Month: October 2012

Water Economics

The next set of lessons in MRUniversity’s development economics course is on water economics. Water is one of the most important issues in developing countries for many reasons, including agriculture, health, and wealth. Every year, millions of people die because of lack of access to clean and safe water. It is estimated that over 1 billion people in the world don’t have adequate access to such an essential resource, and the poor pay the biggest price.

In this section, we cover:

  • The effects water monopolies can have on consumers
  • The pros and cons of water privatization in developing nations, including major examples from Buenos Aires, Bolivia, Saudi Arabia and Yemen
  • Why it’s so hard to regulate private water companies effectively
  • What can happen to the price of water when it is interfered with through subsidies and price controls
  • The tragedy of the commons in water economics
  • How water ethics influences the actual supply of water
  • And finally, what happens when countries engage in trading water commodities

Do you tip more on-line?

David Popkin writes to me:

I hope all is well. I was having a heated discussion and thought of you and your blog.

Do people tip more/less/same via online delivery services compared to phone orders where they pay cash?

Possible reasons for bigger tips on seamlessweb/online services

-tip disclosed before delivery=pressure to put up or deal with cold food

-credit card money less “real”

-no excuse of rounding (i.e. if $3 is norm, can’t escape it because you only have a $20 to pay the 17.75 order total)

Possible reasons for bigger tips in cash

-looking someone in the face

-poor math skills/rounding

-more willing to tip more after the fact based on speed etc.

I would be most interested to hear what the best and brightest have to say about this.

Busan notes

Busan is the best success story I know for the Avent-Yglesias approach to urban density.  Imagine taking a city that looks like San Francisco, or more concretely Nagasaki, and letting millions of Koreans in to live there.

They served me the live, still-wriggling and squirming sea worm entree, which you are supposed to dip into sauce and push down your throat; it was neither the best nor the worst course of the meal.

White sashimi, dipped into hot bean paste, is the preferred manner of eating raw fish here; tuna, salmon, and eel are not popular.

On the beach, on a clear day, you can see Japan across the water.

In a nearby rural area, the populace would appear to go to Sunday church, dressed up in their finery, and then hang out at the museum and welcome center for the local nuclear power plant.

A day tour of Hyundai City, the special economic zone, the chemical-industrial complex (reminds me of New Jersey), and the new port is better than a day tour of Korean temples.  They are all targets for North Korean missiles.

The people I have asked predict reunification within ten to fifteen years.  They are ashamed to have such a brother in the family.

If you visit Korea you should come to Busan.

An MR reader on Proposition 37 (GMO labeling)

He wrote to me:

There’s two things about the labeling debate that really bother me:

First, we have to concede that not everything can be labeled.  If so, the burdens would almost instantly put huge swaths of businesses out of business.  My dad, a dentist, does not have to label every instrument to describe where the metal came from, which machines made it, etc.  So the question is: where do we draw the line on what should be labeled?  My view is, if there is scientific evidence suggesting a plausible connection to harm, then requiring labeling makes sense.  But the view of the food activists is that they should just know everything, regardless of evidence, irrespective of cost.  So everyone should pay high costs because of their fears, which have no basis in evidence or fact.

On related matters, here is Mark Bittman on his ideal food labels, serving up a rather ambitious proposal.

On one specific point, he wants to levy a black mark against companies which treat their workers poorly.  On the contrary, that is a sign the product likely comes from a poor country and probably you are doing the world more good in buying it and, in the longer run, bidding up wages and working conditions in that country.  It helps other people more to buy from China than Portland, even though workers fare much better in the latter locale.  This difference in perspective is a simple illustration of how “ideal” food labeling can rather rapidly go wrong, especially when it is tangled up with the desire to make expressive statements about what one wishes to affiliate with or not.

A further question: at which margin do consumers stop paying attention?  When was the last time you read your new iTunes “I agree” contract before clicking?  Attention is scarce, so we need to pick and choose priorities.

What about the cost of producing such complicated labels and the enforcement of their veracity?  Food supply chains these days are often quite complicated.  Do you need to monitor how the fish sauce or oyster sauce in your composite food product was produced?  Bittman writes:

These are not simple calculations, but neither can one honestly say that they’re impossible to perform.

That is setting a rather low bar, and vaguely at that.  Most bad economic policies would meet that standard.  I would rephrase it: first figure out how many small and poor and foreign farmers this labeling proposal would put under — and then get back to us with a proposal.

Here is my earlier survey post on Bittman and evidence relating to GMOs.  And here Jonathan Adler offers an excellent analysis, including freedom of speech issues.

Noble Matching

In honor of the Nobel prizes to Al Roth and Lloyd Shapley, here is a primer on matching theory. Matching is a fundamental property of many markets and social institutions. Jobs are matched to workers, husbands to wives, doctors to hospitals, kidneys to patients.

The field of matching may be said to start with the Gale-Shapley deferred choice algorithm. Here is how it works, applied to men and women and marriage (n.b. the algorithm can also work for gay marriage but it’s a little easier to explain and implement with men and women). Each man proposes to his first ranked choice. Each woman keeps her top-ranked suitor but defers accepting the proposal. Each woman also rejects her lower ranked suitors. Each rejected man proposes to his second ranked choice. Each woman rejects again any lower-ranked suitors, which may include previous suitors who have now become lower-ranked. The process repeats until no further proposals are made; each woman then accepts her top-ranked suitor and the matches are made.

A similar process works when proposal receivers may accept more than one suitor, not that useful for marriage in most of the United States but very useful for when students are applying to schools and each school accepts many students.

Now what is good about this algorithm? First, Gale and Shapley proved that the algorithm converges to a solution for a very wide range of preferences. Second, the algorithm is stable in the sense that there is no man and no woman who would rather be matched to each other than to their current match. There are of course, men who would prefer to marry other women and there are women who would prefer to marry other men but no mutually preferable match is possible. Thus, the algorithm produces a stable match.

The application to men and women is somewhat fanciful, although should clearly adopt this idea!, but the application to students and schools is very real. Gale and Shapley concluded their paper by writing:

It is our opinion, however, that some of the ideas introduced here might usefully be applied to certain phases of the admissions problem.

Indeed, this is exactly what has happened. Students in New York and in Boston are now matched to schools using versions of this algorithm. Even before Gale and Shapley the algorithm had been used, without much theorizing, by doctors allocating residents to hospitals and since Gale-Shapley and Roth the idea has been used much more extensively all over the world .The algorithm, by the way, has been picked up and extended by computer scientists notably including Knuth.

I said above that the men propose to the women–this matters because when the women propose to the men you also get a stable match but it may be a somewhat different match and in general it is better to be the one proposing. Matching becomes more difficult when, as in modern times, both men and women may propose. Fortunately, in many problems, such as with students and schools, the proposers and receivers can be fixed.

Another question is whether the algorithm can be strategically manipulated. In an Impossibility Theorem with much the same flavor as Arrow’s Theorem and the Gibbard-Satterthwaite theorem, Roth and Roth and Sotomayor proved that there is always some possibility for manipulation but the G-S algorithm can be said to minimize the opportunity for strategic manipulation; in particular for the proposers, men or say students applying to schools. it is a dominant strategy to reveal one’s true preferences.

The importance of a stable matching algorithm can be seen in what happens when such algorithms are not used. In trying to allocate residents to hospitals, for example, what typically happens when a stable algorithm is not used is unraveling and chaos. Unraveling occurs when offers are made earlier and earlier in an attempt to get a jump on the competition. Prior to the currently used National Residency Matching Program, for example, hospitals were making offers to residents up to two years in advance! All kinds of chaos arose as hospitals would make exploding offers, accept now or the offer explodes! Such offers would inevitable lead to recriminations and backing out of the offers as better matches were sought.

What Roth has done is extend the Gale-Shapley algorithm to more complicated matches and to actually design such algorithms to solve real problems. In the 1970s, for example, the medical residency algorithm began to run into trouble because of a new development, the dual career couple. How to match couples, both doctors, to hospitals in the same city? By the 1990s assortative matching in the marriage market was beginning to derail matching in the doctor-hospital market! Roth was called in to solve the problem and moved from being a theorist to a market designer. Roth and Peranson designed the matching algorithm that is now used by Orthodontists, Psychologists, Pharmacists, Radiologists, Pediatric surgeons and many other medical specialties in the United States.

Most famously, Roth has worked on improving kidney allocation. I first wrote about this in 2004 (see also these posts):

Your spouse is dying of kidney disease. You want to give her one of your kidneys but tests show that it is incompatible with her immune system. Utter anguish and frustration. Is there anything that you can do? Today the answer is yes. Transplant centers are now helping to arrange kidney swaps. You give to the spouse of another donor who gives to your spouse. Pareto would be proud. Even a few three-way swaps have been conducted.

But why stop at three? What about an n-way swap? Let’s add in the possibility of an exchange that raises your spouse on the queue for a cadaveric kidney. And let us also recognize that even if your kidney is compatible with your spouse’s there may be a better match. Is there an allocation system that makes all donors and spouses better off (or at least no worse off) and that maximizes the number of beneficial swaps? In an important paper (Warning! Very technical. Requires NBER subscription.) Alvin Roth and co-authors describe just such a mechanism and show that it could save many lives. Who says efficiency is a pedestrian virtue?

Since that time we have seen many such swaps including this record of 60 people and 30 kidneys. Truly a noble match.

Minor editing Oct. 23.

Nobel Prizes: Al Roth and Lloyd Shapley

Great choices. Al Roth for matching and the design of new types of markets. Lloyd Shapley for fundamental contributions to game theory and mathematical economics including the Gale-Shapley algorithm which is a cornerstone of the matching methods Al Roth pioneered. I am especially pleased about this because of Roth’s great work on improving kidney allocation. Here is Roth’s blog, Market Design and here he is giving a talk at Google. Here is what I wrote in 2010 about Roth

Roth has applied heavy-duty theory to the very practical problems of matching doctors to residency programs, children to schools, economists to departments and kidneys to patients in a way that is stable, incentive-compatible, and maximizes the gains from exchange.  In my view, Roth is the most influential economist working today. Influential among other economists?  Yes.  But what I really mean is influential in the world.

Previous posts on MR about Roth (also here). Roth’s papers.

More soon.

2012 Nobel Laureates in economics

Alvin Roth and Lloyd Shapley!

Great picks.  Both have done work on matching theory, bargaining theory, allocation theory, and market design. Here is Roth’s blog, he often reads MR by the way and sometimes sends us links.  I now need to repack and travel, my apologies, but Alex is likely to have more to say.  Alex in particular has many excellent past posts on Roth.  Here is an excellent overview of the contributions of Shapley.  Here is Wikipedia on Shapley.  Here is a Forbes profile of Roth.  Here is the Swedish information.

I think of this as a prize about how theory can be turned into usable results, how trade and matching can be made more efficient in concrete ways, how trade is a coordination game, and the intimate connection between issues of trade and issues of distribution.

Richly deserved by both men.

Zhang Weiying on Austro-Chinese business cycle theory

Chinese officials no longer treat Mr. Zhang as a pariah. He reports that Ministry of Agriculture officials tell him they enjoy reading his articles. Other ministries and local governments, including in Henan and Liaoning provinces, invite him to speak. He says that when he recently wrote an article praising the late Austrian economist Murray Rothbard, the Communist Party secretary of Shanghai—a fairly high-level apparatchik—told him he liked it.

Here is much more, and for the pointer I thank Mark Skousen.

A Brief Visit to North Korea

Tyler is in North Korea, Alex is in South Korea.

Alex is in North Korea, Tyler is in South Korea.

If we look a little tense it was because it was tense, perhaps even more than usual since just days before a North Korean soldier had killed two of his commanding officers while defecting to the South. North Korea also appears to be undergoing greater food shortages than in many years which no doubt adds to the tension. I had not realized, by the way, that you can see North Korea from a major highway in South Korea and the land is clearly stripped bare of trees which have been cut down for firewood and what little nutrition the bark offers.

Here are the North Koreans watching and photographing us to put into their permanent records.


How to think about makers and takers

Here is my latest NYT column, on how we ought to be thinking about the issue of makers vs. takers.  Excerpt:

EVERYONE FEELS ENTITLED People tend to think that they have justice on their side, whether it comes to making or taking.

For example, millions of homeowners have spent hundreds of thousands of dollars on the premise that the tax deduction for mortgages will be continued. If they support a continuation of that deduction they hardly feel like brigands, even though a bipartisan consensus of economists doubts the efficiency of this tax break.

As years and decades pass, recipients of this deduction and other benefits start to see them as deeply and richly deserved. Furthermore, almost all of us reap one or more of these benefits, so few individuals are consistently opposed to all government transfers.

It becomes difficult for a politician to articulate exactly what is wrong with this arrangement when the audience itself is in on the game and perhaps does not want to hear about its own takings.

Mark Thoma comments.

You also should read the new (short) book out by Nicholas Eberstadt, A Nation of Takers: America’s Entitlement Epidemic, which came to my attention quite recently.

Long profile of Glenn Hubbard

From the NYT, you can read it here.  Excerpt:

 “Did you know, for instance, that he has a brother who is a country music star?” asked Kevin A. Hassett, a friend and scholar at the conservative American Enterprise Institute.

Hubbard’s younger brother, Gregg — known to fans as Hobie — is a member of Sawyer Brown, a country rock band that gained fame via “Star Search,” a sort of precursor to “American Idol.”

“He’s always had a great sense of humor,” says Gregg Hubbard, speaking by telephone before a flight to a concert. He recounts celebrating his 40th birthday in New York City and sharing a gift he had just been given, a Razor scooter, with his brother. “We were with my older nephew,” he says, “and we took turns, the three of us, riding up and down Broadway on a scooter.”

Stock bubbles, Gangnam style?

Matt Yglesias reports:

Why is South Korean semiconductor manufacturer DI seeing its share prices surge? Is it a key supplier for the forthcoming iPad Mini? An integral element of Samsung’s next great smartphone? Nope. It’s surging because its chairman and main shareholder is Park Won-ho, father of Park Jae-sang, a.k.a. PSY, a.k.a. the “Gangnam Style” guy.

Why a family link to a viral video sensation should help this company is difficult to say, but apparently this kind of theme stock surge is a not-uncommon phenomenon in the Korean equity markets. South Korea, I would note, is one of the most recently affluent countries around so it’s simply possible that the Koreans markets haven’t had enough “learning” to avoid fast-rising momentum bubbles.