Archive for September 27th, 2012

Why shopping malls/hypermarts place candies/cigarettes on exit doors?

September 27, 2012

I am not sure about shopping mall designs in other countries.

But whatever little I see in Indian shopping malls is full of paradox. On one hand there are these advertisments/offers in these hypermarts on pushing healthy foods like brown bread, organic pulses, multi-grain flour, dental care etc.

On the other hand, on exits you have placements of sugar candies, potato chips, cigarettes etc. You cant escale exits as most payment desks are placed there. So the idea is to just tempt you in picking these things at the exit. You can escape them inside but we will chase you to the end. And it is not just on the floor which sells food, beverages etc. These are there even on floors which sell clothes, digital stuff and so on.

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How Euroarea is nothing but Tragedy of commons..(how would Lin Ostrom respond to this?)

September 27, 2012

A superb article by Phillip Bagus of Universidad Rey Juan Carlos (He has written a super book as well on the issues in Euro) .

He calls it Euroarea a common, a kind of good which gets exploited because of lack of property rights.

The Eurosystem, the monetary system in the European Monetary Union (EMU), has brought the euro to the verge of collapse. We can understand how this situation arose in terms of the theory of negative external effects and the tragedy of the commons. Poorly defined property rights in money can cause negative external effects to be neglected. In practice, the EMU has evolved into a tragedy of the commons because several independent national governments have made use of the European Central Bank (ECB) to finance their deficits indirectly.

The theory of the tragedy of the commons states that a publicly owned good will tend to be overexploited and disappear. The euro and its purchasing power are following this course. The euro is threatened by independent states’ trying to finance their deficits via the ECB and to externalize part of their deficit costs in the form of higher prices in the EMU. This mechanism of a tragedy of the commons has contributed to the current sovereign-debt crisis in Europe. In this article, I explain how a tragedy of the commons exists in the EMU because of public property in money and how it is caused by the possibility of financing deficits through a single central bank.

A nice mixing of micro with macro ideas..

He says fiat money itself is like a commons problem:

External costs also occur when fiat money is issued. Fiat money is a medium of exchange that the issuer (the state) puts into circulation backed by no collateral except the paper on which the notes are printed. Residents are then forced to accept this kind of money as a means of payment (legal tender). Fiat money thus represents an encroachment on the principle of freedom of contract. People cannot do with their property what they want but are forced to accept fiat money in exchanges and to use it for tax payments. If no one had to accept public paper money, no external costs would be incurred. People could simply decide not to accept fiat money.

Given the absent private-property rights in money production and a monopolist producer of fiat money, the benefits of the production of money accrue to its producer, and external costs take the form of rising prices and, in most cases, a lower quality of money.2 These external costs are imposed on all users of fiat money. The additional monetary units allow their holders to bid up prices. 

The main beneficiary of the central bank’s increase in money supply is the government, for two reasons.3 First, increases in the money supply lead to profits called “seigniorage.” Central-bank profits are remitted to the government at the end of the year.  Second, central banks can finance government directly by buying government bonds or indirectly by accepting government bonds as collateral for loans to the banking system.

Hmm..Never really thought this way..

In eurozone this becomes even worse:

Although the external effects of a monopolistic money producer are common in the Western world, the euro’s establishment has created a unique layer of external effects and a tragedy of the commons. Within the EMU, all governments can use the ECB to finance their deficits indirectly. So there is a tragedy of the commons in base-money production. As already noted, a central bank can finance a single government’s deficits by buying government bonds or by accepting them as collateral for new loans to the banking system. Within the EMU, several governments can finance themselves via a single central bank, the ECB. 

When governments in the EMU run deficits and issue bonds, a large amount of these bonds are bought by the banking system. The banking system buys these bonds because they are accepted as collateral by the ECB in its lending operations  The banks presenting the government bonds as collateral receive new base money from the ECB. The banks then create new money by credit expansion, exchanging the money against government bonds and using the government bonds to refinance with the ECB. The end result is that the government has financed its deficits with new money, and the banks have received new base money by pledging the bonds as collateral.

This scheme’s incentives are clear. The first users of the new money benefit. Governments and banks have more money available; however, prices have not yet been bid up. When governments start spending the money, prices are bid up, and
incomes increase, mainly in the deficit countries. As prices and incomes increase in the deficit country, the new money flows abroad, where the effect on prices has not yet been felt. In this way, the new money spreads through the whole monetary union.

This asymmetric system leads deficit countries to be the first to exploit the commons:

The deficit countries that first use the new money win. They have a higher monetary income before prices start to rise. They benefit at the cost of the new money’s last receivers, who are mainly in foreign member states that do not run (such
high) deficits. The last receivers lose as their incomes start to rise only after prices have increased. The benefits of the increase in the money supply go to the first users, whereas all users of the currency share the damage to the monetary unit’s purchasing power. The consequence is a tragedy of the commons. Any governments running deficits can profit and offer the gift of a more balanced budget to its voters at other governments’ cost.

What is the solution? Regulating the commons:

For now, a !750 billion bailout plan and the ECB initiative to buy government bonds have stopped the rise of bond yields and contained the danger of sovereign insolvency. Yet the same incentives remain in place, and the euro’s future remains
bleak. For the euro to survive, the self-destructive tendencies of the tragedy of the commons must be contained. Government deficits must be controlled and effectively restricted by credible sanctions and penalties.

This is based on how tragedy of commons is prevented:

Overexploitation of public property can be restricted in several ways. The simplest way is to privatize public property and to define and defend private-property rights. Another solution is to use moral persuasion and to educate the actors who exploit the commons. For example, fishers can be persuaded to voluntarily restrict their exploitation of the school. A further option is to regulate the commons to restrict its overexploitation. Garrett Hardin (1968) calls such regulated commons “managed commons”: the government limits the exploitation. An example is the introduction of fishing quotas that provide every fisher a certain catch per year. Thus, each fisher receives a monopoly right that he will try to exploit fully. Because he is the only owner of this right, there are no external costs. Thus, overexploitation is prevented.

The question is who should make these rules? Should it be an agency like say government which makes these rules? Or should it be local people based on their  know-how as Elinor Ostrom has shown in her fab research. In this Euro common area this could imply having a central government asking making rules and asking all to comply. Or it would mean govts agreeing amongst themselves on the mechanisms to prevent rising deficits which is as per Ostrom.

Eurozone guys went for Ostrom approach (if I can call so) and tried to manage these deficits via SGP. However, SGP  was both developed and abused by its members. There were large violations leading to over-exploiting. This made the Euro commons even worse.

The problem with this commons is that after the crisis has errupted, the solution has been more and more exploitation. The govts  are finding it difficult to force internal devaluation ( lower exploitation) and ECB is creating more and more liquidity.

How to get this Euro commons working and restore its fisheries (confidence) and prevent externalities (contagion to other countries)?

Curious tale of econ development in Abu Dhabi

September 27, 2012

Acemoglu/Robinson in their recent post:

Nestling at the Southern end of the Persian Gulf is the modern nation of the United Arab Emirates (UAE). The UAE was formed in 1971 from the amalgamation of seven different independent sheikdoms which had previously been part of a British protectorate called the Trucial States. The largest of these seven are Abu Dhabi and Dubai. Today the UAE is an oil fueled development success with astonishing urban development in Abu Dhabi and Dubai, the latter currently boasting the world’s tallest building. You can see signs of the remarkable transformation in the city state in the last 50 years in this picture.

But this was not always the case, even after the oil came on stream…

Read the post for more details..Fab as always

Linking welfare economics with behavioral economics…impossible?

September 27, 2012

A superb post from . What a blog Worthwhile Canadian Initiative is..

We keep mentioning about the interesting findings and applications of behavioral economics. However, how does one really fit the findings in other economic streams? If one brings the irrationality assumption in say Price theory, how will graphs etc change.  You get  some idea here as Prof Woolley links to welfare economics.

The case here is banning large sodas. Typically welfare economics assumes rational behavior. So banning large sodas leads to demand being higher than supply, leading to deadweight loss:

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