Showing posts with label transaction costs. Show all posts
Showing posts with label transaction costs. Show all posts

29 September 2014

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.

14 August 2014

Here's a link to Living with Water Scarcity FREE

I've eliminated the stamp of your name and email.

Feel free to forward the PDF to anyone.

Sorry for complicating "free" :)

Back story: It's my present to you on MY birthday, where I said: 
Bottom Line: Everyone needs to do their part when it comes to managing our water, so I am giving my book to you for free. Your job is to use its ideas to inspire local action and help your community.

Happy birthday to me -- here's a gift for you!

A refreshing bath in Canadian snowmelt
It's my 45th birthday today, and life in Amsterdam is good. Cornelia is going to get a masters in Urban and Regional Planning. I've just started as an assistant professor of economics at Leiden University College, a new school affiliated with the 400+ year-old university that is different better for me due to its emphasis on teaching over research.

I'm sure you'll learn more in the coming year(s), but let's get to the exciting part -- your gift!

A few months ago, I was going back and forth on pricing Living with Water Scarcity, i.e., finding a balance between cheap (more sales) and expensive (more revenue). That debate was complicated by the (real or imaged) ideas that higher prices mean more value or a greater obligation to read for some people at the same time as non-zero prices create a barrier for people who lack credit cards, doubt the book's value, or have plenty of "free" stuff to read.

I've been thinking over these issues over the past few months, and I've decided to lower the PDF price from $5 to free because revenues to me are not as important as getting this book into people's hands and its ideas into their heads.

To get your copy, click here

I hope that people who download the book will read it, recommend it to others, and review it on Amazon, their blogs, facebook, and other websites. More important, I hope that my book helps readers and leaders engage in fruitful debates that improve water policies in their communities

Bottom Line: Everyone needs to do their part when it comes to managing our water, so I am giving my book to you for free. Your job is to use its ideas to inspire local action and help your community.

25 July 2014

The Starfish and the Spider -- a (mini) review

Over-controlling CEO or empowering Catalyst?
CH sent me this book by Brafman and Beckstrom, which I started -- and stopped -- this morning.*

I stopped because the prose was far too excited for the authors' point, which is that a starfish has a decentralized "leadership" that allows individual arms (even polyps) to "decide" what to do, without consulting any center. A spider, OTOH, needs to keep the entire web in order if it's going to eat. The obvious figure at right "explains."

This analogy is meant to apply to organizations (hence all the CEO endorsements) that want to balance between centralized and delegated control.

I get it. You get it. The main question, then, is HOW to find that balance.

When it comes to water, for example, we can leave a farmer with a well or reservoir to decide how much of his private water to use. He knows how much there is and how much he wants to use, and his decisions do not affect the water of others.

Change that scenario to a bunch of farmers sharing the same aquifer or reservoir, and there's a need to coordinate their use. This can happen by allowing each the same quantity of water, auctioning rights to the "sustainable" yield, etc. A "spider" needs to keep track of aggregate use, but there's no need to track the "why" of use (trees, row crops, pools, etc.) because we can assume the farmers know what they're doing.

Take it one step further, to water prices in cities. Water managers can try to tell people how much to use, when and for what. Or they can move towards a starfish type of management by setting a price that will keep total consumption within an acceptable range. The managers will not know who uses how much water for what (except when sending bills), but their ignorance does not matter. They don't know who should use how much water, and they should not try to understand. They only need to keep aggregates in balance.

If you like airport business books, then check out Starfish. If you want better perspectives on these ideas, then read Two Cheers for Anarchism or the founding papers on these topics: Hayek's 1945 "Use of Knowledge in Society" [PDF] or Coase's 1937 "Nature of the Firm" [PDF]

Bottom Line: I give this book TWO STARS for lacking anything sticky to hold me.

* This is a mini-review because I didn't read the whole book. I may have missed a masterpiece (correct me, please), but I cannot spend too much time looking when one may not be there.

24 July 2014

Ronald Coase, institutions and water

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

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

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

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

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

So, how can we apply his ideas to water?

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

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

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

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

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

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

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

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

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

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

09 July 2014

Do you trust your neighbors?

A few months ago, I participated in a brainstorming on the future of water (American Water was paying) where this quandary came up:
How do we get good regulators* who can balance between the long term needs of the community (reliable water service) and short term temptations of the utility (less work, more profits)?
One suggestion struck me as perfectly appropriate: regulators should be drawn from the population of citizens in the same way as jurors, to serve for a year or so (i.e., meeting a few times per month, with compensation).

What I like about this idea is that it guarantees fresh, outside perspectives on the regulatory balancing act. Fresh perspectives will be neither "conventional" nor "captive" to the goals and views of water managers. Rather than being a drawback, I see regulators' lack of technical experience as a plus, as it will force managers to explain the projects and funding they need in common sense terms.

Is it possible that the regulators will be manipulated or deceived by their permanent staff or the utilities? Yes,  but those who understand their ignorance will be wary enough to make sure they have enough information to make an appropriate decision.

Your thoughts?

Bottom Line: The community needs to regulate its water services, so why not have members of the community appointed (by lottery or vote) to carry out that role?

*I discuss the dynamics of this "principal-agent-beneficiary" problem in this paper on international aid, this paper on a human right to water, this chapter on selfish water managers [pdf], and this exploration of customer power and customer service.

29 May 2014

Plagiarism or creative writing? A review of Grammarly

I taught economics to a group of third year students at Simon Fraser University this spring. Perhaps 80 percent of them spoke English as a second language (most were from China), and very few of them had experience writing in English, as the Economics department put most weight on math skills.

I went against that trend in asking students to read and write about Economics in two briefings (here's the PDF for the first) and a blog post (remember these?).

I had given the same assignments to my 2009 UC Berkeley class (blog archive), but I had not thought about plagiarism as an issue because I had skimmed through most of their briefings (I failed one student for a ridiculous copy/paste from a sociology paper).

I was going to do the same this time and asked students to print three copies of their briefings so we could distribute them to other students for peer grading (see this post). Then it occurred to us that we could use online submission to make the process easier (and maybe save a few trees). That step gave us a new possibility of checking the briefings for plagiarism. (We were not interested in grading or correcting them, as that was for peers.)

By curious coincidence (not!), I got an offer to try out the grammarly service, which helps students and professors check writing for grammar and plagiarism issues.*

In my short use of the service, I did not pay much attention to the grammar function, although I can see how it would be better than Word, which tends to vary between terse and useless.**

I did spend a lot of time with the plagiarism function and found it to be VERY useful, especially as nearly 40 percent of my students plagiarized material for their first briefing. Most of them made the mistake of copy/pasting without "marking others words," but some were brazen enough to copy entire paragraphs without attribution.

Most of them lost half their points on that assignment (their midterm and final grades tended to be lower, so I think there was some self-selection), and few of them did it again on later briefings and blog posts. (I was really shocked when some did!)

Bottom Line: Grammarly makes it easy to check lots of material for obscure sources on the internet. I recommend it to anyone who needs to grade a lot of essays for original content. It's also handy for grammar feedback (you can print a PDF report), but I wouldn't assign grades for grammar.

* Grammarly offered to pay me to review their service (this post), but they've been totally hands off on what I say. They did implement one of my suggestions on how to improve the interface. The service costs $30/month, but many of my students enrolled in the 7-day free trial to double check their work after a bunch got caught plagiarizing (see above).

** My grammar and spelling is terrible, so I don't mind some highlighting. I find more mistakes by rereading my work, but some people cannot do that at an "objective distance."

20 May 2014

Climate change IS happening now

Just another day in paradise
[This post spells out some unwritten thoughts behind my post yesterday, which may have given the wrong impression of my thinking on the impacts of climate change.]

There's been a long-running debate over (1) whether global warming is happening, (2) whether that's leading to climate change, (3) when climate change will lead to "novel" weather, (4) how damaging that weather will be, and (5) what we should do about it.

Most of the debate has focussed on (5), since changes in habits are costly for individuals who prefer business as usual and VERY costly for businesses that would lose money from a shift in habits (using less oil, for example). In contrast, the science in (1) and (2) is settled.

What's interesting to me, is that the models behind (3) and (4) may have been too optimistic, in terms of predicted intensity and frequency of impacts.

Three years ago (if not earlier), I claimed that we need to reform our institutions to adapt to the impacts of climate change arriving in greater fluctuations in the water cycle, to defend ourselves against "death by a thousand cuts, but I have not seen very much action in that regard. Some companies are changing their business models, and some investors are divesting from fossil fuels. Many insurance companies are raising prices, but few governments are changing policies.

My guess is that the smart money is now looking VERY hard at how current events will translate into future options, especially when the vast majority of people are sleep walking into greater danger. For me personally, that means moving to Amsterdam, which both a pretty place and one of best-defended cities in the world. The contrast with Riyadh, a city in the desert that depends on water from 500km away and 24/7 air conditioning when temperatures are above 40C (104F) for months, is stark.

Bottom Line: Don't wait for climate change. It's happening now. If you think that's wrong, then compare the benefits of action from the costs of inaction.

16 May 2014

Speed blogging

(Sorry, I have a lot of material stacked up for you. Enjoy!)
  1. Water and Hydraulic Fracturing and Responsible Investing in Canada (live webcast) on 29 May

  2. Participate in the OECD Survey “Stakeholder Engagement for Effective Water Governance” before 5 June

  3. The evolution of clean water laws under the influence of citizen-watchdogs, a comparison of water governance at national versus regional levels in the EU, the LACK of progress for women who get water at wells closer to their home (waiting time is close to walking time), and an examination of unnatural (engineer-caused) disasters on the Mississippi

  4. Bureaucratic overload: California's Dept of Water Resources doesn't even know how many agencies supply water. WTF?

  5. The US government studies dams as a source of new, green power. No sign of studies to reduce demand for energy or decommission worthless dams. Fail
H/T to GD, DL and RM

14 May 2014

Momentum meets change

Change isn't always easy, but it will work out if you give people time...

30 April 2014

Anything but water

  1. The key to success is not ignoring failure but learning from it (listen to this podcast)

  2. Use this willingness-to-pay calculator to divide rooms (and rent) among roommates

  3. Crony Republicans are weakening aid to foreigners and increasing the price of domestic energy by protecting the US-shipping cartel. Pathetic

  4. Gaming incentives: Saudi start ups can't get funding because 93 percent of investments are in real estate, which has excellent returns. Why? Land use regulations promote sprawl over infill. Commuters, renters and the environment lose

  5. A majority of Kitimat voters oppose the Northern Gateway pipeline that will bring oil to their coastal city. The pipeline should be popular ("jobs"), but there are 10 opponents to the pipeline for every promised job. (Local "jobs" benefits equal 0.2 percent of the pipeline's $6.5 billion cost.) Will BC's government listen?
Hattip to AA

12 April 2014

Flashback: 7-13 Apr 2013

A year later and still worth reading...

The nexus of bullshit -- don't try to manage energy and water until you can manage water!

Question of the week -- the generation gap may mean that people think differently. I'll add that they also learn and communicate differently. This can lead to confusion and inhibit cooperation.

To centralize or not to centralize? Depends on information, distribution of costs/benefits, politics, etc.

07 April 2014

Say yes to Carbon Tax

Lauren Zhu writes:*

The streaming BC carbon tax debate continues since the first day of its implementation in 2008. And as I have acquired more knowledge on the phenomena, I have become a total supporter of the tax policy. I believe that the most effective method to reduce green house gas emission is to implement compulsory policies including taxation (price each unit of emission), limited permit system (cap-and-trade) or set regulations on the production side. Among which tax policy would be the most efficient and effective policy to have to influence people’s behaviors. Tax on per unit of emission polluted has a direct impact on price (ex: gas price) which is the main mechanism of changing consumption of gasoline. In addition, tax policy is also the most cost effective. It doesn’t require huge amount of transaction cost and it is significantly simpler than cap and trade system. However, it is inevitable that tax policies encounter great political difficulties.

Bottom Line: If you want to reduce green house gas emissions; it is not FREE. And the alternative policies to a carbon tax (regulations) are more expensive and less economically efficient.

* These guest posts are from students in my resource economics class at Simon Fraser University. Please leave feedback on their logic, ideas and style and suggestions of how to improve.

10 March 2014

145 Trans Link Bus Can Kick the Dust

1038 writes:*

If the 145 Trans Link bus could disappear and be replaced by a gondola, that would be great. The experience of riding the tedious and painfully slow 145 that heads up the Burnaby Mountain to Simon Fraser University is not only inconvenient for an acclaimed communal university but also not favorable to the environment. Four “sorry bus full” buses pass you by, whereas if there were a gondola, a lot more people would be able to be transported up and down the mountain more efficiently.

Why the proposal to build a gondola is not moving at a faster pace is an important question. Yes it is expensive, yes there are debates on who will pay for the project and yes towers will be built developing concerns about surrounding wildlife but who cares! A gondola means six minutes off the commute, fewer delays, less air pollution and a happier student population.

Bottom Line: Just build the gondola already!

* These guest posts are from students in my resource economics class at Simon Fraser University. Please leave feedback on their logic, ideas and style and suggestions of how to improve.

03 October 2013

Anything but water

  1. An entertaining clarification of the difference between Holland and the Netherlands

  2. College may be worth it, but I wish that people would see education as a goal, instead of just a means to money. In a related story, Wharton is putting first year MBA classes online, for free. Why? Because people will still pay a lot to meet other MBA students at Wharton. That's not because they will be good study buddies; it's because they will use connections to get a leg up in making money and deals. That's good when it lowers transaction costs but bad if it eliminates competition. Don't have money for four years or time to watch free classes? Maybe you want to buy a diploma online. Read this GREAT story of an academic who took down a counterfeit empire that was based in Washington State

  3. If we're going to eat more meat (either b/c of the primal diet or merely to "eat rich") then it's good to see that meat production can be sustainable. The key is fewer feedlots and more grazing over varied landscapes

  4. Venezuelans are buying airline tickets but not flying -- they use tickets to arbitrage black market currency trades. Some may want to fly, to escape food shortages caused by land seizures and government interventions in markets and prices

  5. Electricity regulation was more about giving extra profits to utilities (i.e., regulatory capture) than investing in larger networks. From what I've seen in the US and UK, it's probably the same with water

17 September 2013

Units of confusion

I love the metric system for its obvious simplicity (1 meter = 100 centimeters) and elegance (one liter of water weighs one kilogram; one cubic meter of water weights one ton, or 1,000 kg).

In the Netherlands, I enjoyed the metric system in its full glory, and I thought I was going to have the same experience in Canada, but I am not.

Before Canada started switching to the metric system in the 1970s, it had a system that borrowed elements from the UK and the US. That system was confusing (e.g., an imperial gallon is 4.55 liters; a US gallon is 3.78 liters), and so it made sense to move to a single, logical system such as the metric system.

But the switch didn't exactly occur, and Canadians today use pounds and feet, alongside kilograms and meters. In some ways, Canadians are in an even worse situation than Americans, who've firmly rejected the metric system (except for kilos of cocaine and two liter bottles of coca cola). This confusion increases transaction costs, as people need to find or convert to a common unit of measure (I'm trying to sell a backpack that has 65L/4,000 in3 of capacity, telling people that I am 1.78m/5'10").

Transaction costs do not just affect communication among people; they also slow down our internal thinking, by forcing us to convert measures or -- worse -- ignore measures in our everyday affairs.* I blame some share of American innumeracy on our chaotic system of measures, which means that Americans make more gratuitous mistakes. It seems that Canadians are handicapping themselves in the same way. That's a pity.

Bottom Line: The metric system makes it easier to measure and relate different objects and ideas. Those who do not use it cannot think as clearly as those who do.

* The same holds for tipping and sales taxes here. In the Netherlands, people do not tip. Service is still good since servers are paid a good wage. Taxes are included in the price (e.g., €1.99 means €1.99) but you can see them on the receipt. It's silly to sell something for $9.99, then ask someone for $11.20 here (12% tax). Just tell me the price; don't make me THINK even more about something I already decided to buy!

21 August 2013

How to build a water market

Just a reminder of what you need...
  1. Define and quantify yield (allowing for variance) for surface and/or groundwater, by time and place
  2. Exclude environmental flows (e-flows) necessary to maintain a minimally healthy environment
  3. Assign remaining water ("sustainable yield" or SY) to tradable permits in flows (temporary water) and/or rights (permanent water). Flows are assigned each year/period as a percentage of rights.*
  4. Note that "consumptive rights" are SY less return flows, i.e., return flows will fall if consumption (=efficiency) rises. "Diversion rights" ignore return flows, so their sum should not exceed SY. Leakage from diversion rights go to e-flows. 
  5. Study transaction costs to choose between a consumptive or diversion regime.
  6. Establish and identify delivery infrastructure for flows and trades at a reliable price/access. 
  7. Register rights and/or flows in one place.
  8. Subtract carriage losses from any trades.
Most of these steps are based on conversations I've had with traders, what I've observed, and the Australian system for the Murray Darling (as I understand it).

Did I get all the steps? In the right order? Do you have examples of other functioning water markets?

* It seems that trading activity is shifting from rights to flows in the MDB.

09 July 2013

Summer reading

  1. Gather physical and digital stuff into one place/folder
  2. Dump all the crap that you're not going to read
  3. Sort the rest of it into fun and work, from short to long
  4. Read one thing from each pile, then return to (2)

08 July 2013

Anything but water

  1. The third bike revolution? "Americans live in confined houses, drive around in confined cars, and work in confined office spaces. Bicycling takes you out of the box, lets you smell, hear and experience the world around you"

  2. Don't bother to replace Google Reader (because "surprise" opinions are useful) and another 99 ways to simplify your life

  3. How to suck at your religion, i.e., WWJnD!

  4. MIT will help you see what the NSA know about you (gmail only, but the NSA especially likes spying on hotmail users!)

  5. Speaking of bugs, "Eradicating mosquitos from the face of the earth would have no negative consequences" [PDF]
H/T to RM