Posts Tagged ‘Economics’

Homework: ICBC Should Stay Public

Tuesday, February 16th, 2010

If ICBC were a private-sector monopolist, we would expect to see high prices and high profits. But ICBC is a public entity with no profit mandate and we observe the lowest prices for primary insurance for any province. What can explain these low prices?

A monopoly supplier is a larger organization than a set of competitive suppliers. Large organizations benefit from economies of scale. Monopolists of low-elasticity goods do not need to spend money on marketing. Competitive firms sometimes engage in price wars outside of price equilibria, which is a waste of resources when the war ends in a stalemate.

Private-sector firms are required by their owners or shareholders to “skim” profit off the difference between sales and costs. From the consumer’s point of view, this profit is an inefficiency (it would be cheaper to buy the firm’s inputs directly). Since ICBC has no profit motive, they should be able to provide their product for a slightly lower price. If ICBC suffers a shortfall in revenue, it will be covered by the taxpayers of BC.

Since primary insurance is legally required, the government would likely regulate a competitive market. This regulation, possibly in the form of a commission office, adds an additional cost to BC taxpayers. ICBC currently regulates itself, so essentially it may be impossible to privatize this function.

Insurers’ costs go down when the number and severity of accidents goes down. As a public entity, ICBC can directly offer policy advice on safety, for example the recent ban on cell phone use, to cabinet. A private insurer has more options for reducing costs and even an industry association does not have the lobbying power of a Crown corporation. BC should have less accidents with a public insurance agency than a competitive market, but it is difficult to calculate this benefit.

Car insurance provides opportunity for insider fraud. Despite recent high-profile cases, it may be easier to control corruption with public sector values than private-sector monitoring. Public servants believe that the social cost of fraud is higher than private employees. Lower fraud results in lower costs.

Homework: ICBC should be Privatized

Friday, February 12th, 2010

There are some reasons why BC should consider privatizing ICBC and opening the primary insurance market to competition:

ICBC has a legislated monopoly on a low-elasticity good: primary insurance is legally required and few consumers are willing to go without a car. If ICBC were a private sector company, they would increase the price of primary insurance to maximize profits. Since ICBC does not have a mandate to profit, they do not maximize the price but they also do not minimize it. A primary insurance market with competition should result in lower prices.

Since ICBC is not collecting a profit from the non-minimal prices, where else is the money going? It is being passed along to their suppliers. ICBC’s bigger supplier, by far, is their employees. Employees in monopolies engage in “rent seeking”: earning a higher wage by virtue of their position in the market. A market with competition of employers should result in lower wages (the savings passed on to consumers).

ICBC’s employees also have no incentives to work smarter: there’s no competition attacking their market share and, as public sector employees, their pay is not linked to company performance. Competition in a market increases productivity. Existing firms invest and innovate to increase their competitiveness and new firms grab a share of the market through innovation. Higher productivity results in lower cost.

As the sole supplier, ICBC has less incentive and opportunity to innovate. For example, many economists advocate pay-as-you-drive insurance rates. But ICBC has no reason to implement changes without political will. A competitive market would produce more innovative services.

Recent scandals at ICBC demonstrate a sense of entitlement. Employees of a monopolist feel that they “own” the market. Being a Crown corporation under control of a Minister opens the door to political meddling. Consumers would receive higher quality from independent organizations.

Economic Analysis of Men Chasing Women

Monday, January 25th, 2010

I’ve been thinking about another interpretation of the beauty vs message graph for men messaging women that I posted last week:
attractiveness normal distribution and message reverse Weibull distribution

I was quite surprised that the men’s graph didn’t follow a Pareto distribution: the 20% most attractive women should have received 80% of the messages. I had to refresh my economics to understand why.

Consider the (unembeddable) bar scene from A Beautiful Mind. This excellent article explains the economics behind the scene. The scene is not an example of a Nash equilibrium, it’s an example of a coordination game.

A Nash equilibrium is when no one can improve their lot by a selfish action. A Pareto optimal outcome is where the total happiness of the group cannot be improved. In this case, the Pareto optimal Nash equilibrium is for one of the men to get the blonde and the other three to get brunettes.

The question is how to determine which of the men should go for her. Women set prices for themselves. Men, based on their attractiveness and other qualities, have “money” to spend on them. Think of the women as having probabilistic prices: a brunette is more likely to go home with an average man than the blonde; the blonde is more likely to go home with an above-average man than an average man.

The payout for every individual man is the probability of getting the woman he targets multiplied by the value of that woman. If the blonde knows her value, she should set her price at a level that makes her more attractive than a brunette for the man with the most “purchasing power”. Then the market will tend to an equilibrium where that is the man who goes after the blonde and everyone else goes after a brunette.

So, without any cooperation, we should end up with people paired off who have relatively the same value. The women with the lowest attractiveness are not getting messaged either because the low-value men believe they will be happier single or because the price signals are distorted at that end of the market. The women with the highest attractiveness are not getting messaged as much as their slightly-less-attractive competition because men perceive their price as being too high (either because the women are acting irrationally or because the price signalling is noisy).

How Much Carbon Tax?

Friday, January 22nd, 2010

The big advantage cap&trade has over a carbon tax is that a cap is easy to set compared to a taxation rate. That’s because international agreements are always negotiated in terms of emissions amounts. We’ll just assume that the negotiators are using climate models to determine what amounts to negotiate for.

Elasticity is the measure of how price-sensitive a good is relative to cost. The elasticity of demand is how much consumers will adjust their consumption if the cost goes up or down. Economists are aware that there are different elasticities based on time period: for example, it takes time to purchase a more fuel-efficient car.

With a carbon tax you need to know the elasticity of demand for fuel to figure out how much emissions will drop for a given taxation rate. I am having a very hard time finding estimates of a reasonable rate to achieve various emissions targets. Maybe this is why the public is lukewarm on carbon tax – would you vote yes to be taxed a completely unspecified amount?

Using a economic model I found on CarbonTax.org and the Canadian Ministry of Finance’s stats on elasticity of demand for air travel I calculated that the carbon tax would have to be $325/Imperial ton to cut airplane emissions to 50% of 2009 levels. Air travel has a much higher elasticity than gasoline*: CarbonTax.org estimates a tax rate of $370/ton would decrease emissions by a third.

In BC, a $325/ton tax would produce enough revenue to set corporate and income taxes to 0 and then produce a $5 billion surplus (which could be used as a $1250/person dividend, or something completely different).

* I’ll explain why I chose to model the relatively-insignificant air travel sector in a future post.

Intentional Climate Change is Better than Accidental

Friday, December 11th, 2009

This New Yorker book review of Superfreak-onomics implies that Levitt and Dubner show their true colours as right wingers, just like all economists, even renegades.* ;) They downplay the seriousness of climate change and suggest geoengineering is a better solution than restricting carbon emissions. The review quotes Al Gore:

We are already involved in a massive, unplanned planetary experiment. We should not begin yet another planetary experiment in the hope that it will somehow magically cancel out the effects of the one we already have.

I agree with the criticism in the article right up until the end where she mentions that Freeman Dyson has proposed genetically engineering trees to grow on Mars. The value of running yet another planetary experiment on Earth is that we will learn how to terraform other planets!

I’ll trade a 20° Earth for a 28° Venus and a 7° Mars.

* Exception: Richard Thaler supports carbon taxes in Nudge.

More Fringe Economics

Saturday, August 29th, 2009

On the theory that long responses should be new posts, here we go:

Alright, a couple of developments:

First, I underestimated the budget. MPF scooped the Times Colonist (again) in reporting the funding cut but the TC got the inside story: Fringe’s budget this year is $700,000. The funding cut is $35,000, or 5%, plus 5% for the HST for a total hit of 10%. I don’t like including the HST though because it’s value-added and effects the whole province. It’s more an adjustment in the value of the currency than a pricing change.

Second, Fringe is 10 days long. That’s $70,000 per day for a community theatre event staffed by volunteers. I talked to a friend who used to organize Fringe in Minneapolis and, to quote him directly, “that’s an absurd amount of money to spend on Fringe. Absurd.”

I’m interested in knowing where it all goes. Perhaps I’ll Google around for some kind of statement of expenditures. I bet it’s available as a FOIPA request for the grant application. The TC says something about it being for “technical and administrative expenses” which doesn’t bode well — those seems like the kind of things volunteers would do for free, or that could be expensed, donated, and deducted twice by corporate affiliates like Intrepid.

Third, I was doing the math in the shower this morning and estimated thus:

Imagine you have 20 shows at 50 seats each, which all sell out, and you increase ticket prices from $9 to $20. That’s only an extra $11,000 so insufficient to cover the shortfall. Perhaps someone in the know could critique my figures though? I just made them up — how many shows sell how many seats on a total basis? What’s the take on those passport-buttons?

For economics geeks like me out there: What’s the elasticity of a Fringe ticket? It’s going to have a sloping coefficient, sure, but it seems reasonable that people are almost indifferent between, say, $9 and $10. There’s clearly some room for a price hike.

Talking to someone else who was at the show last night, “they should charge more” is not a unique opinion. Okay, part of the audience is the elderly and the poor — but really? I seem to remember the shows being stuffed with hipsters.

Victoria is getting richer and younger, not poorer and older. I think there’s a case there for better advertising — hit more offices than outreach shelters. Get in touch with a team building leadership consultant and have offices full of programmers, lawyers, accountants, doctors, and government workers in to network with each other.

And students, while feigning poverty, are well known to be price-indifferent to pretty much everything, despite what they think and say. “I’ll just use debt, or skip the alcohol” is their eternal last minute justification.

In any case, I no longer think price hikes are the whole solution.

If this was a business case I’d dig into the expenses and look for efficiencies, raise prices very slightly (enough to keep them locally-inelastic), and turn the public funding cut into a rallying cry for private funding. Give a bank some cheapgood public relations:

Fringe Fest, brought to you by RBC Dominion Securities. Invest in your community and in your future.

Targeting young professionals and hipsters is ridiculously difficult now that we’re all on to the suckage of television. This kind of situation is tailor-made for generating corporate goodwill and new RRSP signups.

To take it further, $700,000 per year is endowment-level cash. If you could run the show on the cheap for a few years and invest the remainder eventually you’d end up with a self-sustaining show instead of one beholden to the vicissitudes of public economic policy. That’s “only” an endowment of $14 million invested at 5% or 6%. A little more to inflation-protect it, call it $20 million. Has anyone rung up the Egoyans and asked if they’d like to give back? If you can’t find rich people looking for $20 million in tax deductions in Victoria I suspect you’re not actually trying.

I love The Fringe, I love the people, I love the shows. They need to lose the addiction to public funds and do some hard thinking about where that $70,000 per day is going. A 5% budget cut at the end of a terrifically deep recession isn’t the kind of event that should send a cultural institution spinning off into the artless void (I like that turn of phrase, Karen).

If Intrepid wants to talk to someone about business strategy and financial planning they have my contact info. I’m registered as a volunteer, perhaps my time would be better spent on the finance committee than distributing hand fans and collecting sports day hot dog vouchers. They could also use a better PR firm and probably better accountants, and I know people.

Idiocracy, Doom, and Great Customer Service

Wednesday, August 5th, 2009

Via Treehugger, via BB: If you want to be really kind to the environment don’t have any kids.

Of course, then you’re breeding altruism out of the gene pool. That’s probably for the best, though. Altruism is apparently a survival counterindication now, best not to torment the consciences of the little darlings. Of course, if you have kids anyway congrats! You didn’t need to worry: You’re not an altruist! Now head down to your local GM dealer and buy all the SUVs you need to protect your oxytocin-high-inducing munchkins.

Poor humanity: Smart enough to know about degenerate prisoners’ dilemmas, but too stupid to solve them.

To complement my bitter, bitter outlook I had onions drenched in vinegar today for lunch. I realized how far gone I was when I received terrific customer service from the counter — it actually kind of freaked me out.

“Wow,” thought I, “these people are helpful, prompt, friendly, smiling, and laugh at my ironic mannerisms… How uncomfortable.”

I think I’m getting a kind of assholishness Stockholm Syndrome. I vacillate between “Mean People Suck” and “Fuck Nice People, They’re Just Stupid” pretty regularly.

Anyway, that was certainly not the customer service experience I’m used to. On the way back to the firm I ruminated on my discomfort, and my lunch. I thought about Every Hand Revealed and my tangy, salty, crunchy, bitter, batter-fried onions. So good I wish I had more RIGHT NOW!

You have to adjust for the wry Scandinavian-ness of the book (“My objective today is to avoid any dastardly Finns!”, “Uh oh, it looks like we’re in Swedish territory!”), but The Great Dane mentions at least once that a particular card in a particular situation tastes bad. I wonder: Synaesthesic poker decisions, perhaps?

Every poker player has a couple of wild ideas. Doyle Brunson’s original Super System contains a chapter on why he thinks ESP exists based on decades of him reading his opponents’ minds. Barry Greenstein’s fabulous Ace on the River has a chapter about how all high-powered people — sports stars, politicians, business people, etc — need a regular supply of extramarital sex to keep on top of their games, poker included.

My crazy poker theory is much less inflammatory, for once. I think that it’s possible for our incredibly powerful pattern-matching brains to pick up shuffling algorithms, particularly live. This could be why a card “tastes bad” — the right brain is banging on the senses saying, “danger, poker Robinson, danger!”

Alright, that’s it for lunch hour. Back to the Accounting mines. I’m up to the interior to be burned alive for Spacekat’s wedding for the next five or six days. I doubt I’ll have my computer with, so: Hiatus! I’ll see if I can get some pics of one of these 2,000ha superfires that’re roasting away in the backcountry.

And when the Lamb opened the seventh seal, there was silence in Heaven about the space of half an hour… And the seven angels which had the seven trumpets prepared themselves to sound.

Parking vs Density

Monday, July 27th, 2009

Jared pointed me to this Times Colonist letter, which suggests that Victoria needs to critically examine our zoning policies with respect to parking. In the letter, they talk a lot about urban sprawl, and various other, relatively boring outcomes of strong parking requirements for new development in urban centers. I think a much simpler comparison might have more impact: LA has similar policies to Victoria, San Francisco and NYC do not.

Freakonomics did a big series on misconceptions about LA, and why downtown LA has a reputation for sprawling, whereas downtown San Francisco is considered “vibrant”. The most interesting thing they linked to was this study on the true costs of parking in LA.

On the Pareto Efficiency of Poker Tournaments

Friday, July 24th, 2009

I am first in a small HORSE tournament at the moment. Eighty players remain of 240 who started.

If we stopped the tournament now and paid everyone equally then all of us would triple our buy-ins (240 / 80 = 3 buy-ins per player remaining). But that doesn’t take into account stack size or player skill. I’ve thinned the field more than other players — it seems fair that I should get more. Still, an equal payout seems like the happiness-maximizing distribution — it pays more than 75% of the remaining field will end up getting.

The equal distribution is also not Pareto-efficient because there is another distribution which doesn’t make anyone relatively worse off while enriching others. You could, for example, take $1 from all remaining entrants and give it to the chip leader. It seems that setting a tournament structure is an exercise in balancing overall happiness using Pareto efficiency. More efficient tournaments make better players happier at a cost to everyone else.

At least in theory.

This week I’ve enjoyed a few hundred smaller tournaments that pay the top half of the field twice the starting buy-in and then call it quits. Their pay structure is highly perfectly Pareto-inefficient and that affects the strategy for playing them. First, it drives variance way down — it’s harder to lose “accidentally”.

Second, essentially the top half of the field all have the same chip count so there’s almost no point in two people above that cutoff getting involved in a hand — it’s not likely that doing so will get you closer to winning. This brings Sklansky’s theorem into play in interesting ways, especially the bit about implicit collusion, and can give rise to the almost-mythical “folding Aces preflop” situation (I’ve been mucking AK like crazy). Morton’s theorem is wrong in certain situations as well — perhaps counter-intuitively it makes sense for you to help your neighbors stack the 50% – 1st player by playing sub-optimally. Cooperative poker!

Anyway: Pareto efficiency doesn’t consider fairness, equality, or happiness. Maybe we should be balancing our big economy differently? Pareto inefficiency seems to make small poker economies more fun :)

What Your Country Can Do for You

Friday, June 12th, 2009

Do taxes redistribute wealth from hard-workers to moochers or pay for public services that the wealthy disproportionately consume (eg: bigger target of property crime, children more likely to go to university, etc.)? The Canadian Centre for Policy Alternatives has attempted to measure how much Canadians benefit from public services.

The CCPA says 82% of public service consumption is measurable by household; only 18% is indivisible things like environmental protection and national defense. People in households that make more than $50k/year all get around $15k/year (households that make less get significant transfer payments). Wealthier households tend to have more people in them, so they consume more public services at the household level.

Here’s the most detailed table the report provides for figuring out how much you’re getting:

% of pop per capita benefit
Single senior 4% $25,386
Childless single 10% $21,929
Senior couple 12% $21,199
Single parent 6% $20,416
Childless couple 15% $15,407
Empty-nester couple 11% $14,758
Family 41% $13,332
Other household 2% $16,740
Total 100% $16,527

Multiply by the number of people in your household. Then subtract your total personal taxes from the Fraser Institute’s calculator. (I figure the left-wing bias of the CCPA will cancel out the right-wing bias of the Fraser Institute.) If you have a surplus, vote for more taxes; if you have a deficit, vote for tax cuts.