Monday, February 8, 2010

Kaldor-Hicks bargains in civic life

Consider these three situations.

1. Builder Babu constructs a new apartment complex in Free Market Colony. Adjoining the entrance to the complex is an electricity pole (or a water line or a public tap), located on the road margin, which apart from adversely affecting the elevation of the new building also inconveniences vehicles entering the compound. Builder Babu applies to get the electricity pole shifted to the other side of the road, adjoining the backside of the neighbouring house, and makes the required payment for shifting. However, once the elctricity utility starts the shifting work, the Not-in-my-backyard (NIMBY) effect comes to the fore and local residents oppose the shifting. They couch their opposition on the grounds that shifting would result in drawing lines across the street, thereby spoiling its elevation (or cutting the road, though the road restoration costs are already paid to the municipality).

2. Welder Ram proposes to start a welding shop in a shop he has taken on lease in the narrow and congested Free Market Street. However, being a hazardous activity, the presence of a transformer at the road margin and adjacent to the entrance of his shop means that he cannot start his business activity without shifting it. He therefore approaches the electricity call center and pays the required shifting charges. The electricity utility's contractor starts the work only to face strong and vocal opposition from the shop owners in whose area it was proposed to relocate the transformer.

The congested nature of the locality means that there is no other land (actually it needs only a small space to erect the plinth and mount the transformer, but the transformer looming in front of their shops is a deterrrent) available on the road margin to locate the transformer. In other words, in the absence of any vacant land or space, the transformer has to always remain mounted adjacent to some shop.

3. Consider the flower market located in the narrow Flower Street. The flower market generates massive quantities of waste material which was being dumped in the only available vacant land in the vicinity (and then lifted by the municipal authorities everyday evening). Now the owner of the land has returned from the abroad and decided to construct a shopping complex in his land. Having lost their temporary waste disposal location, the flower market association decide to request the municipal authorities for a dumper bin for Flower Street. Municipal authorities readily oblige and transport the bin to Flower Street.

Now the problem starts. In the absence of any vacant land, the dumper bin has to be located on the road margin over the covered drain and footpath. The congested and closely spaced nature of the shops in the street means that it is inevitable that the bin be located adjacent to atleast one shop. None of the flower shop owners are willing to sacrifice the entrance to their shop with the sight of a dumper bin.

All the aforementioned examples are commonplace in our cities and source of considerable acrimony between people and causes neighbourhood disputes. They are also some of the commonest types of complaints received by municipal authorities and utility officials in many Indian cities. However, the involvement of government rarely solves the problem. If anything, it often ends up exacerbating the problem as the officials accept bribes and take sides in a neighbourhood dispute, where no side is right or wrong.

Ideally such disputes ought to be settled through civic organizations like Residents Welfare Associations (RWAs) or other local commercial associations. The local social capital is the most effective instrument to solve such problems. However, if the local community fails to arrive at an amicable solution, the free market has a possible solution.

Econ 101 would see all three as classic test cases for application of the Kaldor-Hicks criterion. Under the Kaldor test, an outcome will be efficient if the maximum amount the gainers are prepared to pay is greater than the minimum amount that the losers are prepared to accept. The Hicks test stipulates an outcome to be efficient if the maximum amount the losers are prepared to offer the gainers in order to prevent the change is less than the minimum amount the gainers are prepared to accept as a bribe to forego the change. The Hicks test is from the loser side and the Kaldor test the gainer side reasoning.

The aforementioned commonplace civic disputes can be subjected to Kaldor-Hicks bargains. In fact, there may be nothing immoral about such negotiations, especially when the alternatives leave everyone worse off. Such informal and mutually negotiated dispute settlement mechanisms were employed even in olden times, mediated by local councils of elders in many societies. Even today, atleast in some commercial areas, such disputes would get settled before the local rowdy who would, apart from intermediating to identify a mutually acceptable price, also wring out his share from both parties.

The danger lies in the institutionalization of such informal arrangements, where in the absence of appropiate legal instruments, non-state actors occupy the vacuum and damage the fabric of the local society. However, instead of undesirable lumpen elements, the local community associations can embrace this approach and provide the platform for such bargaining.

No comments: