Matt Nolan

And a side note on addiction

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With alcohol regulation we decided to remember that it is the external cost that matters.  Now one reason private costs might matter in terms of regulation is internalities.  There is a discussion of this with regards to boozing here.

This brings me to the idea of “addiction” I discovered from this article.  What is addiction, and why are we so scared of it.  Looking at a search of TVHE, I can tell that the authors here are not scared of addiction, we view it a little differently to the black and white box often given by (say) health professionals (ht Dim Post).

For me, all addiction tells us is that the consumption of the good CHANGES the costs and/or benefits of the consumption of the good in the future.  As a result, what is important is:

  1. Information with regards to how addiction functions (and the costs and benefits of consumption) for people,
  2. Having mechanisms available so people can “pre-commit” to consumption patterns in the face of an addictive good.

When we have these two pieces of the puzzle we can figure out what tax and what institutional policies can be established to improve outcomes with regard to the consumption of this specific good.

There is NOTHING wrong with addiction per see.  If we banned things on the basis of addiction we would ban pretty much everything.

Personally I think of addiction as follows:  A good is addictive if consuming it increases the marginal benefit of consuming it in the future and/or it increases the marginal cost of NOT consuming it in the future.  The first type of addiction is unambiguously good, the second type is not – but it is internalised as long as people know about it, and people are able to deal with issues of time inconsistency.

Matt Nolan

Another perplexing picture

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The Freakonomics blog provides another perplexing picture (the last one was discussed here).  This time we have a situation where it costs LESS to buy two of something then to buy just 1.  So they are PAYING people to take the second unit.  What gives?

The way I see it, there are two likely explanations:

  1. Firms realise that, given buying two units is cheaper than buying one, everyone will buy two units.  However, by pricing a single unit at such a high level they give people the impression that the good is worth more – fundamentally, in this case, the value associated with buying the good is related to its price.
  2. Individuals are time inconsistent.  Realising that one way to prevent themselves being in a situation where they suffer from this inconsistency, they want to limit the amount of the product they buy.  We discussed this with chippies a while back.  If there are two sets of customers that value the good differently, and a time inconsistency problem, this could be a form of PRICE DISCRIMINATION between the two sets of consumers.  In essence we could have one set of customers that values the commitment device strongly, and one that doesn’t!

In both cases we have to assume that there will be no resale – the search cost associated with finding a matching partner for resale is prohibitively high.  However, given this assumption both explanations could work – people could determine there value of a good based on a related price, or it could be a form of discriminating between customers based on how heavily they view buying a small packet as a commitment device.

I prefer the second explanation, as we don’t have to make an additional assumption regarding what people value.  I find the first explanation believable as well.

The main lesson I take from this is, market pricing is a crazy thing that is hard to understand – but it gets the job done.  I doubt that we can effectively try to determine what the right prices are ourselves, when we can’t understand the mechanisms firms use to maximise their profit.  So let the market do its thing, and use the government to solve identifiable market failures and co-ordination problems and redistribute.

I realise this is the lesson I take from everything …

Matt Nolan

Pop lyrics and cognitive biases

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There is an excellent post from Stumbling and Mumbling on this issue, it can be found here.  I love the conclusion:

Now, I don’t want to claim that all of this year’s most popular songs contain howling irrationalities. The mighty Lady Gaga passes muster. But could it be that such irrationalities – as distinct from plain nonsense – are more common now than years ago? If so, isn’t this yet more evidence of the decline of civilization? And what hope is there of people becoming properly educated if they are exposed to such cognitive errors? Will no-one think of the children?

In the comments someone suggests that the lyrics of the Beatles were more rational, and that the rationality of pop singers is declining over time.  However, I’m not convinced that is the case.

For example, in the the “The End” Paul states (and John heartily agreed with) that “the love you take is equal to the love you make”.  Now this is true on average, but I doubt there is any behavioural rule that ensures this occurs for every person.  Such a rule could lead to people “over-investing” in love, in the belief that any they give will be returned to them.

goonix

On football player agents’ fee structures and incentives

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Recently Premier League clubs in the UK have disclosed the amount of money they are spending on football player agents’ fees. These agents act as middle men between players and clubs, facilitating the transfer of players. Some of the more interesting information revealed in the disclosure includes:

  • Premier League clubs are paying almost £2 million a week to agents in commission;
  • The 20 English top flight clubs disclosed they spent £70.7 million on agents’ fees last season alone;
  • Manchester City were by far the biggest spenders, splashing out almost £13 million during dates covering last winter and the recently closed summer transfer window;
  • Chelsea paid out about £9.5 million – the second highest – with Liverpool third on £6.7m; and
  • Burnley parted with the least amount – less than £500,000.

Agents are typically paid a percentage of a player’s transfer fee. The nature of this payment structure means that agents have an incentive to encourage players to transfer regularly, as they are able to ‘clip the ticket’ each time.

Furthermore, agents have an incentive to encourage ‘high’ transfer fees, as they profit more from such moves. One common tactic from agents to try and push up the price of their players is to link them with big clubs (links which media appear all too happy to report on). Just recently, Spurs’ Russian striker Pavlyuchenko was linked with a move to North London rivals Arsenal, for example. Such ludicrous rumours are designed to wrangle more money off clubs genuinely interested in such a player, such as Zenit St Petersburg and Spartak Moscow.

Sounds like a good line of work if you can get it.

goonix

California knows how to ban stuff

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The California Energy Commission, in all their wisdom, have decided that the best way to encourage energy conservation is through imposing compulsory energy efficiency standards on TVs – in other words they are banning what they deem to be ‘energy inefficient’ TVs. They are the first state in the US to implement such a measure.

The aim of the intervention is to reduce electricity demand and hence avoid the need to build new power plants to meet this demand. In this sense, the Commission perceive the building of power plants to be a negative externality, presumably as the cost of building is reflected in the per-unit price of electricity for all users.

I take issue with this ‘externality’. For example, if a lot of consumers suddenly started demanding ‘Thierry Henry is God’ t-shirts, such that the price increased, should I feel aggrieved that the action of others is affecting the price I must pay for such a worthy product? No, that is how the market works.

Putting aside my scepticism, let’s assumes that the externality is a genuine one. What might be a superior way of discouraging consumption?

Bans are a blunt tool. From an economic efficiency perspective, you should first try and use prices to incentivise behaviour. High demand for electricity is only ever a problem over relatively short periods. For example, in New Zealand the peaks occur on weekdays in the morning as people wake up and in the evenings as people go home. In hotter climates, the peak typically occurs at the hottest part of the day as air-con works its magic. Hence one might try to charge higher prices at times of high demand to discourage consumption (and hence avoid the need to invest in new power plants). There are electricity meters that are capable of facilitating such differentiated pricing and indeed they are being rolled out in California as we blog.

Under the differentiated pricing scenario, consumers are paying the ‘true’ cost of electricity, so even if they continue to consume at high levels, one should be indifferent to building a new power station as the externality has been internalised.

The obvious perverse incentive that arises from the ban is that consumers will simply purchase their televisions out of state, knowing that they can get a better range of TVs to better suit their individual needs at more cost-effective prices.

It is far more preferable to keep consumer choice open and simply make consumers fully pay for their choice through efficient pricing (assuming that an externality exists in the first instance).

goonix

In defence of the scalper

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Events in high demand that have limited capacity sell out. See for example the Wellington Sevens or Toast Martinborough, which sold out in three minutes and thirteen minutes respectively. These events sell out as demand far outstrips supply at the price that the seller sets. In other words, many of those purchasing the tickets would be willing to pay much more than they actually do pay in order to attend said event.

High demand events such as these are the capitalist world’s version of queuing for basic food items in a communist shit-hole. When buyers are unable to adequately express their willingness to pay, due to blunt ‘one-for-all’ pricing and an inability of the seller to price discriminate, shortage ensues.

Enter the scalper. Scalpers are typically demonised by the media in New Zealand. However, scalpers simply allow buyers to reveal their true willingness to pay. When a scalper auctions off a ticket on Trademe, buyers are able to pay exactly what they value their attendance at said event at. What ensues is the efficient allocation of resources – scarce resources are allocated to those that value them highest – an admirable economic goal. Contrast this with the lottery that is the current ‘log-in and hope’ method of ticket allocation. Rather than be vilified, scalpers should be commended for their actions that facilitate the clearing of the market!

Indeed, a commentator at the NBR goes further, calling scalpers “unsung entrepreneurs”. I tend to agree with this sentiment.

Disclaimer: I have both scalped and been scalped. Both experiences were highly pleasurable and I encourage you all to try them.