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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.


Contradictions In Selective Immigration Policy

Contradictions In Selective Immigration Policy06/01/2010

Posted by opemipo3655 in ImmigrationPolicyPolitics
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Chris Dillow (Stumbling and Mumbling) has a good post on the dilemma between immigration which doesn’t depress domestic job prospects and immigration which maintains social cohesion.

Chris Dillow: What Sort of Immigrants?

Lord Carey’s remarkson immigrationraise an issue for those who favour immigration controls: is there a trade-off between the immigrants you want on economic grounds, and the immigrants that would promote social cohesion?

Here’s what I mean. From the point of view of the labour market, we want immigrants who are as unlike us as possible. We want people with different skills and tastes from us, who’ll do jobs that we can’t or won’t do. These sort of people don’t compete with us in the labour market and so don’t threaten “our” jobs and wages.

However, from the point of view of social cohesion, we want people just like us, those who share our values. 
Isn’t there a contradiction here?

You might think not. It’s quite possible that people can differ from us in labour market aspects and yet share our values in other respects.

Possible, but not certain. Indeed, some research has found that, among Muslims, labour market success is associated with stronger religious views. In this respect, immigrants who are good for the economy are bad for social cohesion: Kafeel Ahmed, who died trying to blow up Glasgow airport, was the sort of highly-qualified man who appeared to be an ideal economic migrant.

You might think the solution to this dilemma is simple: we should simply stop trying to pick and choose who enters the country.

True. But I fear instead that it has another implication. It implies that opposition to immigration will always be with us. If immigrants were just like us, Carey and his like would moan about how they are depressing the job prospects of indigenous workers. And if immigrants were so different as to not jeopardise indigenous wages or employment, they’d moan about them being different, not sharing our values, or creating uncertainty amongst native people.

Hostility to foreigners will always exist. All that changes is the shabby nature of the justification for it.


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.



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