Media funding, prizes and public goods

The government's paid $50m to help shore up newsmedia companies' finances during Covid.

But the overall media funding problem is bigger than the current Covid mess.

I went through things in a bit more detail in Newsroom last week (ungated here). Too many news types want to find ways to have the government strongarm tech companies into rebuilding the old advertising-based funding model that worked until the 2000s - it's basically nostalgia for an era that just won't come back.

But where we wouldn't see any need to support buggywhip manufacturers against the rise of the car, there are reasons to expect the optimal amount of journalism is higher than we might wind up with where the personal benefits of being informed aren't all that high. 

I talked about it all with Jesse Mulligan yesterday afternoon on RNZ.

But you can get the nut of it from this snip from the piece at Newsroom.

That would not be a problem on its own. But there are reasonable ‘public good’ aspects to a thriving news sector. If an investigative journalist exposes a city councillor’s corruption, the benefits extend far beyond that newspaper’s subscribers being better informed. Worse, the benefits of being better informed have always been just a little ephemeral.

Sure, there is prestige in being able to hold one’s own in conversations about current events, but most of us really could ignore almost everything that’s going on in politics, and in policy, and in sport, without really noticing the loss.

It is then no surprise that the most typical findings of the academic literature on voter knowledge are that voters know very little.

This is hardly a new phenomenon. Even in the heyday of journalism, in 1964, well before the great decoupling of newspapers from classifieds and other advertising, only 38 percent of surveyed Americans knew that the Soviet Union was not a member of NATO – despite that the Cuban Missile Crisis had almost brought the powers to nuclear war only two years earlier.

And so we get to the nub of the problem. For most people, there is little personal benefit in getting the kind of information provided by serious journalists. So there is less effective demand for news than would be ideal, both because serious journalism directly provides benefits in democratic accountability, and because a better-informed voter base is likely to yield better outcomes at the ballot box.

There are two basic ways of trying to solve the problem. News producers could be directly subsidised, whether by philanthropists or by taxpayers. Or the rewards for being better informed could be strengthened. Let’s take each in turn.

Last year, the Stigler Center for the Study of the Economy and the State’s Final Report on Digital Platforms suggested taxpayer-funded vouchers could help fund news. Under this scheme, each adult would receive a $50 voucher to be used as a donation to their favourite news outlet. The proposal has a lot of advantages over other forms of state-funding. Rather than the Government or a panel of anointed experts doling out the money, individuals would reward outlets they most wish to support.

The proposal is interesting. The authors have thought through most of the obvious objections. But while the scheme would help reward the investigative journalism so important for democratic accountability, it would not do as much to encourage people to read the stories.

There is another way of encouraging people to pay a bit more attention to the world around them.

Growing up in Canada, radio stations often ran contests where they would phone someone at random and give them a prize if they could name the song the station had just played. It encouraged people to pay a bit more attention.

Imagine if the Government allocated $36.5 million to a prize pool. Every day, the editors of the various news outlets overseen by the Media Council would submit skill-testing questions drawn from the more important stories they had recently produced. Every day, some lucky Kiwi would get the phone call promising a $100,000 prize for successfully answering one of the questions of the day – with calls continuing until someone got the prize.

Suddenly, knowing what’s going on would matter for more than just water cooler kudos. Even if the odds of getting the call were low, the pain of getting the call and not knowing the answer would encourage paying attention to current events. That would help to drive subscriptions to the news outlets providing the news and build a better-informed electorate.

That seems more promising than letting the Government adopt mafia-style standover tactics to force tech companies to fund journalism.

Uplifting?

I'm not sure quite what I was expecting out of NZ First's Regional Growth Fund, but it wasn't this. From Richard Harman's Politik newsletter (well worth the subscription):

Regional Economic Development Minister Shane Jones has announced Provincial Growth Fund (PGF) support for a new 560-tonne travel lift for Oceania Marine Group. The new lift will better serve the growing demand for refit and building services of workboats and superyachts and will help fund civil works at South Shipyard – including new piers, hardstand reinforcement and other works. "The PGF will support this important investment with a loan of up to $4.8 million, and further discussions are taking place on terms and conditions” Shane Jones said.   

I'd thought the fund was for public infrastructure stuff that might enable regional growth, and maybe for helping out councils having to shell out for facilities for tourists who don't spend much in the area.

I don't get the justification for this one. Why is the government subsidising outfits fixing superyachts? Is there some failure in credit or capital markets that's specific to boats? Why aren't private investors seeing the opportunity and rushing to fund the project? Don't owners of superyachts pay fees for service that could cover the cost of the lift over time?

I hope that due diligence around this stuff is tight....

Afternoon roundup

Today's worthies:

• Cabinet has not yet produced a cabinet paper on the Taranaki oil ban, and Simon Bridges says that the government instructed officials not to provide advice on the ban. Even if you think that 'doing something about climate change' was part of a Labour/Green political mandate, wouldn't it make sense to make sure that whatever is done is the thing that can most cost-effectively abate emissions? If Bridges is right that the government instructed officials not to provide advice, can there be any good reason for that instruction? The most obvious explanations are not good. 


• Kiwisaver provider Simplicity runs a very low fees model that is very attractive. But not one that's attractive to me, since they seem to have very strong non-return preferences baked into their model. If tobacco, gambling, oil or porn stocks started looking like attractive investment options, would they change their mind about the ban? 


• The government's looking to repeal the three-strikes legislation. Farrar points out that three-strikes policy is fairly popular, but I'd be surprised whether people remember come 2020 unless crime figures become salient. I rather liked New Zealand's legislation, and especially in comparison to American examples. The point of three-strikes, from an economic perspective, is to maintain marginal deterrence. In short, you need a stronger expected formal penalty for a second offence or third offence than you do for a first offence to achieve the same deterrent effect. Why? Because the first offence comes with a giant informal "Now you have a criminal record and a whole pile of things you thought you could do with your life are now going to be very very hard" penalty. That informal penalty's sunk after you've got the first conviction, so you need a stronger formal penalty for the later offences. And where California induced problems by having the same harsh penalty for second and third strikes across broad classes of offences, New Zealand maintained proportionality by linking everything to the sentence-specific maximum penalty. But, all that said, I doubt there'll be any particular effect on crime. There were just too many high profile cases where judges thought any application of the strike penalties was unjust, and so invoked their discretion (in my view) inappropriately. If folks don't expect the penalty will be applied because the judges won't apply it, the law's useless even if it's great in theory. 


• Is there any simpler explanation for the meth-mess than that Housing New Zealand had excess demand for houses and using an insanely sensitive hair-trigger for evictions let them free up some houses? Plus the usual stories around how agencies are more likely to be punished for not being sufficiently risk-averse than for being too risk-averse? 


• And, finally, some good news. Catherine Healy is now Dame Catherine Healy. She heads the New Zealand Prostitutes' Collective and helped see prostitution legalised in 2003. And how can you not love a union that, on seeing abuses of migrants on temporary visas illegally working in the sex industry, argues for legalising their work too instead of having more labour inspectors going around to deport competitors? America's ahead of us on marijuana reform, but we're miles ahead on this one. Too many Honours go to career public servants whose main merit was having diligently undertaken their day-job for 40 years. This one isn't like that. 


• David Friedman at Oxford Union on market failure. HT: Jim Rose.  

Rental rationing

Louis Houlbrooke has an eye for interesting questions.

The crazy thing about the current rental squeeze: queues outside flat viewings suggest that landlords are *under-pricing* flats. We're still early in the student season, how long before landlords reading the news savvy up and hike rents further?

— Louis Houlbrooke (@louishoulbrooke) January 16, 2018

Why wouldn't rentals simply clear on price?

The credit rationing literature points to one potential answer. In that literature, the market for loans doesn't clear just on interest rates because the people willing to borrow at the highest rates know that they're very risky types. So instead you get interest rates a bit below what would otherwise clear markets and lenders choosing among applicants to get borrowers who are good bets.

Application to rental markets? Suppose it's hard to evict a bad tenant. It'll take a long time, it'll be a hassle, and the tenants might destroy the place while you're going through the tenancy tribunal. If you set a high price and if it's hard to monitor and police what's going on in the flat, you might have problems. The high bidder might be the one expecting this to be a short-term game.

Landlords would want to evaluate a potential tenant's bid across a pile of hard-to-specify and possibly illegal-to-specify (but impossible to police unless you're dumb enough to write it in the ad) non-price margins. If you want that, you want to have excess demand at the posted money price so that you can clear on the other margins.*

Implications:

• The harder it is for landlords to evict problem tenants, the more we should see this kind of non-price rationing;
• The harder it is for landlords to specify their actual requirements in a for-let ad, the more we should see queuing. Otherwise, you'd see less queuing and more clearing on prices among those who meet the landlord's other requirements;
• Non-price rationing should be more common for flats where landlords are more worried about there being problems. 
• The burden of non-price rationing will be felt hardest by people who would be good tenants but who landlords can't distinguish from risky tenants. They'll keep bidding on flats and keep failing to get one;
• If you're in the market for renting, and you're of the type that landlords would prefer to rent to, you'll do better by finding a way to credibly signal as much. 

Meanwhile, Dan Rowe over at The Spinoff complains simultaneously that rents in Wellington are too high and that there's too much queuing and non-price rationing and that tenancy protection laws are too weak. This is what happens when you don't structure your thinking around an underlying economic model. Price increases and non-price rationing through queuing are both outcomes of demand exceeding supply at the prior price. 

Unless you address the underlying shortage, all you can do is choose among various ways of rationing scarce supply - whether prices or queues. Doing it through prices at least provides investors with incentive to build new rental stock and provides homeowners with a reason to put up with the hassle of having a tenant in the spare bedroom. Doing it the other way doesn't. 

It is depressing how many people still like rent controls, despite the evidence against it. 

* Please remember that this is a positive rather than a normative analysis. Not saying that any of this is good, just that it's how we should expect incentives to play out. 

Rental rationing equilibria?

The only way I can make sense of Lee Suckling's renting experience in Auckland is that we're in a rental rationing equilibrium.

What does that mean?

In credit rationing models, too high an interest rate will only attract bad borrowers. When the lender can't tell enough about the borrower's creditworthiness, he'll ration credit: charge a bit less interest and give the loans to the most credible borrowers. Demand for loans will exceed supply at the going rate, but nobody does better by increasing interest rates to clear the market. Tyler and I discussed these models a while back; the implications for market efficiency aren't as clear-cut as you might think.

What does that have to do with the price of rental accommodation in Auckland?

First, note that it can be hard for landlords to evict bad tenants. Or, at least, lots of landlords believe that to be the case. Here is one recent horror story. Another another; the government has a hard time with it too. One property management company lists a best-case of a 7-week process to evict a tenant that has stopped paying rent.

Now here's Suckling's account:

At every viewing you'll be one of at least 20 people. You'll wait patiently outside, eyeing up the competition, then will line up like sheep, shoes off, ready to file in five-at-a-time.

The reality is never as good as what TradeMe presents - especially if the listing used overexposed real estate photos, complete with fisheye angles that make 50 square metres look like 80. If you're looking in a city-fringe suburb, you will be met with grottiness. Auckland landlords, you seriously need to have your houses professionally cleaned. Last time we checked, $500 a week didn't buy us mould.

Still, such filth seems not to deter most. Four or five people will fill out applications then and there, before greasing up to the agent to find out how they're going to "win" this grubby, fungus-friendly house.

The answer? Be a white couple (yes, it seems race matters in agents' eyes), not a group of potential flatmates. Come with no kids, no pets, your own whiteware, and full-time jobs in a stable industry like law. Good references are vital, and you can't have a current lease - you need to be able to move in, well, tomorrow, so the landlord doesn't lose any money.

If such qualifiers are not already ridiculous enough, you'll also need to be flexible on your budget. I started with a price range the $450-$500 vicinity. Every week, my husband and I renegotiated the ceiling on our accommodation allocation. Last week, the budget had reached $600 per week.

Oh, and you'll need $3500 in the bank to give away as move-in costs to seal the deal - inclusive of the ever-ridiculous "letting fee", which seldom exists outside of Auckland and goes straight into the agency's pocket alongside five or 10 per cent of your weekly rent.

Viewing after viewing, application after application, your spirits will sink low. Really low. Finding a rental is like applying for jobs: you're excited and hopeful in the beginning, but come week three of rejections you think there's something seriously undesirable about you.

Rental-hunting depression is also fuelled by the sheer lack of decent houses out there - those you'd never thought you'd live in, but now, somehow, are actually considering.

Suppose you had a queue of 20 potential renters at a $600/week rent. At a higher rent, you'd have a shorter queue, but you'd have a worse pool from which to draw and less ability to be selective. So keep the rent lower and pick-and-choose.

If your basic model is that landlords are trying to eke out as much in rent as possible and that they'll hike the rent at any chance, why aren't they charging more if they're getting queues of dozens of potential tenants? A rental-rationing equilibrium could explain part of it.

Sure, maybe they're lowballing things to draw in a bigger pool for the at-house auction, but the additional anecdotal hurdles are all characteristics-based, not offer price. The tenants' expected financial stability matters a lot more when it's hard to evict non-paying tenants.

The rental-rationing story is also consistent with other odd accounts you'd hear, like that longer-term tenancies induce the landlord to charge more rather than less. If the rental-rationing story is right, a long-term tenancy subsequent to a short-term tenancy would be preferred by the landlord who's then learned tenant type, but the initial request for a long-term tenancy is riskier because you have fewer opportunities to be easily rid of a bad tenant. I don't know whether that's the case: I'm neither a landlord nor a tenant.

On the other side, Tenancy Tribunal decisions are already publicly searchable; landlords can find out about the riskiest tenants. This limits the extent of any rental-rationing equilibrium by knocking out the tenants who've recently had judgements against them and who are applying for your place under the same variant of their name that they used at their last place.

Potential solutions?

Making it easier to evict problem tenants can help, but that comes at the risk of empowering bad landlords.

Best solution would be to allow sufficient increases in housing supply that landlords had to compete a bit harder for tenants - while also making it fairly easy to evict bad ones.

I wonder too whether some of the grottiness and lack of upkeep is explained not only by the tight market for rentals but also by regulatory uncertainty around zoning. If you think the unitary plan might let you bowl a run-down property in a couple of years to put up townhouses, why invest in upkeep?

Credible Crack Commitments

Suppose that you're a crack dealer and you know that the Mayor of Toronto would like to buy some crack. But the mayor rightly fears that you might surreptitiously video the mayor's crack use and sell the video for big big money.

If the mayor doesn't trust you, he won't buy your crack. If he does buy your crack, and you can get away with it, you will video and sell. Since you can't commit to not videoing, he won't buy and you're both left worse off.

How can the dealer credibly commit to not videoing the transaction?

1. If the mayor can commit to violent retaliation even where such retribution would be personally costly, then that can induce performance. But it's can be hard for a mayor to make that kind of credible commitment when he's had large public disputes with the police.
2. The mayor could require the dealer to provide him with his name and address. Then, the mayor could wear a big "I'm smoking Jim's crack" t-shirt during any videoing. Any released video would implicate the dealer, who could then be arrested for selling crack and would likely have any video profits seized as a proceed of crime.
• But, the mayor would know that a sufficiently canny dealer could blur out the t-shirt's incriminating details before selling the video, so that doesn't work. Further, it's really no different from committing to rat out the dealer if arrested. Where the dealer has an easier time hiding than a large and prominent Mayor (and doesn't lose much by having to hide out), it won't work. 
3. Maybe the dealer could establish a reputation for being the dealer who's discreet. So the mayor could ask other prominent Torontonians who also use crack, and who would plausibly have been blackmailed already by their dealers were their dealers the blackmailing and videoing type, who their dealers are. But the bigger the portfolio of such folks that one dealer amasses, the greater the chances that the one off "sell all the video" gains will dominate the flow of continued celebrity drug money earnings.

I'm not sure there are any good feasible solutions to the problem. Since no dealer can credibly commit to not selling out the Mayor, the Mayor won't buy the crack.

Or, maybe, the kind of Mayor who repeatedly is caught buying and smoking crack just doesn't much care whether he's caught smoking crack.

Negative value added: education edition

Remember the story of the West German auto exec who, after touring the Trabant plant, wept because the value of the steel and other inputs going in exceeded the value of the car coming out? The Trabant plant was destroying value.

That's how I felt on reading the New Zealand Qualifications Authority standard on economics. Or at least this bit. They are making the students dumber by teaching them things that are not so.

Here's the particularly offensive bit:

3.  Market failure refers to situations when a market fails to deliver an efficient or equitable outcome. Efficiency occurs when Social Marginal Cost equals Social Marginal Benefit. Equity occurs if a situation or outcome is considered to be fair. The different market failures relate to: consumption externalities, production externalities, public goods, imperfect information, inequitable income distribution. 

4.  Government interventions refer to interventions in a market by central or local government. For example, these may include, for each market failure, a selection from:

• subsidies, taxes, regulations, property rights and government provision (consumption externalities) 

• subsidies, taxes, regulations, property rights and government provision (production externalities) 

• government provision (public goods) 

• regulation (imperfect information) 

• progressive taxes, welfare benefits, collective provision and minimum wage (inequitable income distribution). 

This just isn't so!

Pick up any reasonable intermediate microeconomics text. Market failure occurs when the conditions underlying the first welfare theorem fail to hold. That doesn't necessarily mean that there's anything the government can or should do to fix things, but it opens up the possibility that there could be interventions that improve outcomes. The kinds of things in the first four bullet points are pretty standard textbook analysis, though we'd need to caution that the failures are necessary but not sufficient basis for intervention.

The last bullet point is right out. Draw the standard Edgeworth Box and derive the contract curve. Any of the infinite number of points on that curve are consistent with market efficiency (the First Welfare Theorem), but only some of the points will be consistent with particular views of equity.

If the government decides that one point on the curve is preferred, for equity reasons, to the one that would be achieved by markets, it can push things in that direction through appropriate redistributive measures. That's the Second Welfare Theorem. But we would never describe equity-based interventions as correcting a market failure. If we were on the contract curve, where marginal rates of substitution and marginal rates of transformation all lined up nicely, but we just didn't like that point for some reason, that just isn't a market failure. And I would have given a failing grade to a student who would have described it as such. Heck, I ran multichoice questions specifically checking against this kind of fallacy. NZQA is teaching students how to get a failing mark on intermediate micro exam questions.

Even worse, were we to take the Second Welfare Theorem as justification for equity-related interventions, the Theorem does require that least-inefficient means be used to get to the preferred point on the contract curve: typically, lump-sum redistribution of initial endowments. In the real world, you aim for the least distortionary taxes available: maybe land value taxation, maybe progressive consumption taxes. But you sure as heck don't go for minimum wages. That's a good way of ensuring that you never get back to the contract curve, or that you stay farther away from it than you could have using alternative measures like wage subsidies (or, to be consistent with theory, lump-sum transfers).

Why does this matter? There are decent theoretical reasons for interventions addressing First Welfare Theorem considerations. They're sciency. And, if designed properly with appropriate side-payments, they can in theory make at least one person better off while making nobody worse off. But there just aren't such justifications for equity-based policies - they're based on aesthetic considerations. It would be like having an engineering class move on from efficiency considerations in engine design to say that it's also an efficiency failure if the engine is painted blue instead of red.

Somebody please fix NZQA so that the economics standard isn't teaching kids how to fail their intermediate micro exams?

Update: in comments, Granite26 very correctly notes:

In your red vs blue engine example, it might be more correct to say 'uses too much fuel regardless of the efficiency with which it is converted to horsepower'. We should all be riding Mopeds, you know

Update 2: Paul Walker points me to the source on the Trabant story.

Lock-in, path dependence, and government

Twenty years ago, all the hip folks thought a great argument for government intervention was that markets could be subject to inefficient lock-in. Paul David and Brian Arthur were the most famous proponents of this line of argument. In that world, it could make sense for government to put in place mechanisms to slow down adoption of particular standards so we could make sure the right one was adopted. Stan Liebowitz and Stephen Margolis nicely showed not only that no historical cases really matched the Arthur/David story, but also that the scope for beneficial intervention was pretty slim when viewed correctly from an ex ante perspective: the costs of the delay were certain, and how could we really tell which delays, if any, would really prove worthwhile? See here for related discussion.

Today's example of pernicious lock-in: governments can take rather a long time to rescind dumb laws.

In 1982 Marshfield, Massachusetts banned coin-operated video games. Over the years many have tried to get the law reversed and failed. But the good news is that Marshfield lifted the long-standing ban this week. On Monday, residents of the small town voted 203-175 to overturn the bylaw and welcome arcade gaming back into town. To put this ban into perspective, that's a 32 year ban on playing arcade games; compared to China's 14 year ban on console games lifted this year. Incredible!

So what caused arcade games to be banned in the first place? Apparently residents believed that arcade games attracted an "undesirable element." In 1983 the ban was challenged and upheld by the Massachusetts Supreme Judicial Court, based on the rationale that video games are "addictive to youth, who will skip school and spend unreasonable sums of money to play them at a quarter -- and sometimes 50 cents."

At least that's what Thomas R. Jackson, a retired narcotics agent and the resident who proposed the ban, said at the time. He also alleged at the time that gambling and drug activity were connected to the video game locations where youth "congregate unsupervised."

Read the whole thing.

I suppose that the silver lining could be that nobody in town's really had a go at an old Galaga machine, or Ms Pac-Man, or Zaxxon. They could open a retro 1980s gaming palace, imagining that the place has just opened subsequent to the failure of the 1982 law, with machines from 1982 and earlier only. Then bring in some 1983 machines next year. While it would be ridiculously fun for folks there now, it hardly outweighs the losses incurred over the last 30 years.

Lousy lock-in. If only government could protect us from it.

HT: The twitter feed of the NZ Office of Film and Literature Classification, the censorship board whose decisions of decades ago, banning all kinds of stuff now considered tame, continue to be in force until and unless somebody makes application for a reconsideration.

Of Free Riders and Forced Riders: America's Cup edition

We're all familiar with the typical free rider problem. If there's some public good, individual incentives to contribute towards its funding are attenuated by non-excludability: if you benefit from the good whether or not you pay for it, why pay? And so we get all kinds of arguments for government provision of various public goods.

A couple of days ago, my former Econ 224 student Brennan McDonald sagely suggested that the America's Cup bid be funded via Kickstarter. Economists know that most of the "economic benefits" case for these things is, as Shamubeel Eaqub so precisely put it, bullshit. What's left then? If the fun from a big party outweighs the cost, fine. Otherwise, not. Brennan then suggests:

If we host the next America’s Cup, Kickstarter or some other sort of crowd-funding is the only responsible choice. We should be forcing these special interest groups to put their money where their mouth is. I’m sure that a non-trivial proportion of Kiwis would donate to such a campaign. The deal with council and government could be that if you reach $XX million in voluntary contributions, we’ll streamline the resource consents necessary.

I think Brennan's largely right here. Kickstarter's pretty well placed for funding things that provide warm glow benefits, though they're not the only one. I gave some money to the Indegogo campaign for SeaSteading's current fundraising initiative; I'll get a polo shirt to wear. Actually, a third identical blue polo shirt with a nice Seasteading crest. I get warm glow and get to show affiliation, they get money, I get some prospect-theory-based utility.

Will Taylor then raises the usual objection:

@EricCrampton @brennansmacro @tvhe agree, though free-rider problems would be an issue.
— Will Taylor (@WillTaylorNZ) September 18, 2013

Yup, free-riding still could be an issue even for a decent Kickstarter. If we don't make payment mandatory, we'll get some free-rider problems from those who enjoy the benefits but refuse to pay. Sure. And I'm certain that Will here is simply raising the theoretical point rather than taking it as an argument for state funding of yacht races. However, others would use this argument as justification for state support: free-riding on a public good can provide reason for funding.

But there's a necessary complement to free-rider problems. If we do make payment mandatory through taxes, we'll get a forced rider problem: lots of people who get epsilon, zero, or negative utility from the yacht race are forced to pay for it through their taxes. I would currently be willing to pay $50 for the America's Cup to simply cease to exist; I'd pay more to abolish the Olympics. I hate the America's Cup. It clogs up tv, the Twitter Stream gets a bunch of unblockable nonsense added into it, radio blather gets worse. The America's Cup is almost intolerable being held a Pacific Ocean away; it would be unbearable in Auckland. At least it wouldn't be held in Christchurch.

Yes, I'm being ornery and maybe I'm exaggerating just a little. But worries about free-riders' benefiting from the America's Cup without paying lead people to force me to pay for stuff I do not want and the abatement of which I would view as a good. I wouldn't really push a button to abolish these things because I can't know that I wouldn't be doing more harm than good. But none of the darned boosters seem to give a hoot about whether they're doing more harm than good when they want to force everybody to pay for their parties. That's why they keep trying to frame this nonsense in "aggregate economic benefit" terms - so that they can pretend that even people who don't like the Cup get some notional benefit from it. And the merits of that argument were succinctly summarised by Shamubeel.

Free-riders can be a reason for government funding of public goods. It's possible for the aggregate true willingness-to-pay for something to exceed the cost of provision but for the payment not to be forthcoming because of non-excludability. But for stuff like the America's Cup, it's entirely plausible* that the losses from impositions on forced riders exceed, by orders of magnitude, the gains from avoiding free-rider problems. Please let's not go about creating political failures that are worse than the purported market failures they seek to solve.



* James Zucollo asks for evidence that forced rider problems will here be greater than free rider problems. I'll confess that I haven't gone around and run surveys on it. But surely the onus ought to be on those who would use force to compel my payment for a yacht race to prove that the thing creates rather than destroys value. And it's not that hard to turn Brennan's suggestion of Kickstarter into something more like Alex Tabarrok's Dominant Assurance Contracts. In that system, everyone who pledges towards the Kickstarter gets some small reward for their pledge whether or not the Kickstarter raises enough money to activate. If the campaign raises enough money, everyone has to pay up for their pledge. But because everyone is rewarded for pledging regardless of whether the project goes ahead, free-riding problems are reduced. Maybe it's not perfect as you still need some high demanders fronting a bit of cash for the up-front payments to supporters, but it's a decent way of reducing free-rider problems while avoiding forced-rider problems. That boosters of major events typically go for compulsion first suggests, to me at least, something about their expectation that individuals have more than notional demand for these kinds of things.

I'm having a rather harder time imagining how you run a Kickstarter for "No America's Cup Bid For New Zealand". Sure, I can imagine a site taking donations. But where a pro-Yacht Kickstarter would actually pay for the event, an anti-Yacht Kickstarter would have to be providing something to the governing coalition in order that they not go ahead with an America's Cup bid. It couldn't just donate to the National Party as too many potential donors would be put off by that and because Parties can't actually be seen to be selling policy. Instead it would likely have to be providing some desirable-to-the-government public good but only in the case that there's no Cup bid.

Update: I've been informed that if New Zealand wins the racing, the next America's Cup will be held in New Zealand. While I still think this is better funded by Kickstarter if it does go ahead, it's seeming increasingly likely that there might be me and maybe two other people in the country who might be annoyed by having to pay for a yacht race. A lot of people seem to be getting utils out of this thing. And while I think that this makes it way more likely that you could get a million people each shelling out $10 - $15 to support the cup in exchange for exclusive supporter t-shits, it also means that Zucollo could be right: losses from forced riders could be low. Bread and circuses are popular.

Information failures and risky buildings [updated]

There's a trade-off when government agencies disclose known risks. Take, for example, AIDS disclosure laws. Some US states require that partners or others likely to be at risk from a patient testing positive for HIV;  others fear that the effect of such disclosure laws is to induce those at risk to avoid being tested. I've certainly not seen any data sufficient for running that cost-benefit analysis,* but it's plausible that either regime could be the correct one.

Wellington Council has a list of buildings sharing the same design flaw as the collapsed CTV building in Christchurch. But they won't tell anybody which buildings are on that list. Is this likely to be efficient? It depends on how Council knows and what they do with the information. If these kinds of flaws get found when Council officers dig back through the old building plans, then there's little risk that disclosure induces building owners to hide flaws. If they're found instead when owners inform Council, then disclosure could induce owners to keep quiet. So, in the former case, disclosure makes sense. In the latter case, it's a trade-off. Whether it makes sense to keep things quiet then depends on the number of owners who would likely be deterred from revealing risks in the disclosure regime and on whether Councils actually do anything to ensure that risky buildings are made safe. If buildings of that sort fall under the usual "you have 30 years to fix it" rule, then it seems unlikely that we're doing much good by keeping things quiet. If they're working towards much quicker repairs of disclosed faults, and if we think that tenants would overreact to the risk disclosure, and if we think that building owners would hide faults in a disclosure regime, then perhaps non-disclosure makes sense.

I'm inclined to agree with NoRightTurn that the case for disclosure seems strong - and especially since the justification seems to be to avoid imposing losses on the owners of risky buildings rather than to avoid that other owners notify Council of building deficiencies. But I'd reverse that call if it turned out that Council were really pushing to get this fixed and if there were substantial risk from unknown building flaws that would fail to be notified under a disclosure regime.

Update: 'An Engineer', in comments below, suggested that errors in the list would be sufficient reason for non-notification. I agreed, noting that there would then be reason for Council to get in touch with owners to ensure that buildings were up to scratch, with disclosure if they weren't fixed. Now looks like half the buildings have been cleared.

* This state-by-state variation seems eminent fodder for empirical work on the effects of disclosure laws on testing rates. File under "future honours projects" if it's not already been done.

Parking Market Failures

Does any market failure argument justify parking minima? Many cities require that residential developments include some minimum number of off-street carparks. Can these be justified?

Well, I'm glad you asked, Agnito.

The best argument I've heard for these regulations is that on-street parking is rivalrous and non-excludable. If you have an apartment building with too few carparks, residents will park on the street or might keep flitting between a few different no-parking zones, staying one step ahead of the enforcement officers. A lot of people see paying for parking a bit like hiring other kinds of personal services: why pay for it when you can apply yourself and perhaps get it for free? And if you find the perfect parking spot, there's then a huge opportunity cost of leaving the space: people with really good parking spaces never give them up. Finding the perfect space can be a joy to be shared with others. Further, where excess congestion from everyone's free-riding on on-street parking gives incentive for the able-bodied to park in handicapped spaces (or in front of fire hydrants), disastrous consequences can ensue.

Having mandatory parking minima then avoids the free-riding on the on-street parking that could best be left for higher-turnover use. And where long-term on-street parking is discouraged only by time limits, it also encourages other socially wasteful forms of entrepreneurship.

The best response to this kind of argument is that it's massively second-best relative to the more efficient solution: price on-street parking. Do that properly and everything else sorts itself out.

Of course, in that world, Seinfeld wouldn't have been nearly as good. And where Gerry Brownlee wants to ban Auckland from using congestion charging, we might not be able to get first-best parking charges anyway.

For the record though: there is no real-world market failure sufficiently large to justify mandatory parking minimums. At least not in Auckland, best I can tell.

Inducing failure

Is cybersecurity a market failure? Every individual counts the cost to him of a virus attack but ignores the cost to others if his system becomes a zombie spam machine; consequently, people underinvest in computer security.

Eli Dourado does a great job in taking on this kind of argument in his Mercatus working paper - on the syllabus in my Economics of Current Policy Issues course. 

First, the externality is, in most cases, inframarginal: most individuals have sufficient personal interest in ensuring security that the external benefit accrues inframarginally rather than at the margin. In other words, while it's true that people benefit others when they install proper security software, they're doing enough to benefit themselves at the same time that they're likely getting things right.

Second, there are plenty of other parties that have an encompassing interest in ensuring that the Internet works well. Google has a harder time selling ads if a lot of clicked links install malware and the like; consequently, Google works hard to make sure that, if you're using their Chrome browser, you get lots of warnings if you try to visit a dodgy site.

We'd think that Microsoft would have a similarly encompassing interest. Why isn't a decent security system built into Windows? I recently built a computer and put Windows 7 on it. After a bit of searching around, I found that Microsoft produces a very decent, and free, Internet security package. So I downloaded it, for free, and installed it. And I wondered why it wasn't built into the OS. Surely it would be in Microsoft's interest that people using their machines be protected against virus attacks, and it's precisely the kinds of people who don't know they need to go searching for an antivirus package who'd be the kinds of people who'd impose costs on others by letting their machines turn into a zombie.

Then I remembered... Microsoft gets slapped around by the Department of Justice and the European antitrust guys whenever they try to make Windows better by adding features. Bundling antivirus into Windows, where it should be, could be deemed a measure that the Europeans would figure would hurt competitors; hurting competitors seems to matter more than helping consumers in European law. And Eli pointed me to this article from 2008 offering antitrust as reason why antivirus hadn't been built into Windows.

Fortunately, it looks like Microsoft's found a workaround for Windows 8. Antivirus will be built in, but will be automatically switched off if any other vendor's product is installed; it only turns back on if the user fails to renew the subscription to the alternative product. Note that Windows 8 is already under antitrust investigation in Europe, but for browser default issues rather than antivirus (so far).

What if?

U.S. House Budget Committee Chair Paul Ryan asks a good question:

Let me ask you a question: what if your President, your Senator and your Congressman knew it was coming? What if they knew when it was going to happen, why it was going to happen and more importantly, what if they knew what they needed to do to stop it from happening and they had the time to stop it? But they chose to do nothing about it, because it wasn't good politics?


What would you think of that person? It would be immoral.

This coming debt crisis is the most predictable crisis we've ever had in this country. And look what's happening. [emphasis added]

Now, I've not been following American budget politics and am consequently agnostic about whatever budget plan he might be proposing; I'd be surprised if it made more sense to cut Medicaid, which helps poor people, than to cut cut Medicare, which helps old people many of whom are wealthy. There's more informed analysis of American budget politics elsewhere.

But I really liked the question. Recall New Zealand Prime Minister John Key's position on maintaining former Prime Minister Helen Clark's policy of zero-percent student loans:

Charging interest would bring in considerable extra revenue for the Government, but Key said he would be voted out if National did so.

"Bluntly, if you want me to be really crude about it there are 565,000 student loans out there. If we add interest back on the student loans, it doubles repayment time of the loan.

"If your loan is $50,000, and it's estimated it will take you eight years to pay it off, we effectively turn it into a loan that is about $90,000 with interest that takes you about 15 years to repay," Key said.

"That is about the only thing that will get [young people] out of bed before 7 o'clock at night to vote, but it's not politically sustainable to put interest back on student loans. It may not be great economics, but it's great politics. It is a bit of a tragedy because it sends the wrong message to young people, it tells them to go out and borrow debt." [emphasis added]

What do we think about this person? Here's what Matthew Hooton thought.

At least Key's not pretending it's good economics; politicians more typically convince themselves that whatever's politically popular is also economically sound.

But instead of leading a national conversation about the size of the deficit and ways of addressing the problem, including reintroducing interest on new loans and phasing interest back in on existing loans over time, he shuts the door on sound policy. Recall Justin Wolfers' argument against forgiving student loans; zero percent loans aren't that different - they forgive a good chunk of the proper present value of the debt.

Budget constraints do bind; Key last year suggested limiting access to loans rather than charging market interest rates. The coming budget is likely to have more restrictions on loan access: rationing the zero-interest credit. And such restrictions aren't necessarily bad economics either: if government-backed loans solve a market failure in credit markets that stems from inability to collateralize human capital, restricting people with other assets that could serve as collateral from accessing zero percent loans reduces costs without any particular policy cost. Or, if some degree programmes or student cohorts are exceedingly unlikely to see sufficiently enhanced earnings for the policy cost to be recouped through the tax system, restricting loan access there also doesn't necessarily do harm relative to a policy of loans issued at market interest rates. But it smacks a bit of government picking winners rather than letting students make their own choices after looking at the expected loan repayment burden at market interest rates.

And, there are other negative consequences for tertiary policy that flow directly from maintaining zero percent loans. The Government caps tuition increases, ostensibly for the students, but really because it can't afford to dish out loans at zero percent were tuition to rise. Similarly, the government has moved to limit domestic tertiary enrolment via capped enrolment at the universities - a policy that would be superfluous if tuition were higher and students charged market interest rates.

I sure hope the budget has something other than "Yeah, the deficit is really big. But everywhere we looked for savings would have somebody complaining, and Labour would then get elected and boy wouldn't that be worse. So we're not really going to do anything - not even commit to raising the age of superannuation eligibility two decades from now. It's horrible economics and boy the Treasury guys will get mad at me. But it's great politics."

iPredict says there's a 43% chance National wins government again in 2014. Pulling out a couple of high variance plays might not be crazy.

Goff fails my intermediate micro exam

Every year, I work to beat into my Econ & Current Policy Issues students what things get to count as market failures and what things don't. So I could ask on an exam something like:

After the earthquake, many houses became uninhabitable; the price of remaining houses went up as supply remained relatively inelastic. Explain whether this is a market failure. If it is, what kind of market failure is it? If it isn't, explain why.

The very best answer - the kind that goes a bit beyond what's asked without getting much wrong - would say:

That prices increase consequent to changes in supply and demand is not a market failure; it represents the normal functioning of markets after an increase in relative scarcity. No part of the First Fundamental Theorem of Welfare Economics has been violated. At best, there is a pecuniary externality benefiting those whose homes have been less damaged. If we worry about the inequities that result from the lottery-assignment of property destruction or property price increases, that is better addressed by insurance or other transfers to those adversely affected than by intervening in property markets to cap prices.

The government may wish to reconsider the optimality of zoning regulations that limited the supply of land for housing on the Christchurch suburbs however; even in the case that those restrictions were optimal prior to the earthquake, the very large negative supply shock likely changes things.

Now, here's Phil Goff in last night's Leaders' Debate.

At times you have to intervene. The market is a good system. But there's a thing called market failure. And when you've got 10,000 people chasing sections all at the same time, that's not the normal functioning of the market. And if there isn't the supply to meet that, then your property prices are going to be inflated.

Sorry, Phil, that gets you a C- at best. Yes, if there's a shock to demand for standing houses and supply is relatively inelastic, property prices go up. But you've bollocksed the part on market failure by taking the populist understanding of the term instead of the economic one. More on that later.

Goff goes on to recommend that the government buy up a pile of sections and sell them on at cost to folks whose houses have been destroyed. Unless that's coupled with easing up the supply restrictions on the edges of town, that does nothing to reduce the run-up in house prices. And if it is coupled with easing supply restrictions, all the work's done by that easing; the government intermediation of sales is superfluous.

Key replies to Goff that central government came in to release more sections for development. It took central government far too long to do this, but moving more quickly to kick Christchurch Council around might not have been well received.

I really hate how politicians use the term market failure to refer to any market outcome of which they disapprove. They couldn't do it, though, if the public didn't share that view of market failure. And we, as a profession, do harm in our introductory-level teaching of economics. If a student comes away from Principles with a better grasp of that government can improve outcomes in case of market failure than of the strict conditions under which this may be true, we've set the stage for later policy harm.

The omniscience constraint

Man, a bit of market failure theory can really screw you up.

Recall that the First Welfare Theorem shows that, under an idealized set of sufficient conditions, market outcomes cannot be improved upon.

Normal economists recognize that the conditions fail and that, when they do, there may be room for ameliorative government policy. Policy would still need to be assessed to see whether it's welfare improving; we need comparative institutional analysis.

Abnormal economists say that whenever one of the conditions fails, we can throw all of economics out the window. That's what Collins & Lapsley did when asserting that alcohol consumption involves only social cost with no offsetting benefit: because consumers don't have perfect information, they can't have enjoyed consumption benefits.

Here's Single, Collins et al:

Thus, if the costs of substance use are to be classified as private costs, the following three conditions must be simultaneously satisfied:

1. The users are fully informed as to the costs which the substance use imposes upon themselves;
2. The users are required to bear the full (internal and external) costs of the consumption; and
3. The users make rational consumption decisions in the light of all the information available to them.

These requirements are extremely stringent, so stringent in fact that the conventional approach of treating all abuse costs as social costs is fully justified.

Collins & Lapsley wrote as reason for counting private costs as social:

Being fully informed about the private costs of abuse requires the abuser to have access to, and have the ability to process and evaluate, epidemiological information on the effects of drug use. It also requires the drug user to be able to evaluate the probable future health and other costs resulting from the drug use. It is difficult to believe that drug users, by their nature, are fully-informed, or even well-informed, about the costs of their abuse.

Both of these are clearly nonsense. Sure, full information would require that. But that's insufficient basis for assuming zero private benefit. And, it's insufficient basis for saying that alcohol needs more regulation than anything else: no form of consumption would meet the Single et al requirements.

Don Boudreaux finds another example today from the New York Times' letters section:

In a perfectly functioning economic world, all consumers would receive perfect education about good nutrition and then simultaneously demand that fast-food companies and grocery stores start offering healthy options, thus forcing Big Food to supply what the people demand.

Until that happens, we need regulation of Nestlé, Monsanto, McDonald’s and the rest of the moguls that dictate our diets.

I suppose that's not as bad as the Collins & Lapsley assertion that imperfect information transforms all private costs into social ones. But it's worrying how often folks run the following syllogism:

1. People make choices I dislike;
2. Those people do not have perfect information; therefore:
3. Regulation must be used to make people choose the things I would have chosen for them.

No recognition of imperfect information problems in government; no notion that preference heterogeneity could underlie different choices; no attempt at comparative institutional analysis.

I think we as a profession are doing harm in our principles level teaching when we cover market failure. Far too many people seem to come away from Principles of Micro with the impression that any market imperfection is sufficient basis for throwing away the rest of price theory and revealed preference.

Intervening for the surplus

Paul Walker asks whether consumer surplus can ever justify government intervention. Arguing against Sam Richardson's contention that consumer surplus from the Rugby World Cup can justify government intervention, Walker notes:

Three question came to mind for me: 1) If CS is a reason for government involvement in a project then isn’t this a reason for government involvement in almost everything? I meant the CS generated by computer software, for example, must be huge and thus should the government not subsidise Bill Gates?! 2) If there really is enough CS to justify government involvement doesn’t this tell us that that real issue here is one of the pricing of the event? If the council priced in such a way as to capture the CS, e.g. some form of price discrimination, then evaluation of its investment would be easy, just look at the profits generated. 3) If there is a large amount of CS to be captured then why have the council involved at all? Why not just let the private sector run/build the event/stadium, pricing in such a way as to capture the CS, and let the event stand on its own economic feet? No government involvement is necessary.

What's Walker missing? If there's a market failure preventing the realisation of potential consumer surplus. Imagine that the local folks putting together a bid for the RWC set up their bid optimally with respect to maximal extraction from those who could attend games: lots of tiered pricing, lots of tied sponsorship arrangements, lots of merchandising. And the bid were just shy of making it. And, suppose further that each and every Kiwi got $10 in warm fuzzies just from pride in knowing the event were here being held. If there's no market in which they can express their preference for the event's being held, and if the event wouldn't be held absent the contribution from those folks who'd never attend a game but who would enjoy benefits, then that can be an argument for government intervention.

Now, the warm fuzzies can be internalized through sponsorship arrangements: if those not attending the game get warm glow from the games, sponsors may capitalize on that warm glow. But we'll specify that the $10 per person is over and above any amount that can be capitalized on by sponsors.

In that case, you could argue for government involvement. You need a market failure of some sort to make the CS argument for intervention hold. It's not nonsensical on first principles. But it's rather unlikely that we've been made better off by the investment. Why?

First, we'd have to know that the potential CS made it worth the cost.

Second, we'd have to ask why alternative mechanisms for solving the coordination problem among those experiencing warm glow weren't attempted. KickStarter is an awesome mechanism for this. You put up your project and your required funding threshold; folks pledge money and are only called on for funds if the collective willingness to pay is high enough. Sure, there could be free rider problems, but there are ways of turning assurance contracts into dominant assurance contracts. If RWC never even bothered trying KickStarter and went instead immediately to the guys who can use guns to force your contribution, we might be sceptical that they really believe that there are net gains to the public (or that the latter is just easier for them).

Finally, we'd have to weigh up whether the losses from bearing the market failure - the forgone benefits - really justify the costs of intervention.

I'd put 20:1 against that the NZ government's investment in RWC meets any kind of sane cost-benefit analysis. There are states of the world in which such investments can be optimal; we're just rather unlikely to be in that world.

Obvious points on student loans

John Key's suggested limiting access to New Zealand's zero percent government guaranteed student loans; folks nearing retirement age will no longer be eligible to get zero percent loans from the government for living expenses while in tertiary study.

Folks in the Labour Party have called the move discriminatory; some implausible parallels were tweeted.

Two obvious points that perhaps need spelling out.

First, there is a good market failure argument for government guarantees of student loans. Namely, asymmetric information about the likelihood that human capital investments will yield returns that would be paid to the bank combined with the bank's inability to foreclose on your B.A. in Poetry. So the banks may abstain from participating in that market without some kind of guarantee. Nothing in that argument justifies low interest or zero interest loans.

If the point of policy is to remedy the market failure, then best policy would have the government act as backstop guarantor on student loans where the government expects to be able to recoup the loan. Government can always force repayment through the tax system and by confiscating the passports of those with outstanding debt, so long as the debtors have sufficiently augmented earnings consequent to education to pay off the loan.* If it's exceedingly unlikely that someone would be able to repay the loan, it would make sense for the government to decline to extend the guarantee; it's not a market failure that a bank refuses to extend a home loan to an overvalued property where the buyer has little prospect of paying the mortgage. And, by and large, near retirees taking on student loans will be in this group. Sure, some will be retraining for a late career change. But even for those, paying off the loan will be tough. And many others will be taking courses for consumption rather than investment purposes.

So if government guarantees of student loans are meant to solve market failures resulting from asymmetric information, putting in an age cutoff doesn't seem obviously discriminatory. It's no more discriminatory than that a life insurer might refuse to extend coverage to the terminally ill.

If the point of policy is other than solving market failures, then maybe it's a bad idea to restrict access to the elderly. But we'd need to specify then what the purpose of policy is. Barring specifying some point other than meliorating market failure, I'll stick with that it's entirely reasonable to restrict government student loan access.

* Note that the alternative solution to the market failure would solve things by allowing banks to make more restrictive and enforceable contracts with folks taking on loans for human capital. Government is able to solve the problem by compelling payment through the tax system: future income streams then become collateral. Were banks able similarly to compel payment, I'm not sure there would be any particular failure to solve.

Suppression of market-relevant information

I don't know about you, but I tend to expect that how somebody handles his own finances gives some information about how well he'd handle my money if I invested with him.

And so I'd be spitting tacks at District Court judge James Weir were I one of the many who was burned by Hanover Finance.

Read the Herald and weep.

Mark Hotchin, director of Hanover Finance, and Kerry Finnigan, another director and CEO of Hanover, successfully were granted name suppression of that that they were among the victims of a Ponzi scheme.

Mr Hotchin said in his 2003 affidavit requesting name suppression that he believed if the facts of his having invested in the scams became known:

- "There would be concern over the investment strategies adopted within the Hanover organisation because of the loss of credibility and damage to my reputation."

- "Investors and third parties with whom Hanover and its entities deal could well come to the conclusion that if one of the directors of Hanover was making inappropriate investment decisions personally then he could well be doing the same for the group. This in turn could cause a lack of investor confidence and support potential for a run on funds, the possible collapse or restructure of the Group with obvious impact on its 600 employees."

...

But there is no indication in the decision by District Court judge James Weir that the judge considered that investors and potential investors were entitled to the information to make a balanced assessment of their capabilities.

Mr Hotchin and Mr Finnigan were prominent figures in finance companies which failed. Together the ventures had a billion dollars of investors' money at risk.

Millions of dollars were invested in Hanover after name suppression was granted and at a time when its advertising was based on claims of prudence, careful strategies and the experience of its managers.

By suppressing an example of poor judgement by a co-owner and director and an executive director, Hanover investors were denied means to measure its claims of prudence and care.

Simply amazing.

The state can induce market failures, when it tries hard enough.

The Coalition for Fun

What do I need to do to be a founding member of Sorens's Coalition for Fun?

Formerly a discipline devoted to research on sanitation and epidemiology, public health is now more or less an explicitly ideological field devoted to ginning up panic over freely chosen, private behaviors and to cheerleading for paternalist government action to prohibit or discourage them. Take any fun activity enjoyed by those who are not urbanized, (generally) white, middle-aged, highly educated professionals – smoking, shooting, drinking, eating tasty food, calling a friend in the car, generally exercising “personal freedoms” – “public health advocates” are agin’ it. (Of course, you don’t see them agitating against marathon running or rock climbing or bungee-jumping or long-distance hiking or extramarital sex. Fun, risky things that urbanized, highly educated professionals like.)

...

The politics behind today’s public-healthery are sinister. They are driven by loathing of the poor, the overweight, people who shop at Wal-Mart and eat at fast-food joints, people with a Southern accent (who probably own guns and might even smoke) – the list goes on. Otherwise, why aren’t progressive-dominated governments trying to ban colorful local diners and casual-dining chains the way they are fast-food chains – even though the former often have higher-calorie food and don’t even report calorie counts to their customers? Of course, it’s the white middle classes who frequent quaint diners and TGI Friday’s.

So – I raise a glass of whisky and a cigar to the hope of a backlash against “public health,” a new Coalition for Fun.

Jason Sorens at Pileus nails it. I'll be guest blogging over at Pileus later this month; it looks like I'll be in very good company.

I've a piece in today's New Zealand Medical Journal taking another swipe at the healthists. The page proofs are at the end of the post for folks without a subscription.

Let’s begin with CHB’s [Peter Crampton, Hoek and Beaglehole] case against efficient markets. They argue that because models of perfect markets require a set of conditions not found in the real world, extensive and comprehensive government intervention in individual health choices is necessary. You could just as reasonably argue that because Earth has an atmosphere, we needn’t worry about falling off of cliffs: theories of gravitational acceleration of 9.8 metres per second squared are derived for a vacuum and so do not here apply.

The conditions under which markets can be shown to maximise efficiency—the benchmark case against which market failure is measured—are sufficient rather than necessary. We can be at an optimum even if the conditions fail.3 Under those idealised conditions, it is impossible to make any person better off without simultaneously making someone else worse off.

Where the idealised conditions fail, we have some guidance about policies that may improve outcomes, but do not necessarily do so. The market failure is necessary but not sufficient for policy to meliorate outcomes. Proving a particular failure does not give us carte blanche to implement any intervention we like; rather, it tells us where an intervention might be targeted. And it also tells us when intervention isn’t warranted.

As case in point, consider the potential for market failure caused by imperfect information about calorie counts. If consumers are mistaken about true calorie counts, they might eat more or less than they would under conditions of full information. Perhaps. Let’s leave aside for the moment the ease with which any consumer could investigate calorie counts at most fast food restaurants simply by checking their websites— if he actually cared. But experiments making calorie counts really salient at point of fast food purchase show no effect on purchases.4
The rather mixed evidence on the effects of information provision suggests to me that there was no real information market failure. If your reaction to the evidence is “well, let’s try a different intervention then and claim a different market failure as justification”, you’re no longer making the case based on market failure; you’re just being paternalistic. Public health activists have been abusing market failure theory to give a sciency flavour to what is actually just paternalism.5

I get really irritated at the claim that, if we have any kind of market failure, we can throw standard economics out the window. The claim's made a lot in the alcohol social cost literature - from the early Single et al papers through to Collins and Lapsley. If we take a straight neoclassical line, the failure tells us the type of interventions that might be warranted. If you still don't like the outcome after the correction's been made, that's too bad. If we take a more Austrian line, it's the presence of these failures that opens up market opportunities for entrepreneurs to come in and transform deadweight losses into profits.

I don't know whether the "any failure justifies any intervention" line comes from a deliberately opportunistic reading of principles-level texts or if we've screwed up as a profession in teaching principles of micro.

Cursed Rhetoric Page Proofs

Overcoming the tyranny of choice

Do too many brands and too many choices on store shelves really make customers unhappy? Sounds like a profit opportunity for somebody to run a store offering fewer choices with more editorial discretion on which products make the cut. I wonder who could do that...aha.

Swapping selection for value turns out not to be much of a tradeoff. Customers may think they want variety, but in reality too many options can lead to shopping paralysis. "People are worried they'll regret the choice they made," says Barry Schwartz, a Swarthmore professor and author of The Paradox of Choice. "People don't want to feel they made a mistake." Studies have found that buyers enjoy purchases more if they know the pool of options isn't quite so large. Trader Joe's organic creamy unsalted peanut butter will be more satisfying if there are only nine other peanut butters a shopper might have purchased instead of 39. Having a wide selection may help get customers in the store, but it won't increase the chances they'll buy. (It also explains why so often people are on their cellphones at the supermarket asking their significant other which detergent to get.) "It takes them out of the purchasing process and puts them into a decision-making process," explains Stew Leonard Jr., CEO of grocer Stew Leonard's, which also subscribes to the "less is more" mantra.

Trader Joe's spends a lot then on figuring out the best few items to stock.

But what about all those other pesky choices where you can't control your impulses? Oh, if only I could stop wasting time on the web, texting while driving, spending too much.... Ah.

Dan Nainan can’t trust himself to work at his computer without clicking on distractions, so he uses an Internet-blocking program to shut down his Web access twice a day.

“I’m sorry, but try as I might, I could never, ever do this on my own,” said the New York City comedian who’s struggling to finish a book. “I wish I could, but I just don’t have the discipline.”

Nainan’s system of two, two-hour blocks is one example of how Americans are trying to control their impulses using technology that steps in to enforce good behavior.

With the new year days away, many tools are now available to help people stay in line, including a GPS-enabled app that locks down texting once a car gets rolling and a program that cuts off credit-card spending. Another device monitors your workout and offers real-time voice feedback.

Have we entered an era in which electronics serve as mother, cop and coach because we can’t manage our own desires?

Yep, said Ann Mack, a trend-watcher for JWT Intelligence, an arm of the marketing giant. She named “outsourcing self-control” and “de-teching” as two top trends for the new year.

Markets interpret deadweight losses as profit opportunities, with entrepreneurs routing around the inefficiency. In the world outside the blackboard.

Update: And via @acoyne, an ignition interlock app for your phone to stop drunken posting to social networks.

Mobile developer Imperial Penguin is announcing the release of Social Interlock 1.0, a new app for iOS and Android devices that is designed to make the morning after a heavy night of drinking just a little less stressful. When you replace the official Facebook, Myspace, and Twitter apps on your phone with this app, you can lock yourself out if the app determines that you are too intoxicated to post your status and/or message your friends responsibly.

The app works by requiring the user to take a simple motor skills test when they are sober. After the sober test is taken, the user can lock the app to prevent themselves from accessing the three supported social networks. In order to unlock the app, and gain access, the motor skills test must be taken again and a score of near the sober amount must be earned. The difficulty of passing the test can be adjusted in the options, so each user can adjust the app for their specific tolerances.

It costs $0.99.