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January 11, 2010

Government Action To Reduce Externalities

Government Action To Reduce Externalities11/01/2010

Posted by opemipo3655 in Economic PolicyEconomicsEfficiency,ExternalitiesPolicyPollutionPublic GoodsSocial Justice
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We all know the feeling: You’re on your way to an important business meeting (even a job interview) and then you end up stuck in a traffic jam. An hour later, you’re already late and you find out that the disruption was caused by some company digging up the roads. Then you think to yourself “Deja vu! I could have sworn traffic was held up by another road-digging crew yesterday, and the day before.” (NB: I don’t know the feeling, I don’t drive and I live on campus at university and secondly, WHY ARE YOU DRIVING IN LONDON? Tube, bus, maybe bike- but then I forget that you can’t be seen on the modes of transport of the masses even if it means sitting for such a length of time that you get a clot the size of your heart… IN YOUR LEG[Sorry for complaining, I understand perfectly]).

This is an example of a negative externality. Negative externalities occur when the market does not lead to the socially optimum price level and output level. Negative externalities arise when the private costs of a good are lower than the social costs (private costs+external costs) leading to a lower price level (as only private costs are recognised by the market) and thus to overproduction of a “bad” which leads to inefficiency and reduction in public welfare (does harm to society or reduces the overall good to society of having cars).

In this case the social costs would include the business deals or jobs that would be lost if everyone that was held up was late to work, their job interview or their meeting and can be estimated quite easily (I won’t) in monetary terms; this is the opportunity cost (to society) of sitting in a car for four hours instead of working. Other social costs include the pollution (smog, CO2 and other gases) from thousands of idly-running cars everyday; affecting the health of those in the area (passengers, drivers, pedestrians, road-diggers, those who live nearby) as well as contributing to climate change; and noise pollution. Even though these costs are quite difficult to estimate monetarily, it doesn’t mean they don’t matter, we shouldn’t try to,  or that it is impossible to. For instance, costs of pollution can be estimated from the costs to treat or cure people who get respiratory problems mainly explained by constant exposure to gases emitted from vehicles.

One way to reduce social costs is for regulators (usually government) to do their job and regulate. Issuing directives on the amount of CO2 and other gases that cars can emitforcing manufacturers to produce less emitting cars and more efficient ones; banning the use of leaded-petrolwhich emits lead (lead poisoning) into the atmosphere; even possibly, requiring manufacturers to make sure their cars are not louder than X decibels.

Another way of reducing externalities (which I think is more efficient as it works through the market) would be for government to raise the private costs of the good to meet the social costs so that the new market equilibrium is at the point where social costs equals social benefits (socially optimum point). This can be done by the government taxing goods with externalities; the new car tax bands are an example- car taxation based on CO2 emittedby the car aiming to make people buy less emitting cars.

I first heard the term social engineering used to describe this type of government intervention some days ago in this Robert Frank NYT article(he writes about global warming, but the theme is transferable) which is unsympathetic to that view and tries to show that it is not a crime against individual liberty to tax harmful goods that some people gain satisfaction from consuming (h/t Mark Thoma):

…Although both proposals pass muster within the Coase framework, conservatives remain almost unanimously opposed to the cap-and-trade proposal approved last year in the House… Much of this opposition is rooted in a passionate distaste for “social engineering”…

But social engineering is just another term for collective action to change individual incentives. And unconditional rejection of such action is flatly inconsistent with the Coase framework that conservatives have justifiably celebrated. …

In the case of global warming, markets fail because we don’t take into account the costs that our carbon dioxide emissions impose on others. The least intrusive way to have us weigh those costs is by taxing emissions, or by requiring tradable emissions permits. Either step would move us closer to the conservative/libertarian gold standard — namely, theoutcome we’d see if there were perfect information and no obstacles to free exchange.

Finally, back to the issue I started with. There was an article in the Guardianabout plans for the government to price and coordinate the road-digging/traffic disruption timetable in London (SHOCK, HORROR- GOVERNMENT) so as to reduce disruption and Londoner’s frustration. “Oh, I thought the government caused the disruption with too much regulation just like it causes everything?” No the private utilities did because they could. No regulation and no costs meant they could dig up the roads whenever they felt like it.


Summary of “History of Now: The Story of the Noughties”

Summary of “History of Now: The Story of the Noughties”06/01/2010

Posted by opemipo3655 in Uncategorized
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I really enjoyed watching thisyesterday on the BBC and the Demos blog has a very good summary of the programme.

According to Julia Margo, Director of Research at Demos, “Age is to the C21st what social class was to the C20th. It’s one of the major fault lines in our society”. She appeared on the BBC’s History of Now: The Story of the Noughtieson Tuesday night, delivering a bleak picture of the gap between where young people in their teens and early twenties thought they would be, and where they found themselves at thirty.

With the recession hitting young graduates hardest, this disparity will probably amplify. It’s a bitter pill for the children of the good-time ‘baby boomers’ who enjoyed an expansion in university education – bolstered by grants – adding to the growing of the middle class. Their degrees counted for something and they entered jobs and finished them with final salary pensions. They rode the wave of the property boom and are now enjoying living their retirement to the full, spending their cash on foreign travels and grown-up gadgets with a grown-up price tag.

The programme was critical of the baby boomers and their quest to be the Peter Pan generation, refusing to let go of youth culture by adopting gadgets like the micro scooter and clinging on their teenage rock heros with paying through the nose to see them at the O2 arena. On the other hand, Generation Y are struggling to get jobs and loaded down with student debt. They will be in their thirties before they are even able to get on the property ladder, let alone think about having children.

The Guardian’s Economics Editor Larry Elliott commented “If you think about what’s happened to young people … it is somewhat surprising I think that young people aren’t angrier than they are about this.”

And here the contradiction lies: society is critical of older generations for being ‘middle youths’ but critical of the recession-hit younger generations for not wanting, or not being able, to follow in their footsteps. It’s a mark of maturity that younger generations aren’t having a tantrum over their lost ‘entitlements’. So perhaps as well as the age divide, a History of Now has shown an attitude divide – between generations that never want to grow up, and generations that are forced to do so.


Google’s Monopoly Power And A Rant

Google’s Monopoly Power And A Rant30/12/2009

Posted by opemipo3655 in Attempts at HumourBusinessCompetition Policy,EconomicsGoogleMarket ContestablityMarket StructuresMarkets,MonopolyMurdochNews CorporationNewspapersNewspapers vs Internet
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Mark Thoma:

It is not illegal to have monopoly power, but there are limits on how that power can be used. Has Google crossed over the line?:

Search, but You May Not Find. by Adam Raff, Commentary, NY Times: …Today, search engines like Google, Yahoo and Microsoft’s new Bing have become the Internet’s gatekeepers, and the crucial role they play in directing users to Web sites means they are now as essential a component of its infrastructure as the physical network itself. The F.C.C. needs to look [at]… “search neutrality”: the principle that search engines should have no editorial policies other than that their results be comprehensive, impartial and based solely on relevance.

The need for search neutrality is particularly pressing because so much market power lies in the hands of one company: Google. With 71 percent of the United States search market (and 90 percent in Britain), Google’s dominance of both search and search advertising gives it overwhelming control. …

One way that Google exploits this control is by imposing covert “penalties” that can strike legitimate and useful Web sites, removing them entirely from its search results or placing them so far down the rankings that they will in all likelihood never be found. For three years, my company’s vertical search and price-comparison site, Foundem, was effectively “disappeared” from the Internet in this way.

Another way that Google exploits its control is through preferential placement. With the introduction in 2007 of what it calls “universal search,” Google began promoting its own services at or near the top of its search results… Google now favors its own price-comparison results…, its own map results…, its own news results…, and its own YouTube results for video queries. And Google’s stated plans for universal search make it clear that this is only the beginning.

Because of its domination of the global search market and ability to penalize competitors while placing its own services at the top of its search results, Google has a virtually unassailable competitive advantage. And Google can deploy this advantage well beyond the confines of search to any service it chooses. Wherever it does so, incumbents are toppled, new entrants are suppressed and innovation is imperiled. …

The preferential placement of Google Maps helped it unseat MapQuest from its position as America’s leading online mapping service virtually overnight. … Without search neutrality rules to constrain Google’s competitive advantage, we may be heading toward a bleakly uniform world of Google Everything — Google Travel, Google Finance, Google Insurance, Google Real Estate, Google Telecoms and, of course, Google Books.

Some will argue that Google is itself so innovative that we needn’t worry. But the company isn’t as innovative as it is regularly given credit for. Google Maps, Google Earth, Google Groups, Google Docs, Google Analytics, Android and many other Google products are all based on technology that Google has acquired rather than invented. Even AdWords and AdSense … are essentially borrowed inventions…

Google … now faces a difficult choice. Will it embrace search neutrality…? Or will it try to argue that discriminatory market power is somehow … harmless in the hands of an overwhelmingly dominant search engine? …

Thoughts (just on the search engine market):

Why did Google then acquiesce to Murdoch’s demands for charging when linking to his sites (five free links then you are directed to the payment page)?Probably because the internet search engine market isto a large extentacontestable market; even though there is a dominant firm (Google), other firms are in market (Bing which also powers Yahoo! Search is the major one)who can gain market share from Google by making a deal with Murdoch to become the sole search engine for News Corporation whose size cannot be sniffed at. [Wall Street Journal(US), Fox (US & Australia), The Times(UK), The Sun(UK), Sky (UK) among many others. It is important to remember that News Corp is not made up of only newspapers, it is a complete media conglomerate (world’s 3rd largest in entertainmentand 2nd largest media conglomerate)].

It is not a contestable market due to the high entry costs (servers, staffing, massive computers etc); they will also need massive advertising campaign(s) to even register in public consciousness which is difficult on its own but also adds to entry costs. This means that there can be no credible threat of entry into the market except if an already large (preferably IT) company decides to set up a search engine (though costs could still deter them).

I’m not completely sure which would suffer most if Murdoch decided to make Bing the only search engine that can “find” News Corp material. I think, however, that Google is big enough and so much ingrained in the public’s mind, that any “war” with News Corp would not affect it. People are satisfied with Google, with it achieving a score of 86 out of 100 in a study and its closest rival Yahoo! on 77. Also I read somewhere (I can’t find it now), that the majority of readers don’t stick with one newspaper website but tend to go with whoever has a story (nowadays everyone has the same story, if you restrict it in any way, people will get it from somewhere else). That is, they might hear about a story, type it into a search engine and go to any of the sites that has the story. This suggests that if for instance, readers don’t see The Washington Postor The Sunor The Timesin a Google search (which has 71% and 90% of the market in the US and UK respectively), or they have to pay for it, then they will read it from somewhere else; The New York Times, BBC, and the Guardianwhich are all free (I haven’t seen any indication that they want to begin charging). I imagine that if these were the sort of readers that compose the majority of  News Corp publication’s readers then this will affect News Corp’s advertising potential and revenues and finally its profits (ceteris paribus). This may change in the future if Bing becomes the major search engine, but in the short to medium term at least News Corp would lose.

My view on newspaper charging (for now) is that it will not work without cooperation among the media moguls (and their egos) and some very harsh laws on copying from web articles and news networking. If there is no cooperation it will fail for anyone that moves unilaterally to a pay-for-news model. Even if there was cooperation among the ‘old-world’ print news media, they would have to contend with internet-only operations which don’t seem to have the same vision of the future of journalism such as Politicoand The Huffington Post,which has a rather good Dumbest Quotes of the 2000s.Why is it that you only get these sorts of sites in the US and not here in the UK? (Are we more in awe of the gentleman journalist?). Without cooperation people will change allegiance to the free papers. In less than a year I changed from reading to The Daily Mail (sorry), to The Timesand finally The Guardian all before my 18th birthday and I was paying for the papers.

They would also have to find and kill a lot of bloggers to stop them stealing what their journalists have wrongly reported. It could become the next witch-hunt after middle-easterners. Jack Bauer torturingusing “enhanced coercive interrogative techniques” on bloggers; 

“ “42 DAYS” MAKES CRACKING TV, THE PAST 2 YEARS HAVE SHOWN THAT WE HAD THE BEST SYSTEMS ALL ALONG; ECONOMIC AND CIVIC” The Beijing Record;

“5 STARS FOR FOLLOWING WHERE WE LEAD” Tehran Daily;

“DARN RIGHT. PUT THEM THERRE RED FLAG WAVING-AMERICA HATING-LIBERALS IN THERRE GUANTANAMO BAY… OUR COUNTRY WAS FOUNDED ON FREEDOM AND RIGHTS NOT COMMUNISM WHICH ONLY BRINGS YOU NAZISM… DEATH TO DARKIES”The Hillbilly.*

If people get a cheaper deal (free) when they change their allegiance (if they have one) then the pricing scheme will fail woefully as it will lead to lower site traffic and lower advertising revenue

So, my advice to Google, as a Business Consultant par excellence/ first-year student is “Screw Murdoch, what’s he gonna do? Bite you?” To which I will get laughed out of the building, rolling in a trash can.


* I did do a Google Search for these names and nothing came back. If your publication is any of them, my sincere apologies for the unintentional coincidence... seriously.



"The Fairness of Financial Rescue

“The Fairness of Financial Rescue”30/12/2009

Posted by opemipo3655 in Economic PolicyEconomicsFinancial Rescue,Great RecessionRecessionSocial Justice
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Brad DeLong (HT Mark Thoma- Economist’s View)

The Fairness of Financial Rescue, by J. Bradford DeLong, Commentary, Project Syndicate: Perhaps the best way to view a financial crisis is to look at it as a collapse in the risk tolerance of investors in private financial markets. … [W]hen the risk tolerance of the market crashes, so do prices of risky financial assets. … This crash in prices of risky financial assets would not overly concern the rest of us were it not for the havoc that it has wrought on the price system… The price system is saying: shut down risky production activities and don’t undertake any new activities that might be risky.

But there aren’t enough safe, secure, and sound enterprises to absorb all the workers laid off from risky enterprises. … Ever since 1825, central banks’ standard response in such situations – except during the Great Depression of the 1930’s – has been the same: raise and support the prices of risky financial assets, and prevent financial markets from sending a signal to the real economy to shut down risky enterprises and eschew risky investments.

This response is understandably controversial, because it rewards those who … bear some responsibility for causing the crisis. But an effective rescue cannot be done any other way. A policy that leaves owners of risky financial assets impoverished is a policy that shuts down dynamism in the real economy.

The political problem can be finessed: as Don Kohn, a vice-chairman of the Federal Reserve, recently observed, teaching a few thousand feckless financiers not to over-speculate is much less important than securing the jobs of millions of Americans and tens of millions around the globe. Financial rescue operations that benefit even the unworthy can be accepted if they are seen as benefiting all – even if the unworthy gain more than their share of the benefits.

What cannot be accepted are financial rescue operations that benefit the unworthy and cause losses to other important groups – like taxpayers and wage earners. And that, unfortunately, is the perception held by many nowadays, particularly in the United States.

It is easy to see why.

When Vice Presidential candidate Jack Kemp attacked … the Clinton administration’s decision to bail out Mexico … during the 1994-1995 financial crisis, Gore responded that America made $1.5 billion on the deal.

Similarly, Clinton’s treasury secretary, Robert Rubin, and IMF Managing Director Michel Camdessus were attacked for committing public money to bail out New York banks that had loaned to feckless East Asians in 1997-1998. They responded that they had not rescued the truly bad speculative actor, Russia; that they had “bailed in,” not bailed out, the New York banks, by requiring them to cough up additional money to support South Korea’s economy; and that everyone had benefited massively, because a global recession was avoided.

Now, however, the US government can say none of these things. Officials cannot say that a global recession has been avoided; that they “bailed in” the banks; that – with the exception of Lehman Brothers and Bear Stearns – they forced the bad speculative actors into bankruptcy; or that the government made money on the deal.

It is still true that the banking-sector policies that were undertaken were good – or at least better than doing nothing. But the certainty that matters would have been much worse under a hands-off approach to the financial sector, à la Republican Treasury Secretary Andrew Mellon in 1930-1931, is not concrete enough to alter public perceptions. What is concrete enough are soaring bankers’ bonuses and a real economy that continues to shed jobs.


University Tuition Fees (Thoughts On Public Good Provision)

University Tuition Fees (Thoughts On Public Good Provision)27/12/2009

Posted by opemipo3655 in EconomicsEducation PolicyExternalitiesPolitics,Public GoodsRedistributionSocial JusticeUniversities
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David Blanchflower (former member of the BoE Monetary Policy Committee [MPC]) thinks richer students [students who have rich parents] should pay tuition fees more in line with the market price for education (Link). That is closer to the £30,000 paid by Ivy League students in the US (elite private colleges eg. Harvard, Dartmouth). He wants the cap on tuition fees to be raised from £3,225 p.a. so that better-off students are charged more while (or so that?) financial aid is given to students from poorer backgrounds. An analysis can be found here.

This comes against the backdrop of the government’s decision to claw back £135 million on top of the £180 million savings they had to make over 18 months (a favourable analysis based on the incentives for innovation it gives to universities can be found here) as well as the funding review which is expected to recommend an increase in tuition fees.

Education as a (net) Public Benefit

It must be noted that university education has significant positive externalities (social benefits). For instance, if a significant amount of a country’s labour force is university educated,the growth potential of the country should increase. This is because the workforce becomes more productive; being able to produce more with the same resources- a better educated workforce is better able to generate innovations in production and administration which improve productivity. A better educated workforce also increases the flexibility of the economy- if and when a sector of an economy fails, the workforce can transfer quicker to another sector if they are well educated as it takes a shorter time to train [This is very simplistic and requires elastic demand for labour in all other sectors of the economy so wages do not fall and the extra supply of labour can be absorbed]. Flexible economies tend to be resilient to shocks as easy movement of resources to sectors with the best potential for growth works against shocks in any sectors. [Resilience does not mean that recessions or sector failures will not occur, it just means that even if they do, the economy is able to bounce back quicker and stronger than in a less flexible economy].

When looked at with this background, I think it should be plain to see that increased participation in university education (meaningful degrees) should be encouraged and indeed facilitated, for the public good, through loans, grants and price caps among others (as the UK has been doing so far- Thank you, Britannia and Labour of course). This has led to an increase in government university funding of 25% over the last decade. However, with the revenge of the CDO economic crisis , government bailouts and fiscal stimulus we have reached a political equilibrium on spending somewhere between savage cuts now or savage cuts later. This has led to the aforementioned cuts and savings in university funding.

With cuts in funding I think it’s only fair that richer members of society should pay a higher price for education so as to subsidise the less well-off. This could leave the amount of “university education” (a good) the same or even raise it from the level it would be if the cuts were imposed at the same time as a rise in tuition fees as these would lead to a fall in participation by students from poorer backgrounds. As a reduction in a public good is harmful (leads to an efficiency loss) to society, anything that would leave the good demanded (and supplied, although this would have to be brought about by other means) unchanged or could raise it is useful.

I think this is a good argument for subsidising poorer students by richer students (I might be biased right now). However, it loses all weight if you’re a fiercely individualistic libertarian (“No such thing as society”- M Thatcher). Then you would believe that whatever is yours cannot and should not be used by others for anything other than your good so you should not be subsidising anyone (Read Nozick’s ‘Anarchy, State and Utopia’ for reasons why whatever you own is fairly yours if it has been traded legitimately etc. as well as arguments against redistribution). However, I believe that part of what makes us human is our ability, even our need to work together and help each other for the good of the collective. Now, while I do not dispute that what everyone owns is theirs and they should be left alone to enjoy it, I do think that the source of everything we own or will own can in some way be traced back to the society we live in, be it respect for property shown by others who do have incentive to steal what we own or the maintenance of the rule of law by the state. In most countries, public provision of primary and secondary education, maintenance/ provision of education standards in both public and private institutions by government and even (until recently in the UK) free university education through grants also show that at least part of what we own cannot be attributed to our individual genius. With this in mind, I think that the haves should help the have-nots so as to improve social welfare (which benefits all).


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