Friday, December 3, 2010

Fat Tax?

A recent study puts 68% of adult Americans either overweight or obese. While India would be far behind the US on this health issue, it is natural that with economic growth, we will move in the same direction. The health hazards and their related social costs are well documented - but what does not seem to be very clear is: is it a problem that can be solved? In other words, can the markets or the governments come up with a combination of regulations and incentives to nudge people in the right direction in terms of nutritional choices?

To me, this appears to be one case where both the markets and the governments will be unable to do anything substantial. This is clearly a situation of market failure, mostly since it is pretty much impossible to factor in all the negative externalities related to health hazards from unhealthy food. There is a similar parallel that does exist in the tobacco and liquor industries - but with two fundamental differences. Firstly, there is broad acceptance on the negative consequences of tobacco and liquor. Secondly, both tobacco and liquor are not 'mass consumption' items. Both of these factors make it relatively easier for governments to tax them, as a proxy for pricing their negative externalities (side note: it is interesting that most governments do not label these taxes as 'health hazard taxes').

When it comes to food, however, the situation is far murkier. To begin with, humans seem to have a deep, personal connection with food - one that comes in the way of making rational choices. Which is probably why the existing regulations mandating the printing of nutritional data has not meant much, apart from increasing the actual cost of the product. This is even more so in India where there do not seem to be any standards on reporting nutrition information (e.g. most products do NOT carry the fat content as a % of recommended daily diet). Add to that the fact that packaged foods are but a tiny percentage of food consumption in India and most of the food consumption is freshly prepared food from ingredients (typically home-cooked). This makes it even harder to devise economic mechanisms to influence behavior. For instance, imposing a 'fat tax' on cooking oil seems like a non-starter, and in any case, the neighbourhood mithaiwala is outside the ambit of the formal economy - which essentially closes out the option of imposing a similar tax on sweets/samosas (!)

And so this brings us to the only possible solution - that of educating people to make healthy choices when it comes to food, which mostly consists of laying off unhealthy foods - easier said than done, given that most of the food consumed in any occasion is an exercise in maximizing the consumption of fat, sugar and cholestrol! And given this 'deep emotional bond' that we have with food, it is not very clear how effective an education initiave would be. And this situation is likely to worsen as incomes rise - India is already ranked 2nd in the number of diabetics (behind China, of course).

Monday, November 8, 2010

Traffic Regulations for Pedestrians?

Appears that some of the powers-that-be in London want to regulate pedestrian traffic on Oxford Street in West End, London.

This one surely has to fall in the class of problems that have low returns/economic impact and yet tend to occupy the public sphere of debate. However:
1. It is entirely sensible from a pure economic theory point of view - the same constrained resource (footpath) is being demanded by two sets of agents - one is the dawdling shopper and the second is the busy worker bee. Since the demand from the resource is different (the former wants to have a good-time window-shopping and/or shopping; the latter wants to cover the distance as rapidly as possible), it is only sensible that a solution to this problem be attempted.
2. While dividing the footpath into fast/slow lanes sounds sensible, there is an obvious issue of enforcement. It is a bit like designating a minimum speed by lane on a highway and penalizing anyone who violates this rule. It is close to impossible to implement.

Finally, two things stand out:
1. Similar rules have had some success on roads for vehicles (differential tolls by lane/dedicated car-pool lanes etc) - however, given the whole sensitivities involved in a plebeian activity like walking, the hackles are up immediately when there is any mention of 'segregating' pedestrians. Although the underlying economic logic is exactly the same in both scenarios.
2. One continues to marvel at the dogged attempts by the state machinery to put in regulations that are pretty much un-enforceable !

Tuesday, October 12, 2010

The Economics of Parking

The apartment complex where I live comes with limited parking slots. A little over 2 years after the complex was built, it has filled up with close to 100% occupancy. And as usually happens in such cases, the demand for car parking has outstripped the supply. And as usually happens in such cases, the only way to address this problem is to introduce a price mechanism that would bring demand and supply in alignment. Since each apartment comes with a parking lot, the problem is with the 2nd car syndrome, increasingly common in most affluent urban households. This clearly opens up a 'market' for a 2nd parking lot.

1. There is a space constraint (street parking is ruled out in our neighborhood) - in other words, supply is constrained and cannot expand infinitely to meet the demand. This is generally true since parking supply is highly inelastic (it takes a very long time to add new parking spaces and conversely, once added it is practically impossible to re-use the parking spot for some other purpose).
2. Where the price mechanism can be regulated by a voluntary residents' association, it is very difficult to agree to a sensible pricing strategy.
3. Residents and guests end up going after the same supply of parking lots. Resident parking demand is very, very inelastic. Once a resident has chosen to buy a 2nd car, her demand for a parking slot becomes completely inelastic - in other words, she will be forced to pay irrespective of the fare demanded. And this amount, theoretically, could go up to a point where it becomes viable for the resident to park her car at some other location and pay her way back to the complex!
4. On the other hand, guest parking is relatively more elastic - as parking becomes difficult, the residents can even ask guests not to bring their cars. Obviously, the feedback loops are not perfect here, which in turn impedes the elasticity.

While #1 would automatically posit that a variable pricing mechanism where the price is dynamically determined by the demand with the marginal price for each additional parking slot keeps on increasing, the obvious constraint to that would be #2 which makes any price structure that looks remotely exploitative difficult to implement.

So, what is the way out?

1. Obviously, paid parking is the way to go. The challenge is to improve elasticity of both demand and supply to the point where the market mechanism can take care of the problem dynamically.
2. While it is ideal to have a dynamic pricing mechanism, implementation issues will force a fixed pricing mechanism.
3. The price itself should be revised as frequently as possible to align demand and supply. If nothing else, this would control demand for parking from guests.

The topic of the economics of parking has been studied extensively - two interesting articles:
Recent article by Tyler Cowen in NYT and a more scholarly, yet very interesting, paper on the economics of parking in Chicago around the Cubs stadium during the games - where there is high, relatively inelastic demand for short bursts (during the season home-games) in a highly constrained supply environment

Tuesday, August 31, 2010

Fare Dodgers!

This one is pretty creative. A group of people in Paris are trying to institutionalize the age-old practice of fare dodging (once the exclusive preserve of students ...).

Under the guise of a very specious argument that public transport ought to be a pure public good (i.e. the state should provide this for free), they are promoting the idea of dodging fares on the Paris metro. They even have an 'insurance fund' in place as a risk pooling mechanism. I wonder if the ever-enterprising Mumbai local train commuters figured this model out ...

To begin with, public transport is clearly not a public good - given the simple fact that there is always a shortage of availability of good public transport in any city (and certainly a city of the size of Paris), there needs to exist a price mechanism to ensure that the demand is controlled to align with the supply. Which itself may sound paradoxical, given that one of the goals of public transport is to offer a low-cost alternative to people. So long as the cost of public transport is lower than any other means of private transport at the margin, it will always remain the more effective mode of transport. And once you add up all the other negative externalities that transportation creates (pollution, global warming, oil dependency et al), public transport wins hands down as a public utility.

Giving it away for free will create an administrative headache of managing the demand, which will almost certainly outstrip supply -hence the need for a price mechanism. And so, if there is a city where the supply of transport far exceeds the demand, there may be a case for the state to subsidize a large part (if not the complete) cost of public transport.

Wednesday, August 4, 2010

How much is a tiger worth?

Went to Kabini (Nagarhole National Park in South Karnataka) last week. This National Park is one of the largest tiger sanctuaries in India. And given the ongoing "Save the Tiger" campaign, there was naturally a lot of talk about this among the visitors to the Park. Everyone felt that we must do 'everything that it takes' to ensure that we don't wipe out the species.
Which got me wondering - how much should we (as a country) be spending on this exercise? In other words, how much is a tiger worth? The rational economist would first try to put a number on a tiger's worth and then multiply it by the desired increase in the tiger population - and if the cost of doing this is less than this value, then it is a worthwhile investment.
Makes sense - but leads to an obvious question: how do you go about measuring a tiger's worth? Now extending this argument - how do you measure anything that cannot have a market (say, a beautiful scenery, a sunset etc)? This is, by the way, not merely an academic question: it has practical implications. For instance - if a mining company wanted to dig up a hillside, how much should they be made to compensate for the loss in quality of life for everyone who would otherwise enjoy the view? Similarly, in a developing country like ours which is resource constrained, any expenditure on 'Save the Tiger' campaign is money taken away from some other deserving social programs.
After some trawling on the internet, it emerged that there is an obscure area in economics which deals with these exact situations and it goes by the name of "Contingent Valuation". Some interesting leads:

One thing that is obvious as you read through this is that this can be highly subjective - perhaps naturally (!) since there is a huge sphere of human activity that is beyond the confines of the domain of revealed preferences (i.e. where a need or want is expressed through the price mechanism) and in the domain of stated preferences - which is why we take pleasure in watching a beautiful sunset or the lush green countryside but abhor the idea of putting a price to these experiences. Talking of such experiences - try the train ride on the Bangalore-Mangalore route. This has recently been upgraded to a broad gauge and the stretch between Sakleshpur and Subrahmanya Road through the Western Ghats is breathtaking (esp. in the monsoons). I am pretty sure that in pure economic terms, this is an investment that the Railways will never recover - but then the ride itself is, well, worth it!

Thursday, July 22, 2010

The economics of taxi/auto markets

Slightly dated post - but goes to show that this is an interesting topic.

The next big question that is intriguing is that of pre-paid autos. Are they efficient - both from the demand and supply point of view? If that be so, then why not create multiple such hubs around the city? I suspect that they may not be an efficient as it sounds. Food for thought ...

Thursday, July 15, 2010

Trashing behavioural Economics?

Friday, July 9, 2010

Breaking the auto cartels?!

Another update on the market for autorickshaws. The other day, we had to take an auto – and we walked up to the ‘auto-stand ‘ (essentially, an informal gathering of auto-rickshaws, ostensibly to provide a way for people to reduce the costs of seeking out an auto – which makes sense, on the face of it). When we asked for a ride, there was a quick, impromptu huddle among the auto drivers and they came back with an atrociously high quote and needless to say, refused to go by the fare meter. Clearly, cartelization was at work here. Note that this is independent of a competitive equilibrium for the demand-supply of autos that may exist at the city level (which I had mentioned earlier). This is what may be called a positional monopoly which would come into play where active collusion drives up the prices.
Under classical micro-economic theory, as the number of suppliers of a good or service increases, there comes a point where it is no longer possible to form cartels as the cost of cartelization becomes prohibitively high. As with most things about classical micro-economics, rarely ever happens in real life.
Which then brings us to a policy question – is there any way to solve this problem or are we as consumers of this service, doomed to suffer? One way to enable this would be to disallow ‘auto-stands’, which would make it difficult to create the situation for cartels to form in the first place. Taking this one step further, it would be even better to force the auto/taxi drivers to keep driving around (rather than waiting at a place). In addition to preventing them from forming pools of cartels, it would also create a very strong incentive for the drivers to pick up fares as and when they are available – following the simple logic that it is better to drive around on a fare rather than incurring the marginal costs of driving around without any revenues. Clearly a desirable solution as far as the consumers are concerned – and to make it equitable, the drivers have to be compensated, the only way for that to happen is to allow a higher fare/unit distance, which will also create a further incentive not to drive around empty, while compensating for the incremental marginal cost that they have to incur for not being allowed to wait at a place.
Meanwhile, now you have the answer why the taxi and auto drivers prefer to create these ‘stands’ , which by the way, tend to be more common in places where general enforcement is poor (hence you would see a higher number of stands in places where the metering systems do not exist. In Delhi for instance, the ‘taxi stand’ is an integral part of most neighbourhoods).
And finally, what did we do that day to get a better deal? Just walked down a short-distance around the block and waited (out of sight of our predatory monopolists) – a short wait later, one auto-driver came by and offered to take us on the meter fare.

Wednesday, May 19, 2010

Future of book publishing?

Follow-up to an earlier post. The book publishing business is clearly an opportunity waiting to be exploited. The current economics of publishing business is clearly skewed against the content creators and towards the publishers. In its current balance of power, the publisher premium for risk aggregation and distribution costs has eaten into the content creator - i.e. the market seems to be rewarding the former over the latter, something that clearly does not make sense in case of an artistic endeavor.
As with a lot of markets, the internet has the potential of shaking this up - yet another demonstration of the long tail effect. One such start-up is

The publishing space is an interesting space to watch out for over the next few years.

Saturday, May 15, 2010

How many autos is too many autos?

Anyone who has had to negotiate an auto-rickshaw fare in places like Chennai or Delhi knows that it is an experience that is highly unsatisfying, to say the least. Since there is no metering system in place, it is purely left to your negotiation skills, where the odds are stacked against you. You only have a vague idea of the distance and even little idea of what a reasonable fare per kilometer ought to be. In a perfect market, you can have multiple auto drivers bidding to meet your demand in a reverse auction mechanism which would settle the fare at the marginal cost. However, anyone who has tried that strategy with a clique of auto-drivers on a street corner in Chennai will testify that nothing could be farther from the truth - there is a well established cartel which controls the price bands. The only possible upside of these transactions is that once you have a rate agreed upon, it is the auto driver has every incentive to put you to your destination in the shortest distance and time possible.

Cities like Bangalore and Bombay, on the other hand, have a metering system in place. While it is vastly superior as a pricing mechanism, it can lead to other distortionary actions as well. For instance, once an auto driver has a passenger, there is clearly an incentive to maximize the distance covered in travelling from point A to point B since the alternative for the driver would be waiting for a passenger without any marginal revenues. These is even more so when there is an excess supply of autos which would create an incentive for the driver to 'hold on' to a passenger as long as possible. There are two ways to counter this: the first one is to offer a minimum guaranteed fare for the auto driver. In Bangalore, this is fixed at 2 km i.e. you have to dish out 2km worth of fare even if you need to travel less than this distance. This could act as an incentive for the driver to keep 'rotating' passengers, under the assumption that there is a possibility of landing up with short-distance rides. In other words, one way to create a dis-incentive for the drivers to take their passengers for a ride (literally!) could be to increase the guaranteed base fare.

However, there is a trickier problem at hand - if there is a supply glut (i.e. too many autos chasing too few passengers), it is likely to encourage the drivers to hold on to a passenger as long as possible, since in the absence of a point-to-point fare negotiation option, the only alternative to maximize revenue is to milk distance from each captive passenger. The opposite situation of too few autos is clearly undesirable. And that begs the question - how do we know the optimal number of autos required to serve a city? The simplistic answer would be to let the market decide but that is clearly not so straightforward in a market where the entry and exit costs are non-zero. In fact, the entry costs are quite high - the cost of procuring an auto, a driving license and then a license to operate the auto. The exit costs, meanwhile, could end up being quite high when the auto is bought on a loan (which is usually the case) and any exit from the market could end up being an expensive proposition, which often ends up forcing them to continue in the market even though it may not be economically viable.

One potential way to get around this supply-demand imbalance could be to make the auto-licenses transferable in an open auction market (like a secondary market for equities). This would essentially give each auto-license owner the right to auction it in this market, subject to a floor price (which would be equal to the cost of a fresh license). The premium at which the licenses would trade could then be a good indicator of the supply-demand gap. Thus, when the premium starts increasing, the government could issue fresh licenses, bringing the premium down. This has the clear advantage of the market determining the supply-demand equilibrium for autos in any city and would be a clear leg up over the current system of a government issuing licenses without any particular method of arriving at the optimal number.

And so, the question is not to ask 'how many autos should Bangalore have' but to create a mechanism by which the market will determine the right number. Would that mean that this proposed system could create an economic haven where you can always get the auto who would take you to your destination in the shortest possible route? Now that is like expecting economic theory to predict human behavior!!

Wednesday, May 12, 2010

Wisdom of crowds on the roads?

My daily commute takes me on a route which has a very narrow bridge on a two-way road - just enough room for cars to squeeze through in one direction. This obviously creates a huge requirement for spontaneous co-operation among the drivers since there is usually traffic flowing in both directions. Not an easy thing to do in India where we are notoriously poor when it comes to sharing of scarce resources, esp road space. Obviously the best solution to this would be
an enforcement mechanism like a traffic signal that regulate the flow of traffic in both directions. For some unfathomable reason, the boffins at the traffic department have not yet thought it necessary to provide that. And so that leaves it to the 'Wisdom of Crowds'. If all the drivers were homo economicuses (economicii?) then they would have done the most optimal thing to do - that is to follow an alternating strategy - one car at a time in each direction. This would even out the flow in both directions and most importantly, make it a predictable process where the costs (of waiting) are evenly spread across all the parties. Obviously - this does not happen.

What actually happens is rather intriguing. Let's say that the vehicles are flowing in one direction and there is no backup from the opposite direction. All is well - until the queue starts building up in the opposite direction. At this point, it is completely left to an individual driver's selfless act of
stopping and letting the opposite side start. From that point onwards, it is left to the random occurrences of altruism from drivers in both directions, until there is no backlog in any one direction. Not a very rational process - since there is clearly no incentive for any driver to stop voluntarily because by doing that, she would have selected a high cost option (of waiting) as against the zero cost option (in units of waiting time) of driving through. However, someone or the other ends up doing that each time and what's more, this seems to settle down to a fairly predictable pattern. I have noticed that after 4-5 cars, the opposite side takes over. Which is remarkable since this essentially means that an altruist emerges for every 4-5 drivers. Is it that the drivers, battered by the abysmal infrastructure that passes for our road network, spontaneously arrive at this solution, i.e. is there really a 'wisdom of crowds' phenomenon working here? And then you begin to wonder - why doesn't this happen at all other bottlenecks? For instance, when a traffic signal fails (a not-infrequent occurrence!) then there is almost always a logjam and there is no such self-regulating flow mechanism that emerges.

The only possible explanation is that in case of the bridge, given that it is a predictable situation (the flow problem repeats itself every day), it is in each commuter's 'enlightened' self-interest to contribute to solving the problem. If that be so - why have traffic rules at all? Would a completely self-regulating mechanism appealing to the collective self-interest of the commuters work?? Or is there a tipping point beyond which aggregated individual behavior descends into chaos?

The economics of art?

Recently, I read Vikram Chandra's Sacred Games - a 900 page effort which, as the book blurb claimed, took 7 years to write. Like all art forms that are centered around a single individual (i.e. writing, painting etc), this makes art a highly unpredictable and fickle business - at least from the point of view of the artist. As an artist, you invest a huge amount of time and the corresponding opportunity cost of not doing a regular 9-5 job of say, accountancy. And in return, the piece of work that you produce may sink without a trace since you never really know what the market wants. And this is probably the fate of an overwhelming percentage of such artistic endeavors. Without getting to why they do it then, I am more intrigued how the publishing and music industries have evolved to manage this risk.

At the very least, it does make the case for intermediaries like publishers, who are basically the risk aggregators spreading the risk across several such potential bets. The way I suppose the publishing industry works is to place their bets (in the form of advances) on several artists with the assumption that at least some in the portfolio will return a multiplier large enough to create a reasonable return on the overall portfolio. In addition to the aggregation of risk, these intermediaries played another important role - that of connecting the artists with the consumers. With their marketing budgets they would create the buzz and then back it up with the distribution might to push the wares to the retail channels.

That at least was the theory on which the entire music and book industry has evolved with a handful of very large intermediaries. All was well - until the internet came along. The truly disruptive power of the internet was to allow the music artist to reach out her audience directly (the long tail et al) which is fast making the push strategy of the record labels increasingly out of fashion - at least the artists now have a much less expensive option for marketing their wares. And what remains now is the upfront investments (risk aggregation) that the labels used to provide - and bands are again figuring out ways around that by again leveraging the internet. A typical strategy is to upload your music on youtube and then leverage social networking as a means to create the viral marketing effect to kick-in. Then ride on the buzz to organize band gigs and concerts to start the monetization process. One critical thing that enables this in the music space is that the digital music file lends itself perfectly to such transactions. Each song is a tangible unit of output that can be downloaded, monetized (think itunes). In all this it is merely a matter of time before the record labels and retail stores with CDs etc are priced out of the market.

Back to the Vikram Chandra book: turns out that he was given a hefty advance to write this book as he was already a pretty big author who must have merited a decent advance. Which then begs the question - would anybody pay a first-time author to churn out a 900 page tome that may turn into a masterpiece or more likely end up being a dud? Probably not, in the sense that it is a highly risky venture to invest in - it is not like any startup where you can fire the members of the founding team if they are not working out. To top that, artists can be a fickle lot and may not take too kindly to an interfering VC to set timelines on inspirational activities!

So the intriguing question here is - will the book industry go the way of the music industry? The e-book industry may help this along - remains to be seen.

Wednesday, March 31, 2010

The concept of Fairness

How does the sense of fairness work across societies and cultures? Intriguing question - and now someone actually went ahead and did some research on it. See below for the discussions: