Abandoning spectrum auctions

It feels a bit like moving into the dark ages.

Coase 1959 started explaining the merits of allocating radio spectrum by auction.

And then...

New Zealand’s 1984 elections put the Labour Party in control of Parliament after it had been out of power for a decade. At the time, New Zealand’s economy was suffering, and Labour chose to use privatization and deregulation as tools to improve economic performance. An early step in this process was to separate the post office into three entities—a state-owned telephone company, a state-owned postal company, and a spectrum regulator. Before that, the post office, a major spectrum user, had also been the spectrum regulator.

The government did not stop with this separation of functions. In 1987, the government stated that it intended to end the telephone monopoly, and in 1988, it commissioned a study by John Fountain, an economist at the University of Canterbury, to review the literature on the economics of spectrum management (Fountain 1988). The first two articles addressed in Fountain’s review were Coase’s (1959, 1962) articles. The report was not directly an analytic or advocacy piece; nevertheless, it did clearly communicate the view that economic mechanisms for spectrum management were feasible and promised significant benefits.

New Zealand pioneered it! There were some early issues, and they learned a fair bit about spectrum auctions along the way. And others followed.

But now the government's abandoned them for winner-picking giveaways.

The Government has abandoned plans to auction radio spectrum.

Instead, it will directly allocate the 5G-friendly to telcos for a 20-year term - on the proviso that they make commitments to better address mobile calling and broadband gaps in rural and small-town NZ.

The move means Communications Minister David Clark has gone for public good over a windfall for Crown coffers that could have run to hundreds of millions, based on previous spectrum auctions.

Clark says the arrangement means more people will get better mobile coverage more quickly, and in more places.

The better approach would have been to auction off the spectrum, then set an RFP for services that the government considers to be valuable but that are not commercially viable. 

Do it that way and the least-cost provider of the RFP services winds up being the one to do that stuff, and the highest-value users of spectrum are the ones to buy it. Bundling them together will only find the right mix by accident. 

The giveaway to incumbents could be worth hundreds of millions. 

Coasean noises

I loved this picture making the rounds on Twitter.

So good. pic.twitter.com/fXFRInFEog

— Erin Delahunty (@della79) July 30, 2018

And so I made a small suggestion.

Where residential development is proposed adjacent to a noisy thing, put a note on the title that noise control officers will entertain no complaints from those properties about the noisy thing. If it is on the Land Information Memorandum, it will be noted by buyers. Developers then have a few options:

• Develop as usual, know that the buyers will see the noise notice on the LIM, and sell at a lower price;
• Install more substantial sound-control insulation than would otherwise be in place, and note the insulation in the marketing for the properties;
• Pay the owners of the adjacent noisy thing for abatement of the noise.

Which is chosen will depend on how much people hate noise, how expensive it is to insulate the houses, and how expensive it would be for the noisy thing to be less noisy. 

Making it very explicit on the title, and potentially requiring active explicit disclosure of the noise restrictions and sign-off by the buyers, helps guard against the usual political economy worry that people will buy the property at a discount (because of the noise) then lobby for the banning of the noise. 

Coming to the nuisance

I simply don't understand the mentality that leads people to move next door to music venues then push Council to shut them down. Even more baffling is why we have developed institutional arrangements that give every jerk a veto right.

Just read it and weep.

The Barrytown Hall - a popular venue for New Zealand music for at least 40 years - has been shut down after a noise complaint from a neighbour.

The rural village hall is well known on the New Zealand and international music circuit as an alternative live music venue.

Hall committee chairman Roger Ewer said because of one complaint the committee was now having to jump through hoops to resume staging live performances.

It has already cancelled gigs through until at least August, including the latest Arts on Tour offerings, which incurred a $1000 financial penalty for cancellation.

"It's ridiculous. One person can do this. We've got one person able to complain to stuff things up," Mr Ewer said today.

"It is very frustrating when I've been involved in these types of things since 1972 and there's never been a problem."

When the hall began to host live music the surrounding environment was totally rural.

He said the noise complainant was a relatively recent arrival in Barrytown, living in one of the former railway houses that were shifted from Otira to a site opposite the hall about 18 years ago.

This is what you get when you abandon common law coming to the nuisance principles in favour of a stupid Resource Management Act.

It gets worse.

The hall committee had considered a legal challenge but decided instead to work with the council.

"They seem to be quite responsive about helping us through it. We've gone along with their requests rather than fighting it legally, which we could have done."

They had been working on the basis of "existing use rights".

"It's interesting. It's turned out that they can impose a residential noise limit on us after 9 o'clock at night, which is ridiculously low."

Mr Ewer said the hall had now applied to adjust the decibel level in its consent.

Two affected residents opposite the hall had assented to the hall's application.

Another two households had declined and the hall also had to get sign off from absentee property owners.

"It's really stuffed things up and is losing us a lot of money."

Folks who put houses next to an existing music hall, or who move into them, should not have standing to complain about noisy music.

If we're moving towards increased intensification in urban areas, we likely need to get existing neighbours' use rights written down in the LIMs for the surrounding area - both so that buyers have no way of pretending that they didn't know that they were moving next to a bar or music venue, and to diminish their standing to complain about things that predated their move.

HT: Darian Woods, who notes that he had a great time performing there in 2008. Pity the fool who complains about hearing this from next door.

Coasean biosecurity externalities

Michael Reddell beat me to the punch on this one.

The budget's imposed a customs levy on air travellers to cover the costs of biosecurity border enforcement. Michael makes the simple Coasean point:

• A new tax on international travel.  I wonder if the government looked at the possibility of levying these costs on, for example, the apple and kiwifruit industries, for whose benefit most of the biosecurity apparatus seems to exist?  Are those industries really economic?

It's a bit beyond that. Somebody bringing hoof and mouth disease into the country would do rather more harm. But the simple Coasean point is that it takes two to make an externality. Either the agricultural sector will impose an external cost on the tourist sector, or vice versa. It isn't obvious which side of the ledger ought to bear the burden.

The rest of his post on the budget is well worth reading, as is his follow-up. I especially liked this potted history in the latter post:

The previous government in many ways deserves a lot of credit for keeping spending in check for their first six years, but the structural surplus in 2006 peaked at 4.7 per cent of GDP (OECD estimate). Those huge surpluses just set up an electoral auction in the 2005 election campaign.  No political party will ever want to be in the position of allowing their opposition to spend the surplus their way –  those choices, about priorities, are a large part of what politics is about.  And the large surpluses built up in the early 2000s didn’t even do much to ease pressure on monetary policy, because they were run up well before the peak pressures on resources (2005 to 2008).  Quite possibly, overall macroeconomic management in New Zealand over the last 15 years would have been a little better if piecemeal adjustments had been made throughout.  We’d never have got into a position where we had highly stimulatory discretionary fiscal policy in the period (2005-2007) of greatest pressure on resources (and on the exchange rate).  And it would also have avoided a situation where Treasury, applying its best professional judgement, finally determined only just before the great recession of 2008/09 that the revenue increases looked permanent.  A high stakes judgement that turned out to be quite wrong.  Fiscal institutions, and ambitions, need to take more serious account of the severe limits of anyone’s knowledge.  A Fiscal Council, as the New Zealand Initiative and the former director of the IMF’s Fiscal Affairs Department have recently called for, might explore some of these issues.  Or a Macroeconomic Council might?  Then again, our academics and think tanks might lead such debates.

The best case we can make for yesterday's budget is that it bought the government time to undertake the more substantial reforms to the benefits system behind the scenes: pushing towards outcome-based contracting, outsourcing service provision, running innovative experiments like Tamaki.

Maybe my expectations have been too high. Under the government's budgetary projections, conditional on continued fiscal discipline, by 2018 government spending as a fraction of GDP will be back to where it was in 2004 under Helen Clark. In 2008, I'd have been very happy for government spending to ever return to 2004 levels. So there's that. Conditional on continued fiscal discipline.

Coasean seating

Paul Walker has a series of posts* on the Coase Theorem and Josh Barro's column on property rights and reclining airline seats.

This had all seemed really very simple to me at the outset. It still seems really very simple; I don't know why everyone else has complicated it so much.

Each passenger is in a contract of carriage with the airline.

The airline has decided to put the recline button for my seat on the arm of my seat rather than on the back of my seat. The airline, which is profit maximising, has decided that the rights should lie with me, the recliner, rather than with the person behind me. I can push the button, and recline, but the person behind can offer to pay me not to. If the airline had not wished to grant me this right, the button would not be there for my use.

In the alternative, where the button were placed on the back of the seat, I would have to ask the permission of the person behind me that he might push the button. He might seek compensation for doing so, or the whole negotiation might start a fight.

The airline could be choosing the option that minimises the number of cross-row unpleasant seat discussions, since only a subset of reclinings will yield such discussions under the status quo where all of them would require it under the alternative. But if the gains from being able to recline were sufficiently low, they could choose to install seats that did not recline.

If enough anti-recliners took sufficient umbrage, there'd be returns to offering a no-reclining section. That that also hasn't happened says something about expressed versus revealed preferences.

Paul says it isn't clear where property rights lie. But recall that the interesting cases in Coase are always in the high transaction costs worlds. There the judge is called upon to assign default rights so that problems are avoided at lowest cost. The airlines are the judges. They compete with one another. They all have assigned the default rights this way when some could have chosen otherwise. If they've all set the default this way, when they could just have easily flipped it the other way, should reasonable people not infer that property rights lie with he who has the switch?

That some individuals wish to force a transfer through use of anti-reclining devices does not indicate that the existing rights are unclear unless we also believe that a bank robber indicates uncertainty about true ownership of the cash in the till.

Full disclosure: the only time I would ever recline my seat is on a long overnight flight where most people hope to sleep.

* In order: here, here, here, here, here.

Coase and dorm-room noises

The University of Auckland's halls of residence warn that they might ban students from copulatory activites from 10 pm to 6 am, because of the costs their noise imposes on students in neighbouring rooms.

Ronald Coase reminds us of the reciprocal nature of externalities. Without the ban, active students impose costs on their neighbours. But by implementing the ban, the neighbours impose costs on those who would wish to undertake such activities. Which is best?

And so we have a situation identical to that which obtained in the Economics Department here at Canterbury when we moved to open-plan offices post-quake. No, we don't do that in the offices, despite the apparent productivity benefits. Rather, some of us type loudly and like talking with colleagues while others of us cannot abide noise while working. The Department is split over two buildings. In my building, we fence out the noise by adopting a "wear headphones" norm. This is fortunate both because I do take a few media calls from time to time, and because the Department's administrator is located in our building, and because I have the world's best keyboard. In the other building, they've adopted a shushing norm. I strongly prefer the norm in our building, but nothing stops people from choosing one building or the other as suits their fancy.

When I was an undergraduate in the University of Manitoba's University College dorms, I sadly was not the source of, well, any external noise cost. But rather than wish to shush others or seek to ban their fun out of envy or resentment, I played Bach's Brandenberg Concertos on infinite repeat, loudly, all night, every night. The Concertos still put me to sleep. But I was a Coasean, even though Manitoba's Economics Department didn't much emphasize Coasean approaches: I recognized that the costs to me of averting the costs of the noise were much lower than the costs I could possibly impose on everyone else from banning noisemaking.

Further, Bach was a general-purpose solution: it worked against sex noises, but also against the noise of drunken revelers coming home late from the campus bar. Ban all specific noises as much as you like, but there'll still be noise that happens. It's simply more efficient to encourage people who don't like distracting noises to fence it out with Bach.

I guess the point of all of this is that Auckland students should come to Canterbury instead.

Coming to the nuisance

John Walley has a point. He worries that commercial encroachment on industrial zones is not being treated as a coming to the nuisance but rather could push out the prior industrial firms.

The mobile Nimbys are motivated to perceive these residual problems as significant, using every opportunity to whip up opinion against any previously acceptable use as unacceptable.

In normal times this creates problems, in a disaster recovery situation it becomes a more serious issue. Industry and manufacturing has been a lifeline for our city through our disaster, the sector kept going and, through the efforts of many, maintained activity.

Our disaster has forced our city to become more diverse, more mixed. Different sensitivities have been pushed together and sadly, we have not seen an expansion in the tolerance of established use.

Minor problems become significant when more sensitive people are present to witness them. We all know that dealing with problems becomes all the more challenging when earthquake damage insurance difficulties and weather extremes are in the mix.

The reverse sensitivities in Woolston are not new; noise and smell have always been potential issues, however these existing uses need to be tolerated as many jobs are threatened, being replaced by a handful of hospitality and retail jobs. Does that make any sense? How would you feel if your job was threatened in this way?

The Woolston gelatine plant has generated a gawdawful stench for at least the decade I've lived here.* Rolling up the windows while driving past is pretty standard drill. And it's been worse since the earthquakes.

A few short months after the earthquakes, Cassels & Sons opened their excellent brewpub close to the Woolston plant. It is a glorious place to spend the afternoon when the sun is out and the wind is coming from the right direction; we were there on Sunday. But when the wind isn't right... well, they have a phone number displayed prominently for patrons to call Environment Canterbury with complaints. Cassels are expanding with a large section of retail shops soon to open beside the brewpub.

The gelatine plant clearly pre-dated the retail development. It's also very likely that the gelatine stench predated most of the current owners of the houses just up the road from the plant; they would have bought their properties at a substantial discount reflecting the disamenity. Anyone who bought a house there after the plant was established came to the nuisance as much as did Cassels.

So, it's almost a classic coming-to-the-nuisance case. And, it's also one where there's a strong residual claimant on most of the abatement benefits: the Cassels family. Their brewpub and assorted retail holdings will do rather better when the foul winds cease to blow. In this kind of case, we expect bargaining to efficiency: if it's cheaper for the gelatine plant to change their operations or to move than it is for Cassels to bear the stench, then they can pay the plant to do it. It might have been too hard for the dispersed homeowners to pay the gelatine plant for abatement, but Cassels could pretty easily coordinate things if they wanted a Coasean solution.

But it's a bit more complicated. The gelatin plant may have been breaching some of its emissions consents:

As one of the three air monitoring stations set up in Christchurch by Environment Canterbury (ECan) is directly across the river from Cassels, ECan is well aware of the problem too. As ECan monitoring officer Chris Elsmore explains, there is the odour from gelatine production and there have also been breaches from sulphuric acid production - that would account for the sulphur smell.

"It's at a difficult stage at the moment," Elsmore says.

"Gelita certainly comprehend the problem and are taking significant steps."

But Gelita is working at a different speed to Cassels and others in Woolston, Elsmore says.

But if Cassels aims to have his Tannery complex open in six months, which is his ambition, will the smell have been minimised by then?

"Most likely," Elsmore says. "We're pushing them all the time."

That said, Woolston has long been an industrial area and is where such businesses have traditionally been. Besides Gelita, there is Independent Fisheries, a tannery and, until recently, rubber curing.

"If it was smelling, it was in that area," Elsmore says. "Alasdair's right in that things needed to improve."

So if Gelita is emitting more noxious fumes than they have the right to emit, and if it is more expensive for them to abate down to Code than for Cassels to bear the stench, they could pay Cassels to stop complaining. Cassels is pushing their customers to notify ECan whenever things are too smelly; some of this will be a push for enforcement of existing code while some of it would be to build pressure for reducing the permissible amount of emission.

John Walley has a point where changed neighbouring uses lead to lobbying for changed rules in cases where it would be really simple for the aggrieved neighbours to buy abatement if abatement could efficiently be provided. But where they're instead lobbying for the enforcement of existing standards, and where you can make a pretty reasonable case that any de facto easement existed only because of strong coordination problems among the residential neighbours, perhaps Gelita should be the ones purchasing abatement from Cassels.

* If you're from Winnipeg, think about the Saint Boniface yards from two decades ago.

The House that Spite Built

It would be too quick to say that Coasean stories fall apart when these kinds of cases exist; they could be the sad occasional ex post enforcement that keeps all kinds of other bargains from falling apart. But they do make for interesting cases. But they do make for interesting cases. Via +Courtney Knapp: Spite Houses. Houses built to spite the neighbours.

Mental Floss lists nine of them; the article seems mostly repetition of the Wikipedia page on Spite Houses. Some of the houses seem more example of bloodymindedness than of spite. But the comments thread at Mental Floss provides all kinds of other interesting cases.

Outside of Somerset, Manitoba, near where I grew up, a farmer who had some grudge against a neighbour built a pig barn directly opposite the neighbour's house, his own farmyard being a couple miles down the road. I don't know if it was a fight over churches or local schools, but the targeted family seemed exceptionally unlikely ever to have done anything to anyone that might have warranted such treatment. Spite isn't an edifying motive, but it can be a motive nonetheless.

The more that you think others are motivated by spite, and the less responsive you think spite is to side-payments, the more you want restrictive zoning rules like set-backs.

Air Coase

No matter how much the screaming baby on an airplane annoys you, it really isn't imposing a Pareto-relevant externality. Recall that a Pareto-relevant externality is one where there are gains from trade that fail to obtain. The airline here is residual claimant: if it could earn more by having baby-free flights, or by restricting children to some segments of the airplane, it would do it. Airlines aren't going to throw money away by failing to implement baby-abatement policies if implementing them would earn them higher profits. Absence of baby-abatement airline policies is then evidence that inconvenience imposed on parents by a change in policy outweighs the inconvenience babies impose on other fliers.

Turns out there are two airlines that cater to demand for kid abatement.

Malaysia's two main airline groups have provided a way through the morass by creating kids-free zones in their biggest planes on long-haul routes.

Malaysia Airlines went first in 2011 when it banned kids in first class on its 747s and extended the policy in 2012 when it introduced the superjumbo A380 on twice-daily flights from Kuala Lumpur to London.

The A380 kids policy applies only to the upper deck's tiny economy section of 70 seats behind the 66 seats in business class. However, it's not an outright ban: the airline still has bassinets in the upper deck economy section and will allow kids if there's a kids overflow from the lower deck.

In any case, there are still baby bassinets on the upper deck in business class, so MAS is simply trying to make the upper deck quieter than it otherwise might be.

AirAsia X, which flies from Kuala Lumpur to the Gold Coast, Sydney, Melbourne and Perth and now has an interlocking shareholding with Malaysia Airlines, this month also introduced kids-free "quiet zones" in the forward section of its economy class, where kids under 12 aren't allowed. If you want a seat in the quiet zone, it's offered as an optional extra for which a surcharge applies.

"The airline is not banning kids from travelling, but instead, is enhancing the array of product offerings on board to suit its guests individual needs and preferences," says AirAsia X chief executive Azran Osman-Rani.

I love it when a Coasean-bargaining plan comes together.

There are situations where there are real Pareto-relevant costs imposed on you by other fliers despite the airline being residual claimant: government policy in some countries makes it illegal for airlines to charge heavy fliers more, or to require them to take an extra seat. Governments thereby create market failures by externalising the internality.

Externalising the Internality

In my standard classroom account, a smelly person on the bus next to you isn't imposing an externality, or at least not one that can be relevant for policy. You're both in a contract with the bus company through purchase of the ticket. If the bus company reckoned it would earn more money by restricting bus access to those suitably groomed, they could do so. That they don't means that the losses from doing so exceed the gains - the costs in hassles for the bus drivers and increased time at the stop exceed the costs of lost custom among those who don't like that particular negative lottery ticket. The bus company has an encompassing interest in getting that decision right; they're residual claimant on the surplus.*

But that account is wrong when the bus company can be sued for discrimination. The law can externalise internalities by mucking about with exclusion rights.

L.A. Weekly tells the story of a homeless man who sued MTA for violating his civil rights; they wouldn't let him on the bus because of his appearance. And, from the context of the rest of the story, likely because of his odour. MTA settled for $200,000 in January 2011. In a Coasean world, the bus company could just start paying him not to take the bus. But free entry into the "being unpleasant and not taking the bus" industry would probably make that rather cost-prohibitive.

The rest of the story is well worth reading. Nowell, the man excluded from the bus, used a good chunk of his settlement to take a one-year lease in an apartment building. But because his neighbours were pretty insistent that he take a bath, he consequently refused to take one. So after several months of legal fights, he was evicted. Nobody comes out of the story smelling minty fresh.  The story concludes:

"When I moved in, they made such a huge issue right from the start," he [Nowell] says.

If he cleaned up, they would think he did it because of them.

"It might be a childish way to react, but it also has to do with self-respect. Call it pride, or whatever you want. If they'd just left me alone, let me catch my breath. By them making an issue out of it, none of it happened. Everything went wrong."

Nowell admits there are patterns he's become locked into. "Enough people tell you you're a certain way, a bum, you think, 'I must be that.'  When you're at the bottom of the barrel, everyone feels like they have the right to tell you what to do, where to do it and when. It becomes a reflex action to dig your feet in and say no," he says. 

SB Properties kept his six months' prepaid rent plus double deposit. Now it is going after him for attorney's fees. Nowell estimates he paid his attorney $30,000. He isn't sure. He hasn't been counting the money too closely, except to note that he has less than a quarter of the original settlement left. He is spending much of the rest to appeal the jury verdict.

"Why did they allow me to sign the lease and immediately turn around and spend the next eight months trying to remove me?" he asks, unable to move on.

By the time SB got him out, it was August. The irony — and in this case there are many — is that his lease had only four months left.

Asked if he believes Nowell would have cleaned up on his own, had he just been left alone, SB Properties general manager Yaniv Abiner pauses for a long time, then finally says, "What do you think?"

Nowell, meanwhile, is on the hunt for a new place to live, noting wryly, "A roommate situation isn't going to work for me."

Yesterday, he explains over the phone, he went to see a unit in a downtown artists loft building, hoping that artists would be more understanding. The woman who owned it was waiting out front. She said no the minute she laid eyes on him, adding that he ought to try a halfway house for people on welfare. "I'm not the stereotype you think I am," he admonished her.

He did not wear the new pants. "I'm looking at them right now, in fact," he says.

It has been some time since he last took a bath.

Fixing homelessness seems a bit harder than giving somebody enough money for rent.



* Similarly, Christchurch's Red Bus must reckon that the costs of letting professionals onto the bus with a takeaway cup of coffee exceed the cost of lost custom among my cohort.

Grinch

As nice as Seuss's Grinch story is, we can't forget that it's the story told by the victorious Whos a century after the event. And so I told Ira the real story over Christmas. He prefers my version. And so I thought I'd share it with you as well. It's not in Seussean verse; maybe someday.

Recall that in The Lorax, insecure and ill-defined property rights, combined with a rather stupid Onceler and with a Lorax who cared more about grandstanding than about saving the trees, produced an outcome that none of the protagonists would have chosen. If the Onceler weren't an idiot, he'd have scaled back his capital investments to be commensurate with the stock of Truffala trees available. If the Lorax weren't a moralizing jerk, he'd have pointed out to the Onceler that re-planting trees as he went would let him get a return from his physical plant for a much longer period. And if property rights had been secure, either the Lorax could have sued the Onceler for stealing trees or have subsidized a faster replanting rate. 

And so we can see that the Grinch story is a problem of insecure property rights as well: does the Grinch have the right to peace and quiet, or do the Whos down in Whoville have the right to make as much noise as they like? In a Coasean world, it wouldn't matter as they could bargain to a solution. This could even hold in a world of poorly-defined property rights. If the Grinch really valued peace and quiet more than the Whos enjoyed making noise, and nobody knew which party had rights, the Grinch could still be sensible and pay them to stop even if he thought he had the right to peace and quiet. But only if he thought his rights would then be enforced; Seuss doesn't really like letting his characters find the efficient solution anyway*. And so in How the Grinch Stole Christmas, the Grinch isn't able to convince the Whos to stop making noise despite their most likely having come to his nuisance. 

In my version, the Grinch leaves the big noisy city and, after a tedious search, finds the perfect place for his studies: he homesteads a mountain overlooking an empty valley. There, he's able to read and write without interruption. Until the Whos show up and start building a town. The Grinch welcomes them, and tells them how much they'll love the peace and quiet of the place, hoping that they'll take the hint. After the noisy construction finishes, they have a raucous party in celebration. And then another for every holiday after, from Arbor Day to Xylophone Appreciation Day. But the biggest party they saved for Christmas. The Grinch pleaded with them; he was there first, surely they could try to keep the noise down. But they wouldn't. In desperation, he tried to steal Christmas, thinking that might stop them. But it didn't. So he gave up. He returned all their toys and dined with them before packing up his things and going off to find a new quiet place to live. He was there first, and by rights they should have compensated him for his loss, but enforcing the claim was more difficult than just leaving. And so he finally did the efficient thing and left. 

I tell it with a bit more embellishment, but you can fill in your own details.

* In The Zax, the North and South-Going Zaxes surely could have played leap-frog to solve their conundrum; instead, they just stood there until the city grew around them. By contrast, in The Sneetches, Sylvester McMonkey McBean is an entrepreneurial hero who profits by the prejudice of the Sneetches with Stars Upon Thars and the lame mopiness of Those Who Had None Upon Thars - the latter of which ought just to have had their own frankfurter roasts. A pox, or a McMonkey McBean, on both houses.

Update: In Lorax, it's possible to get complete forest decimation as being optimal from the Onceler's point of view, if the Truffala trees grow slowly relative to discount rates. But clearly he erred here given the massive capital investments and his intentions of biggering and biggering and biggering even as he chopped down the last tree. And so I expect decimation here was based on idiocy rather than rational calculation.

Fence in or fence out?

Coase taught us that externalities are two-sided: there can't be an externality if nobody's around to experience it. And so we seek rules that make the lowest cost avoider of the externality be the one to bear the costs.

Today's application: open-plan offices. Canterbury's Department of Economics and Finance is now split between two open-plan barracks among a couple dozen such buildings in a muddy part of campus that once was a running track. Odds are that we'll be in the barracks for the next year and a half, but the right tail on that estimate is thick. They're gutting the old Commerce building looking for any problems in the cement floors (remember, we're still in earthquake-land); we have to entirely vacate that building, with most of our stuff going into long term storage as there's no way that the current facilities have room for everything.

But enough whinging; on with the problem at hand.

We all make noise in the course of our work: taking phone calls, chatting with colleagues, typing exceptionally loudly on a Das Keyboard Ultimate. Initial recommendations were that staff move to a small private room inside the open-plan space for extended phone conversations or chats with colleagues. The alternative is that everyone buy a set of noise-cancelling headphones. I've been pushing for the latter. Wearing headphones is pretty low cost, especially relative to having to run and transfer calls all the time. And everyone has a different idea about how annoying other folks' conversations are; that's more easily solved via the volume knob on a headset than by shushing colleagues. Added benefit: the heavy construction equipment outside provides only a visual distraction. A hundred bucks spent on a good set of headphones puts me into my own little world, open-plan office or not: money very well spent.

Two norms seem to be developing across the two barracks. In my barracks, the micro folks pretty much live and let live. Folks who don't like noise wear headphones (ok, it's just me so far, but folks are only starting to move in), others wear no headphones, and if I'm taking a long phone call, I head for the private room less for my colleagues' benefit than for privacy. In micro, we're basically Coaseans (as is right and proper for any Top-100 Economics Department)

In the pod where the macro, finance, and experimentalists live, a norm of being shushed all the time seems to be emerging. We'll see whether the two-norm equilibrium holds or whether those wacky macro folks see the light. Either could be optimal depending on folks' costs of wearing headsets and folks' noise abatement costs.

Final note: none of this counts as an externality for policy purposes precisely because we expect firms to optimally structure things within their own contractual nexus. The optimising employer will seek that the lowest cost avoider bear the costs and will allow sufficiently disaggregated decisionmaking to allow inter-departmental heterogeneity in different types of cost be reflected in different barracks' solutions.

The Cross-Weight Labour Supply Elasticity That Dare Not Speak Its Name

A Matter of Weight? Hours of Work of Married Men and Women and Their Relative Physical Attractiveness

We explore the role of relative physical attractiveness within the household on the labor supply decisions of husbands and wives. Using data from the Panel Study of Income Dynamics, we find that husbands who are heavier relative to their wives work more hours, while wives who are thinner relative to their husbands work fewer hours. We also find a 9% -elasticity of annual hours of work with respect to own BMI for married men, and a -7%- elasticity with respect to wife's BMI. For married women, we find an 8% -elasticity of annual hours of work with respect to own BMI, and a -6%- elasticity with respect to husband's BMI. While own BMI is positively related to own hours of work for married individuals, no statistically significant relatioship emerges for eigher unmarried men or unmarried women.

They estimated the elasticity of male labour supply with respect to the wife's weight.

They estimated the elasticity of male labour supply with respect to the wife's weight. And vice versa.

Before you critique for confounds that could have been present, check the paper. Long story short: the more attractive spouse, where BMI proxies for attractiveness, gets to work fewer hours; the less attractive spouse has to work more hours. The effect is basically symmetric. If the husband is substantially less attractive than the wife, he works more hours; if the husband is substantially more attractive, she has to work more hours.

As I've suggested before, people are Lancasterian goods in the marriage market and outcomes within marriages are the result of Coasean bargains. Confirmatory evidence? Oh yes.

HT: @CJFDillow

Environmentalist Calculation [updated]

Suppose that you care about reducing carbon dioxide emissions. Should you:
a) implement a low carbon tax across all carbon dioxide emissions, or
b) subsidize solar power?

I've argued before that, absent comprehensive Pigovean taxation, you can get nonsense.

So, if you answered b, here's a nice little example of exactly that kind of nonsense.

Preliminary evidence shows some solar stations may have run diesel-burning generators and sold the output as solar power, which earns several times more than electricity from fossil fuels, El Mundo said, citing unidentified people from the energy industry. The power grid received 4,500 megawatt-hours of power from midnight to 7 a.m. in the months audited, El Mundo said.

Yes, this was fraud, and fraud could well also be a problem for a carbon tax. But it's hard to see how they could have pulled this one off if there were a carbon tax on diesel (and all other sources) rather than a subsidy to solar power. One wag suggested that the solar companies could have stayed within the letter of the law by using the diesel generators to power huge spotlights, which they'd then shine on the solar panels at night. This would never make sense under a carbon tax, but would be eminently rational if the solar subsidy were high enough.

Conditional on wanting to do something to reduce emissions, Club Pigou remains your best bet.

Update: Note, of course, all of the problems with Pigovean solutions relative to Coasean ones. Patri helpfully posts a reminder. In short, when the Pigovean solution is efficient, we're unlikely to get it because political processes will push us to cap & trade or other systems that benefit incumbents. And, if we got a Pigovean carbon tax, it's exceedingly unlikely that we'd have commensurate reductions in other tax rates; much of the collected taxes will be wasted.

I often use in class David Friedman's example about how the combination of a Pigovean tax and Coasean trading can lead to highly inefficient outcomes.

Evening roundup

• From a Coasean perspective, the Brits have just switched the rights structure such that noise-makers need to compensate those adversely affected. In equilibrium, the noisy will install insulation, and the prurient who previously enjoyed positive externalities will be disappointed as the transactions costs of negotiating a breach in the insulation seem...high.
• Furthermore, when externalities are reciprocal, direction of payment becomes unclear. Should Google compensate newspapers, or the other way round? I lean to the latter.
• Worst? Hardly. Rather, evidence of the beneficent effects of commerce in improving race relations. Do watch the video.
• Problems with Fair Trade. HT: Jeet.
• Stossel on eating endangered animals to save them. He should have a chat with Roger Beattie about his private efforts at weka conservation. Continuing with the Coasean theme, defining and enforcing property rights are key. It just takes DoC getting out of the way.