Matt Nolan

Cut GST for fruit and veg?

/5 Comments/in , /by

Over at Kiwiblog, Mr Farrar noticed a newspaper article on removing the GST tax from fruit and veg. I agree with him on both his points,

1) that the response of consumers to a 12.5% reduction in the price of fruit and veg will likely be small (items that only take up a small part of your household budget are inherently price-inelastic), and

2) that it is better to have a flat GST rate, as you are ensuring that the relative price of goods remains the same and minimise the cost of implementing the policy

However, the Massey Researchers also have a point (there is something I never thought I’d say 🙂 ), and it has to do with situations where the second point doesn’t hold, specifically when we don’t want the relative price of the goods to stay the same. This occurs if we have an externality.

Read more

jamesz

Patents not so evil after all…

/in , , /by

We’ve previously blogged about the potential for patent protections to restrict innovation when inventions are sequential. However, Sudipto Bhattacharya and Sergei Guriev suggest on VoxEU that the research we cited by Bessen and Maskin might be misleading. In particular they point out that there is a ‘third way’ that knowledge can be treated.

Rather than patent it or make it public, a firm may choose to simply keep the information private as a trade secret. It can then be licenced to a vendor in return for royalties. Unfortunately, this is less efficient than patents because the vendor will under-invest in development of the technology. Essentially this is because the vendor bears the whole cost of further development but is forced to pay a portion of the revenue generated from that investment to the original inventor in the form of royalties. The authors claim that decreasing patent protections could thus cause more inventions to be kept secret and inefficiently licenced, which reduces total welfare.

As a consequence is that the number of ideas available to firms to develop is probably a concave function of the level of patent protection, with an interior maximum! With no patent protections ideas are kept as trade secrets and handed out under exclusive licences. With full patent protection it is too costly to licence the patent and develop the idea. In both cases the level of innovation will be low. Somewhere in between is the ideal level of intellectual property rights enforcement. So even if innovation is sequential, reducing patent protections has the potential to stifle further invention, although not for the reasons usually cited.

NB. Besson and Maskin’s paper isn’t directly comparable with the Vox paper: the former use complementarities to drive their result while the latter exclude such complementarities and allow for private information. Bhattacharya and Guriev are therefore considering a more general problem than B & M, which is why I describe reliance on the B & M result as misleading: it doesn’t represent the vast majority of industries in which patents are used.

Matt Nolan

In the long-run is happiness constant?

/4 Comments/in , , /by

I was just reading the dirty old (note dirty old is a complement from me) Dilbert blog, when I happened upon a post he called Happiness smoothing. Now in this blog post he discusses how individuals choose to interact with people in a way that is inversely related to the persons current success. So if you see a successful person you rip them down, if you see a downtrodden person you help them out (all other things equal). This is similar to tall poppy syndrome and empathy all rolled into one.

Read more

jamesz

Supply siders on climate change

/1 Comment/in , , /by

Most debate surrounding climate change focuses on the best method of suppressing demand for carbon intensive technologies. However, as Hans-Werner Sinn points out at VoxEU, reductions in demand for carbon could result in perverse incentives on the supply side. In particular, the suppliers of oil, coal and other non-renewable, carbon rich resources could face an incentive to increase their rate of extraction.

This arises because of the special nature of exhaustible resources: since there is a finite quantity of the resource to make profits from, the extractor tries to sell it when the price is highest. If carbon reduction policies are successful then we should observe declining demand for these resources over time. Decreasing demand will cause prices to fall and, since the extractors of oil can anticipate the price drops, they’ll try to sell as much now as possible. The increase in supply will cause prices to drop straight away which will trigger countries who have not signed up to Kyoto to consume more carbon rich fuels now.

The two ways this could be avoided are to either force the entire world to conform to the same Kyoto-type standards, or to forcibly restrict the supply of carbon rich fuels. Failure to do either of these things could result in global carbon emissions actually rising as momentum builds behind the environmental movement. Sinn thinks that the only way to cope is to invest heavily in afforestation to offset the extra emissions. Given the rate of global deforestation it can only be hoped that political pressure and reputation effects will be enough to prevent cheap oil flooding the world market. Thankfully oil prices show no signs of diving since the advent of the Kyoto protocol. So far at least…

jamesz

Helping me to help me

/11 Comments/in , /by

Matt and I recently discussed whether we thought the government should intervene to correct intra-personal externalities that arise from time inconsistency in peoples’ behaviour. We particularly talked about smoking: models of smoking which incorporate hyperbolic discounting predict that people will want to quit in the future but will never be able to quit when the time comes (and here I’ve horribly conflated two different causes of dynamic inconsistency in the interests of simplicity). I wasn’t able to persuade him that it is in the public interest to correct such externalities, but perhaps this paper(NBER) cited on MR provides a harsher example of the consequences of time inconsistency (and, yes, I know I’m horribly mangling together two different causes of dynamic inconsistency).

The authors find that

…women who are the victims of domestic violence often leave and return multiple times. … We present supporting evidence that women in violent relationships display time inconsistent preferences… We find that “no-drop” policies — which compel the prosecutor to continue with prosecution even if the victim expresses a desire to drop the charges — result in an increase in reporting. No-drop policies also result in a decrease in the number of men murdered by intimates suggesting that some women in violent relationships move away from an extreme type of commitment device when a less costly one is offered.

The problem here is that there is no device available to the women that allows them to commit to leaving the relationship and force their ‘future self’ not to return. A no-drop policy on the part of prosecutors gives them that precommitment power and prevents them from reneging on their desire to leave the abusive relationship. By restricting the womens’ future choice set the state can make them better off. I feel bad talking about domestic violence in such dry terminology, but I think this is a really good example of how economic theory can help understand important ‘real world’ problems. Policies such as taxation of smoking and no-drop prosecution of domestic violence are not examples of government interference in peoples’ lives: they are examples of the government helping people to help themselves.

Matt Nolan

Macroeconomics is to microeconomics as …

/4 Comments/in , /by

This GREAT quote from a commenter on this marginal revolution post:

I’ve always felt that macroeconomics was not economics the way astrology is not astronomy. (*)

That is brilliant.  I have to admit, I work doing Macro, but I heart Micro.