Sunday, 22 July 2018

Digging holes and filling them in again

This week in ECONS102, among other things we will be discussing the diminishing marginal product of labour. The example I use to illustrate this concept is a simple firm that digs holes, transports the dirt to the other side of the site, and fills in the previous days' holes. It's a ludicrous example, but as it turns out it is now not without precedent, thanks to this example from the clean-up of the California wildfires of 2017:
Over the next seven and a half months, contractors worked across Sonoma, Mendocino, Napa and Lake counties, where they scraped 2 million tons of soil, concrete and burned-out appliances from 4,563 properties, loaded it all into dump trucks, and hauled it away.
In the end, the government-run program was the most expensive disaster cleanup in California history. The project, managed by the Army Corps of Engineers, totaled $1.3 billion, or an average of $280,000 per property. The bulk of that $1.3 billion comes from the Federal Emergency Management Agency (FEMA), but state and local governments are also responsible for about $130 million...
The Army Corps of Engineers said the high cost of the project was necessary to ensure a safe and effective cleanup. But KQED found that these multimillion-dollar federal cleanup contracts actually incentivized unsafe and destructive work...
Critics say many of the problems with the project -- high cost, safety lapses and over-excavation -- are linked to the primary incentive structure that the Army Corps put into place: paying by the ton.
Contracts reviewed by KQED show that the Army Corps of Engineers paid upward of $350 per ton for wildfire debris. Dan’s truck could haul about 15 tons. That’s more than $5,000 per load -- a powerful financial incentive to haul as much heavy material as possible as quickly as possible.
Dan said he saw workers inflate their load weights with wet mud. Sonoma County Supervisor James Gore said he heard similar stories of subcontractors actually being directed to mix metal that should have been recycled into their loads to make them heavier.
“They [contractors] saw it as gold falling from the sky,” Dan said. “That is the biggest issue. They can’t pay tonnage on jobs like this and expect it to be done safely.”...
Paying contractors by the ton incentivizes them to haul away as much dirt, rocks and concrete as they can.
“It's such a needless waste of our society's resources to pay by the ton,” said Sonoma County contractor Tom Lynch, who was an early and vocal critic of the program.
So many sites were over-excavated that the Governor’s Office of Emergency Services recently launched a new program to refill the holes left behind by Army Corps contractors. That’s estimated to cost another $3.5 million.
As Steven Levitt and Stephen Dubner noted in their book Think Like a Freak (which I reviewed here), no individual or government will ever be as smart as all the people out there scheming to take advantage of an incentive plan. So, when you pay contractors for every ton of debris they remove, you create an incentive for contractors to maximise the number of tons of debris they remove. Sounds good in theory, but nobody should be surprised that the contractors 'find' additional tons of 'debris' to remove.

[HT: Marginal Revolution]

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