Gambling at the TAB, monopolies and innovation

I like to place the odd sports bet. In New Zealand I have no official option but to do this through the TAB, which is a state-sanctioned monopoly.

In other countries there are often many competing institutions offering odds on various events, including sports. In fact, there are now many companies that operate across borders in many countries. Recently the best real money casino apps for US players at started offering sports bets as well as other online casinos.

The lack of competition in the betting market in New Zealand stifles innovation in the betting options they offer. One recent pundit proclaimed the TAB “the most conservative betting agency in the world”. Essentially the TAB has no incentive to innovate, as they know punters have limited ability to legally gamble through other avenues or

The TAB have started opening more interesting books on the FIFA World Cup, such as whether Lionel Messi will score more goals during the campaign than the All Whites combined (Messi the hot favourite at $1.55!).

If the gambling market were officially opened up to competition I suspect we would see a lot more of this innovation.

*I’m not sure of the legal status of these organisations in New Zealand, although I understand it is possible to open accounts with them (legally or otherwise).

California knows how to ban stuff

The California Energy Commission, in all their wisdom, have decided that the best way to encourage energy conservation is through imposing compulsory energy efficiency standards on TVs – in other words they are banning what they deem to be ‘energy inefficient’ TVs. They are the first state in the US to implement such a measure.

The aim of the intervention is to reduce electricity demand and hence avoid the need to build new power plants to meet this demand. In this sense, the Commission perceive the building of power plants to be a negative externality, presumably as the cost of building is reflected in the per-unit price of electricity for all users.

I take issue with this ‘externality’. For example, if a lot of consumers suddenly started demanding ‘Thierry Henry is God’ t-shirts, such that the price increased, should I feel aggrieved that the action of others is affecting the price I must pay for such a worthy product? No, that is how the market works.

Putting aside my scepticism, let’s assumes that the externality is a genuine one. What might be a superior way of discouraging consumption?

Bans are a blunt tool. From an economic efficiency perspective, you should first try and use prices to incentivise behaviour. High demand for electricity is only ever a problem over relatively short periods. For example, in New Zealand the peaks occur on weekdays in the morning as people wake up and in the evenings as people go home. In hotter climates, the peak typically occurs at the hottest part of the day as air-con works its magic. Hence one might try to charge higher prices at times of high demand to discourage consumption (and hence avoid the need to invest in new power plants). There are electricity meters that are capable of facilitating such differentiated pricing and indeed they are being rolled out in California as we blog.

Under the differentiated pricing scenario, consumers are paying the ‘true’ cost of electricity, so even if they continue to consume at high levels, one should be indifferent to building a new power station as the externality has been internalised.

The obvious perverse incentive that arises from the ban is that consumers will simply purchase their televisions out of state, knowing that they can get a better range of TVs to better suit their individual needs at more cost-effective prices.

It is far more preferable to keep consumer choice open and simply make consumers fully pay for their choice through efficient pricing (assuming that an externality exists in the first instance).

The carbon emission circus is coming to town

Late last week the Government announced that they were running a public consultation on the emissions target for 2020.

The Government already have a long term goal of reducing carbon emissions to 50% of 1990 levels by 2050. Long term goals tend to work quite well for Governments as it gives the public the idea that they are proactively doing something but realistically they will never be held to account if and when they don’t meet the target, as they don’t align all that well with the three year election cycle. But I digress.

This consultation process is part of setting the ‘interim’ goal for the year 2020. Environment Minister Nick Smith has quite correctly identified that setting this target requires a trade-off between our economy, our international reputation and, obviously, the environment.

Ultimately this 2020 goal will be presented in international climate change conferences at the end of the year, including the post-Kyoto Copenhagen Conference. I’m sure we will all be waiting with bated breath to see what the outcome of this Conference will be.

Of far more interest are recent ‘cap and trade’ developments around the world. Obama *just* got his bill passed by the House of Representatives while in Australia the proposed Carbon Pollution Reduction Scheme (CPRS) is very much struggling to gain legs.

New Zealand’s version of cap and trade, which will aim to reduce emissions to the 2020 (and subsequently 2050) goal looks set to be determined sometime later this year, although early indications are that it will be somewhat like the Aussie model. To blatantly oversimplify things, the Aussie model is a more politically palatable version of cap and trade, with lots of pressure-group exemptions and handouts to favoured sectors, as compared with the version NZ originally had planned for under the previous Government, which was more of an economically pure ‘you pollute, you pay’ model.

The final design of New Zealand’s scheme will be very interesting indeed…

In defence of the New Zealand wholesale electricity market

Recently the New Zealand electricity sector has been taking a bit of a hammering. According to a Commerce Commission sanctioned report, consumers have been overcharged by $4.3b over a six year period (how’s that for a headline!). More specifically, the report concluded each of the four big generators – Meridian, Contact, Genesis and Mighty River – has been exercising the power the market’s design gives them to command unjustifiably high prices, at least during years when inflows to the hydro lakes are low as they were in 2001, 2003 and 2006.

New Zealand has two markets in electricity – the wholesale market and the retail market. The wholesale market is where generators sell their production to retailers (often the seller and purchaser are one and the same). These prices vary significantly depending on the conditions of that particular period (for example, how dry Southern Lakes are or whether a generation unit is out service).

The second market is the retail market, where retailers sell electricity to consumers. Prices here are typically very stable, with consumers seldom exposed to the vast variation that takes place period-on-period in the wholesale market.

In the long-run, the prices in the wholesale market feed through to the retail market. In other words, if a generator/retailer found themselves short of generation and thus had to buy excess generation on the wholesale spot market at relatively high rates, they would eventually pass through these additional costs to their consumers in the retail market.

The report is essentially saying that generator/retailers were able to use their dominance in the wholesale market to push up prices during periods of constrained supply, which consumers then ultimately had to pay for in the retail market.

The report also says that pricing in the wholesale electricity market is, in the absence of dry periods, typically competitive. A very important point made in the report is that no market is ‘textbook’ perfectly competitive and this is certainly the case in electricity, given its unique characteristics (in particular the need for supply to continuously meet demand).

Indeed, I would say that the wholesale electricity market is working almost exactly as intended. Pricing is commonly competitive except at times of tight supply, when generators are able to reap higher rewards that incentivise continued investment in generation (which is extremely expensive) so that ever-growing demand can be met into the future. And the Commerce Commission determined that the generators’ actions were a “lawful and rational exploitation of the opportunities the market gave them”. I doubt you’d be able to make nearly as impressive a headline out of that though…

Plastic bags: industry-based solution versus regulation

Foodstuffs have recently announced that they will voluntarily introduce a 5c charge per plastic bag consumed through their New World and 4 Square supermarkets, with the revenue generated being used for an “environmental initiative” (previous post on the issue here).

Foodstuffs account for over half of all supermarket sales in New Zealand through their New World, 4 Square and Pak ‘n’ Save brands, while supermarkets in general account for 80% of plastic bags. Foodstuffs has got its own warehouses and wide spread distribution chain. Maintaining a warehouse is a challenging task. Visit for some tip.

This move follows the likes of the Warehouse and Borders who already charge for plastic bags (and North Island Pak ‘n’ Save stores have long charged for plastic bags, albeit for different reasons).

One might assume from this positive action by Foodstuffs that an industry-based solution to the perceived problem of plastic bag over-consumption would negate the need for any regulation. But the thing that jumped out at me from the article was this quote from the Greens Russel Norman:

“What we need now is for the Government to back up Foodstuffs’ good initiative by introducing mandatory product stewardship for plastic bags”

Why would the Government need to mandate anything to do with plastic bags when the industry is clearly finding a solution to the perceived problem? Regulation is costly, not just in terms of resources needed to enact a bill or other measure, but also due to unforeseen outcomes that may arise from such intervention. Regulation should always be a last resort. In this instance I think regulation is blatantly unnecessary.

One might argue that it is due to the threat of regulation that Foodstuffs took this action in the first instance. This may be true, we don’t know. But given the moves made by Foodstuffs and other retailers I think that to now clamour for regulation is just plain silly and unfortunately seems to be a reflection of the Greens approach to everything – regulate!

No matter what the issue, you should always give industry a chance to resolve a perceived problem before intervening.

Where the streets have no signs

Eric Crampton points to an example of offsetting behaviour in driving reported by Popular Mechanics:

…modifying roads and intersections so drivers are less comfortable—by making driving, in some ways, more dangerous—forces people to slow down and pay attention, producing a change in behavior that, paradoxically, results in more safety. This is also true for pedestrians, who Vanderbilt says are more cautious away from crosswalks than within them because they don’t know if cars will actually stop.

It reminds me of the idea of shared space that’s gained some popularity, particularly in Europe. Read more