Anti-tobacco virus

SciBlogs (US) reports that gene therapy for tobacco addiction may be around the corner. Code a virus to produce an antibody that neutralizes nicotine, inject, and there's no longer any buzz from smoking. Apparently the tests in mice have worked.

A couple of thoughts:

• An injectable treatment available as a choice for smokers who wish to quit has to be good.
• The availability of such a choice also makes more desirable a strategy of "I'll smoke 'till I'm 25, enjoy being cooler than other people, and then take the treatment before I do any long-term damage." Just as barriers to exit are barriers to entry, things that facilitate exit also facilitate entry in a rational addiction model. This doesn't bother me, but it might bother others. 
• It's hard to imagine the vaccine being made mandatory. But what happens when some fanatic decides to build it into something that can be spread by sneezing? Lower vaccine distribution costs than injection. But egads.

Shame elasticity of demand

Here's a fun one. New Zealand supermarkets have started putting in self-checkouts. Turns out customers buying embarrassing or personal products are more likely to choose those checkouts than ones staffed by clerks.

Pak 'n Save Moorhouse Ave was the first supermarket in New Zealand to have them installed, in 2006.

Foodstuffs chief executive Steve Anderson said 20 to 30 per cent of transactions were now through self-checkouts. However, they accounted for a far lower proportion of customer spending.

Customer research showed people who used the self-checkouts tended to buy fewer items and were often mothers with children, the technology-minded or introverted.

"Embarrassing products", such as personal or indulgent items, were more commonly bought at the self-checkout.

Anderson said there had been some savings for the business, but "nothing major". It had not saved on employee numbers. "The idea was more about customer choice and convenience," he said. "You still need staff there." [emphasis added]

So here's a potential IV study for somebody. If people are more likely to buy condoms when these kinds of self-checkouts are introduced, and there's no correlation between self-checkout installation and underlying sexual behaviour trends, you could use the availability of self-checkouts as an instrument for condom use. Ta dah!

It would likely be a weak instrument, alas; the correlation isn't likely to be that high.

About that Canadian study...

Last week, anti-alcohol advocacy group Alcohol Action NZ put out a press release where the University of Otago's Jennie Connor was quoted:

"A recent Canadian study has shown that a 10% increase in the minimum price of alcohol reduces its consumption by 16% relative to other drinks".

I got in touch with one of the authors of what has to be the study to which she's referring.

Chris Auld reported that the -1.6 price elasticity figure indeed only refers to a measure of own-price elasticity. Except it isn't quite own-price elasticity. Because the estimation technique doesn't correct for substitution effects, it combines the own-price elasticity with cross-price elasticity from other products. Quoting from Chris, with his permission:

Suppose we have two types, 1 and 2. Demand for type 1 is x_1( m_1, m_2 ), presumably decreasing in own min price m_1 and increasing in the min price, m_2, of the other type. The panel models recover d(x1 - x2)/d(m_1), so they are not estimates of own-demand slopes. For example, we might estimate -1.6 if the own-elasticity is -0.9 and the cross-elasticity is +0.7. Since we are not controlling for the cross-price, nothing can be said from these models about the effect of increasing both minimum prices---it could be that total consumption is almost invariant to min prices, but we could still generate big estimates from these models if various types of alcohol are strong substitutes. Test statistics against the null that the total effect is zero are still valid, but it's easy to misinterpret what the estimates mean

Chris also confirms that the -0.34 estimate is the one that best reflects the expected effects of an across-the-board price increase like minimum pricing, but notes that the standard kinds of time series problems makes that estimate rather less robust than he'd like.

I think it's [the estimate] probably too high, although it may be in the ballpark - a variety of evidence does suggest that min price changes are quite effective in targetting heavy drinkers.

Wagneaar found -0.28 among heavy drinkers, so I'm less worried about potential lack of robustness around Chris's estimate; if every estimate of this sort has similar robustness issues, then we might worry about systematic overestimation of demand elasticity with publication bias.

Heavy drinkers who consume cheap alcohol will be targeted with minimum prices, but so too will moderate poor drinkers who choose cheap alcohol.

Chris says he's doing some theory work showing that:

the central planner would always like to impose minimum pricing but reduce conventional taxes when confronted by consumers who are heterogeneous in an underlying demand parameter and when externalities are nonlinear in consumption---because there is an externality on the quantity but quality choice, the planner would like people to drink less alcohol, but drink higher quality alcohol.

I agree with Chris on this one - I'd posted a pretty similar point last week. The New Zealand Drug Foundation should perhaps pay attention to this one: having a minimum price should be coupled with excise reductions, not increases; NZDF has been pushing for both a minimum price and an increase in excise. If the ex ante excise were seriously below the optimum, then I'd expect a model like the one Chris is likely working up to say instead that minimum pricing lets us increase excise less than we otherwise would. But aggregate excise here isn't far out from actual external harms from alcohol. And I still worry about effects on moderate drinkers of lower income. The policy seems likely to be severely regressive.

Jennie Connor really should retract her press release or issue a correction. It leads people to believe that a minimum price will have far more effect on harmful drinkers' consumption than can be supported by the evidence. Otherwise, how much weight should anybody place on any "fact" claimed by Jennie Connor in her press releases?

In other scorekeeping, Ross Bell is right and John Key is wrong: a minimum price will increase the average quality of drink consumed, not reduce it. Here's Key:

"Instead of buying a $10 bottle of wine that might go to $15, they'll buy a $5 bottle of wine that'll cost $10. Their outlay is the same, the quality of what they're buying is worse," John Key said.

Competition among retailers, distributors, and producers ensures that drinkers get at least the minimum price's worth of value for the drink they're consuming except where there are other restrictions in the system that allows agents to accumulate rents.


But in that same article, Bell underestimates the number of standard drinks in a bottle of wine; this has the effect of reducing the perceived effect of a minimum price. Bell writes:

If the Government were to set the minimum price for alcohol at $1.50 - a reasonable and workable price - it would mean a seven-standard-drink bottle of wine could not be sold for less than $10.50.

Most bottles of wine are closer to 8 standard drinks than to 7. I had a quick flip through our wine rack. A Pegasus Bay riesling came in at 6.6 standard drinks. Nothing else in the rack rounded to 7 - everything else rounded to 8, except a few Aussie reds that rounded to 9. 8 standard drinks at a $1.50 minimum price is $12, not $10.50. And, though I'm a moderate high-income drinker, I do often buy bottles of wine in the $10-$12 range. The Montana Classics range on special for $9 is typically great value; I never feel bad about using third of a bottle in cooking at the price, and a glass while cooking is generally decent too.

Bell cites a Scottish government study suggesting that moderate drinkers won't reduce their consumption by much in absolute terms while heavy drinkers will have massive reductions in absolute consumption. If that one's based on Sheffield, and if Sheffield there is assuming constant elasticity across moderate and heavy drinkers, I wouldn't put much weight on it. Sometimes Sheffield estimates differential elasticities, sometimes they just assume constant elasticities. I'm not sure what they're doing in this particular one. And I also worry too about differential patterns in how people reduce their consumption. The Australian study I'd cited last week showed that most of the action in price increases is in reducing the number of days of light drinking rather than reducing the amount of heavy drinking, though there are other studies suggesting reasonable price elasticity of binge drinking. 

Finally, Bell cites BERL's (adjusted) figure on alcohol-related harm: $4.4 billion. That's disappointing. Ross, please remember that that study is just terrible. Again,

• They count the VSL from lives lost while simultaneously counting the total value of forgone production from premature mortality. The Ministry of Transport, who puts out the VSL measure, never does this when they tabulate the social costs of car crashes. They count the value of lives lost in accidents, the cost of injuries, and the value of production forgone due to injuries, but they don't count forgone production from those who die. The measure of the value of a statistical life is inclusive of the measure of forgone production. BERL says that VSL costs are $1.52 billion and that labour costs, mostly from deaths, is $1.48 billion. 


• Where their model study, Collins and Lapsley, counted both the health benefits and the health costs of drinking and took a net measure of costs to the health care system, BERL took a one-line assumption that harmful drinking can never have any health benefits as justifying a move zeroing out any of the aetiological fractions where alcohol reduced costs. This was absurd and points strongly to that they just wanted to give the Ministry of Health the very very large number that the Ministry of Health wanted. Even drinking that is on net harmful can have a mix of underlying positives and negatives. 


• They everywhere conflate private and social costs. Ross, you probably want to include all the costs that drinkers impose on themselves. And that's fair enough where you accurately characterise those total costs as mostly consisting of costs drinkers impose on themselves. But neither of the points above have anything to do with that. It's just poor method designed to inflate reported costs. And repeating the "costs New Zealand" line without the qualification makes people think that you're referring to a cost to the taxpayer through the health system rather than a cost drinkers impose on themselves - it's misleading; I hope not purposefully so.

Peter Dunne seems pretty sensible on this one, even if I do curse his name each and every time I want to get cold medicine that works.

"To say that we'll have a minimum price of $12 for a bottle of wine because people who can't afford to pay $12 shouldn't pay a lesser price, but Chardonnay socialists who can pay $25, $30 for a bottle of wine will still be able to get their wine. I think that's a really elitist and ridiculous argument."

The policy would reduce some harmful consumption, but it would also reduce some reasonable consumption from lower income drinkers - and from a few higher income cheapskates like me. We either need more serious work showing that the harms prevented outweighs the harm imposed by the policy, or at least coupling the policy with transfers to those negatively affected.

Worthless rugby players

If a rugby player leaves for Japan, is there a loss to the country? Seamus says no. So long as he's being paid his marginal product.

While rugby fans may decry his loss to the sport, Canterbury University economics lecturer Dr Seamus Hogan told NBR ONLINE there is no loss to the New Zealand economy.

"If he was prepared to play in New Zealand free, obviously that would be of tremendous value to the rugby union because it would get more bums on seats.

"Beyond that, there wouldn't be any spill over benefit economically to the country."

Dr Hogan says that in terms of economic activity, if Williams' presence in a match gets more fans into the stadium those people are just spending money they would have spent elsewhere.

"It is just a transfer. It's not a benefit to the country economically."

Dr Hogan says Williams gets almost the full value of his contract because he has unique talents.

If the Rugby Union is good at getting fans to pay for the value provided, and if Sonny Bill's manager is good at negotiating his pay, then he doesn't provide much value above his pay. Because the rugby union can't perfectly price discriminate, fans might get some surplus from a good player that isn't captured by the rugby union. But, if the player has a good manager, sponsorship and endorsement deals ought to mop up at least some of what's left.

But I would have expected that fans shifting away from rugby into something else because of the departure would have some loss of associated surplus. The other activity also generates surplus, just less of it; that's why it was the second choice prior to the staffing change.

He says somebody who is a very good lock, such as Brodie Retallick from the Chiefs, cannot command a high price because the next-best lock is right behind him.

"If he goes, the cost to the rugby union of losing him is not great because there is somebody waiting to take his place.

"But if Williams goes this year, we have to take a step down in the quality of our second five-eighths."

However, Dr Hogan says it would not be a big slide because there are plenty of other talented second five-eighths around.

Williams' biggest value is probably in terms of the entertainment he provides, such as taking his ripped shirt off during a World Cup match last year, he says.

 Afraid I'd missed that.

No slippery slopes, nothing to see here

Never a slippery slope to be found.

The Health Select Committee, which is to hold an inquiry into the UK Government’s recently published alcohol strategy, will look into a series of proposals including plain packaging for alcohol sold in shops, similar to a plan being considered for cigarette packets. Yesterday MPs were warned that removing well-known trademark images such as Johnnie Walker’s striding man and the Famous Grouse on bottles, could damage the Scotch whisky industry, which is worth £4 billion in exports alone. Labelling of alcoholic products is currently reserved to the UK Government, which means that if Westminster eventually agreed a ban it would affect shops and products across the whole of the UK, including Scotland. It would hit all parts of the alcohol industry, but whisky producers believe it would be particularly damaging for them.

Chris Snowdon helpfully points to assurances that they're not planning plain packaging for food.

As I'd said a couple years ago, in a different context:

I always find it depressing how folks like NORML think beating up on alcohol makes marijuana legalization more likely rather than just making for tighter regs. The hospitality industry lobbies for more restrictions on supermarket-bought alcohol to boost sales in bars; small brewers push for more punitive tax rates on big brewers... the only winners are the healthists who get support bit by bit for more regulations on everything. It's like a bunch of folks on the scaffolds complaining that the other guy's noose isn't quite tight enough. Y'all might instead direct your attention to the hangman sometime and try helping each other cut those ropes.

Gouging!

The Canadian Broadcasting Corporation has really outdone itself with its new series, The Invisible Hand. Episode One takes on price gouging, featuring Mike Munger. As Stephen Gordon is economic advisor for the series, expect more good things to come.

I've had no end of problems in getting the podcasts to stream; Munger's figure out a link that works. Here.

I just about never listen to podcasts; with two under-4s, I don't get the alone-time where it works. But this one was worth making time for.

Previously on price gouging:

• In defence of corner shops' price gouging post quakes.
• Me in the Christchurch Press advocating price gouging after the September earthquakes
• Response to a few critiques of same.
• And to a few more.
• I really wish that they had doubled petrol prices for the few days after the February earthquake.
• Some follow up
• Response to Keith Ng's somewhat intemperate anti-gouging argument.
• Anti-gouging legislation isn't the only binding constraint; reputational effects induce too little gouging.
• If earthquakes are endogenous to the actions of post-quake opportunists, then perhaps we might oppose price-gouging: Japanese Catfish edition.
• Allocating Marmite in a world of scarcity; Keith Ng still worries about social unrest.

Markets hate profits

Unless there's some barrier in the system preventing it, no firm can sit on excess profits forever. Competition erodes away the excess profit until everybody's again earning a normal rate of return. Today's case in point: alcohol minimum pricing. I've made the point before, but it's worth walking through again as the logic isn't immediately obvious to non-economists.

Neil Miller argues:

Because most craft beers are currently priced over the $2 a drink threshold, it could be argued that they will become closer in price to mainstream beers which might encourage drinkers to “trade up”.  However, the costs to the big breweries will not have increased and they will basically be making more money for the same beers.  This means they will be able to increase marketing and distribution efforts.  Mr Albertson’s point about minimum pricing putting pressure all the way up the chain is critical.  

He's right that the big brewers will have more money for marketing and distribution. But they're pretty unlikely to be making more money for the same beers. Let's walk through the logic.

Suppose I'm one of the big brewers and Labour takes power. Lianne Dalziel announces a $2 per standard drink minimum price. Doug Sellman shouts about how it should be $10. My product previously retailed at $1 and cost me $0.25 to produce. I got $0.05 in profit and the rest was distribution / retailing costs. Can I suddenly start pocketing $1.05 in profits for that drink?

Minimum pricing hasn't made my competitors go away. I expect that they'll be trying to increase market share. What should I do? The first thing I'd try is a new promotion: Every 4th case (24 pack) of beer has $20 inside. My production cost goes up by a bit over $0.20 per bottle, so I'm only pocketing $0.85 in profit per bottle. But if my market share goes up by enough, it's totally worth it.

My competitors try it too. They promise $20 in every 3rd case. Then somebody in Parliament figures out that the real cost of alcohol to consumers is nowhere near $2 per standard drink as we're effectively rebating a big pile of the minimum price to consumers as a cash lottery. So that gets banned.

What next? Free t-shirt! Free shot glasses! Free beer mugs (collect all 8!). Then Parliament bans bundling any kind of good with the beer.

What next? It depends a lot on how different cohorts of drinkers respond to increased product quality versus increased related amenities. Maybe I can turn my bottles into something that's beautiful, with a stopper cap on a wire that makes it useful for re-use as a water bottle. Maybe I can make my labelling nicer. Maybe I can open up my own bottle shops where I sell only my own product but there's just an awesome environment for my customers: free massage from a Tui Girl with every purchase.

Think I'm kidding? Look at what happened in the US when airline prices were regulated. The airlines were banned from competing on prices. So what did they compete on instead? Better meals, better drinks, and more attractive stewardesses.

Unless there's some barrier to competition somewhere in the system, nobody gets to sit on free profits. These kinds of rents get eroded pretty quickly. Customers either wind up buying alcohol that actually costs $2 per standard drink (less normal profit) to produce, or that's bundled with amenities they find more valuable than improvements in the quality of the drink but that still cost $2 per standard drink (less normal profit) to provide.

Who might get to enjoy excess profits - rents - out of minimum pricing? My first pick are those who have bottle shop licences in poor neighbourhoods. They'll have local monopoly rents, especially when their customers have a harder time going across town for bargains. That will be capitalised into the price of the firm, and the next guy who buys the bottle shop will only then be earning normal profits, but there's likely a windfall gain to some small bottle shops.

Markets hate free profits: somebody's always rushing in to try to grab them. That competitive process runs until everybody's just earning a normal rate of return. I'd expect that the only conditions under which the big breweries get to keep selling current product at a $2 per standard drink minimum profit and just bank the profits are the conditions under which they could do it without a minimum price. Basically they need a strong cartel that prevents entry. Fortunately, we're nowhere near that kind of a world, at least in New Zealand.