Morning roundup

The morning's clearing of the tabs...

• Price theory is the core of everything that's good in economics. Albrecht and Hendrickson explain the basics. Price theory emphasises exchange and emergent outcomes. Public choice studies politics as exchange. It's fun to think about what would happen if an incoming government required Ministry Chief Economists to pass a test based on workouts in the old Alchian & Allen textbook.  
• Like the idea of government paying a bonus to people for having kids? Robin Hanson has a neat way of doing that. But I doubt that proponents of baby bonuses will like it. 
• This came out a while back but I'd missed it. Surprisingly enough, hydrogen deposits seem to form underground in spots where olivine is prevalent in the presence of heat and water. NZ has a lot of olivine, and heat, and wet. I wonder if anyone's gone looking for hydrogen - geological deposits hadn't previously been thought possible. If we have some, stick a pipe in it to power a boiler and generator above the deposit, and you'd have electricity that generates water rather than CO2. Seems a longshot, but would be pretty sweet.
• Chris Trotter is nostalgic for a joyous left. Excellent piece. 
• This kind of thing pushes electricity toward a global law-of-one-price, doesn't it?
• Henry Thompson on the Industrial Organisation of the Mafia, forthcoming in the JLE.  
  

  This paper uses economic reasoning to analyze the organization of one of the most successful criminal groups in modern U.S. history: La Cosa Nostra (LCN). Drawing on recently declassified FBI reports and a hand-collected dataset, I argue that the costs of violent disputes are key for an economic understanding of LCN’s core institutions. Violent disputes were costly for LCN as they consumed resources to produce and were destructive. However, violent disputes were especially costly to LCN because of its need to keep a low profile. As a member did not bear the full costs of a profile-raising police investigation, each had a perverse incentive to resolve a dispute with violence. Hierarchical firms and a sophisticated court system were LCN’s solution. They gave bosses the authority and incentive to limit violent disputes and to use violence judiciously. LCN’s longevity and success are, in part, a testament to the institutions’ efficacy.

   

Prices prices prices

Post-quake Christchurch is hardly back to normal. Here in the eastern suburbs, we're warned that excessive power consumption will result in blackouts; we have to curtail power use. Fortunately, the folks in the eastern suburbs are also the ones more likely to be running woodburners or old illegal coal burners (yes, I do smell it driving around from time to time), so they're more likely to have options. And everyone in town is warned against letting too much water go down the drains lest the sewage treatment plant overload and be turned into a cesspool that can't be fixed for months.

Prices can help solve one of these problems.

It can't help with water, at least not with current infrastructure. While we all have individual water meters, they're only read about once per year and manually. In an ideal world, we'd have electronic metering with per unit pricing. In that world, the solution on water would be pretty simple.

Step one: figure out how much water each household used last year from April through to October (or whenever they think that restrictions will have to last until).

Step two: multiply that number of litres by the amount of a reasonably substantial water price increase.

Step three: give every household a cheque such that if they bought as much water as they did last year, they'd be no more out of pocket than they were last year.

Step four: increase the price of water to the new higher level.

Ta dah! No household is worse off (I will smack anybody who tries to tell me that the scheme above with higher prices hurts the poor) and every household has incentive to reduce water use. The First and Second fundamental theorems of welfare economics in application.

We can't do it for water. We don't have a baseline reading on the individual meters for starters. And I'd be surprised if Council didn't have better things to do than get a whole pile of new water meter readers to go out and check things.

But we can do it for electricity - we've already got monthly (at worst) readings. Double the power prices in the eastern suburbs and give every household in the eastern suburbs a cheque that would leave them no worse off if they chose to use as much power as they did last year. Some of the scheme's funding would come from windfall gains from the power surcharge, but a decent chunk would have to come out of general revenues - ideally from the property tax assessments of folks who get to not have blackouts over the winter.

Whatever arguments you want to make about folks coming together in crises and all pitching in and price mechanisms eroding that goodwill - I can't see that lasting through the winter. Instead the massively public goods nature of power conservation will become blindingly obvious. In anticipation of which, it's time for me to call the chimneysweep to repair some minor earthquake damage inside our logburner.

Warm houses in cold climates, dead stock in warm paddocks

Most of us are familiar with David Friedman's beautiful application of fixed and marginal costs to housing. If you live in a warm climate, you spend not too much on insulation. The marginal cost of increasing the internal temperature is then higher, so you keep your house cooler. If you live in a cold climate, you have to incur the insulation cost because the alternative is likely freezing to death indoors. The marginal cost of heating is then lower and so you'll have warm houses in cold climates and cold houses in warm climates.

New Zealand lamb farmers are currently experiencing massive stock losses due to a big snowstorm down south. This isn't exactly unprecedented; it seems like every second or third year since we've been here, there's been a big snow storm during lambing somewhere in the country that has killed a bunch of lambs and ewes. This one seems worse than prior years' though.

These pretty heavy stock losses always puzzled me a bit. I grew up on a mixed farm in southern Manitoba. Our beef cattle calved out starting around the third week in February and finishing in March. If calving went later, then there'd be elevated risk of scours for the calves with the mucky spring thaw and variable temperatures - the calves needed to strengthen up a bit before the spring. And so the first calves often were born on very cold February nights. Daytime highs of -20 celsius or worse; nighttime lows of -40 celsius weren't completely uncommon, though -30 was more typical.

But we never had stock losses like the farmers here have with snowstorms. With about 50 or 60 cows calving out in a season, we might have gotten two or three calves that didn't make it; those deaths were far more typically due to the cow lying on the calf or strangling during an unattended birth than to being born in a snowbank at -40. Here, it's likely hundreds of thousands of lambs that are dying in the snow. Why? Friedman's story. Because the weather was on average terrible, we had to use practices adapted to it. The young cows stayed in a corral near the barn where they could be quickly attended to if things went wrong; the more experienced cows were in another corral also close to the barn. They were all on straw bedding with lots of good hay and alfalfa (lucerne). If they weren't, they'd all have frozen or starved to death in the pastures. So the marginal cost of ramping things up a bit on a really cold night - putting out more fresh straw bedding and being extra sure to go out two or three times overnight if a cow was due instead of once or twice - wasn't that high. But the farmers here have all their stock out in paddocks far from help. The marginal cost of getting them to a paddock close to the house in the very short notice before a serious snowstorm is high, and keeping them all on hay close to the house would waste a lot of winter paddocks.

And so you get dead stock in warm paddocks and relatively happy cows at -40.

It's likely all optimal. But I wonder whether having adapted to this kind of agricultural practice hasn't helped make things like Crafar more likely.