I agree with Russ Roberts on the dynamic effects of GMail: in a very short time span my Yahoo! email capacity went up from 6 MB to 100 MB, which is good, because I have a couple of friends who like to travel and email home some VERY high-resolution photos.
Competition is wonderful.
Steve Verdon has a thought-provoking post with good links on the potential value of a synthesis of Austrian economics and evolutionary game theory that focuses on learning. One of the problems even for the more sophisticated models of learning in games is that the economist still pretty much has to specify the environment, and if you have to specify the rules by which the system evolves, you have to do it deftly to avoid just having the “evolution” be replication. So I’ll be very interested to follow his links and see if we’re converging on a valuable synthesis.
One sticker for me is going to be that in Austrian economic theory, one of the important features is that through the process of competition you learn both what your preferences are and what the opportunity set is. Game theoretic models usually fix those dimensions to make the models more tractable. And how do you formally handle the fact that not everything can have a probability distribution fit to it — in Frank Knight’s terms, we face not just risk but also uncertainty. Formal models don’t do a good job of capturing the joint dynamics of the discovery process and the omnipresence of uncertainty, not just risk, on some dimensions.
So thanks to Steve for the post and the links. I’ll check them out.
Virginia Postrel has a lot of good discussion of the issue of productivity growth, based to some extent on William Lewis’s new productivity book and some of Brad DeLong’s posts. Just a pointer to her discussion and links …
In the past couple of days I’ve done some things that have given me some insights into my current research questions – I’ve purchased appliances for our house and I’ve gotten our car’s emissions tested. Both of these situations have implications for policy regarding what are typically viewed as negative externalities. The main question to ask is: do we really need to devote as much public policy attention to “internalizing externalities” as we seem to do? My answer is, probably not.
My appliance shopping illustrates the point nicely. Without loss of generality, let’s concentrate on the decision over the clothes washer. I have always been a huge fan of front-load washers for five main reasons (in declining order of importance): they treat clothes more gently due to the absence of an agitator, they get clothes clean with less water, they are quieter, they use less electricity, and they are sleek and well-designed. In other words, functionality is the foremost priority, but I also care about the washer’s resource use and its design. In this case, I’ve cared even though I’ve never had to pay a direct water bill, but have always had the water bill rolled into the condo assessment. Saving water and energy matters to me, and my appliance choices have reflected that preference, even in instances where I may have to pay more for the more efficient one.
So, not surprisingly, I was looking at the Bosch Axxis washer. Sleek design, good water management, lots of options for cycle type/spin rate/etc. At $999 it is not cheap, about double the price of higher capacity top-load. But the combination of the features that satisfy my five preferences listed above led me to be willing to pay that much for it.
But the sales associate at Abt Electronics suggested that I consider the Fisher-Paykel washer, for a few reasons. First, Fisher-Paykel is making their name selling high-efficiency appliances that are superbly designed and deliver good results with very low water and energy use. They are already famous for their dish drawer, which is a great innovation that allows you to do half loads, and to stack two together to have the profile of a traditional dishwasher but to load and unload like regular drawers. It’s about 30% more expensive than competing dishwashers, but its unique drawer design has attracted a lot of customers, as has its low water and energy use. We are getting one (duh).
Second, even though the Fisher-Paykel washing machine is a top loader, it does not have an agitator. Its center core has rubber flippers that have electronic sensors that estimate the weight of the load. The water comes in through 300 holes in the tub, so it can soak all of the clothes and dissolve the detergent with less water. That also means that you can fill the tub pretty full without overloading the machine, so you can exploit some economies of scale in load size (good for time management and for resource use). The tub rotates back and forth to agitate the load and get cleaning surfactant action without having to rub the clothes together, so it’s gentle on the clothes. The water exits the tub through the middle core at the end of each part of the cycle. You can choose a spin speed, enter the type of fabric, and enter the water temperature.
Sounds pretty cool, right? And believe it or not, it was only $599, $400 less than one of its closest competitors, the Bosch. So not surprisingly, I went with the Fisher-Paykel, because it fared well on all five of my criteria, and did so at a good price relative to the competitors. They are certainly pricing this thing to move, aggressively.
By now you are probably asking, OK Lynne, why should we care that you are a laundry weenie? Both of the washers that I considered are Energy Star certified, and there is currently a $100 rebate on Energy Star-certified clothes washers. This rebate is being funded by the Illinois Department of Commerce and Economic Opportunity, ComEd, and the Midwest Energy Efficiency Alliance. So the net price I pay for the washing machine is $499. Energy Star is a federal government standard for appliance energy efficiency.
I would have bought the thing even without the rebate inducement. Heck, I went into Abt ready to spend almost double, before I knew about the rebate inducement. In other words, for people like me, with the preferences and/or the income to choose energy efficient appliances voluntarily, without any social engineering, the $100 plus the administrative and bureaucratic cost to fund and operate this program is an unnecessary expenditure.
Put another way: for customers like me, the Energy Star certification has some signaling value (it makes it easier to know which appliances are more energy efficient), although I could have gotten the information from the manufacturers’ websites. But the $100+ spent to internalize the externality was unnecessary in my case because I am choosing to “internalize the externality” myself, based on my own preferences and willingness to pay, without any inducement. Where’s the externality? This $100 just feels like redistribution, a transfer of surplus from other taxpayers to me for something I was going to do anyway.
So the policy question is this: why are they paying me to buy something I was going to buy already? If enough people are like me in the sense that they have the combination of preferences and incomes that they would choose energy efficient appliances anyway, why are we spending all of this money to “internalize externalities” that consumers are voluntarily “internalizing” anyway? Or, put differently, is there a meaningful number of consumers for whom the rebate is “Pareto-relevant”? Or are the remaining “externalities” irrelevant because enough of us are choosing to “self-internalize”? And if enough of us are doing so, and companies like Fisher-Paykel are putting products out there at very attractive prices, so what if some lower income folks free ride on our decision to buy energy efficient appliances? Part of the problem is that the standard social engineering perspective is that we should all reduce our energy use to as close to zero as humanly possible, so in some sense the advocates of the social engineering don’t think there is ever “enough” reduction in energy use. That perspective shows no concept of tradeoffs.
Pareto-relevant means that the rebate changes an individual’s decision at the margin from a less energy efficient appliance to a more energy efficient one. The rebate form has a questionnaire on it that asks you to list the primary reason you bought this particular appliance. In my case, I’ll answer it “gentler on clothes”. “Rebate” is one of the choices, as are “energy savings” and “water savings” and “quieter operations” and “like to buy the best”. In theory, these data could enable the sponsors to determine for how many of the purchasers the rebate was Pareto-relevant, although the fact that you can only choose one instead of listing them in rank order limits the value of the data.
Another policy question is this: is there a cheaper way to get us all to self-internalize? This is another way of asking if there isn’t a cheaper way to create property rights, thereby aligning the incentives to use fewer resources with the individual incentive to reduce resource use because it reduces costs. That question leads to the inevitable implication that energy and water prices that consumers pay must be transparent – they have to be allowed to reflect fluctuations in the cost of providing energy and water to consumers. If we had to confront the real costs of energy and water, then we would self-internalize to a large extent out of a desire to control our private energy and water costs.
That claim itself has two important implications. First, in real-world applications it’s difficult to discover the extent to which price transparency would lead enough people to buy energy efficient appliances to reduce overall resource use. This is where a well-placed plug for experimental economics is appropriate. Suppose we design a move from regulated water and electricity prices to market prices. We could construct an experiment that would look at the effect that regulatory change would have on appliance choices and, through that, on energy and water use. That would give us some handle on how many of the “externalities” that rebates such as this one are intended to internalize are actually Pareto-irrelevant, and should therefore be policy-irrelevant.
Second, we don’t each have to be forced to pay full, real-time fluctuating, prices for energy and water (note this is more relevant to energy than water). But the prices we pay currently for energy (and for water) are typically discounted, especially for residential customers, and we cannot choose from a portfolio of contracts that either allow us to insure against price fluctuations or to choose how much of the price fluctuation we are willing to bear. Such pricing choices would give us opportunities and incentives to “self-internalize” these supposed energy use externalities.
Let’s see … the house is totally overwhelming. Some of the walls on the 2nd floor and the living room ceiling had some seriously degraded plaster, so our main wall guys have had to spend a lot more time (and a lot more of our money) rescuing the plaster than we had forseen.
But it’s going to be great. The place is built like a tank. The new ductless air conditioning is in, the outlets are all rewired and any fire hazards have been eliminated, the plumbing has been spruced up and rerouted a little bit.
And I planted a tree, a cute little dwarf Japanese maple (green, not red) at the northeast corner of the house.
It is taking more of my intellectual and emotional energy than I had anticipated, especially since we’re likely to have about two weeks of additional time spent in temporary housing living out of boxes.
More later, gotta run to hear a talk from Doug North, Barry Weingast, and Avner Greif.
I am in Charlottesville, attending the Institute for Humane Studies Social Change Workshop, where I will be speaking on Thursday on a couple of things from my current research. More on that later …
Today’s Wall Street Journal (subscription required) has a great front-page article on morel mushroom hunters. It highlights one in particular, and gives a lot of insights into how these entrepreneurs make markets, and make markets work better.
When he loaded his family into a beat-up white Chevy van and drove here in May from his home in Randle, Wash., Hassan Voir figured he’d be earning as much as $800 a day. A Cambodian native, Mr. Voir has become a professional picker of wild mushrooms — matsutakes in September, chanterelles in January. When hunting morels, Mr. Voir travels in the path of wildfires, which his brother tracks for him on the Internet.
Mr. Voir has also learned that picking is just one way to earn money in this business. Another is buying. Structured markets don’t exist for wild crops. But markets emerge wherever these products are found. Here, crude white tents with signs that read “mushroom buyer” have sprung up on the dusty washboard road that winds north to the Canadian border. One of those tents belongs to Mr. Voir.
The 38-year-old Mr. Voir rises before dawn each morning and strikes out to pick, carrying along an empty pickle bucket and walking as many as five miles, looking for burned logs, riverbanks and other spots where morels thrive. When he returns 10 hours later, he opens his buying tent and starts his second job. Nearby, his wife and three young children live in a rugged tent with a blue tarp spread out before it like a front porch. Mrs. Voir warms her infant son Jamal’s milk over a fire.
I love this. He provides a profit opportunity for others who just want to gather, and then he profits from selling larger quantities of morels to wholesalers. Life is beautiful.
I’m having a Stephen Bainbridge day … his Tech Central Station article from last week on the impending Supreme Court case over interstate wine shipment sums up the issues nicely. He notes the hypocrisy of the claim that the bans are meant to prevent underage drinking, when in fact it’s bald-faced rent seeking:
It cannot be doubted that New York intends its discriminatory ban on direct-to-consumer sales, in large part, to shield its higher-priced, lower-quality wines from California competition. If New York really were concerned about access to booze by minors, for example, wouldn’t New York also ban direct-to-consumer sales by in-state wineries?
A good read. By the way, it was my birthday on Monday, and my dad came to town to see the house and celebrate my birthday with us. We went to Mon Ami Gabi for dinner, and had a yummy Chateauneuf du Pape. I can’t remember whose it was, or the vintage, but it was a bunch of things all at once — lush and restrained, spicy and fruity, definitely big. One of my favorite wines.
I commend Stephen Bainbridge for his summer reading plan to reread the entire Jeeves-Wooster cycle. “Ring for Jeeves” is great, and I concur with his observations on it.
Before the great flurry of packing boxes and shuffling around, I was reading some early Jeeves-Wooster stories out loud to my husband. Even without the British accent the language makes for outstanding live reading.
Another good collection of short stories is Very Good, Jeeves, which includes one of my favorites, “The Inferiority Complex of Old Sippy”.
When in England in March I acquired an anthology of a few Jeeves-Wooster novels with a foreword by Hugh Laurie, who played Bertie Wooster in the BBC/A&E productions in the late 1980s (opposite an inspired Stephen Fry as Jeeves). Laurie’s foreword was hilarious, and well worth buying a volume even with an overlap of a novel I already owned!
The timing cannot be a coincidence … in the wake of two different sets of audio tapes and transcripts from Enron that illustrate quite explicitly how venal their traders were, California’s Attorney General Bill Lockyer has chosen this week to express public outrage at a FERC order issued on May 12, over a month ago. This heavily-spun San Diego Union-Tribune article from Wednesday casts the issue as FERC ordering the state to pay $270 million in refunds to the very same “greedy, out of state, price-gouging generators” (those are Lockyer’s direct words from 2001) that manipulated energy prices in California’s poorly designed and managed so-called electricity “market”. This Sacramento Bee article does a better job of actually conveying some of the substance of the matter:
California’s latest war with FERC has to do with a little-noticed ruling May 12. FERC said the state Department of Water Resources owes $270 million to sellers such as Enron, Mirant Corp. and Williams Cos., the out-of-state companies that have been accused by California of manipulating the state’s beleaguered electricity market in 2000 and 2001.
The May 12 ruling is a complicated matter that stems from the state’s desperate efforts to keep the lights on in January 2001.
California’s big utilities, stripped of many of their power plants by the state’s deregulation plan, were falling into financial ruin because of skyrocketing wholesale electricity prices. They were so destitute, in fact, that the power sellers were refusing to sell to them. The state stepped in and began buying power on the utilities’ behalf at the Department of Water Resources.
According to California energy official Erik Saltmarsh, the refunds ordered by FERC have to do with purchases the water agency made in “real time” – those sometimes frantic deals made at the last minute when shortages popped up and various players bought and sold electricity back and forth.
At times, sellers had to compensate the state if a shortage developed because they couldn’t supply electricity they had committed to deliver, said Saltmarsh, executive director of the state Electricity Oversight Board. Those sellers were billed for the amount the state paid for the power.
When FERC ruled in 2003 that there was rampant market misconduct, it set a threshold for what electricity should have cost – and ordered sellers to make refunds for amounts over that threshold. While that ruling hasn’t been finalized, it should yield about $3 billion for California ratepayers.
Then, to the dismay of California officials, FERC went a step further. In its May 12 ruling, FERC said the fairness threshold also applies to electricity billed to the sellers during those “real time” deals. As a result, FERC said, the sellers paid the state too much – and the state owes them refunds.
The substance of the FERC notice from 12 May 2004 is arcane and challenging to understand (see pp. 25-28 for the discussion of the issue and the reference to the $270 million in question). Basically, my understanding of it is that in the period from 1 February 2001 to 20 June 2001, when the California Department of Water Resources/California Energy Resources Scheduling folks were purchasing power in wholesale markets on behalf of the financially strapped utilities, there were power transactions that were required to keep the network balanced in some hours. At these times the utilities had “net-short load” conditions, meaning that they had not made enough day-ahead purchases to cover their demand, so CERS had to buy real-time power on their behalf to keep voltage levels in check and avoid brownouts/blackouts. The California ISO, as the system operator, directed CERS to make these purchases to keep the network balanced. CERS made these purchase in bilateral transactions, meaning that they entered into contracts with generators.
The issue is who should pay for those purchases of real-time power to keep the network balanced. FERC’s position is that the parties responsible for the imbalance should pay for the cost of rectifying the imbalance. But it gets complicated because even though these transactions were bilateral contracts, the ISO had been treating them as sales to the ISO, but had been spreading the cost of them over all market participants, including utilities and generators. But by the law governing the operation of the ISO, and by FERC’s decisions regarding refunds from this period, these transactions are supposed to be subject to the refund calculations. That means (through all sorts of elaborate calculations and reasoning that I do not follow) that once the ISO fixes the accounting so it’s in line with the refund methodology and covering these transactions, a flow of $270 million back to non-utility market participants, which for all intents and purposes means generators.
This proceeding has been going on for years. This particular decision was made over a month ago. Yet Bill Lockyer chooses this week to fulminate about it, perfectly timed to ride the crest of outrage and disgust that I’m sure he expected (and has also helped to stir up, like it needed it) after people heard the Enron tapes. And, what a surprise, his office announced today that it has filed a commodities fraud lawsuit against Enron under new powers that the Attorney General was granted as of January 2004.
The shameless demagoguery of the timing boggles my mind. Every time Lockyer says or does some other populist thing that is economically idiotic using inflammatory rhetoric, like suggesting that the California PUC regulate refiners and retail gasoline prices because they “gouge”, I think he won’t be able to surpass it. Yet he does, over and over and over. I would not be surprised to hear that there is evidence to support his claim of commodity fraud against Enron. But sitting on the FERC order from last month and then steamrolling everything together with the release of the tapes and transcripts is utterly pathetic.
And the state’s two senators are piling on. FERC responds by saying that they will review the transcripts again to see if they bring up any evidence that would support changing the refund decisions currently in place.
