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Given the sheer number of emails I am getting about this article I thought I should post it.
Some firms in the porn industry are asking for a bailout – inline with the fact that they have suffered from a sharp fall in demand as a result of the recession.
I would say that their main mistake was saying that they wouldn’t collapse if they didn’t get the bailout – it is all about being to big too fail 🙂
Via the Wall Street Journal we have discovered a list of “job rankings” (ht Marginal Revolution).
Economics manages to place itself at number 11. Something to do with stress places Accounting above us – however, I would still suggest doing an economics degree if you have the chance 😉
I have not yet been convinced that congestion charging, as a general concept, makes sense (especially given the lack of any comments on the post 😉 ). However, this does not mean that there won’t be a general set of circumstances where this type of toll charge does make sense.
One situation I can think of is as follows. Suppose you have a long piece of road, and along the way vehicles join that road. Now, the vehicles that are joining the stream of traffic create an externality for all the vehicles that are downstream of them – but they do not have to face the cost of this at any point. As a result, they are not facing the full social cost of their actions.
If we look at the vehicles joining the traffic stream at this point as the “marginal” vehicles then we can see that, even though on average the cost externality falls on those that perpetuate it, at the margin an additional vehicle faces a lower cost for congestion than the congestion they create! Since people make decisions at the margin we will have “too many” vehicles entering from side streets, and “too much” congestion.
In this case, we should toll the side roads coming onto the motorway. Furthermore, the closer these roads are to the city (which is the likely destination of most of the vehicles) the greater the charge should be.
This is my attempt to justify a toll based on congestion. Notice, in this case a blanket toll, or a toll based on the quantity of congestion isn’t the right toll – the suboptimal solution occurs because vehicles entering the motorway close to the city don’t have to face the congestion, and so do not internalise it. As a result, this gives us a clearer idea about what actually drives the suboptimal outcome, and how we can solve it.
Feel free to tell me how and why I’ve missed the point 🙂
A number of fine authors have come in behind taxing congestion today – namely Greg Mankiw and Stephen Dubner.
The justification for “taxing congestion” appears to be Pigovian – someone clogging up the road has a negative externality on everyone else, and so we should tax that externality. However, I feel that this is just half the story.
In the case of congestion, everyone else on the road is also holding up that one person. In fact, on average, one person on the road is suffering the same negative externality as they are providing. As a result, doesn’t the existence of congestion effectively cancel itself out? Sure putting a toll on will reduce congestion – but if we already have the optimal solution why would we want to introduce a tax on top of it. Note: It may be efficient to actually have some congestion, as the goal of policy is to maximise welfare – not minimise congestion.
Now I have made the argument for an externality in the past (here and here) – my thinking was that the externality fell outside of the drivers and on other areas with which driving was a means to (eg work). Of course, I can’t think of a single situation where there isn’t a “price” mechanism to sort this out (eg with work people wages will adjust to sort out the optimal labour market solution in the case of the “externality”).
I would like to hear if anyone has an externality justification for toll roads – bonus points for using the term “non-linearity”.
But most of the time we assume (or have evidence that? -Matt?) petrol demand is fairly inelastic (hence the proposals to vary GST on petrol). With this in mind I was quite intrigued to see this article about Nikki who switched to driving her van when petrol prices soared and has since switched back to her EVO VII now that prices have fallen.
Her demand for being able to drive everywhere is inelastic, but her derived demand for petrol appears to be quite elastic:)
Over at Economist’s View there is an interesting piece from a book named “History of Economic Thought: A Critical Perspective”.
Now I don’t disagree with large parts of this. It is indeed fallacious to state that any CONCLUSION is value free – as it never is.
However, I feel that the piece mixes up its attack on the conclusions of the Austrian and Chicago school with the general neo-classical method – which is, in itself, closer to value free and objective. As the actual article says:
Their science applies everywhere because it applies nowhere. Most theorizing by these schools is purely tautological.
Now this may make the descriptions “unscientific”, but conveniently it also makes them value free. Remember, the purpose of these “tautologies” is to create statements that we can use to show relationships between things in logical terms – they create a framework that allows us to then apply value judgments and reach conclusions. Currently, this is one of the main roles of economists – to create a framework that can have value judgments added to it to create descriptions and predictions. Economists often move a step further and create testable hypotheses, hypotheses that are supposed to describe, or possibly even predict what is going on. However, another set of value judgments is then required to “prescribe” policy given these descriptions or predictions – this is a bigger step than some economists realise.
Still, for now let us take the implied “argument” that Austrian and Chicago economists are said to use in the above linked article, and see if we can adjust it to suit the way I see things 😛