Hi Bliss,

““Now economics is the study of allocation:” No and yes. Economics is how to manage scarcity. Everything else is details. But markets are not the only (or best) way to allocate resources.”

By allocation I mean we are trying to understand how resources are allocated, and respond to changes in situation/institution/policy given scarcity. I don’t see how saying this makes me wrong about economics.

“That would be OK if we were having a theoretical debate. But we are in a situation where (from memory) one third of NZ households are not as warm as they should be for good health. As an aside this is a market failure in the supply of housing. For years the market has supplied houses that drive up health care costs both for the state and the families that live in them.”

We would use economics to understand WHY/IF there is a market failure. Once we understand it we can discuss it.

The fact that scarcity exists, and that some people don’t have access to resources, does not imply we can ignore any analysis of what is going on.

“Really? I thought it is clear that some will have to pay more. Of course there is a trade off. You have to be a troglodyte to think there is not! But in the medium and long term we are all better off if we address inequality. That is the point. In the short term some of us are worse off.”

You are replying to a quote where I said we should address inequality directly, instead of using a roundabout and inefficient method. If we want to improve outcomes, work to improve outcomes, rather than using a worse policy that is more “marketable”. That is what I was saying here.

“Because that is grossly inefficient! It is not a case of market or regulation. Why not let the market do what the market is good at (allocate at the margins) and regulation do what regulation is good at (control crooks and keep the economy within bounds)?

Direct reallocation has been tried, it does not work. I am not a Stalinist! ”

The policy is an indirect, inefficient, method of redistribution. If the goal is redistribution this is a way of doing it at a higher cost. That is ridiculous.

If redistribution is inefficient in the first place, why would a more inefficient scheme be better exactly?

“No! Property rights are important, but not of overriding importance! If I own a property right to exploit a resource, say I own a mature forest. The most economically efficient thing I can do is cut it all down, now. That is because of the mismatch between human investment horizons and ecological processes.”

This is the discount rate argument. This is another form of externality – in this case we need to find a way to tax the use of the resource, so that the “effective discount rate” is equivalent to the true underlying social one.

“Lastly Matt, you do accept now that you are wrong about the GP policy lowering the marginal cost of electricity? I see Frog has had a go at explaining it to you too.”

Did you see that I replied and blatantly explained how:

1) It lowers the marginal cost of power to people who consume less than the first tier amount.
2) The marginal cost only rises in the second tier if overall consumption rises.

This is why using “economic theory” is important 😀

LOLZ

““If this is the case just redistribute directly instead of coming up with ridiculous schemes like the power company one methinks.”

Because that is grossly inefficient!”

DOUBLE LOLZ

First where you are wrong(ish) about economics:

“Now economics is the study of allocation:” No and yes. Economics is how to manage scarcity. Everything else is details. But markets are not the only (or best) way to allocate resources.

“I have also said that we should look at issues of allocation first – then once we understand allocation we need to figure out what distribution and welfare concerns we care about.”

That would be OK if we were having a theoretical debate. But we are in a situation where (from memory) one third of NZ households are not as warm as they should be for good health. As an aside this is a market failure in the supply of housing. For years the market has supplied houses that drive up health care costs both for the state and the families that live in them.

“I am annoyed at the obfuscation of meaning inherent in the way they talked about this policy. They are using economic language to make is sound like there is no trade-off here – when in actuality they are using a roundabout way to redistribute income.”

Really? I thought it is clear that some will have to pay more. Of course there is a trade off. You have to be a troglodyte to think there is not! But in the medium and long term we are all better off if we address inequality. That is the point. In the short term some of us are worse off. (Me included as my household is way above average income. I should be against it by your reasoning!)

We are not better off in terms of dollar income but better off in terms of lifestyle.

National income or GDP is a very poor measure of an economies quality. Almost all economists would agree with that. I would be interested if you could find a respectable economic published article arguing that measuring GDP is the beast way to measure the quality of an economy. Some may argue it is the most practical, but that is a different argument!

“The reasons the “efficient” allocation will not match the one that maximises welfare are well known – and policy prescriptions to improve outcomes given these failures are well known. This Green policy does not fit into these categories, and it does not properly identify the issue they want to fix.”

Yes they do. The Green policies (as you point out) effectively redistribute resources (by making those people in small houses/businesses pay smaller power bills those in larger pay bigger). I was thinking about Edgeworth Boxes which I was taught in stage II. But it was nearly a decade ago!

BTW In the Green party we are not an “environmental” party in the limited sense of trees, bees and flowers. See the charter http://www.greens.org.nz/charter.

“If this is the case just redistribute directly instead of coming up with ridiculous schemes like the power company one methinks.”

Because that is grossly inefficient! It is not a case of market or regulation. Why not let the market do what the market is good at (allocate at the margins) and regulation do what regulation is good at (control crooks and keep the economy within bounds)?

Direct reallocation has been tried, it does not work. I am not a Stalinist!

“This is in essence a problem of misallocation in the face of scarcity.”

Yep! We agree!

“The problem is the depletion of natural capital given common issues – such as the lack of property rights and the free rider problem.”

No! Property rights are important, but not of overriding importance! If I own a property right to exploit a resource, say I own a mature forest. The most economically efficient thing I can do is cut it all down, now. That is because of the mismatch between human investment horizons and ecological processes.

Another example is the festering sore that is the dairy industry (yes I know about all the lovely foreign exchange it generates). Because dairy land is sold at auction (either literally or effectively) the person who buys it will be the one the most optimistic. Probably basing the decisions on last years milk fat price. The mortgage will be 30 years. If after 30 years the land is a desert then that is economically efficient. (Not to mention externalities that are not solved with property rights but with regulation)

Lastly Matt, you do accept now that you are wrong about the GP policy lowering the marginal cost of electricity? I see Frog has had a go at explaining it to you too.

peace
W

Indeed – so investment isn’t the primary issue then 😉

@Eric Crampton

Excellent, glad to hear it. Good to hear you guys have a lunch room as well.

@Kimble

That is how I feel as well, given my ranting about transparency. That is the main reason I came to such a harsh general conclusion in the post 🙁

Its all about redistribution, but to avoid having everyone instantly see it is all about redistrubtion (by honestly just calling it redistribution) they elect to screw around with pricing.

Matt Nolan :
This of course matters when investment in generation is made by private agents – if it was made by the government then these investment incentives would not be a central issue per see.

Ahhh the good old days when Government invested in some of the most uneconomic projects possible with scant regard for the rights of those affected by development.

“I’m going to do this once now, but definitely won’t do it again in the future, trust me.”

You are proposing expropriation and then saying it’s a fantasy to suggest that people might think in the future there will be further expropriation. Are you having a laugh?