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Optimality of pricing high when there is an excess demand

This nit complains that Uber charged him a 3.6X multiple of the ordinary taxi fare during a period of high demand – namely Melbourne Cup day.  The alternative was for the usual flat fare to be charged and therefore for the excess demand to remain unmet on this day with some punters in urgent need of a taxi consequently being left stranded at Flemington. Continue reading Optimality of pricing high when there is an excess demand


Climate Change Policy Under Uncertainty

I drafted this paper for the forthcoming Beijing Forum at Peking University. Preliminary. Comments very welcome.

Climate Policy Decisions Under Uncertainty

Harry Clarke

Honorary Visiting Fellow, Department of Economics, University of Melbourne, Parkville, Vic, 3052.

September 2015


Abstract: The economics of climate mitigation decisions is discussed when there is imperfect knowledge of likely future climatic changes, of policy effectiveness and of the policy responses of other countries. Simple frameworks recognizing the role of pure uncertainty are derived from heuristics based on classical decision rules. These frameworks are analytically imprecise but offer plausible decision rules that are not informationally demanding. Continue reading Climate Change Policy Under Uncertainty


Droughts & climate change: Some ideas about policy

I’ll present this paper in a week or so at the Water Forum, Wodonga. Comments more than usually welcome.

Drought, Uncertainty and Water Supply Planning

Harry Clarke

Visiting Fellow, Department of Economics, University of Melbourne, Parkville 3052.

October 2015.

Abstract. Water supply planning when there is a threat of uncertain drought is discussed in terms of anticipatory and adaptive policies as well as the links between these classes of policy.   Sound anticipatory policies tend to be low cost and to have complementary effects in enhancing the productivity of adaptive policies as well as in promoting policy flexibility. Continue reading Droughts & climate change: Some ideas about policy


Inefficient real estate sales

I have never understood why events such as this happen. 267 apartments were sold in Glen Waverley in 90 minutes for $70m.  It doesn’t seem to me to maximize profits to the developer – charging higher prices and stretching out the period of sale (or using a simple auction procedure) would make more sense.  It isn’t socially efficient either since this queue-based first-in, first served system does not allocate the units to their highest valued uses.

I have heard many explanations but none satisfy me.  Comments welcome particularly from those with real estate expertise.


Handbook of the Birds of the World

Around 1992 the Spanish wildlife publisher Lynx began its 16 volume Handbook of the Birds of the World.  It is an extraordinary achievement with hundreds of photographers and artists contributing and with a vast amount of general as well as specific ornithological information supplied. It is the only animal family to be completely chronicled in this way and is a major scientific undertaking.  At several hundred Euros per volume I indulgently started off by adding a volume every year or so but a few lean years (private school fees etc) left me 4 volumes short of the complete collection.   In addition an add-on volume of new species has been published. Volume 11 – which I own – has just gone out of print and it seemed likely that my chance to complete the collection was fading. Fortunately Lynx have offered the 4 volumes I want (along with the add-on volume of new species at a substantial discount so I snapped them up.  Still not cheap but, for a bird enthusiast such as myself, it is a happy acquisition. In conjunction with the online resources made available by Lynx it provides all the general information one could conceivably require about the world’s avifauna. I like the species distribution maps.

I also have the 8 volume series of Australian, New Zealand and Antarctic Birds  that was prepared over 20 years by what is now called Birds Australia.  This is a much more detailed account of all the birds I am likely to encounter in Australia. I use it occasionally for specialised information but, despite its glorious colour plates of bird paintings, it does not quite offer the excitement of the Handbook.


Social insurance & the welfare state as substitutes for averting conflict

The development of the welfare state in the Western economies between 1930 and 1990 coincided with a puzzling pattern in the taxation of top incomes. Effective tax rates at the top increased sharply but then gradually decreased, even as social transfers continued rising. These authors propose a new theory of the development of the welfare state to explain these facts. Our main insight is that social insurance and top income taxation are substitutes for averting social conflict. They emphasize the role of the Great Depression as a source of aggregate risk, and argue that the rise of the welfare state can be understood as a process of exploiting efficiency gains in response to gradual technological improvements in the provision of social insurance. Their detailed arguments build on the policy histories of the United States, Great Britain, and Sweden. Full paper in pre-print form here.



Evolution of bird watching

I have been a recreational bird watcher for about 20 years although I do less birdwatching these days than in the past.

In Australia, up to at least 1935, bird observers recorded their exploits by shooting birds with guns and laying out their carcasses on the ground after an expedition. This was accompanied by collecting “skins” and bird eggs: See the history by Robin (2001) *.  Obviously this destructive activity led to a decline in populations. Eventually (and fortunately) “sighting” a bird became just that – you saw it and recorded the observation – indeed, sometimes “hearing” a bird was enough to declare an “observation”. Photographic records of bird nests and eggs  began around 1900 but there were few photographs of birds because of the slowness and complexity of the photographic equipment. However there was some limited photography. Lessor Noddies were photographed in 1899 by A.J. Campbell  – the earliest published bird photograph. Also photos were taken of the now extinct Paradise Parrot in the 1920s (Robin, p. 118).  These days with the advent of digital photography, of high quality relatively inexpensive telephoto lens and with zero cost processing of photos “sighting” has often come to mean gaining a photograph of a species. Of course too, with a photo there are fewer arguments about whether a bird was actually seen.

Most bird watching clubs and societies (e.g. Birds Australia) have photography chapters and even chapters devoted to particular types of bird photography such as seabirds. I pursue this hobby myself in a limited casual way – I don’t have the patience and care of others who pursue this hobby and who are happy to spend days gaining a single shot. The  quality of much of the amateur photography is extraordinary and the work of professionals, such as Varesvuo et al (2011)**, is a serious art form.

* A history is provided by Libby Robin, The Flight of the Emu: A Hundred Years of Australian Ornithology 1901-2001, Melbourne University Press, 2001.

** See Markus Varesvuo, Jari Peltomaki & Bence Mate, The Handbook of Bird Photography, Rocky Nook, Santa Barbara, 2011.


Nationals get water

One of the first decisions of Prime Minister Turnbull is to transfer responsibility for national water policy to the Nationals, specifically to Barnaby Joyce.  Apart from the fact that this puts water in the hands of a particular interest group – water-using farmers – this makes me uneasy for two interrelated reasons. First, the main state impacted on by the Murray Darling Agreement is South Australia and the Nationals hold no seats in South Australia.  Second, water policy has significant environmental implications an area where the Nationals have a terrible reputation.

I assume the move is designed to sure-up Turnbull’s support within the Coalition but it does seem to be a case of giving away a lot too early in order to gain support.  There are 150 seats in the Australian Federal Parliament’s House of Representatives and 90 of these are held by Coalition members of which only 16 are National-Country National Party (NCNP) members.  In terms of power index measures the NCNP members are barely pivotal to forming a majority although they would gain greater power by alligning themselves with the more reactionary elements of the Liberal Party.  But the Nationals as a whole are simply not important enough to the Coalition to warrant a gift of the family silver.

I think other gifts could have been given to secure NCNP support.  This offering seems particularly costly to our nation’s environmental future.


Consensus on tax reform

The consensus on tax reform that is emerging (see e.g. AFR today, editorial, paywalled)  is a continuation of the tax reform trends that have been around for at least two decades.   The basic idea is to swap the tax mix around so that there are fewer adverse effects on working, saving, investing and taking risks.  I summarise the main elements as 5 points. Continue reading Consensus on tax reform


DVD rental stores & history.

DVD rental stores have been buffeted by competition and technological change in a way that is fascinating to students of business history. A fun thing to consider too because simple perceptions here drive justifiable economic knowledge and insight.

I once had 4 of DVD rental stores within 2 km of my home. Now there are none – the last closed  a few weeks ago.  I recall the original movie rental stores stores that rented out VHS and Betamax video cassettes and the eventual disappearance of the technologically superior Betamax cassettes.  It was during this period that I bought a few Laser Disks with my favourite opera on them – it must have been 20 years ago. There were even a few specialised laser disk stores around Melbourne.  The arrival of DVDs killed off video cassettes and laser disks and competition between the stores eroded profits until only a few surviver stores remained in accord with economic theories of monopolistic competition.  Now online streaming, cheap legal DVDs under, I suspect, pressure from the illegal DVD trade, have finished off most of those.  Both online streaming servives and online vendors of new DVDs have search facilities that are far superior too than those available in the physical rental stores. In the end, too, rental DVDs were often scratched so if you wanted to watch a complete unblemished version of a movie you bought it (the advent of illegal copying and competition have driven down the price of new DVDs close to their marginal production plus distribution cost) or downloaded it from a streaming service.

Few DVD rental stores remain these days  and they have switched to specialised operations of the type described in this BBC report.

The DVD rental business is going the way of the CD music business and, to a less extent, book retailers.  Book retailers probably have a brighter future because people do like to browse through boos in a store but, even here, I suspect many browse then buy online at cheaper prices.  It is individually rational behaviour that in fact creates social costs.


Congestion Pricing & Infrastructure Australia (amended repost)

I have been glancing through the 3-part report by Infrastructure Australia (a summary here) on Australia’s infrastructure needs over coming decades. I was mainly interested in the transport sector and proposals that looked – on casual reading of the press – like yet another case for user charges (congestion charging and heavy vehicle charging for road damage costs). As I started working on these issues more than 20 years ago I do get a little peeved by the almost annual attempt to revive such discussions somewhere which always get promptly forgotten.

On this occasion I can only say I am underwhelmed by the low economics intelligence of the Infrastructure Australia analysis. They still don’t understand the basics of user-charging. Nor for that matter did my friend Ian Harper in his recent reported proposals for competition reform.

Infrastructure Australia take as given Australia’s dismal future population trend forecasts (fair enough not their concern, but in my view the forecast rates of population growth via our migration program are unacceptably high) and then look for ways of dealing with the surge in congestion and heavy vehicle demands that will result. Their answer? Build more roads everywhere and find ways of funding such investments. Their answer? Road use charges that fund the roads.

That fundamentally misrepresents the intent of user charges. Unless these prices target congestion and road damage costs this won’t ensure efficiency. Indeed the issue is not primarily one of funding at all. All roads – new and old alike – that are subject to external costs should be priced to eliminate the external costs imposed on them (congestion and road damagers) so that all roads are utilised efficiently. Then if the roads make a profit expand their scale thereby making expansion decisions that reflect demands at the socially correct price.

Its the same old dumb-assed “engineer think” that has dominated Australian road infrastructure planning for decades. It is a shame that they cannot get the basic logic right.


Pension reform (amended repost)

The reforms on eligibility for the pension that Labor has opposed seem sensible to me, The current eligibility for a part pension (for a couple) is $1.15m in assets whereas under the proposed Coalition-cum-Green reform this is reduced to $823,000.

Suppose couples want to leave no bequests and that they own a house worth $650,000. Suppose also they retiree at age 65 and know they will live for 25 years to age 90.

The big factor determining their sustainable income is the rate of return on their assets and whether they can engineer a reverse mortgage on their house that yields this rate of return.

Suppose their assets earn a paltry 2% annually real return. Someone just on the old current eligibility limit (without a home) can spend $58,903 annually over the 25 years (or $92,102 if you include the reverse mortgage). With the lower eligibility requirement they can spend $42,154 annually (or $75,448 with the reverse mortgage).

More realistically suppose returns of 5% annually on the investments. Under the old limit they can (without a home) get income of $81,538 annually (or $127,715 with the reverse mortgage). Under the lower eligibility requirement they can get $58,393 annually (or $104,000 with the reverse mortgage).

I have used simple annuity formulae* to do these calculations. The basic idea is that you can draw down the value of assets and draw interest on residual asset values until they hit value zero at age 90. The Labor Party it seems to me in opposing the Coalition reforms is supporting people who don’t really need it. Of course everyone (including me) want its but it isn’t an imperative.

With a bit more effort I could allow for bequests and longevity risk but these will change these calculations in a straightforward way. Bequests anyway are irrelevant in a situation where you are trying to compute eligibility for basic pension entitlements. Notice too how critically the value of the family home enters these calculations. Excluding the family home from these asset tests does not seem defensible if the opportunity to purchase reverse mortgages is available.

(*) It is a while since I have done financial mathematics but the equation I used is that the sustainable income X * annuity formula given interest rates r and time horizon n, namely a(r,n), must equal the initially value of the capital asset V so X =V/a(r,n). I think that’s right.


Plain packaging (repost from Blogger)

Ireland has followed Australia in introducing plain packaging of cigarettes. David Prentice and I gave an interview on the Australian experience and its implications for such countries in The World Customs Organisation News, February 2015, Vol 76, pages 62-64. This type of work David and I did on plain packaging won’t get prestigious academic awards but in terms of practical policy and promoting the public good I rank it among my best.


Tax reform economics

I am interested that the two dominant ideas in tax economic theory over the last 40 years seem to diminish or downplay the case for redistributive taxes.

First, there are the strong arguments on income taxes from James Mirrlees (1971), and a plethora of followers, which places a premium on relatively flat income tax schedules with a hefty lump-sum income transfer to all. This is effectively a negative income tax of the type promoted by Milton Friedman in 1962.  There is specific concern in this literature with the disincentive effects of high marginal tax rates on high income earners.   I exaggerate a bit here – some of the Mirrlees followers do argue for a U-shaped marginal tax schedule (high marginal tax rates at both low and high incomes)  – but I think the main thrust of this literature is consistent with the original ideas of Mirrlees.

Second, the literature on optimal excise taxes (when there is also an income tax instrument available) generally favours uniform VAT-style excises over differentiated excises of the type favoured by Frank Ramsey in 1927. There is almost no support for the idea of levying high taxes on luxury goods at least when an effective income tax is available.  The early work here was by Anthony Atkinson and Joseph Stiglitz (1976) but it has recently been generalised and extended by Louis Kaplow (2008). Since a uniform VAT style tax on consumption goods is essentially equivalent to having no excises at all and substituting for this a proportional income tax this literature parallels the optimal income tax literature in its fairly anti-redistribution implications.

Almost none of the authors of this type of theoretical work come from the “right” of politics – they are mostly somewhat left-wing in orientation.  Indeed Joseph Stiglitz has written books such as “The Price of Inequality” that criticise strongly the growing inequality particularly in the US.  It seems there is a theoretical Stiglitz and one who is a political advocate and that he keeps these hats quite separate. Much the same comment too could be made about Anthony Atkinson who criticises growing inequality and, in particular, the failure to address issues of poverty.

It is never clear how much impact theoretical work in economics impacts on practical policy-making but the dominant trend throughout the OECD in recent years is to implement the type of agenda suggested by this theoretical work: See e.g. Mankiw et al (2009). Most OECD governments have moved towards flatter income tax schedules and away from differentiated excises towards VAT or GST style taxes. The same is definitely the case in contemporary Australian tax debates which seek , by-in-large, to push further the income tax flattening and GST promoting tax policies developed in recent decades.

One argument is that society needs to live with a low income class who don’t work but who receive large transfers from the wealthy who pay high average but low marginal tax rates. To me that is a bleak vision although it is one that is explicit in the original Mirrlees work. According to this view average tax rates can be quite high if marginal rates are high on low income earners – perhaps through the conjunction of means-tested transfers from government and the tax system.  Then much income can be accessed from high income earners who do not suffer substantial disincentive effects in terms of reducing labour supply effort because marginal tax rates on them can be low. This is then used to effect transfers to the poor who, even should they choose not to work because of the high effective marginal tax rates, do not impose large efficiency costs on the economy because they are relatively unproductive in their work roles anyway.  This assumes that involvement in work has no intrinsic value or social role and that a worker is equally keen living off social security benefits than working for similar incomes – a view that is plausibly false.

It might just be that the focus of economists is on efficiency issues since efficiency gains can be justified by weak value judgements such as the Pareto Principle.  Income distribution issues are less the concern of economic theorists.  Or it might be thought that achieving egalitarian income distributions is an unnecessary  tax policy objective if everyone gains when the wealthy are less constrained to still further increase their wealth – “the rising tide raises all boats” argument of John F. Kennedy. That can be question by evidence showing persistent poverty problems.   It is sometimes further argued that democracies, such as the US, have become captive to wealthy vested interests and this interests are driving tax policy. Finally, apart from lump-sum transfers to all that mean low rates of tax at low incomes it could be that other policies are being seen as the primary means of addressing poverty. One that is often mentioned is the minimum wage law.  Of course too such laws are widely criticised on efficiency grounds as causing unemployment.



My blog up and running again

I got my February 2006 – January 2015 WordPress blog up and running today thanks to my US hosting service Bluehost. I have used this service for about 5 years and recommend it.  Inexpensive and high quality.

Everything now seems to work – themes and links to FaceBook.  I could try to transfer a set of posts I put on a Blogger site but that can wait.

One difficulty is that I have probably lost most of my readers.  Please, readers, return.




What does Xmas mean? (repost)

Xmas is a celebration of what is guessed to be the approximate birth date of Jesus Christ. It is an important occasion in almost all civilised societies for both Christians and Non-Christians alike.

In Australia the number of people who describe themselves as Christians has fallen from 71% of the population to only 64% in the 10 years to 2006. I have been a non-believer for my entire adult life so I am gradually acquiring more companions. As Kevin Rudd said recently, Christianity faces the prospect of being a minority belief – part of the ‘counter-culture’ – in Australian society. But Christianity remains by-in-large an important positive force in our society and Xmas remain important to many of us – both the secular and the religious.

I lack empathy with multi-culturalists and those from other religions who see the widespread respect paid to Xmas as something offensive to atheists and non-Christians. Given my early Christian upbringing I still feel comfortable celebrating the message of hope, forgiveness, friendship and kindness that Xmas brings to us. I have a long-standing respect for the values that the man Jesus Christ espoused. Most of all, the birth of a baby indicates the hoped-for possibility of living in a better world. The materialism associated with Xmas does make me reflect – but most of us enjoy giving and receiving gifts. One can be too puritanical about such matters. Most of us enjoy some of the incidentals of Christmas – carols being sung, food and wine being imbibed and homes being brightly decorated. At the very least these are a valued part of our cultural traditions.

The idea of hope associated with Xmas and the belief that the world can be a better place because of the birth of a boy is a beautiful parable. I do not believe that to appreciate the beauty of this notion that one, in fact, needs to accept the idea that the young boy is the ‘son of God’ or our ‘saviour’. It is enough to think about our prospects for renewal and for trying to live a life that reflects Christian values of kindness and forgiveness even if not of Christian theology.

No religion – Christianity included – should ever be seen as having the last word on anything. One of the great advantages of living in Australia is its openness and the freedom of choice it offers with respect to religion. But the wisdom of many religions, freed from their bigotry, can guide us towards living happier, more fulfilled lives. Whether you are thinking about what job you should take, what partner you should live with or how you should deal with the neighbours and with outsiders, the message of Christianity has something to teach us all. God might be irrelevant in all this – we are after all human beings – but the core message of Christians and the hope of Xmas is not. (478)


Plain packaging & the lack of evidence that it works

Sinclair Davidson and Ashton de Silva argue in the current issue of Agenda (here)  that there is no evidence that the plain packaging legislation works.  They base this finding on an inspection and analysis of data from 2001 to quarter 1 2014.  The legislation was introduced in December 2012 so there are 4 (or 5) quarters of data post policy to consider and about 90 before the change.   They try various techniques but the only statistical results they find is some evidence that consumption increased.  This they rationalise by supposing that if people get less utility from cigarette smoking that they will smoke more to gain the same utility level and somehow try to link this up with Lancaster’s “characteristics” theory of consumption.  They also adapt the standard “compensation” argument of the smoking literature – if people smoke lower nicotine cigarettes they will smoke more.

The second argument is correct but irrelevant here as there is no data suggesting a switch to lower nicotine products after the introduction of plain packaging.  The first argument seems wrong for reasons implied in the correct though misplaced first argument. Smoking is an addiction and smokers adjust their consumption habits to maintain desired levels of the addictive compound (nicotine) their brain seeks. It is highly doubtful that increased nicotine consumption can substitute for ugly packaging.

What have these authors shown? Well really nothing at all.   They don’t have a satisfactory theory and can only record that they can’t detect any relationship.  They try to fudge the fact that they have shown nothing by titling their article “The Plain Truth About Plain Packaging” which suggests a big expose.  But the truth is they have shown nothing at all.  They seem to admit this in a penultimate sentence “Establishing the efficacy of the plain packaging policy will take painstaking econometric analysis over a long period of time”.  I agree but my priors are that making a product less attractive in a marketing sense will reduce its appeal not increase it as these authors suggest is possible.



Auction clearance rates

For years I have struggled to understand the idea that clearance rates are a useful indicator of the demand dynamics of the home auction market – this is an example of this type of story.  A house will be sold when the minimum acceptable price to the seller (vendor price) is exceeded by the maximum price a buyer will pay (the buyer price).  Then a trade occurs and the house is sold.  The difficulty of course is that this condition requires the vendor price to be low enough as well as the buyer price to be high enough.  Clearance will not occur if vendors have unrealistic price expectations (e.g. the situation in a boom) as well as when demand is weak. Likewise I struggle to see why agents are praised for selling a highly desired set of apartments almost instantaneously – it seems to me they should be condemned for not doing the right thing by a vendor and charging a higher price.   I have asked real estate people I know about this but I never get an explanation that makes total sense – typical efforts include: The agency got it wrong, selling constraints imposed by financiers, vendor wanted a quick sale etc.  Does anyone have a half-decent reason for this?


History of violence

Enjoyed this article  – and the video – by Steven Pinker on the history of violence both from ancient times through to the “Long Peace” after 1945.   In almost every respect the world has grown less violent through history and the decline has been most marked after 1945.  Conflicts and wars within countries, between countries, within families and violence involving marital partners, rapes, children and towards animals have all shown steady decline.  Modernity and “progress” have, on balance, been a good thing and they have not – as much popular opinion contends – involved a price in terms of increased violence.  The institutions of civilisation and the development of abstract thinking about ethical issues have been worthwhile.  We should be grateful for the progress made and not look romantically towards a distant past when things were simpler.  I am interested in the idea that the breakdown in tribalism and in the exclusive focus of individuals to family and clan have been a positive and worthwhile development.

Pinker a flexible and interesting thinker.



Rock, Paper, Scissors

I enjoyed the piece on Rock, Paper, Scissors (RPS) in today’s AFR (paywalled but it it was featured in the British press a while back).  Recall the kid’s game  – two parties simultaneously call “Rock”, “Paper” or “Scissors” with the mnemonic “Rock breaks Scissors, Scissors cuts Paper and Paper covers Rock” – so “Rock” beats “Scissors”, “Scissors” beats “Paper” and “Paper” beats “Rock” while the same call of each is a tie.  This game is normally repeated over a series of trials.  Game theory suggests that a randomised strategy of calling each alternative with probability 1/3 outperforms any other strategy  because it gives your opponent no predictability advantage.  But how would you play this game (as a “one-shot” game)  if you wanted to win?  There are many suggested strategies on the internet and there are “expert players” who have skills at detecting non-random responses from their opponents.

Men play “Rocks” most and women apparently play (painful!) “Scissors” most so playing against a naive man a good initial call is “Paper”.  Overall however “Rocks” are played more than “Paper” which is played more than “Scissors”.  Naive players don’t like to make the same selection more than two trials in a row so a “rock” “Rock” is likely to be followed by a switch so, after such a sequence the best option is to choose whatever signal the doubled signal would beat – here “Scissors”.  The US RPS champion starts with a predefined strategy (call this, then this etc depending on whether he won or lost etc) but then switches to improvisation based on pattern recognition and perceptions of an opponents emotional state  in playing. Trash talk is allowed in most tournaments and honesty can be a good policy – I tried this tonight with my son and it worked – I called what I said I would play and then played it. Fooled him as he assumed I would lie.   Facial expressions and the way you pump your hand when starting off (1, 2, 3 , call…) can signal your opponent’s intention.

There is a book length treatment of these issues that I have just purchased from Amazon.  Could I validly include this in a course on game theory? Skilled strategists should outperform those who have studied game theory so there is some a priori benefit from studying the actions of the winners.