Words of wisdom from Bryan Caplan

by on February 7, 2014 at 2:56 pm in Economics, Education, Philosophy | Permalink

BC: Every economist who gives policy advise is implicitly relying on philosophy. Unfortunately, most economists want to rely on philosophy without really reflecting on it, so they’re usually just crude utilitarians (with a heavy bias toward the status quo and democratic fundamentalism).

And:

Question: With the drought in Southern California is it possible the state is over populated? Meaning we have to halt immigration into the south west?

BC: No. Just raise the price of water!

There is more here.

Alexei Sadeski February 7, 2014 at 3:03 pm

99% of Bryan’s words are wise.

Spencer February 7, 2014 at 3:19 pm

Useless advice unless you tell them how much.

prior_approval February 7, 2014 at 3:26 pm

‘who gives policy advise’

The problem with spell checkers is that they don’t catch the wrong word.

Yancey Ward February 7, 2014 at 4:37 pm

Depending on what device he wrote it on, it is possible the problem is that it caught the right one by mistake.

Phillip Black February 7, 2014 at 3:29 pm

We HAVE to be utilitarians. This is what economics is by definition. We make decisions up until MB=MC.

Michael Abrahams February 7, 2014 at 4:24 pm

This is incorrect. I suggest a review of the public choice literature to learn of some of the various perspectives that have been introduced in recent years. http://en.wikipedia.org/wiki/Social_welfare_function

Govco February 7, 2014 at 6:34 pm

OK, fine, but then Econ PhD programs should require a class on Bernard Williams and his ilk :

The point is that [the agent] is identified with his actions as flowing from projects or attitudes which… he takes seriously at the deepest level, as what his life is about… It is absurd to demand of such a man, when the sums come in from the utility network which the projects of others have in part determined, that he should just step aside from his own project and decision and acknowledge the decision which utilitarian calculation requires. It is to alienate him in a real sense from his actions and the source of his action in his own convictions. It is to make him into a channel between the input of everyone’s projects, including his own, and an output of optimific decision; but this is to neglect the extent to which his projects and his decisions have to be seen as the actions and decisions which flow from the projects and attitudes with which he is most closely identified. It is thus, in the most literal sense, an attack on his integrity.

(I’m not saying you have to believe, but you should understand the “integrity objection” etc and scale back according to taste.)

Thor February 8, 2014 at 12:30 am

Great to see this again, thanks. Williams’ unspoken target is also the utilitarianism of Marxism, where the individual, the agent, is left out of the picture, or made subservient to the “greater good.”

Nathan W February 8, 2014 at 1:48 am

If you wish to define yourself as a utilitarian at the expense of all other philosophical and technical benefits the field potentially has to offer, then you are welcome to do so.

I live in a world where economics can benefit from strictly utilitarian analysis, but where there are numerous possible social objectives. Possible social objectives include: maximum production even if it means if one guy takes all and everyone else lives on the brink of starvation; maximize the income of the poorest person; maximize average income, maximize health outcomes; maximize human capital accumulation; maximize physical capital accumulation…. you see, we could arbitrarily define economics as revolving around any of a number of different objectives.

And furthermore, there are many ways to account for utility, the most common of which (income) is generally seen as a highly imperfect proxy for underlying wellbeing, hence the increase move towards the HDI or related indices to measure economic wellbeing.

Steven Kopits February 8, 2014 at 12:44 pm

Right. Each economist has an implicit objective function, of which there are essentially three: liberalism, egalitarianism, and conservatism.

Merijn Knibbe February 8, 2014 at 9:33 am

Well, that’s I guess how you define crude utilitarians… MB can’t be estimated due to the impossibility of estimating M as well as estimating B, MC can’t be estimated for the same reasons. Sometimes, marginal monetary revenue can be estimated – or should we estimate marginal net proceedings which are calculated using arbitrary estimates of write off’s? And nobody even tries to equate MB or MC as, well, as people just do not do this. Try some literature on consumer behaviour. MB=MC is a kind of imaginary friend.

John Mansfield February 7, 2014 at 3:34 pm

Does he have any idea how most of California’s water is used and what portion goes to municipalities?

Charlie February 7, 2014 at 3:48 pm

Yes, almost certainly.

Mark Thorson February 7, 2014 at 10:16 pm

80% of California’s water goes to agriculture, but the people around here are being asked to cut by 10%. Eliminate a few water-wasting crops like cotton and rice, and the problem would be solved. (Both cotton and rice are available from other sources at higher quality and lower cost — the rice I buy comes from India.)

Asking the people to cut back by 10% is inequitable because it’s asking people like me (with only a toilet, shower, and kitchen sink) to cut back, while my neighbor across the street literally has a fountain running 24/7! An equitable conservation program would be strictly per capita, without rewarding water-wasters like my neighbor. If you have a fountain or a pool or a bathtub, that should not entitle you to any more water than I get.

Conservation is currently voluntary, so they can’t expect me to do a thing. Unless the program is equitable, I most certainly will not cooperate.

mkt February 8, 2014 at 12:50 am

Yep. First day of intro econ when I taught in Los Angeles, I would tell the students that water shortages in So Calif are …
(a) inevitable, and
(b) unnecessary

As others have pointed out (and every competent analyst of water has been pointing out for decades), water is radically underpriced in the US Southwest. Outcomes (a) and (b) above follow immediately from that.

Worse, there are not only price controls but quotas on water usage as well. Water could still reach its most useful customers if the lucky holders of water rights could sell their water to the highest bidder — but they aren’t permitted to.

So the result is, as Mark Thorson points out, ridiculous water usage patterns such as California being a major grower of rice and cotton. Think about how rice is grown — have you ever seen a rice paddy? Just maybe, California ought to grow a plant which doesn’t need to have its fields flooded with one of California’s more scarce resources. (And it turns out that cotton is an equally thirsty plant.)

I tell my students that good public policy includes maxims such as “don’t grow bananas in Alaska”. Thankfully there is no banana lobby in Juneau screaming for protection and price supports. But agriculture is one of California’s biggest businesses, and the corollary of my public policy maxim, i.e. “don’t flood rice paddies in California”, is violated every year.

(There was a time when growing rice in California made a lot of sense; there are flood plains and delta in the middle of the state. But there was a time when oil could be simply scooped from puddles in the ground too; resources become scarcer after the low cost sources are used and after demand rises.)

misterkel February 7, 2014 at 3:42 pm

Maybe, but maybe not.
Read Gold Wars: Battle for the Global Economy for a different perspective.

Lord February 7, 2014 at 3:46 pm

Should that have been “Yes, by raising the price of water”?

It used to be 50% but I believe it is over 60% now with about 20% yards and pools.

Thomas February 7, 2014 at 3:55 pm

Yeah, thats right. Raising the price of water is much better than to halt immigration. Everybody knows that if they are reflecting on philosophy instead of just relying on it.
Thats WISDOM, and not just BS.

And the poor people who have been living there for decades are just so lucky. They will either have to move or just try to get along without water. But who cares about these loser….

Philosophy is wonderful, but only when people are reflecting on it.

Doug February 7, 2014 at 4:42 pm

Even if you care about poor current residents relative to poor immigrants, the solution of stopping immigration is Pareto inefficient. It would be better to raise the price of water than redistribute the marginal increase in water revenue to the poor residents. At worst they’ll just use the additional money to buy the same amount of water that they used, but more likely many will find that they can live with slightly less water use and use the leftover money for more useful purposes.

asdf February 7, 2014 at 4:45 pm

I’m sure large cash payouts to prole whites will be a rider on any immigration bill.

Gerard Mason February 10, 2014 at 8:49 am

Racist.

Peter Schaeffer February 7, 2014 at 5:37 pm

Doug,

Low-skill immigration is a net cost to society. There are no gains to redistribute. Considering only water, raising the price of water and transferring the revenues to the poor might leave the poor no worse off. However, everyone else would be a net loser. This should be obvious. Having less of something useful per person, is worse than having more of it.

Of course, the issues go beyond water. Everyone knows that America’s native poor people are a burden. Why would anyone expect imported poor people to be an asset. Importing burdens is a net losing proposition. Redistribution can change the allocation of costs. It can’t change the negative bottom line.

GiT February 7, 2014 at 9:10 pm

“Having less of something useful per person, is worse than having more of it [per person, I assume]”

But this is false, and trivially so. It’s better for two people to have 2 lbs of beef each for the day than for one person to half 4 lbs of beef for the day. Generally, it’s easy enough to figure out how leveling out as a means of leveling down is often better, in aggregate. Of course one avoids that conclusion by excluding those among whom things are leveled out from one’s definition of “society.”

So just be clear about the concern – it’s not about what’s worse, it’s about what’s worse for you and some definition of the proper corporate interest.

Alistair February 7, 2014 at 11:01 pm

“It’s better for two people to have 2 lbs of beef each for the day than for one person to half [sic] 4 lbs of beef for the day. ”

Not for the initial one person. They kind of get it in the neck. Even if total output rises to, say, 3 lbs of beef each (which would be Caplan’s claim).

Yes, Overall utility may rise in some sense, but some individuals will lose. Much as I love Caplan, him and some other libetarians can’t seem to get this into their head. Immigration, especially low skill immigration, would severely damage existing low-skill workers in the west. These people are wholly rational to oppose the scheme; they are not parochial idiots!

Also, a libertarian myself, I remain amazed that negative extranalities from loss of social cohesion and group identity are just ignored by so many other libertarians here. Not to mention the impact of increased costs of land, housing, and utilities which must result. We are usually acutely aware of such things, but you don’t see enough thought behind a cussed “oh, free trade in skills/people is always and everywhere good for everyone” attitude which it plainly is not. Immigration may raise overall human utility (and that of rootless, wealthy cosmopolitans), but it’s not morally permissable to violate the political rights and wealth of existing western citizens at the bottom of the pile to do so. At least not without a vote.

(I suppose Uncontrolled Immigration could be compared to an additional rights issue whose proceeds are returned as a dividend but only to large existing shareholds. Its tantamount to theft by the Board of Directors at the expense of small shareholders).

GiT February 7, 2014 at 11:28 pm

“Not for the initial one person. They kind of get it in the neck”

Well yes, that’s what I wrote, in the next paragraph. And why I specified “in aggregate” in the next sentence.

But I’m not a libertarian and I don’t mind sticking some people in the neck to help others. Lots of folks have very fat necks and it really doesn’t do much to them when you stick ‘em.

Peter Schaeffer February 7, 2014 at 11:52 pm

GIT,

Time for you to practice what you preach. Let’s not stop at Open Borders. We want Open Doors. You need to invite illegal alien families to live with you. At least one family per room. This may not improve your quality of life. But that’s not relevant. The issue is total utility. which will assuredly go up. It’s grimly selfish for you to deny these families their share. Just remember

“Generally, it’s easy enough to figure out how leveling out as a means of leveling down is often better, in aggregate”

For the record, “society” has an easy definition (in this context). It’s called “The United States of America”. You can find references to it in Wikipedia and elsewhere. Immigration that impoverishes Americans is economically unwise and morally wrong.

Peter Schaeffer February 8, 2014 at 12:19 am

Alistair,

It’s not just the impact of mass immigration on the poor that’s the issue. Low-skill immigration amounts to privatizing profits and socializing costs. Who pays the taxes for this? It’s not the poor. They suffer from unemployment and lower wages as a consequence of Open Borders. They don’t pay the bills.

A typical low-skill immigrant family can easily cost $60K in handouts, while paying $10K in taxes. The numbers aren’t hard to come up. Health care averages around $8K per person in the U.S. Education of ESL kids is at least $15K per year. An immigrant family of 4 easily reaches $60K even without WIC, TANF, EBT, Section 8 housing, etc.

Of course, these numbers are high end. Not all immigrant families have two kids. Health care costs are lower below age 55. Serious estimates are in range of $30K in costs and $10 in taxes per low-skill immigrant family. That’s a net loss of $20K per low-skill immigrant family per year.

However, Open Borders imposes an even greater cost on the middle-class (and upper class) in the U.S. Much of American middle and upper class life amounts to arms race, chasing houses in neighborhoods with “good” schools. Everyone knows what those words mean, even though the underlying truths are rarely mentioned. For a rare, honest discussion of the subject, see Losing School Choice – Why Did Mark Thoma Move His Kids? – http://economistsview.typepad.com/economistsview/2008/01/losing-school-c.html.

Stated directly, to the extent that Open Borders undermines public education, the cost to the middle and upper class is staggering.

Finally, the middle and upper classes in the United States are heavy consumers of resources, of which water is only one. To the extent that immigration driven population increases make resources scarce, the burden is on almost everyone, not just the poor. The obvious impact of population growth on housing affordability (ignoring all school quality issues) makes Open Borders a large net negative even there were no tax effects.

This raises the question of whether anyone benefits from low-skill immigration (excluding those who profit directly by employment). The answer is unclear. Even the 1% may end up as losers when they have to pay the bills. One interpretation of the anti-tax obsession of “supply-side” Republicans (who are generally libertarian) is an intense desire for the profits of Open Borders without paying the costs. Of course, the bills always come due.

Alistair February 9, 2014 at 8:02 am

Peter,

I tend to agree. I’m in the UK, so can’t comment on US figures in detail, but we have a very similar experience here.

Detailed studies suggest that the average immigrant is slightly fiscal-positive just by themselves. But there are large negative externalities on healthcare, education, utiliities, and housing costs (the last is especially brutal to our high supply-side restrictions) to be factored in which make it a losing proposition overall. Also, as you say, some local labour is displaced into unemployment and that’s an additional welfare expenditure cost. Obviously, if the average immigrant doesn’t pay, then things must be a lot worse at the margin.

One of our think-tanks did a breakdown on the numbers and suggested, IIRC, low-skill immigration was beneficial for something like the top decile or so of households, and pretty rubbish for everyone else.

libert February 7, 2014 at 9:50 pm

If this were so, then shouldn’t the price of water be zero? After all, that would allow more people to have more of it, And having more of something is good!

For that matter, maybe all prices should be zero! That way we can have everything we want!

Nathan W February 8, 2014 at 1:51 am

They are an asset, as just about any American employer knows, because they will work ten times harder than your average poor American, just so they can send money to their family in the home country in hopes of ensuring decent education for their children, etc.

TangoMan February 8, 2014 at 3:32 am

they will work ten times harder than your average poor American

You seem to be working under the assumption that the importation of low skill immigrants is some kind of population replacement program, where American citizens of low skill are sent out of the country and replaced by these new imports.

If the low skill citizens are displaced from the labor force, they don’t vanish from society. As Peter noted, the bills must be paid.

jerseycityjoan February 8, 2014 at 6:17 am

Nathan, can we assume that you’d support the employers of you, your friends and relatives replacing all of you with cheaper and highly motivated immigrants?

Wouldn’t you all be happy knowing that your employers were better off without expensive Americans employees and able to command much more work out of a helpless and vulnerable population.

Too bad the “immigration effect”, such as it is, won’t last.

The millions of new immigrants we take in become tens of millions — and eventual hundreds of millions — of American citizens as each immigrant generation have kids and their kids have kids.

Does it make sense to base America’s future on the use of immigrant labor when the beneits of immigration labor are gone in one generation — maybe two?

What do you think your descentants will be doing for employment in 2100 or 2200?

Nathan W February 9, 2014 at 3:53 am

If I ran a business, I would like to have access to the largest labour pool possible in order to be able to more easily find the people I need to get the job done. The USA is a great place to find all sorts of talent, but it comes at a very high price.

I am concerned about the impact of immigration on white working poor Americans. This concern does not lead me to believe that immigrants have a negative impact on economic output.

Mo February 7, 2014 at 4:07 pm

The issue isn’t people, it’s the agriculture industry. They use ~80% of the water and pay the lowest prices. So end water subsidies for ag and things should balance out.

cliff arroyo February 7, 2014 at 5:49 pm

“The issue isn’t people, it’s the agriculture industry”

Yeah, who needs food, anyway?

Jay February 7, 2014 at 6:41 pm

Lib-tards believe in “Buy Local”. The residents of New England should be buying lettuce next week from the LOCAL farmers market.

john personna February 7, 2014 at 7:41 pm

There should be a word for a comment branch that gets dumber with each branch. Yes, agriculture. Partly, food – with the important caveat that “food” does not have equal water or energy requirements. Finally no, it isn’t only “lib-tards” who pay for overpriced and water/energy intensive pseudo-local food. Quite a few local Republicans like to dress their table thus.

Alistair February 7, 2014 at 11:07 pm

You can’t seriously believe that California would starve if, say, local food costs rose 5% and it imported, say 10% more of its food? Can you ?

Govco February 7, 2014 at 6:40 pm

Muni water is more expensive than ag water because you have to treat muni water and muni water infrastructure is more costly.

I agree that water users should bear the full weight as much as possible, but ag water will always be cheaper.

john personna February 7, 2014 at 7:42 pm

Muni water is [in part] more expensive …. though certainly policy also plays a role.

Alistair February 7, 2014 at 11:11 pm

Good background point; but not much relevance here, right? It’s clearly agricultural consumption and subsidy that is driving the problem due to the much larger scale of the latter?

Steven Kopits February 7, 2014 at 4:19 pm

I’ll be presenting on supply-constrained oil markets forecasting at Columbia University on Tuesday.

The blurb and registration: http://energypolicy.columbia.edu/events-calendar/global-oil-market-forecasting-main-approaches-key-drivers

260 have signed up so far.

New York investors in oil and gas will be interested in this one.

Thanks February 7, 2014 at 7:11 pm

Thanks! Dynamite drop-in, Monty! Totally relevant and warranted!

TMC February 7, 2014 at 10:40 pm

Steven often has very good comments here, I wish I were around to attend.

Peter Schaeffer February 7, 2014 at 4:47 pm

I love it. We need ever higher water prices to support out-of-control immigration.

Nice to see the Open Borders crowd admitting that more immigrants = lower living standards for Americans.

joan February 7, 2014 at 5:23 pm

Using market pricing to allocate resources for consumption is efficient because higher prices increase supply but raising the price of water will not make it rain.

Alexei February 7, 2014 at 5:30 pm

On a map, what’s that big blue thing to the left of California?

Haight Ashbury February 7, 2014 at 6:41 pm

Nothing is to the left of California.

ricardo February 7, 2014 at 7:40 pm

That made me laugh out loud.

Yancey Ward February 7, 2014 at 8:05 pm

Thread winner!

Axa February 8, 2014 at 4:28 am

hahaahaha, desalination

GW February 7, 2014 at 5:53 pm

77% of California’s fresh water consumption is agricultural, total urban residential use is around 15%, about equally split between indoors and out. Meaningful water savings can only come from cuts in agricultural usage.

john personna February 7, 2014 at 7:48 pm

There are still lawns that could be native plants and etc., but yeah, the urban gains are less easy than they used to be. Still, compare Los Angeles water rules to those in New Mexico and we still have some “give.”

JFA February 8, 2014 at 2:18 am

Citation???

Michael February 7, 2014 at 7:08 pm

Maybe my libertarian humor-o-meter is off–was that raise the price of water line sarcasm?

Yancey Ward February 7, 2014 at 8:07 pm

Why would you think it sarcasm?

Noumenon February 7, 2014 at 10:21 pm

He states that economists who venture into policy are unreflectively relying on philosophy, then immediately proposes a policy change without any reflection on what philosophy underlies it. I read the post as criticizing Caplan for not realizing that sarcasm was required.

Alistair February 7, 2014 at 11:13 pm

No, dead serious. The comments here are mostly discussing how implicit subsidies of water cost in California have led to massive over-consumption by farmers.

Michael February 8, 2014 at 10:43 am

That’s funny. I don’t know how anyone could possibly believe such a thing, but I suppose the crazies are like the poor: they’re always with us.

Lee A. Arnold February 7, 2014 at 7:18 pm

With the drought in California we could be seeing more evidence that the drought pattern which occurred in the so-called Medieval warming period is returning.

A Definite Beta Guy February 7, 2014 at 7:46 pm

Correction: By raising the price of water, and then giving subsidies to the poor so they can buy the water. paid for by cutting their taxes. Except that they don’t pay income taxes. Cut their payroll taxes? Wait, then we start to defund Medicare and Social Security.

Damn, this seems to be a problem. I mean, if we move 4,000,000 extra people into California and they all start dying of thirst because Venture Capitalist Jesus can outbid them for his private pool and Forest of Giant Weiner-plants, what is the political outcome?

Willitts February 7, 2014 at 8:34 pm

An in kind transfer of water to the poor would help, but they would likely sell some of their water. These transfers are always inefficient.

Pricing them out is in effect the same as deportation. You are right that there is no first best solution to the allocation problem.

libert February 7, 2014 at 9:55 pm

Wouldn’t your first suggestion be closest to first-best? It would be closer to a lump-sum transfer. They can send their excess water to the market, reflecting its marginal value. That would be a good thing from an efficiency standpoint, yes? (At the very least, it would be better than subsidizing water prices.)

Willitts February 8, 2014 at 1:01 pm

In kind transfers are inherently paternalistic and inefficient. One would always prefer cash over an in kind transfer. Also, the existence of “excess water” means, by definition, that water was inefficiently allocated. I doubt there is a first best solution with multiple market failures and a dire necessity in play.

What I propose might be second best, and logistically and politically feasible.

Millian February 7, 2014 at 8:05 pm

Most economists endorse rights, like private property rights or rights to certain types of property through redistribution, which are inconsistent with crude utilitarianism. Maybe they are bad philosophers, but they aren’t dogmatic ones?

Willitts February 7, 2014 at 8:56 pm

Not quite right. One can be utilitarian in a world where initial endowments are unequal or inefficiently allocated. The acknowledgment of Kaldor improvements doesn’t imply acceptance of the outcome.

libert February 7, 2014 at 10:03 pm

A utilitarian could endorse private property rights on the grounds that they produce good outcomes (specifically, high total utility), yes?

GiT February 7, 2014 at 10:38 pm

Rule utilitarianism? I believe Mill was a fan.

Merijn Knibbe February 8, 2014 at 10:08 am

Wasn’t it the case that Ricardo didn’t really like high Ricardian rents? Did Mill really endorse ad random distribution of property of non produced inputs, like water? “His biographer, Alan Ryan, conjectures that Mill did not think of contract and property rights as being part of freedom.” http://www.econlib.org/library/Enc/bios/Mill.html

Willitts February 7, 2014 at 8:30 pm

For economists, there isn’t a lot of economic analysis here. Water is a private good, and yes you can raise its price. But the water collection and distribution and purification systems are public goods or natural monopolies. Hence, the free market will provide too little water at prices above marginal cost. The artificially low price isnt exactly a subsidy but rather a rebate of monopoly rents that brings the price closer to marginal cost. Chances are good that the price of water is just about right, but the quantity is way too low.

Then let’s talk about the fact that water is an urgent necessity and hence many (if not most) would consider it unconscionable to allow people to be priced out of the market. Aside from how you or I feel about the equity considerations, the public choice reality is that the electorate won’t allow it. So if price has a ceiling, quantity must be moved.

Agriculture uses fresh water but not potable water, so the marginal cost is far less. They are also tapping into public goods which are problematic to price and ration.

Sorry to tell BC, but there is no simple solution here. There are way too mamy market failures involved.

GiT February 7, 2014 at 10:40 pm

But BC only has simple solutions for his own contrived versions of problems.

Alistair February 7, 2014 at 11:20 pm

Willitts,

No one is going to die of thirst, are they? The cost of water is still so low that even a market price would be affordable to the poor (but would change the behavior of farmers). At a few $ per ton it’s the cheapest purchasable commodity on the planet. The “urgent necessity” phrase looks like weasal words.

I’m really not sure it is a natual monopoly either. You can get water delivered by bowser, collect it yourself, or buy bottled water from the store. Or you could just split the infrastructure from the provider, as they do with my phone line and gas supply.

Willitts February 8, 2014 at 1:10 pm

Yes, splitting out the functions is one way to price the water efficiently but the distribution and collecrion will still be inefficient.

Sure you can deliver water in many fashions but none will be as cheap as an aquaduct. That is the definition of a natural monopoly.

JFA February 8, 2014 at 2:40 am

This is a comment one of my students would make… Water is a private good, but water is a public good… what??? In the strictest sense here, water is a common pool resource (non-excludable but rival). Also, raising the price is a simple solution that would work wonders (why do you think there are golf courses in Palm Springs or rice cultivation in California?). Who would be priced out of the market for water by raising the price by a little (or a lot). You are making lots of assumptions about the amount of water that is a necessity and also people’s willingness to pay for water (not to say that you are incorrect, but it’s am empirical question as to whether your assertions hold water… pardon the pun). Also, drinking water is often purified from the fresh but not potable water (to turn it into potable water) you speak of, so I don’t get the relevance of your point on the discussion. Also, if the state allocates the water, why would you consider this an example of market failure?

Willitts February 8, 2014 at 1:30 pm

If you ever drew supply and demand curves on a board for your students, then you would see that all of the people on the demamd curve to the right of the equilibrium price are priced out of the market. The dire necessity of water means that price elasticity of demand is very low at some point, and this has important implications for consumer surplus, especially in the presence of market failures. If i had exclusive control over oxygen supply, I could extort all of consumer surplus and leave everyone at bare existence.

If you dont understand that water is a private good and the distribution and collection is a public good, youre not fit to teach students. The same is true for electricity and natural gas. The separation of these functions for greater efficiency is well developed in public economics.

That said, i am not opposed to more efficient methods of pricing water. I merely stated that it isnt nearly as simple as BC suggests. The manner in which he stated it smacks of dogmatic faith in markets and market failure denial.

I never said that if the state allocates water it is a market failure. The way you put it is a fundamental misunderstanding. Externalities, for example, ARE are market failure. In theory, a planner could impose an efficient tax or subsidy to bring the price and quantity to the equilibrium the market would be at if there were no externalities. But the market failure still exists – it doesnt go away just because the planner corrected its effects.

The distribution of water IS a market failure. It does not matter what the planner does or does not do. It is a market failure because the unregulated market WILL NOT produce the efficient price and quantity.

Alistair February 11, 2014 at 1:34 am

If you ever drew a supply and demand curve, you’d would see the axis is labelled “quantity” not “people”. The first people to cut their use with a price rise will be high-end users with high demand elasticity, not your poor person thristing for every drop. Anyway, base human metabolic needs, including cooking, are about 10kg/day or 1c at the margin. Don’t tell me there are any consumers genuinely down at that level with very low elasticity of demand.

Your central initial claim is demonstrably false. Natural monopolies based on distribution don’t automatically equate to market failure. Here in the UK I have a choice of electricity, gas, and phone provider all of whom use the same infrastructure . (If I was a large water user, I could choose my supplier there too). As mkt says, you’re ignoring the vast literature on this matter.

Rahul February 8, 2014 at 6:04 am

many (if not most) would consider it unconscionable to allow people to be priced out of the market.

It would be absolutely impossible to price drinking water out in the US markets. No one’s talking of that. You might be attacking a strawman.

The pricing people are proposing would only impact bottomlines of water users where water is a massive input. e.g. farms, agriculture, industry etc.

For the average end user a water price hike would mean next to nothing.

Willitts February 8, 2014 at 1:37 pm

Everyone unwilling or unable to pay the market price is priced out. This is true for any good.

Look at a supply and demand curve crossing. Do you see all the demand to the right of the equilibrium quantity? That represents all the people who are priced out.

I beg to differ on water price hikes. There are places where water is very expensive. California is an example.

Water price hikes mean next to nothing because low priced goods have lower price elasticity of demand than higher priced goods. But as water becomes scarce, it becomes relatively higher priced and its elasticity if demand changes.

mkt February 8, 2014 at 8:52 pm

There’s over 30 years of economics literature about optimal departures from marginal cost pricing, precisely designed for natural monopoly situations such as water (most of the literature was devoted to electricity prices, especially during the 1980s). Actually this literature goes back over 80 years, to Frank Ramsey.

Yes, That Jim February 7, 2014 at 8:37 pm

>so they’re usually just crude utilitarians (with a heavy bias toward the status quo and democratic fundamentalism).

God in Heaven. Someone is actually being paid to write these words.

This should fill you with terror, people. Make your peace.

Willitts February 7, 2014 at 8:54 pm

The status quo involves distortionary taxes and subsidies, ineffective regulation, price ceilings and floors, and untimely meddling with monetary and fiscal policy instruments. I don’t know any economists happy with or confident in the status quo.

I don’t even know what a democratic fundamentalist is. If you mean absolute faith in democratic outcomes, I scarcely know an economist who believes that.

Anon. February 7, 2014 at 8:51 pm

Utilitarianism is the CAPM of philosophy.

Nick L February 7, 2014 at 9:41 pm

Raise the price of water in southern Cal and there will be riots in the streets.

GiT February 7, 2014 at 10:46 pm

Do it based on usage. Who gives a hoot if the Orange County Home Lawn Preservation Society and the members of the various LA golf clubs riot.

GiT February 7, 2014 at 10:54 pm

Worst case scenario they burn their own wasteful lawns to dirt and ash:

“But city officials determined the fix was not acceptable, saying city codes require that 40% of the yard be landscaped predominantly with live plants.

“Compliance, that’s all we’ve ever wanted,” said Senior Assistant City Atty. Wayne Winthers.

Meanwhile, the couple said they had reduced their water usage from 299,221 gallons in 2007 to 58,348 gallons in 2009.”

http://articles.latimes.com/2010/mar/02/local/la-me-bad-lawn2-2010mar02

Mark Thorson February 8, 2014 at 7:35 pm

Golf courses should have priority over agriculture. They mow their greens every day. Golf courses employ huge numbers of people per unit of water. Mechanically planted and harvested crops like rice and cotton employ far fewer people. A free market for water in which everybody competes on an equal basis would favor golf courses and their large payrolls.

Donald Pretari February 8, 2014 at 12:34 am

Instead of Raising the Price of Water, it would be better to Charge for Air. It just seems cheaper.

Nathan W February 8, 2014 at 3:21 am

Farmers use an enormous amount of water, so even very small changes, which may be almost imperceptible to a poor residential consumer, may elicit significant response in agriculture.

Not arguing in favour or against higher water prices (other controls could potentially be used too), just stating that a 20% increase in the price of water would have a very limited impact on the budget of most households. Anyone here from Cali? How much do you pay for a marginal unit of water for residential consumption?

Pierre February 8, 2014 at 4:05 am

Keynes: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

jerseycityjoan February 8, 2014 at 6:35 am

How much of California’s water comes from California?

Isn’t a lot of it pumped in from out of state?

The US population is supposed to reach 400 million (from around 315 million) somewhere around 2050.

If there is any deep and detailed planning or thinking about how our rapidly growing population is going to transform America, I am unaware of it. We are basing our decisions on what we see today, but the bulk of the changes that will happen due to mass migration will be after we are all gone. We see jobs are disappearing by the millions and are not being replaced, we see drought, we read articles about global warming, we do not connect the dots; instead, we try not to see the dots.

jerseycityjoan February 8, 2014 at 6:47 am

Something is missing. This should be the third paragraph for my comment above:

“It seems to me that any place in America that relies on pumped in water is going to become increasingly vulnerable to seeing that “borrowed” water supply be reduced or even cut off, as the areas from which it is taken need it for their own growing population.”

john personna February 8, 2014 at 11:02 am

State boundaries are rather a arbitrary framing. California is huge, and yes, moves water a long ways.

Joe February 8, 2014 at 7:19 am

Caplan is a very sick individual.

CPV February 8, 2014 at 7:27 am

More from the Caplan piece:

“So economics ends up being a vital servant of political philosophy, but nothing more.”

Unfortunately, with respect to macroeconomics, yes

Let’s stop talking about everyone’s bogus macro models.

The Anti-Gnostic February 8, 2014 at 7:54 am

Yes, higher water prices. And while Caplan’s brilliant, macro-brain is about it, we need to charge more for education, welfare, roads, law enforcement, sewer taps and green space as well.

Actually, we can question why we even have this extractive tragedy-of-the-commons known as the State and just get rid of it in favor of a pure private ownership model. And guess what happens? You want to move to Los Angeles, you have to apply to get in! People take up space and generate waste, and unless you’re going to carry your own weight and enhance property values, you can just stay in your shack in Tijuana by the trash dump. Maybe we give you a swipe card and you can show up to spread pine straw and our private security force, unconstrained by the State’s due process, will chase you out at sundown.

Libertarians would be shrieking in horror if their philosophy was immanentized. Libertarians want the State’s Open Borders. They don’t want no borders, because then people get to draw their own.

jon February 8, 2014 at 9:25 am

Is the comment on philosophy and economics really a complaint about other economists lack of thought on the matter or more a statement that Bryan can’t see how they can reach a non libertarian conclusion?

Noumenon February 8, 2014 at 10:46 am

Obviously the second since he has no trouble pumping out completely philosophy-free conclusions about water pricing.

Jon February 8, 2014 at 10:44 am

To have universal open borders you need world peace and international cooperation. Good luck.

qwerty February 8, 2014 at 11:52 am

Yes, but water-prices is a good starting point. So says our economist, and theyn’t realy been wrong about anything during the last few years.
Its called “words of wisdom” so dont come here with all your reallife stuff and bad attitude. Open borders will solve most of our problems.

ThomasH February 8, 2014 at 12:34 pm

Raising the price of water (or better said pricing water at marginal cost) is hardly Caplan-specific wisdom; anyone who did not flunk Econ 101 could do as well

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