Prices and demand response fact of the day - petrol prices in the US

FT points to demand substitution among commuters in the US in response to rising fuel prices, as people shift away from private vehicles to mass transit. People are overcoming their pandemic time hesitations and taking to public transport as petrol prices have gone by 57% in the last two years. 

This is also a much needed boost to mass transit systems which have been devastated by the pandemic. However it remains to be seen as to how many of these commuters stay on after fuel prices regain normalcy. 

High prices are equivalent to a tax on petrol. It's a reminder about the role of taxes to generate demand response to curb negative externalities and also encourage positive externalities.

Historically, a spike in gasoline prices has pushed more people on to public transport. A study conducted by Bradley Lane at the University of Texas examined US cities from 2002 to 2009 and found that for every 10 per cent increase in petrol prices, rail saw an increase of 8 per cent in ridership while bus use increased 4 per cent on average.

This is the study. 

Weekend reading links

1. FT points to 'fauxtomation', coined by Canadian activist Astra Taylor, the gulf between the myth of workless future and reality,

Take McDonald’s. I can now order my burger using giant touch screens, pay for it on the contactless card reader and then saunter up to the counter to collect it. This could be thought of as automating the work of a waiter; in reality, though, the company has convinced me to become an unpaid member of staff. The tasks I do — inputting an order into the system, sorting payment and then collecting the food from the kitchen — are all jobs that would normally be done by someone earning at least minimum wage. It’s the same when I use a self-service checkout at the supermarket, or check myself in and print out my own ticket for a flight. Technology has facilitated a shift in who is working, not eradicated it... Technology, Taylor argues, contributes to an illusion that human effort can be simply substituted by machines — like the famous “ Mechanical Turk” machine that could supposedly play chess but in reality contained a hidden chess master, or the dumbwaiters in Thomas Jefferson’s mansion that relied on hidden slaves.

And its impact on measured productivity,

“Fauxtomation” fits into a tradition of unpaid work being overlooked — work such as caring for the elderly or children, often done by women, that does not appear in official measures of economic output. The economist Diane Coyle argues that some of the extraordinary economic growth in the middle of the past century was probably due to women doing more paid work and less unpaid; if the latter had been valued properly in the first place, the postwar boom would not have been as large as it appears in the official figures. Similarly, the recent slowdown in productivity growth may be due to a move the other way, as everyone starts producing more outside working hours, whether on laptops at home or at supermarket checkouts. And then there’s what Coyle calls “do-it-yourself digital intermediation” — online platforms acting as our bank tellers, estate agents and insurance brokers. The benefits of these services getting cheaper ought to be reflected in higher spending elsewhere. But, Coyle argues, official measures of economic output are missing the value of our unpaid work, meaning the slowdown in productivity growth may not be as bad as it appears.

2. The collapse of the tailing dam in southeastern Brazil owned by mining giant Vale which killed at least 157 people, with 182 missing, is a classic case of socialising costs and privatising the benefits and one where criminal culpability should be traced right up to the top of the mining behemoth.

Vale knows that it can contain its costs by avoiding the construction of strong tailing dams and relying on shoe-string mud structures. The costs can be externalised and the savings can be appropriated privately. And when you add up several such externalities, it all begins to assume significant proportions. In simple terms, Vale, and other multinationals know that it can get away with a mud-dam and its attendant risks. 

What can be easily predicted is what will follow. There will be righteous indignation everywhere for the coming few weeks. Some junior employees on government and Vale's side will be sacrificed. And then everyone will forget and go on with life till the next incident happens. Incidentally, a similar accident on a tailing dam co-owned by Vale killed 19 people in 2015!

3. Some snippets about unemployment trends in India,

Instead of dropping out at a very early age, the percentage of women in the education system is very high until the age of 23-24. Earlier, it used to be only up to 17 years. So, there is a five-year shift; these people are no more in the labour force because they are still in the colleges. So that will reduce the labour force to some extent because they are out of the labour force. And earlier, the unemployment used to start at 20 onwards, now basically it is 24 onwards, so 20-24 they are in colleges and all that. So there’s a shift in the employment pattern from the report. Once they come out from the colleges, they are no more prepared to work on their father’s farm or looking after something and then get married and become housewives... This immediately will pick up the unemployment ratio because they are not showing up in the unemployment-numerator.

4. Livemint graphic on the unemployment problem among the educated,

A recent report by the Centre for Sustainable Employment at Azim Premji University, State Of Working India 2018, noted that unemployment among the well-educated is thrice the national average. There are roughly 55 million people in the labour force who hold at least a graduate degree, and about 9 million of them are estimated to be unemployed, the report added.

5. Nice Economist article on the extra-territorial reach of American policies that seek to penalise global companies for violating American domestic rules. 

Since the turn of the century, America has ramped up judicial programmes whose reach is not restricted by its borders. Focused on enforcing its sanctions, reducing corruption in poor countries and fighting money-laundering and terrorism financing, it has found ways of prosecuting companies and their executives far beyond its shores... Most of the companies caught in its legal net are foreign, often European. Some come from countries in which doing business with Iran, for example, would be no problem were it not for America’s stance... There are instances where America’s long legal reach may have given an edge to its own firms over foreign rivals, as in the case of General Electric’s purchase of Alstom of France in 2014... 

Several elements tie together America’s various legal forays abroad. The first is their creeping extraterritoriality. American law starts with a presumption against application of its statutes beyond its borders. But prosecutors have wide authority over how the laws are interpreted. They have adopted an ever-more-expansive interpretation of who is subject to American law, lawyers say. A banking transaction that ultimately passes through New York—as many do, given the centrality of American dollars to global trade—can give prosecutors a toehold to inspect it. If two executives outside America use Google’s Gmail to communicate about a bribe, say, American prosecutors can claim that the Americanness of the email provider can make it their business. The global banking system also gives America an advantage. Lenders have been hit hard by American prosecutors, notably BNP Paribas, a French lender walloped in 2014 with an $8.9bn fine for facilitating trade with Sudan, Cuba and Iran. Deutsche Bank was fined $425m in 2017 for helping launder $10bn from Russia...

It seems plain to foreign critics that America disproportionately targets foreign companies. Over three-quarters of the $25bn it has exacted in fines for money-laundering, sanctions-busting and related offences has been against European banks, 15 of which have paid over $100m each, according to Fenergo, a consultancy. American banks have been fined less than $5bn over such misdeeds. Anti-corruption probes also fall disproportionately on foreign firms. Of the ten biggest FCPA fines, only two have fallen on American companies.

6. Finally, an article on the decline of bus commuters across UK,  

Since 2009 the number of bus journeys in Manchester has fallen by 14%. Austerity has played a role. Councils in England and Wales have slashed bus subsidies by 45% since 2010, resulting in 3,347 routes being cut back or closed... The average delay caused by congestion in Britain’s cities has increased by 14% in the past three decades... Manchester is badly affected: the 43 bus now takes nearly 80% longer to cover its route in rush hour than it did 30 years ago. The average speed of Stagecoach’s buses fell by 4.9% in 2014-16; one route which took just nine minutes seven years ago now takes 27, according to the company.

Weekend reading links

1. The power of being Amazon, and how economic heft invariably spills over into political capture,

On May 14th the Seattle city council passed a “head tax” of $275 per employee for firms with more than $20m in annual revenue, in order to fund services for homeless people. Amazon, which employs more than 40,000 people in Seattle, promptly halted construction on one office tower and suggested it would sub-let another. A month later the city council tucked tail and repealed the tax.

2. Another less discussed feature of Chinese capitalism is its tolerance of ambiguous arrangements. The most classic example is property, which while legally owned by the government, is virtually vested with private individuals. Transactions of various kinds which effectively transfer the leases are common place, and though questionable is tolerated. Another example concerns Variable Interest Entities,

Variable interest entity (VIEs) are ubiquitous, especially among the country’s internet firms, which have a total market capitalisation of over $1trn. The structure dates back to the early 2000s, when Chinese technology companies wanted to tap global capital markets in New York and Hong Kong and to set up international holding companies domiciled outside of mainland China. Yet their sensitive internet assets, such as licences, may not be owned by foreign entities, according to Chinese law. To get around this, tech firms opted to avoid owning these mainland assets outright, and instead to bundle them into legal entities called VIEs, in turn owned by individuals in China (usually the bosses of the firms and their associates). The VIEs and these individuals sign contracts with the international holding company, handing over to it control of the VIE as well as its profits... There are three problems with VIEs. First, key-man risk. If the people with nominal title die, divorce or disappear, it is not certain that their heirs and successors can be bound to follow the same contracts. Second, it is not clear if the structure is even legal. China’s courts have set few reliable precedents on VIEs and the official position is one of toleration rather than approval. Third, VIEs allow China’s leading tech firms to be listed abroad, preventing mainlanders from easily owning their shares and participating in their success.

3. Richard Baldwin has contrasts rising inequality in developing and developed countries, 

It’s true that China is one of the places where inequality rose most rapidly, depending upon how you measure it. But it’s a totally different thing when average incomes are going up by 10 percent. The poorest people are going to be able to buy their parents’ houses. Here in America, middle-class people can’t afford the house they grew up in. That’s a completely different type of inequality. I do think inequality in the developing world will rise, but it will be all boats rising. Just some people have bigger boats.

As this blog has repeatedly pointed out, the concern is not so much the widening inequality per se, but the consequent inevitable capture of political power. 

And he has this very insightful point about the likely persistence of political-economy based resilience,

I think what people who don’t follow trade very deeply, or they follow it too theoretically, they think that tariffs are something abstract. Instead, there are always people wanting higher or lower tariffs inside every single country. The agreements we have are its balance of power. That balance of power is not fragile. It’s based on long-term, slow-moving things, and that’s what I’m confident will prevail.

4. The Economist draws attention to an unsustainable boom in property prices in developed country cities. It compares house prices with rents and median household incomes,

If prices rise faster in the long run than the revenue a property could generate or the earnings that service mortgages, they may be unsustainable. Or, at least, incomes or rents will eventually have to rise. Taking the average ratio over the past 20 years (or more if data exist) as “fair value”, national house prices in Australia, Canada and New Zealand have been more than 20% above fair value compared with income and 30% above fair value compared with rents for the past three years. They have now hit 40% above fair value for both metrics. Data for rents at the level of cities are lacking. But compared with long-run median incomes, prices appear even bubblier at city level than nationally.

5. In this context land value tax becomes attractive,

House prices there are 34% higher, on average, than five years ago, freezing young people out of home ownership. Windfall gains should be an obvious source of revenue, yet property taxes have stayed roughly constant at 6% of government revenues in rich countries, the same as before the boom.

This is the briefing article on LVT. Here is one of my first opeds making the case for Land Value Tax for India. 

6. Negative externalities from Amazon second head quarters,

Later this year Amazon is due to announce the site of its second headquarters. Cities have been competing to attract the firm. But local residents who do not own property could be forgiven for hoping that Amazon goes elsewhere. Its headquarters will employ perhaps 50,000 rich workers, who will bid up rents and land values, all the while crowding local public services and infrastructure. The chosen city will need to invest to accommodate the workers, but the costs of doing so will be unfairly spread across existing residents, because in their bid to lure the firm, cities are offering Amazon discounts on local business taxes.

7. Shang Jin-Wei and co-authors examine US imports from China and questions the conventional wisdom (David Autor etc) about its negative effects on job creation in the US,

US imports of intermediate inputs from China rose from about 1⁄4 of total imports in 2000 to more than 1/3 in 2014. Those US firms using imported inputs can improve efficiency and potentially expand their employment. Firms that use these imported inputs (e.g., computers, printers, telecommunication equipment, and parts and components of various office machinery) include those in what are traditionally labeled as “non-tradable sectors” such as banks, business services, research and educational institutions... 

this paper explicitly considers downstream and upstream effects of imports from China, and uses more precise information on how imported intermediate inputs from China are allocated across US sectors... Using a cross-regional reduced-form specification but differing from the existing literature, this paper (a) incorporates a supply chain perspective, (b) uses intermediate input imports rather than total imports in computing the downstream exposure, and (c) uses exporter-specific information to allocate imported inputs across US sectors... 

In contrast to the existing literature, we find strong evidence that the downstream effect is positive (i.e., the use of imported Chinese inputs raises US employment) and the effect is greater than the combined negative impact of a direct import competition channel and an indirect upstream channel. In addition, the US labor market is flexible enough that non-manufacturing employment is systematically stimulated by trading with China. The net employment effect from trading with China is found to be positive. As important, once a supply chain perspective is applied, we find that American workers as a group experience an increase in real wage from trading with China. The effect is not the same across all workers; most college educated workers gain substantially, whereas many non-college- educated workers experience a decline in real wage. Still, even without redistribution between capital owners and workers, every worker can be made better off if the total wage bill can be redistributed.

8. Finally, a stunning graphic which shows that the global equity market is shrinking at the fastest pace in two decades on the back of a continuing surge in share buybacks.

Even as buybacks are expected to top a record $1 trillion this year, their volume exceeds new issuances.

Arbitrage and efficiency - externalising costs and capturing gains

This post is triggered by Neil Irwin's fantastic article that I blogged here.  

Consider these. Robots replacing human workers to reduce defects and increase output. Companies focusing on their core-competencies by outsourcing non-core activities. Companies that either outsource or off-shore their production facilities to lower costs. Executives and companies that cut costs by aggressive reduction of their workforce and hiring contract labour, all in the name of competitiveness. Internet-based companies that reduce market frictions by bringing together buyers and sellers of goods and services. Constructing complex ownership structures that enable cross-border shifting of profits so as to minimise tax obligations. Supercomputers that connect to the exchanges through dedicated optic fibre cables over the shortest distance to promote high frequency trading that claim to increase market liquidity and thickness. 

The common thread in all these stories is the search for efficiency and value for money, both in turn aimed at maximising profits, even if, and often because so, at the cost of jobs or the quality of jobs. These trends are considered essential and desirable attributes in today's capitalism, in fact even the ultimate objective of the business enterprise. But this has not always been the case.

The traditional idea of a good business firm was of one which created jobs, productive jobs. Apart from being socially responsible, this was also sound economics. After all jobs provided the demand that sustained businesses, the economy itself. In other words, the firm's actions contributes to the creation and sustenance of the market itself. It is capitalism which generates a win-win equilibrium of private and social gains. It also involves both the firm and the workers accepting trade-offs to create a mutually beneficial system.  

Fast forward to today and the conception of a good business firm has changed dramatically. Ironically, today's good business firm is one which maximises shareholder value, even if by inflicting unacceptable social costs. This in most cases, translates to cutting costs, by among other things, reducing the expenses on labour. The embrace of labour-displacing robots is only the most direct and extreme manifestation of this trend. In other words, today's business firm is an entirely private entity, with limited social responsibility and aimed at maximising private gains. Sustenance of the soil on which the enterprise itself grows, the market, is the least of considerations.

Whereas annual reports of companies earlier took pride at highlighting the number of jobs created that year, today it is all about the bottom-line, even proudly mentioning the savings from lay-offs and tax avoidance. 

In the pursuit of individual business models that rely on realising returns through arbitrage and externalising the associated costs while appropriating all the benefits, capitalist enterprises are collectively chipping away at the sustainability of the market, and thereby capitalism, itself.  

In the cases mentioned at the beginning, it is debatable as to how many of them would be sustainable if all the social costs are internalised. In many of them, far from directly improving the net productivity (across markets) by way of inventing a new technology or a new business model, the efficiency gains arise from arbitraging across markets. These arbitrage opportunities arise from differences in input costs (outsourcing, offshoring, contracting) arising significantly from failures to internalise costs, regulatory standards (digital commerce, tax avoidance), information access (HFT), and so on. The gains from these arbitrages are privately captured, whereas their costs are borne by the society at large. In simple terms, where possible, today's business enterprise seeks to privatise gains and socialise costs.

This is not to decry all arbitrage opportunities. In fact, all economic transactions involve some form of arbitrage, including the mother of all arbitrages, comparative advantage in the natural order of things. Accordingly, labour wages in developing countries are lower than in developed ones, or farm produce is cheaper in villages than in the cities, and so on. Outsourcing and off-shoring can be legitimate productivity enhancing business models. Where these and others become less benign is, as aforementioned, when the private party appropriates all the gains in the arbitrage transaction and externalises all costs. 

It is disturbing when arguably some of the most exciting business opportunities of our times - e-commerce and sharing economy firms - is in making money pursuing activities whose competitiveness lies in regulatory arbitrage that allows externalisation of the negative social and other costs inflicted by them. It is equally disturbing sign when the most admired business leader and company of our times, Steve Jobs and Apple, have made their staggering fortunes not by fulfilling market "needs" but almost exclusively by creating market "wants". Finally, it is disturbing that both these cases are considered today's touchstones of a shift towards a higher trajectory of economic progress.

Weekend reading links

1. Nick Bloom has this explanation for increasing inequality,

The real engine fueling rising income inequality is “firm inequality”: In an increasingly winner-take-all or at least winner-take-most economy, the best-educated and most-skilled employees cluster inside the most successful companies, their incomes rising dramatically compared with those of outsiders. This corporate segregation is accelerated by the relentless outsourcing and automation of noncore activities and by growing investment in technology... studies now show that gaps between companies are the real drivers of income inequality. Research I conducted with Jae Song, David Price, Fatih Guvenen, and Till Von Wachter looked at U.S. employers and employees from 1978 to 2013. We found that the average wages at the firms employing individuals at the top of the income distribution have increased rapidly, while those at the firms employing people in the lower income percentiles have increased far less. In other words, the increasing inequality we’ve seen for individuals is mirrored by increasing inequality between firms. But the wage gap is not increasing as much inside firms, our research shows. This may tend to make inequality less visible, because people do not see it rising in their own workplace. This means that the rising gap in pay between firms accounts for the large majority of the increase in income inequality in the United States.

2. Fascinating series of graphics in Citylab that captures the evolution of urban planning.

3. The Economist has a nice graphic from the work of Zhang Qiang et al which tries to capture the deaths due to global air pollution arising from physical transport of particles and trade of goods and services. 

The headline takeaway,

Rich countries are exporting air pollution, and its associated deaths, as they import goods.

Countries like India are importing air pollution related deaths as they export products! Or when Trump talks next time about what other countries should do to reimburse America, he should be asked what US will pay to compensate the victims from its consumption.

4. Fascinating study by Wendy Williams and Stephen Ceci about how perceptions cloud opinions, in the context of the liberal opposition to a speech by Charles Murray (of "Bell Curve" fame) at Middlebury College, Vermont,

So we transcribed Mr. Murray’s speech and — without indicating who wrote it — sent it to a group of 70 college professors (women and men, of different ranks, at different universities). We asked them to rate the material on a scale from 1 to 9, ranging from very liberal to very conservative, with 5 defined as "middle of the road"... American college professors are overwhelmingly liberal. Still, the 57 professors who responded to our request gave Mr. Murray’s talk an average score of 5.05, or "middle of the road"... No one raised concerns that the material was contentious, dangerous or otherwise worthy of censure. We also sent the transcript to a group of 70 college professors who were told that the speech was by Mr. Murray. The 44 who responded gave it an average rating of 5.77. That score is significantly more conservative, statistically speaking, than the rating given by the professors unaware of the author’s identity (suggesting that knowing Mr. Murray was the author colored the evaluation of the content). Even still, 5.77 is not too far from “middle of the road.” Finally, we divided Mr. Murray’s speech into 10 portions and got ratings on each portion from a paid sample of 200 American adults via Amazon’s Mechanical Turk, an online marketplace for jobs and tasks. These participants identified themselves as having an average political orientation of 4.21, or leaning slightly liberal. When their ratings for the 10 sections were averaged, they too gave the talk a centrist score: 5.22. (Average ratings for the 10 portions ranged from 4 to 6.)

5. So the "build and they will come" approach to opening bank accounts may after all have been an effective strategy. A new paper disaggregates various confounders and find evidence of rising active transactions (cash deposits or ATM withdrawals as against interest debits or DBT transfers) for the period Aug 2014 to Nov 2016,

We find that the number of active transactions per account transacted by PMJDY account holders starts off slow but increases with the age of the account... Active transactions initiated by account holders represent nearly 45% of all transactions... account balance grows steadily with time. This shows that PMJDY accounts are also used for accumulating savings... Finally, in line with the national numbers, we find a steady decline in the number of zero-balance accounts... Simply opening the gates of the formal sector seems to bring in the excluded.

The low baseline access surely helps. But instead of sitting on the laurels, the challenge now is to increase utilisation.

6. The extend and pretend continues with the stalled projects, and things are getting worse. Livemint reports that while the proportion of stalled private sector projects climbed to a 52 quarter high of 20.2% in the March quarter, the growth of new project announcements hit a 10 quarter low.

The breakup of the reasons for stalling show this.

But, as I blogged earlier, these stats conceal more than they reveal. A very significant proportion of these projects are fundamentally unviable projects which need to be scrapped and losses apportioned among all concerned. Extend and pretend will only keep increasing the final cost.

7. How about something similar to this for India?

The Paperwork Reduction Act in the US requires the government to justify any information it seeks, explain how it will be used, and to estimate how much effort it would take for a person to provide this. No form can be introduced until it has been approved by a specialist agency with expertise in process design. The US government publishes an estimate of the total time required by citizens to fill its forms and strives to reduce this.

At the least a first order costs-benefits analysis before any form is notified or issued by a government agency?

8. Livemint has a very good story of why increased production of tur dal in 2015-16 has led to demand for farm loan waivers for farmers in Maharashtra. While the two preceding years were drought hit, it led to central drought relief measures as well as loan reschedules, the combined effect of which significantly mitigated the suffering. In contrast, in 2016-17, the distress has been market-driven,

Both the centre and state appealed farmers to plant more pulses, oilseeds, and move away from sugarcane and cotton. Farmers responded by producing a bumper crop of pulses, especially tur... Maharashtra is estimated to have produced 1.1 million tonnes of tur this year as compared to only 440,000 tonnes in 2015-16. The MSP for tur has been fixed at Rs5,050 per quintal but farm activists and experts say farmers are being forced to sell for Rs3,000-3,500 to traders since the government procurement agencies claim they do not have the infrastructure to store tur on this scale. An official at the state’s agriculture marketing department said the various government agencies had managed to procure only 340,000 tonnes so far for Rs1,600 crore, of which dues worth Rs300 crore are yet to be paid to farmers. Farmers don’t have holding capacity and so, they are forced to sell to traders at a lower price if the state procurement agencies refuse to buy.

9. The defeat of AAP in the Delhi municipal election results have ensured that property taxes will not be abolished in the City. Important, because of this,

Property tax is the single most important source of revenue for municipal corporations and municipalities. It accounts for 30 per cent of “own” municipal revenues in India... Total municipal revenues in India declined from 1.08 per cent of the GDP in 2007-08 to 1.03 per cent in 2012-13, the latest year for which this information is available. The same ratio is 6 per cent in South Africa and 7.4 per cent in Brazil. What is more, the transfers from the state governments in India are neither guaranteed nor predictable. In South Africa, the transfers are determined and announced at the time of the annual budget.

10. FT reports that emerging markets have overtaken developed economies in filing of patents.

The 12 leading EM nations applied for 1.49m patents in 2015, outstripping the 1.48m in developed market countries, according to figures from the World Intellectual Property Organisation, collated by Comgest, a Paris-based asset manager... The figures are a far cry from 2004, when the 12 emerging market countries, which account for the vast majority of developing world filings, made just 372,000 applications, 29 per cent of the 1.3m made by the advanced world.

11. The latest in urbanisation from China is the announcement of the development of Xiongan New Area as a greenfield city in Hebei province, two hours from Beijing, with the objective of decongesting the capital. The project is backed by President Xi Jinping. It is expected that this sleepy backwater with agriculture will house many universities and other institutions to be relocated from Beijing, 

It’s also intended to ease the pressure on Beijing, the capital city that plans to cap its population at 23 million by 2020. Morgan Stanley expects the investment in infrastructure and relocation to run about 2 trillion yuan ($290 billion) in the first 15 years... It spans three counties. The infrastructure build-out will cover 100 square kilometers initially, expand to 200 square kilometers and eventually occupy a space of about 2,000 square kilometers, similar to Shenzhen in the south now, the government says. It will have 5.4 million people in 15 years and boost China’s investment growth by 0.33 percentage point and its gross domestic product by 0.13 percentage point to 0.19 percentage point per year, according to Morgan Stanley’s base-case estimate.

12. Finally, good FT report on London property market which points out that it is cheaper to buy than rent, as reflected in the lower mortgage payments. But any significant dent on the affordability problem can come only from freeing up more land for construction,   

According to a 2015 report from the Adam Smith Institute, building on just 3.7 per cent of London’s greenbelt would free up enough land for 1m new homes — supply which could end the affordability crisis for many young Londoners.

Internalizing externalities in Solar Power

As the share of solar and renewable power, especially roof-top and other forms of captive generation, rises, one of the less discussed concerns revolves around its impact on the existing distribution utilities. Consider this story about the impact on the electricity distribution companies from the massive investments in solar and bargain hunting in power procurements by the large Las Vegas casinos,

While corporations are motivated to “go green,” their push to be more energy efficient leaves the utility with less revenue to maintain the grid and can lead to rate increases. This can cause what energy market observers call the “death spiral.” “If people are consuming less electricity, revenue for the company is going down, so they raise rates on others. That forces more of them to defect.” says Bill Ellard, an energy consultant and chair of economics for the American Solar Energy Society. “Soon, they won’t have enough money to keep gear, power lines, transmission stations working,” Ellard adds. “We have an old, ancient grid. A lot of power companies are just duct-taping and band-aiding things. Now monopolies like NV Energy are competing with free market innovation, and innovation is not their mantra. You don’t have to innovate when you’re a monopoly.” Meanwhile, corporations that have the wherewithal to move forward without the utility are doing so. This year, MGM expanded the solar array at Mandalay Bay Resort and Casino, making it one of the largest rooftop systems in the country. The 8.3 megawatt array can power the equivalent of 1,340 single-family homes, and can handle up to 25 percent of Mandalay Bay’s energy needs when fully active during the day... 

While MGM and Wynn will buy their electricity from a brokerage, they still need to use NV Energy’s transmission lines and other equipment, and will remain customers of the utility in that regard... NV Energy, the state-regulated energy monopoly, has to serve a diverse group of energy users and makes plans on how to meet demand years in advance. Confronted with increased use of solar power as the systems become more affordable, the company has moved to stabilize revenue. Earlier this year, NV Energy decreased the amount it pays residential owners of solar arrays for excess electricity they send into the grid, causing a public outcry. Eventually existing solar users were grandfathered into the original rate.

There are three problems here. One, consumers who use renewables during sometime of the day and rely on grid power during peak hours pose grid management problems for the utility. Furthermore, they also sell power back to the grid. Two, there is an investment management problem that distribution companies face with planning their future investments in distribution and transmission networks. Then there are also the investments required to support the unknown amounts of potential sales into the grid. Three, the power tariffs, both consumption and sales back to the grid, do not reflect these externalities imposed in grid and investment management. 

It is only a matter of time, as the scale of such transacted power rises, that the commercials of the current business models on roof-top solar and large-scale captive power become questionable. Give-aways like net metering will have to end and replaced with more tariffs that internalise the costs of fixed investments and grid management requirements. 

But distribution utilities cannot afford to relax. This could change with another disruption, that in storage. If it becomes possible to store power at commercially viable price points, as looks likely to happen in the medium-term, then the bargaining power of the utility's consumers increase enormously. 

Leaving aside all these details for a moment, an underlying subtle message that I draw from the churn that is happening in this market is that cost recovery in utility services essentially rests on cross-subsidy. The larger and richer consumers provide both the economies of scale and higher tariff increments that can support commercially viable network-wide distribution. In other words, cross-subsidy in inherent to universal supply of such services. So how will governments respond to this emerging scenario where the richer and larger consumers move away from utilities? 

The value capture problem with greenfield projects

The new government in New Delhi has announced an ambitious urban development program, including the establishment of 100 smart cities to be financed mainly through Public Private Partnerships (PPPs). This may be an appropriate time to step back and examine the challenges with such greenfield investments.

Consider the development of a private township in the sparsely inhabited outskirts of a large city. Once the township develops, the positive externalities from the development drives up property prices in the neighborhood. The property owners in the neighborhood capture most of these externalities and reap windfall gains. In contrast, the township developer, despite being responsible for the value creation, gets little or nothing. Worse still, since he makes most of his sales in the initial stages, the developer captures very little of the massive value creation that comes with the development. In simple terms, he creates value, only to be captured by all others.

Econ 101 teaches us that this is true of most positive externalities. It also tells us that, when faced with such a situation, there will be an under-supply of the activities that create the positive externalities. In the instant case, the developers will be loath to invest in such developments, or in any case unwilling to invest substantial amounts in such projects.

In the circumstances, such socially beneficial projects are most unlikely to emerge from predominantly private investments. Governments are best positioned to undertake such activities. This is all the more so since, unlike the private investors, governments can capture a large share of the value from their investments. And it takes time for the valuations to be realized. Such value capture takes place directly through more property tax revenues, levy of impact fees etc, or indirectly in the form of general tax revenues from the economic activities triggered in the neighborhood. In fact, most often, such revenues are large enough to recover the investments within a very short time.

However, this attractive logic conceals one flaw. Governments do a bad job of project execution as well as capturing value. A purely public procurement based execution is generally badly designed, poorly executed, and badly delayed, thereby raising project costs. Weak or inadequate policy frameworks, exacerbated by lax enforcement, severely limits the value capture from such investments. So what is the way out?

There are no easy answers. Among all flawed models - public procurement, private development, and PPPs - an iterative hybrid appears to be the least distortionary. Front-loaded and progressively declining public investments, strategic partnerships with private developers (not the conventional PPPs), enabling policy frameworks and its rigorous enforcement, and a reasonable sharing of value capture between governments and private partners are some principles that should underpin such endeavors. 

A framework for classifying public officials

The suspension of a young IAS officer in Uttar Pradesh has generated considerable angst and indignation in India. Sub-divisional officers and town planners across the country demolish tens of compound walls each month, under much more communally sensitive conditions, and face commendation of their superiors. For those aware of the working of the bureaucracy, that this demolition has resulted in a suspension is more an indictment of the highest echelons on the bureaucracy (itself consisting of only IAS officers, albeit very senior ones) in the state than of its trigger-happy politicians.

But this incident, and the debate surrounding it, provides an appropriate context to examine the various management styles, personal preferences, and organizational impact of different kinds of officials. The simplest classification and description of officials is based on the honest/dishonest and effective/ineffective framework. I am inclined to believe that with small qualifications, the same holds for all kinds of public officials, not just in India but elsewhere. The matrix below tries to capture it, admittedly in a highly simplified manner, and is self-explanatory.

My three observations from this matrix. One, honest and ineffective officer is as much a liability as the honest and effective officer is an asset. Two, the dishonest and effective officer is the most difficult one to manage, since he is not only helpful and like-able at a personal level but is also growth promoting. Three, while in a second best world, stationary bandits may be the best we can hope for, the scarce positive externality generating official needs to be protected and promoted. 

Traffic management explained

(HT: Atlantic Cities)

Externality taxes should be large enough to be an effective enough deterrent

A tax on substances producing negative externalities is a well-established strategy to control its adverse effects. Accordingly, cigarettes and alcohol, have for long been the focus of attention of fiscal authorities, albeit more as a soft source of raising revenues than as an effort to curb adverse health and social externalities.

Amidst this, one of the less discussed issues have been the extent of taxes required to exercise a sufficient enough deterrent against their excess consumption. Econ 101 teaches us that if the price elasticity of demand for the product is low, then taxation will do little to reduce consumption and will only increase the prices paid by the consumers (since the incidence of taxation is higher on the price inelastic consumer). In the circumstances, for taxes to make a substantial dent on consumption, they need to be raised by a large enough percentage.

In this context, a recent RAND study that estimated the potential effect of soft drink taxes on 7300 children's individual-level consumption and weight by examining differences in existing sales taxes on soft drinks between states, and explored whether small or large taxes were more effective, comes to similar conclusions. They find that "existing taxes on soda, which are typically not much higher than 4 percent in grocery stores, do not substantially affect overall levels of soda consumption or obesity rates". They also find that "reducing consumption for all children would require larger taxes". The authors conculde that "Soda taxes do have the potential to help reduce children's consumption of empty calories and have an impact on obesity, but both their size and how they are structured are key to whether they create measurable impact."

Therefore as David Leonhardt writes in a Times article, "So a small soda tax could actually have a worse impact on some families’ budgets than a substantial one — by raising the price of soda without affecting consumption." He also has this superb graphic, which shows that soda prices have been declining since 1978 relative to overall inflation, as measured by the Consumer Price Index, with prices of carbonated drinks falling 34% relative to all other prices, largely because its cost of manufacturing has fallen dramatically. In contrast, the prices of the average real cost of fruits and vegetables has risen more than 30%.



This finding could have echoes in India too. Have prices of the median variety of cigarettes and alcohol risen slower than that of foodstuffs? Have the costs of producing the former fallen faster than that of producing food? If either are true, and my guess is that they are, then taxes on cigarettes and alcohol should be raised even more so as to exercise a large enough deterrent impact on its regular consumers.

Update 1 (6/6/2010)
Greg Mankiw does not support soda taxes, citing the slippery slope arguement (that such paternalism that seeks to protect us from ourselves can lead to undesirable outcomes).

Update 2 (18/6/2010)
David Leonhardt points to a study published in the American Journal of Public Health which finds sales of sugary soft drinks declined by 26 percent following a price increase of 45 cents — or 35 percent of the baseline price, a clear indication that when the price of soda goes up, consumption goes down. The same has been found true for both tobacco and alcohol.

Update 3 (23/6/2010)
Freakonomics points to a study by Tammo H.A. Bijmolt, Harald J. van Heerde, and Rik G.M. Pieters that have found that consumption of all goods in general drops by about 2.6 percent for every 1 percent increase in price. However, in view of its addictive power, alcohol use is much less responsive to prices, as shown by this review of 132 papers on the topic by Craig A. Gallet, who reported the average study showed that alcohol consumption, over the long term, drops only 0.82 percent for every 1 percent increase in prices. Cigarettes sales are even more insensitive to price hikes.

Update 4 (24/8/2012)

Kevin Callison and Robert Kaestner examined recent, large tax changes, which provide the best opportunity to empirically observe a response in cigarette consumption, and employed a novel paired difference-in-differences technique to estimate the association between tax increases and cigarette consumption. They find,

Estimates indicate that, for adults, the association between cigarette taxes and either smoking participation or smoking intensity is negative, small and not usually statistically significant. Our evidence suggests that increases in cigarette taxes are associated with small decreases in cigarette consumption and that it will take sizable tax increases, on the order of 100%, to decrease adult smoking by as much as 5%.

"Sin" taxes Vs "Yuck" ads!

Public health experts across the world have been concerned at the increasing consumption of sugary soft drinks and holds it partly responsible for the increased incidence of obesity, high blood pressure and heart diseases. Accordingly, policy makers have been relying on two main approaches to reduce the consumption of these beverages - awareness creation through ("Yuck") advertisement campaigns and soda (or sin) taxes.

I have already posted earlier here and here about the benefits of an obesity tax on such foods. The New York City has been running high-visibility anti-soda advertisements that repulsively illustrates the harmful effects of these sugary beverages. And taking cue from how cigarette taxes have helped curb smoking, the Obama administration is considering imposing a soda tax on soft drinks, energy drinks, sports beverages and many juices and iced teas.



While public health specialists support these efforts, economists have been more ambivalent in their responses. Liberatarian paternalists, following the lessons from behavioural psychology, strongly advocate such ad-campaigns and taxes as efforts to nudge people away from consuming these beverages. There are others who argue that taxes will help internalize the external costs imposed by obesity and other harmful effects on health - increased burden on government health care systems (Medicare/Medicaid), social contagion effects of obesity etc. However, libertarian opponents, who favor respect for individual decision-making, argue that people drink beverages because of the utility and pleasure they derive from its consumption. Accordingly, they strongly oppose any government intervention in advising them about what is good for their health.

The case in favor of atleast some form of restraints on consumption of beverages is well established and needs no reiteration. In any case, whatever the arguements against public paternalism and protection of individual's right to indulge himself (to destruction and death if he so desires), the net economic cost inflicted on the society by these individual actions are too large to be ignored. One man's liberty stops where it starts adversely affecting another man's (or society's) liberty.

In the scale of liberty, awareness campaigns are surely on the liberatrian side while taxes would appear to verge on paternalism. However, I am inclined to side with Edward Glaeser in favoring paternalism as the more efficient form of controlling consumption of sugary beverages. Both taxes and instrusive and unpleasant ads seeks to internalize the external costs of consuming these beverages by making it costlier for the consumer. But while the former involves collection of the costs in the form of tax revenues, the latter option ends up dissipating the costs.

In other words, as Prof Glaeser writes, "An effective ad that makes drinking soda less psychologically pleasant is essentially a tax without revenues... The case for taxes and against ads is that if we are going to impose costs on cola drinkers, it is better to get some revenue back." And also, from the experience of the efforts to curb smoking, the "bigger decreases in smoking followed big increases in the tax on cigarettes".

Internalize energy efficiency costs

The proliferation of consumer electronic devices over the past few years has considerably increased electricity usage in houeholds across the world. It is estimated that Americans now have about 25 consumer electronic products in every household, compared with just three in 1980, and that consumer electronics which now represents 15% of global household power demand is expected to triple over the next two decades.



This dramatic increase in the use of electricity consuming devices makes it imperative that there be stricter energy efficiency standards on newer electrical devices. Presently, many of the newer generation of electronic products like flat screen TVs and video game consoles, which are energy guzzlers, have no efficiency standards anywhere.

These are examples of classic negative externalities - in so far as these new generation devices impose a disproportionately larger burden on global energy reserves and the environment. In the absence of regulatory controls, such devices will continue to proliferate and expand at the same or faster pace. Therefore, as with any such negative externality, the solution lies in getting the producers to internalize the full external costs of these devices.

Manufacturers of these devices, who oppose stricter standards on the grounds that it would increase costs and stifle innovation, and its users should be made to fully internalize the external costs by spending resources to improve the energy efficiency and by paying higher prices comensurate with use of cleaner technologies, respectively.

Social contagion and positive externalities

The US National Heart Institute's Framingham Study of the health conditions of 15000 odd residents and their descendents of Framingham, Massachusetts, since 1948, has yielded several interesting results (like identifying the positive role of "good" cholesterol) about the risk factors for heart disease.

Now, the NYT Magazine draws attention to the work of a pair of social scientists, Nicholas Christakis and James Fowler, who used the information collected in the study over the years, to find enough evidence to subtantiate the claim that "good behaviors — like quitting smoking or staying slender or being happy — pass from friend to friend almost as if they were contagious viruses". They argue that clusters of friends (and their behaviours) infect one another's health in both positive and negative ways. Therefore, they claim that good health is not only about about your diet and genes, but also a product of "your sheer proximity to other healthy people".

As a testament to the importance of "social contagion", they found that "groups of people would become obese together, while other groupings would remain slender or even lose weight... When a Framingham resident became obese, his or her friends were 57% more likely to become obese, too... A Framingham resident was roughly 20% more likely to become obese if the friend of a friend became obese — even if the connecting friend didn’t put on a single pound. Indeed, a person’s risk of obesity went up about 10 percent even if a friend of a friend of a friend gained weight."

They also found evidence that smoking too spreads socially — a friend taking up smoking increased your chance of lighting up by 36%, and if you had a three-degrees-removed friend who started smoking, you were 11% more likely to do the same. Drinking spread socially, as did happiness and even loneliness. They framed the "three degrees influence rule" about human behaviour that claims that an individual's influence stretched out three degrees before it faded out.

They rationalize that if a person is seated next to someone who’s eating more or has heavier friends, then he will calibrate his sense of what constitutes a normal meal or what is obese, and will therefore eat more or add pounds. They argue that happiness may result in more deeply "sub-conscious contagion" - "the spread of good or bad feelings might be driven partly by 'mirror neurons' in the brain that automatically mimic what we see in the faces of those around us — which is why looking at photographs of smiling people can itself often lift your mood".

They also find that contrary to conventional wisdom, the key to happiness and good health is not to have a few deep, long-term and heart-to-heart friendship, but lots of friendships of all kinds. The happiest people were those who had the most connections, even if the relationships weren’t necessarily deep ones. When people experience repeated emotional mirroring, their spirits are automaticaly raised by the mirroring of the spirits of their partners.

They find that happiness is more contagious than unhappiness. According to their statistical analysis, each additional happy friend boosts your good cheer by 9 percent, while each additional unhappy friend drags you down by only 7 percent.

However, there are critics who raise doubts about the contagion theory, arguing that it is is too complicated to isolate causal effects in such social issues in an inter-connected society. They point to two specific reasons - homophily and environment - to cast doubts on the work of Christakis and Fowler. The fact that people tend to gravitate towards those similar to or like themselves and shared social and psychological environments too are characterizied by similar networks tend to add to weight to the claims of these critics.

Update 1 (10/11/2010)

Scott E. Carrell, Mark Hoekstra, and James E. West examined data from the random assignment of 3,487 undergraduates to residential groups of about 30 people at the United States Air Force Academy from 2001 to 2005, and found that "poor physical fitness spreads on a person-to-person basis".

Selling negative externalities - ban global arms trade

It is acknowledged that wars impose the largest and most pernicious of negative externalities on the society and economy. And weapons are the instruments to fight international wars and violent internal civil strifes. It may therefore be not too inappropriate to describe weapons as responsible for causing the "mother of all negative externalities".

The NYT reports that US stands alone at the top of the list of global arms sellers, signing agreements to sell weapons valued at $37.8 billion in 2008, or 68.4% of all business in the global arms bazaar, up significantly from American sales of $25.4 billion the year before. Italy was a distant second, with $3.7 billion in worldwide weapons agreements in 2008, while Russia was third with $3.5 billion in arms sales last year — down considerably from the $10.8 billion in weapons deals signed by Moscow in 2007. The increase in US sales comes despite the value of global arms sales in 2008 (at $55.2 billion) declining 7.6% from 2007 and the global economic recession that has adversely affected all other industries. Weapons sales to developing nations reached $42.2 billion in 2008, up from the $41.1 billion in 2007, of which 70.1% originated in the US. The top buyers in the developing world in 2008 were the United Arab Emirates, which signed $9.7 billion in arms deals, Saudi Arabia, which signed $8.7 billion in weapons agreements, and Morocco, with $5.4 billion in arms purchases.

And, as with all negative externalities, the obvious answer to mitigate its effects is to get the sellers (of these externalities) to internalize the costs. Since these wars inflict extensive and too-large-to-quantify human suffering, the obvious solution to internalizing costs is to impose a ban on international arms trade. However, such bans can be effective only when the embargo covers all international trade in weapons.

Given the massive avoidable suffering caused and economic destruction generated by wars, a global ban on arms trade should have been at the top of the list in global multi-lateral discussion forums. I am therefore surprised that it does not compete with climate change and nuclear proliferation as important issues in multilateral negotiations. Should we give credit (for this) to the clout of the global arms industry or the appetite for war within and between nations?

Health care - positive externalities

That basic health care is a public good and provides considerable positive externalities, and will therefore have to be supplied by the government is widely accepted. Now here comes more examples of its positive externalities.

A CEPR study which finds that small business activity to be marginal in the US, considered the home of entrepreneurial capitalism, has provoked various explanations for the surprising finding, prominent being the role of high health care costs in the US.



About the reasons for the low self-employment rates in the US, the study writes,

"One plausible explanation for the consistently higher shares of self-employment and small-business employment in the rest of the world’s rich economies is that all have some form of universal access to health care. The high cost to self-employed workers and small businesses of the private, employer-based health-care system in place in the United States may act as a significant deterrent to small start-up companies,12 an experience not shared by entrepreneurs in countries with universal access to health care."

Paul Krugman makes this interesting punchline, "We’re not independent free spirits; on the contrary, we’re more likely than Europeans to be cubicle rats working for big employers." NYT has this op-ed which makes the case for universal health care and its importance in lowering costs for small businesses. The reforms proposed by the Obama administration like the setting up of health insurance exchanges would enable smaller firms to buy helth insurance plans for their employees at the same cost as larger firms.

Contrast this low level of small business activity in the US with India, whose cities have been found to be teeming with entrepreneurial spirit. Interestingly, here too the absence of additional health care costs for their employees may also be an important contributing factor to the proliferation of small businesses. However, in this case, the government is not bearing the health care burden and there is no clear and enforceable mandate on the employees to do so. In the circumstances, the workers are left to fend for themselves, with profoundly adverse implications for the society and economy as a whole.

Update 1
The US Secretary of Commerce makes his case in support of universal health insurance as beneficial to both small employers and their employees.

Climate change - classic negative externality

For sometime now, it has been widely acknowledged that while the developed economies, led by the US, have been the chief culprits of climate change, its major brunt has been borne by the poorer nations. The Lancet has an excellent density equalizing illustration of the source and victims of climate change for the 1950-2000 period.



The top map illustrates which countries are considered more responsible for climate change - that is "undepleted cumulative CO2 emissions" - and the bottom map shows the countries that will be most harmed by climate change — that is, "the regional distribution of four climate-sensitive health consequences (malaria, malnutrition, diarrhea, and inland flood-related fatalities)".

As the map shows, while the US, W Europe and China are the overwhelmingly biggest culprits, Africa and South Asia bear almost all of the burden. Interestingly, the effect on US, W Europe (and even China) is minuscule as to be almost irrelevant.

Judging by the locations of cause and effect, one could easily describe climate change as the "mother of all externalities" and the classic negative externality. In the absence of any arrangement to internalize these costs, the developed economies have gained at the expense of their developing country counterparts. The Lancet study appears to indicate that the costs on the poorer nations have been far out of proportion by any yardstick.

It would be instructive for someone to study the subsidy reaped by the developed economies by not paying for the costs of their climate change producing actions, and the cost inflicted on the developing countries due to the climate change producing activities of the richer nations. In other words, for the past half a century, the poorer nations may have been paying a "climate change tax" to the richer nations, which they can ill-afford.

(HT: Economix)

Finance and its negative externalities...

... deserves to be taxed! So writes Martin Wolf (via David Leonhardt),

The UK has a strategic nightmare: it has a strong comparative advantage in the world’s most irresponsible industry. So now, in the wake of the biggest financial crisis since the 1930s, the UK must ask itself a painful question: how should the country manage the cuckoo sitting in its nest?...

... The fiscal costs of this crisis will be comparable to those of a big war... Loss of jobs and incomes will also scar the lives of hundreds of millions of people around the world. All this occurred, in part, because institutions replete with highly qualified and highly rewarded people were unable or unwilling to manage risk responsibly.

[W]hat framework is needed to ensure that the operation of the financial sector is compatible with the long-run health of the UK and world economies? Quite simply, the sector imposes massive negative externalities (or costs) on bystanders... So how should one manage a sector that produces such 'bads'? The answer is: in the same way as any polluting activity. One taxes it.

And about the way ahead for Britain (and this applies for other economies), he has five recommendations - global regulation to prevent regulatory arbitrage; ensure that owners and managers of financial institutions internalise most of the costs of their actions; reject egregious special pleading (on the pretext of maximizing innovation) from the industry; diversify the economy away from finance; and ensure that the risks run by institutions they guarantee fall within the financial and regulatory capacity of the British state.

IPL - A case of externalities unaccounted for?

I am an inveterate fan of cricket, so don't get me wrong on this. There seems to be something wrong about the economics of holding cricket matches in India.

The uncertainty and debate surrounding the holding of Indian Premier League (IPL) cricket matches during the time of general elections in India throws up a few interesting issues. Amidst the debate about national pride, the ability of Indian state to provide security against terror attacks, the relative importance of cricket and elections, and a host of other issues, it is often overlooked that that big cricket matches (tests, one-dayers, T-20, and even exhibition events) have substantial externalities that make these events effectively public functions/events.

It cannot be denied that international cricket matches have long since ceased to be mere private commercial events organized by a private sporting body (the Board of Control for Cricket in India or BCCI) and viewed by ticket paying audience. Hidden from public view is the fact that cricket matches involve massive mobilization of logistics by the local administration. Everything from medical care and sanitation, provision of drinking water, arranging parking facilities (in most venues), and police bandobust to avoid stampedes and security at the stadium become the responsibility of the district administration. Massive numbers of police and other personnel are mobilized for the smooth conduct of these matches. The heightened security dimension only adds to the responsibilities of the state. That most states have demanded central paramilitary forces to assist them in conduct of the IPL games this year, is a testament to the extent of security force mobilization that is required.

In other words, cricket matches generate substantial externalities, whose costs are most often borne by those other than the organizers. As with all such externalities, the incentives get distorted if their costs are not internalized. The present confusion surrounding the IPL is a classic example of how the distortions in incentives can produce undesirable outcomes. The scheduling of the IPL matches in April-May period, despite the prior knowledge that general elections would be held at the same time, came naturally to the organizers since they were indifferent to the costs of such a decision.

After all, security and the other massive logistics were externalities to be borne by someone else. In fact, security and other external concerns are rarely under consideration when the organizers schedule the fixtures, which are then presented as a fait accompli to the local administration. If the costs of holding a cricket match were internalized, the organizers would have had to account for the heightened security concerns and take decisions after due consultations with the government.

Further, internalizing the costs of holding cricket matches includes not only paying user charges for the services utilized, but also arranging adequate parking facilities, providing good quality seating and other facilities to spectators, other public utility logistics within the stadium etc. Given the revenues generated by the sport and the huge commercial interest (after all if there were no money, businesses would not bid spectacular sums for IPL players), it is imperative that these external costs are internalized.

It is not for nothing that the local cricket associations in most bigger cities are headed by either the District Collector or Superintendent or Commissioner of Police. This, mutually beneficial arrangement (wherever the official is a cricket fan), effectively co-opts the local government administration into the cricket establishment, thereby blurring the lines between the public and private dimensions of holding a cricket match. The generous doling out of VIP passes and box seats to opinion makers takes the sting out of any major public opposition to the huge costs imposed on the public exchequer by cricket matches.

We need to bear in mind that while the players on the field play cricket and provide public entertainment, and that too for a price paid by each member of the audience, what goes outside the field is a commercial activity, more so in events like the IPL. It is unfair on the society at large, especially those not enamoured by the game, to let the private organizers of such events free-ride on public resources.

Positive externalities of porn industry - case for bailout!!

Chris Dillow makes a case in support of Larry Flynt's (he has approached the US Congress with a $5bn bailout request, to "rejuvenate the sexual appetite of America") request for Government bailout of the porn industry.

Dillow calls porn, a "strategic industry", the "driving force" behind many technologies like the "triumph of VHS over Betamax tapes, cable TV, and broadband (an illuminating article about this is available here). In fact, it has been claimed that internet porn has been one of the biggest contributors towards generating the "network effects" (by getting more and more people hooked into computers) that have made computers (and even books in England and Italy, as indicated here) so successful as a technology. It also creates skilled workers for other industries; countless actors and cameramen have moved from porn to mainstream TV and film work."

It has also been claimed that sex has been a major source of comfort during the recession. Battered bankers and finance sector professionals have been seeking solace from the turmoil, by relying on the sex industry (apparently more for comfort that for any actual sex). If this is true, then there is a case for supporting the sex industry, so as to atleast keep the beleaguered society in good mental health!

In other words, it appears that, contrary to conventional wisdom (or am I wrong?), pornography has classic positive externalities, which if not supported by government, is likely to be undersupplied by the market!! Dillow should have the last word, "When we think of the great iconic images of America, what comes to mind? Surely, tits and arse more than cars. After all, no car has ever been elected to high office, but plenty of arses have. So, surely, isn’t the case for bailing out the porn business at least as strong as that for bailing out the motor industry?"

LoJack for tracking stolen goods!

LoJack is small, hidden radio-transmitter device, embedded inside cars, and that can be activated after your car is stolen and therefore used to track down stolen vehicles. As Ian Ayres and Steve Levitt showed, LoJack's utility lies in the large extent of positive externality it delivers. Uncertain about whether the car they are stealing contains LoJack, car thieves become wary, thereby reducing such crimes and also protecting cars without LoJack.

The concept behind LoJack can be used to protect any valuable good from theft. As Freakonomics writes, The University of Washington has just released a free program, Adeona, that will track your laptop if it’s stolen. If the program is installed on a computer with a built-in camera, it will even send you a photo of the thief at the keyboard.

Given the large positive externalities associated with them, LoJack type tracking systems, will be under supplied by the market. It is therefore appropriate for governments to incentivize the erection of such systems.