Now, it was pointed out to me that an open source alternative, “Open Office” is compatible with MS Office, and has most all of the same functionality. There would have to be some retraining, however, to ensure that everyone could use it correctly.

It was put to me that my organisation could save quite substantial sums (even after the cost of retraining for its use) from changing to this alternative, and that there would be very few costs to the change.

I searched for reasons why this person was wrong:

• We work collaboratively with a lot of other organisations, and need to be using the same software. But apparently they are completely compatible.
• The support that microsoft offers means it is much safer to use MS office. I can’t recall the response, but apparently this isn’t a big deal.
• People just won’t retrain and will insist on using MS Office because it is what we know. My friend scoffed with contempt.

Why do we all pay so much to use Microsoft intellectual property? I have my suspicions why, but would like to hear from others.

The intuition goes something like this:

The road that is a candidate for congestion charging has an alternative, but the alternative is slower. There are two types of travellers who use the candidate road, “high” and “low” types. “High” types value getting somewhere fast highly, with “low” types preferring quick journeys too, but only by a small amount. Without the congestion charge they both still use the candidate road because it is quicker than the alternative route, with the “low” types getting a small amount of utility compared to using the alternative route, and the “high” types getting a little bit more (but still not much since it is really congested and not much quicker than the alternative road).

If the “low” types didn’t use the candidate road the “high” types would get a very high amount of utility since there would be less congestion and they would get to where they want to go quicker. The low types would be a bit worse off for being excluded from the candidate road, but not by much since they didn’t value using it when it was congested by much more than the using the other road.

With appropriate paramater values, there exists a congestion charge that would exclude “low” types from using the candidate road (since the cost of the charge would be more than they value using the candidate road over the alternative road), but which would still have the “high” types using it. Without the “low” types clogging up the road the “high” types get where they want to go much quicker, and they experience much much higher utility, and with appropriate paramater values (such as the split in road users between high and low value types) this exceeds the drop in utility for the “low” types of now using the alternative route (due to the charge) and overall society is better off (the cost of the congestion charge is netted out because it is just a transfer between agents and not a cost on the economy overall).

Make sense? Of course note the qualifications, in particular “for appropriate paramater values”. Comments appreciated!

The full passage is quoted below, but the bit of interest is in the final bullet:

Over the medium term, there is a need to shift taxes from bases
that are internationally mobile and have the most detrimental
impact on growth to tax bases that are less mobile and less
damaging to productivity growth. Policy direction that will
contribute to productivity improvements and revenue
sustainability, include:
• reducing high marginal personal tax rates in order to improve
incentives for labour supply, entrepreneurship and the
retention of skilled labour within New Zealand
• equalising rates of tax on different forms of investment to
improve savings and investment, including reducing the rate of
tax on some existing forms of investment income and
introducing a tax on capital gains to reduce the diversion of
investment into tax-favoured or tax-exempt forms
• moving towards a tax system more heavily weighted towards
consumption taxes and, over a longer horizon, with a greater
contribution from property taxes.

Now I have always found our tax system (and most tax systems internationally, actually) bizarre. I’m actually not against progressive taxation, but taxing labour always seemed a bit daft to me. The only really good explanations that I have ever found for the government funding its activities in this way is that: (1) it is administratively efficient; and (2) it is easier to impose taxation progressively by imposing it on income. [A third point might be that ‘we have always done it that way’, and I think that this could be the biggest reason why we continue to levy funding for government activities through income tax].

Now I don’t necessarily disagree with these points, but I do wonder if we couldn’t manage to achieve these objectives through different tax systems if we really tried. Consumption taxes would certainly be a component of this (and already are to an extent), but I feel that they would need to be used in conjunction with other forms, since I don’t think that fully raising tax revenue on consumption is either equitable or constitutes good fiscal risk management.

Taxing externalities is generally supported in theory, but seldom introduced (barring cigarettes and alcohol and a few other product classes) and there is certainly room to do this more. I sometimes hear that taxing externalities isn’t a very good solution since you can’t fund much of the governments need for dough in this way, as the ‘economically efficient’ externality tax is only equal to the difference between social and private costs. However taxing labour is not in any way related to externalities – so why not over-tax the ‘bad’ things, since it is no worse than the status quo and at least some of it will be efficient? There could be a precautionary principal here – we don’t know exactly how large the externality is, but if we overshoot we will at least know we covered it. Again, I see how this is inefficient, just not how it is less efficient than the status quo.

For the most part, New Zealand has heaps of water. Yet in Wellington, where I live (for instance) sprinkler usage is currently rationed, and there is talk of an all out sprinkler ban if a big downpour doesn’t happen soon (the recent trickles are only holding things off for a while). That is because the main sources of drinking water in the region – the water catchment area in the rimutukas (near Wainui), the Hutt River near Kaitoke, and the Aquifers under the Hutt Valley, are all at about the limit of what they can give without incurring major damage, due to the recent low water flows.

Now there are still plenty of options for ways to take more water. We could flood more pristine valleys to make damns, or we could take from other waterways. Of course, doing this has costs. First, there is the loss of amenity value of having properly flowing rivers, or of a nice pristine valley. Some might even consider the loss of ecosystems to be of value in itself. Then there is the recreational activities that could be impaired – fishing, swimming or walking dogs along the river and for a swim (both were banned in the Hutt river for a while as low flows partly caused by water taking caused toxic algae to bloom, killing 3 dogs and prompting a ban on himan and animal use of the river), and other fun activites such as rafting etc. The list goes on.

Then there is the infrastructure cost of establishing pipeline networks, treatment facilites etc to take the water from these sources and deliver it to the household, and electricity chemicals etc also used (not to mention the treatment of wastewater down the track). Basically, if we want more water, we are going to have to pay for it, indirectly in terms of the effects of extracting it from some water source, and the direct costs of treating it and transporting it to its end use.

But do we really need all of this water? To many foreigners, our water use would be considered wasteful in the extreme. Compared to some countries, our per capita use is around twice theirs. Surely we could be a little less wasteful without reducing out standards of living? But then, is there any incentive not to waste water?

In Australia, not only do they have water pricing, but they also have labelling of domestic water using products for their water efficiency, as well as minimum standards on products for their efficiency of water use. The latter two don’t seem to impose any major costs on consumers or producers. And surely the former (water pricing) is a valid way of making users pay for both the direct cost of the infrastructure that treats and carries the water to them, and the indirect environmental and amenity/recreation costs – certainly, isn’t it better than taking it out of rates? Of course, a few regions in New Zealand alread have water pricing, but as I understand it there are some real issues with how this is done. Done properly, the charges could be used to lower council rates to more efficiently gather revenue, while providing a price signal to account for the true costs of providing domestic water.

What do you think? Should water be charged for directly, rather than paid for out of rates? If so, how should the charge be levied? Fixed monthly rate, variable charge (ie per cubic metre), or a mix? Should it only cover the infrastructure costs to council, or the environmental/amenity/recreation costs too? Or should there be a profit element as well?

I would be interested to hear any points of view.

Repressed Mandarin DT

But not to the Real Estate Institute of New Zealand (REINZ). REINZ was set up under the auspices of the Real Estate Institute of New Zealand Act 1976, and all licensed real estate agents are required to belong to it and abide by its rules.

The REINZ is one of a class of industry bodies that has been given government recognition. In many other industries, there is no government recognition/compulsion, yet the motivation for setting up the bodies is largely the same. These industries usually have some kind of bar to entry, but it is not one that is strictly prohibitive – for instance a professional qualification may be needed (eg estate agents license, admittance to the bar to practise law). Ostensibly, the bodies regulate the behaviour of members, who ordinary people cannot fully understand or regulate themselves because of the informational difficulties (cannot tell them apart, do not understand things like lawyer-client privelige or are in a compromised position (you are at the mercy of your lawyer in the middle of a trial) etc). It is argued that it is more efficient for the body to regulate, as it is cheaper than legislation, more adaptive to community needs etc.

Sometimes, the industry bodies are formed by members to prevent government regulation – leading members set the bodies up and claim to be preventing poor conduct on behalf of the industry, to stop the government doing so, presumably because they believe that the rules will be less onerous if they write them themselves.

Where this happens and a kind of defacto-power is given to these bodies (or actual power in the case of the REINZ), problems emerge. Often hurdles to competition and industry entry are set up under the semblance of increasing standards – higher qualifications required, minimum practise times, a majority of members need to approve their power to practise. In the end, without actual and real government oversight it is almost innevitable that these bodies move to become quasi-cartels that aim to protect their members under the guise of protecting the helpless consumer. So it is that the REINZ has censured a member for seemingly only competing.

Which brings us to the question of what good it is having them. If without government oversight these bodies invariably abuse their position, why have them and not simply have the government set the rules? I personally find this compelling as an alternative to compulsory industry governed bodies. However voluntary bodies should not necessarily be treated the same, particularly where those who are non-members can be recognised by the public and accordingly treated with due care. If these ‘rebels’ prove reliable enough, there is no reason why they can’t establish their own reputation for protecting consumers etc, and set up their own bodies with their own rules in competition with the established one. If sufficient information is out there for competition to emerge, the two watch dogs will compete on keeping their members in line. The key here is that there is an ability to compete rather than a defacto cartel. On the other hand, cartels running themselves clothed as consumer interested altruistic organisations are no good, and have no place in the New Zealand economy.

I am not against nuclear power in New Zealand if a robust economic case can be supported for its use, relative to other generation sources. This case would, of course, have to internalise the probability of a nuclear disaster multiplied by the expected costs of such a disaster, and also the real difficulties of disposing of nuclear waste. On 26 April 1986 in Chernobyl there was a nuclear power plant explosion, that is one thing that I worry would happen here. But is Chernobyl safe now? From research I read that they got rid of the topsoil and put new soil down, except they were not able to do that around the trees. So if you stay on the paths it has very little radiation. On the other hand, the emissions of alternatives (such as coal thermal generation) would need to be internalised as a negative for them in comparison to nuclear.

I support analysis that works to such a framework as being a crude but generally good way to rank alternative generation sources, taking into account all of the many pros and cons of each. Unfortunately, most New Zealanders seem to think that because the only raw materials used in generating power from nuclear is a plant and a bit of Uranium, it must be cheap in comparison to a wind farm or photovoltaic (solar) generation, let alone coal or other thermal generation sources – which in New Zealand just is not true. This was best exemplified by a column by Michael Laws in yesterdays Sunday Star Times. Besides describing George W Bush as a very smart man, it suggested that nuclear was more cost effective than wind power and geothermal power (among others), and that an oil price of $2million a barrel was needed to justify the costs of marine energy (plain wrong) and that solar is not an opportunity for future generation (actually, solar is currently non-viable, but not anywhere near as what Mr Laws suggests. In 10-15 years it will probably be a goer).

Let us get some perspective here. With current nuclear technology, the cost of nuclear generation is around twice the current cost of generation in NZ. Wind is actually much more efficient than nuclear, does not emit, generate nuclear waste, or risk catastrophe. There is some visual impairment. But the cost of this is much less than that of storing nuclear waste, or the risks of nuclear disaster. Indeed, marine would at the very least appear to be roughly as economic as nuclear for NZ (and in terms of scale is much more economic), without counting the risk of catastrophe and the costs and risks of nuclear waste disposal.

I am not against nuclear power for NZ per se, but the debate needs to be grounded in economic facts. New generation nuclear technology, probably emerging in 10-15 years may be more suitable for New Zealand than current technology. We should keep an open mind when this comes, but also not just jump on it as an easy fix and a solution to all of our problems – there are a lot of things to think about and internalise when comparing different generation options, and this should be done with care. Knee jerk opinions such as Mr Laws’, based on nothing but perception, do not represent good economic analysis.