible and therefore decrease the overall labor cost. However, these reforms changed the model of development, which provided a low growth of productivity, low investments on capital, but a high use of the labor force. Of course the goal was to increase the employment levels and to bolster again the manufacturing sector, but the results were not as promising as expected.

The economic situation was furthermore aggravated with the introduction of the Euro, which brought initially positive results in foreign direct investments but caused an increase of prices. In the early 2000s Italy was already starting to lose against the pressure of the global competition. Italy’s long-standing textile and machinery industry, once jewels of the Italian industry, were then lost to the competition. The prevailing liberal culture that resulted in this Italian economic miracle era of the 50s paradoxically created the structural problems that are now difficult to change. In the past 25 years, the Eurozone members spent more than Italy on research and development, with an average gap of 1 percent of GDP. In addition, strong patent laws mean that technological knowhow is not as widely spread in Italy. The resulting weakness in national innovation discouraged investments Italy's high-tech sector.

In conclusion, the long period of low occupational growth without a significant increase in productivity is one of the most fundamental problems of the Italian economy. The increase of prices caused by the introduction of the Euro, and the increase of competition from the emerging economies also severely affected Italy. The lack of incentives for innovation and policies of protectionism that only worsened the level of competition of key companies did also certainly not help and a fragility of the real economy was to be expected. The necessary reforms were dragged from government to government. As a result, the current economic crisis is just a mere reflection of Italy's failure to change in the past decades.

Bottom Line The Italian economic crisis is a result of bad politics of the 90’s that affected the model of production in Italy, in which a cheaper labor force was preferred over high investments in capital. This made Italy miss the opportunity to develop its industrial markets.
* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

Prospect Theory on Valentine's Day

Flip writes*

When applied to the right kind of problems, economic thinking can actually yield very valuable insights. On the Saturday before Valentine’s Day, I was drinking coffee in a busy shopping street in The Hague (the Netherlands). Honestly, up until the moment I saw all the hearts and Valentine’s sales in the shops, I had actually forgotten about V-Day. This, because I have a girlfriend, was quite problematic (understatement). Seeing all these people on the street hurrying in and out of shops to get the best gifts for their beloved made me wonder what I should do. If ‘everyone’ was buying gifts, should I just buy them too?[1]

Image 1. Source: K & T p 279
Until Kahneman and Tversky’s 1979 paper in which they introduced prospect theory [2], the expected utility theory was the main descriptive model of economic behaviour (refresh your memory about expected utility theory). The most important of the many insights of Kahneman and Tversky’s paper was that losses affect utility stronger negatively, than gains do in a positive way. As can be seen in image 1, the utility function for losses is much steeper than that for gains.

Image 2. The V-Day shift
Under normal circumstances not receiving a gift is equal to the status quo, and you neither gain nor lose any utility (see image 1). Valentine’s day, however, changes this status quo (image 2), because there is the widespread notion that you need to do something special for your partner. Not getting a gift or receiving special attention suddenly becomes the exception and would result in negative utility. Depending on the expectations your partner has (affected by the amount of TV programmes you watch in which people are getting spoiled because of Valentine and the non-stop Valentine related commercial breaks) his or her hypothetical utility function is transformed (moved) by x. The size of x depends on the expectation of the time, money and thought put into the gift.

Taking another sip of my coffee, I saw two options. First, take my losses for this Valentine’s Day and surprise my girlfriend when she didn’t expect it at another time. Hoping to achieve some positive utility then. Or, second, try to reach the status quo by giving her the best gift I could find under limited time and money I had (I couldn’t buy her a trip around the world, for instance). Kahneman and Tversky made me realise that the utility lost with not getting a gift, outweigh the gains of giving a gift at another time. So I had to buy a gift.[3]

V-Day had me cornered. I took a last sip of my coffee, got up and moved in with the Valentine shopping crowd, looking for a Valentine’s gift.

Bottom line: Get your beloved a gift for Valentine’s. Always.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.
  1. It is important to note that all the people on the street give a very biased view of the attention being given to Valentine’s Day. Just like the ads and shows being shown on TV.
  2. Kahneman, D. and A. Tversky. 1979. “Prospect Theory: An Analysis of Decision Under Risk.” Econometrica 47: 263 – 292.
  3. Put differently,  the disutility of no gift now would never be "replaced" by a gift later, i.e., |Uno gift| > |Ugift|.

15 Feb 2016

EU Ministers continue to allow overfishing in 2016

Richard* did his bachelor's thesis with me. This post represents his ongoing work...

Fisheries in European waters are managed by the EU under the Common Fisheries Policy whose stated objectives include to ensure the sustainable management of fish resources - specifically achieving Maximum Sustainable Yield for all stocks by 2020 at the latest. The primary means through which the EU aims to achieve this is through fishing quotas called Total Allowable Catches (TACs) which specify the maximum tonnage of particular stocks member states may fish. Unfortunately, fisheries ministers from EU member states consistently set these TACs too high in the annual EU Council meeting – allowing overfishing. Between 2001 and 2015 TACs were set on average 20% above levels scientists recommend to ensure sustainability. The irony of this is that ministers hail higher quotas as a success under the pretext that fishing revenue and jobs will benefit even though the opposite is true in the long run.

Fish stocks are a natural resource that deliver the most benefits when allowed to reach a large size. If the stock populations are larger, they can be fished at a higher rate as their natural growth rate through reproduction is also higher. The highest rate of fishing that also maintains the size of the stock is called Maximum Sustainable Yield (MSY) which is what the International Council for the Exploration of the Seas (ICES) - the main scientific body providing advice on TAC levels - use as their main criterion. Modelling research by the New Economics Foundation (NEF) has shown that allowing stocks to recover and fishing stocks at MSY in the EU could generate an additional €1.6B in revenue and create 20,000 more jobs. It makes both economic and environmental sense to fish at MSY and the longer this is delayed, the more potential value is lost.

Analysis of the TACs set for 2016 [pdf] show that although the amount of TACs set above advice is much lower than it was 15 years ago, the slight increase from last year’s quotas is counter to the continuous progress required to achieve MSY by 2020. The main beneficiaries from this excess quota this year are Ireland and Spain who receive quota 26% and 24% above advice respectively. Ministers representing these countries appear to be successfully pushing for outcomes that may result in more catches this year, but fewer in years to come.

Bottom Line Fisheries ministers will need to be courageous in making the politically difficult decisions in the next TAC negotiations so that this valuable resource can be optimally and sustainably utilised.

* Richard Kleinjans [email] is a Research Assistant at the New Economics Foundation

13 Feb 2016

Legalize it.

Bill Mahler warns that Big Alcohol/Tobacco/Prisons want marijuana to stay illegal.

9 Feb 2016

Published! Water metering in England and Wales

The struggle for residential water metering in England and Wales has just been published in Water Alternatives (an online, peer reviewed journal).

Abstract: The transformation of water services that began with the privatisation of water companies in 1989 extended to households with the implementation of water metering. Meters 'privatised' water and the cost of provision by allocating to individual households costs that had previously been shared within the community. This (ongoing) conversion of common pool to private good has mostly improved economic, environmental and social impacts, but the potential burden of metering on poorer households has slowed the transition. Stronger anti-poverty programmes would be better at addressing this poverty barrier than existing coping mechanisms reliant on subsidies from other water consumers.

I began this paper about 5 years ago, as an EPI-Water case study (here's a very different, earlier edition [pdf]), and my thoughts on the topic have evolved over time. I see no problem with treating water as a private good and poverty as a collective good (in terms of responsibility).

This publication pushed me to create a page with my academic publications organized by water theme, for those of you who want to read more deeply on tariffs, trading water, performance insurance, groundwater taxes, and so on.

2 Feb 2016

Open thread... progress, failure and ideas?

I'm absolutely buried under school and other work for the next week or so.

Please comment on your recent experiences and learning about progress, failure and/or new ideas in water.

Others can join in!

1 Feb 2016

Got ideas on how to reduce NRW? Win a prize!

This lauches today:
Dreampipe, a major British government-funded, multi-year innovation prize, was launched today, aiming to stem the amount of water lost in developing countries through leakage, meter inaccuracies and unauthorized use.

The initiative will spur improved ways of mobilising funding to reduce the vast amounts of 'non-revenue water' (NRW) – the difference between water entering the system and water billed to customers – in developing countries
I find it ironic that they are targeting NRW in developing countries when English water companies leak about 20 percent of their water and about 5 percent of bills go unpaid (cumulative debt is over GBP 2 billion).

More information here.