Monday, 30 September 2019

Dealing with student assessment anxiety in the first year at university

Ako Aotearoa has some excellent materials and research projects that help tertiary teachers to improve their practice. For instance, consider this research project that finished towards the end of last year, by Valerie Sotardi and Erik Brogt (University of Canterbury), entitled "Understanding Assessment Anxiety during the Student Transition to University". I just read the final report from the project. Unsurprisingly it caught my interest because I predominantly teach first-year students (and PhD students, and nothing in-between any more).

In some ways, this project didn't highlight anything terribly new. Students face anxiety around assessments, and the transition from high school modes of teaching and assessment and their expectations to university modes of teaching and assessment and their expectations is a big contributor to this anxiety. The change of learning environment from high school to university is an unforgiving transition. Assessment at university tends to be higher stakes (or appears so to students), and the large class sizes in first-year lectures tend to prevent students from receiving individualised feedback on their progress. Another big contributor to assessment anxiety appears to be student uncertainty - in particular about how to interpret and execute assessment tasks, and about the criteria and expectations against which assessments will be graded.

I have to say that I was unsurprised at the extent of anxiety that was reported:
More than 3 out of 4 participants in this sample had expressed that tests (82%), writing tasks (82%), and oral presentations (78.2%) elicited mild-to-extreme levels of anxiety. To a lesser degree, approximately 1 in 2 students (52%) had reported group work as associated with mild-to-extreme levels of anxiety. Also noteworthy were descriptive reports of anxiety on extreme anchors of the instrument (i.e., students reporting a 6 or 7 on the 7-point scale). Participants found oral presentations the most intensely distressing (33.5%), followed by tests (31.4%), writing tasks (28.5%), and group work (6.7%).
The lower anxiety around group work was a bit of a surprise. I wonder whether students at the top of the grade distribution and those at the bottom have different experiences of anxiety relating to group work?

The report tried to dig into some of the factors that contributed to assessment anxiety. This bit will also not come as a surprise to any university lecturer:
Time management was another key issue contributing to assessment anxiety. Leaving things to the last minute and realizing too late that there was more to do than anticipated led to an increase in stress and anxiety levels. In contrast, students who planned their work ahead of time and had the opportunity to edit and redo parts of their assessments reported less stress than those with poor time management skills.
The only disappointing part of the report was the lack of really concrete recommendations for improving practice among lecturers of first-year university classes. Sotardi and Brogt surveyed students and staff, and I found the summarised student responses to be a bit more helpful than those from the staff:
Of the course-related factors that reduced anxiety, the most common was confidence in the task. A few students identified various ways of managing their stress, whether that be self-soothing strategies, seeking reassurance from someone else, time management, and group study with classmates. Having prior experience in the assessment type or university experience seemed to greatly relieve stress for students. Other factors included effective teaching, providing useful resources, low weightings of early assessments, and knowing that stress was common among classmates.
It is hard to establish what to do when the recommendation is "effective teaching", since I don't believe there is one-size-fits-all model for that. This bit (again, from students) is also important:
Student participants made the following observations and recommendations about their first year that they thought lecturers should be aware of (in order of frequency):
1. Lecturers need to be realistic and clear about student expectations.
2. Students need time in advance to learn, comprehend, and complete assessments.
3. Time to relax is important.
4. Students don’t always feel comfortable asking questions.
5. Students enjoy self-directed and active learning tasks.
6. Students [may] have mental health issues.
7. Courses with competitive entry are stressful.
8. Lecturer enthusiasm with students makes it easier to learn.
9. Students face a lot of pressure to do well.
10. Too much information can be overwhelming for students.
There is a lot of value in the report, but I get the feeling that this is only just the beginning for understanding the anxiety that students face in the transition to university-level study. More focus on how students perceive this transition, and what works well and what doesn't work so well, will be important. Sotardi and Brogt conclude that:
...staff can assist university students by reiterating that the transition from high school is challenging, and that stress and a lack of confidence are common. Students should know that they are not alone in the challenges they face, and that they can learn to adapt and cope by developing effective strategies in terms of learning, such as study practices and help-seeking behaviours. Lecturers can also assist by taking the time to review their course assessment structure in a way that builds students’ confidence, makes the expectations and priorities for students clear, guides them into thinking about how to approach the assignment, and informs students about the university support structures available to them.
Those might be the most important takeaway messages from this important research.

Sunday, 29 September 2019

We don't need an international framework for sand extraction

Economists define common resources as resources that are rival (meaning that one person's use of them reduces the amount of the resource that is available for everyone else) and non-excludable (meaning that it is not possible to stop people from using them - if they are available to anyone, they are available to everyone). When thinking about common resources, we often think about the obvious examples like trees, or fish (in fact, that's an example I spend some time on in my ECONS102 class). But what about sand? Nature reported back in July (footnotes omitted):
Sand and gravel make up the most extracted group of materials, even exceeding fossil fuels. Urbanization and global population growth are fuelling an explosion in demand, especially in China, India and Africa. Roughly 32 billion to 50 billion tonnes are used globally each year, mainly for making concrete, glass and electronics. This exceeds the pace of natural renewal such that by mid-century, demand might outstrip supply (see ‘Global scarcity’). A lack of knowledge and oversight is allowing this unsustainable exploitation.
Desert sand grains are too smooth to be useful, and most of the angular sand that is suitable for industry comes from rivers (less than 1% of the world’s land). This extraction of sand and gravel has far-reaching impacts on ecology, infrastructure and the livelihoods of the 3 billion people who live along rivers (see ‘Shifting sands’). For example, sand mining on the Pearl River (Zhujiang) in China has lowered water tables, made it harder to extract drinking water and hastened river-bed scour, damaging bridges and embankments.
Is sand a common resource? It is rival, since one person using sand means that the sand is not available for anyone else to use. Is sand non-excludable? Possibly yes:
Most of the trade in sand is undocumented. For example, between 2006 and 2016, less than 4% of the 80 million tonnes of sediment that Singapore reported having imported from Cambodia was confirmed as exported by the latter. Illegal sand mining is rife in around 70 countries, and hundreds of people have reportedly been killed in battles over sand in the past decade in countries including India and Kenya, among them local citizens, police officers and government officials.
If essentially anyone can extract sand, then it is non-excludable. So, it seems that sand is a common resource, as defined by economists. Common resources suffer a potential problem, known as the 'Tragedy of the Commons'. The private incentive for sand harvesters is to harvest as much sand as they can, in order to maximise their profits. However, the social incentive is to harvest sand in a sustainable way (to ensure that sand is always available). This leads to over-harvesting of sand, and threatens the collapse of the resource.

Solutions to the common resource problem involve making the resource excludable. This could include regulation (with enforcement) or assigning property rights. Either of those options make the common resource excludable, since they define who is allowed to use the resource. They make sense as solutions when we are talking about trees or fish, because if the solution is enacted before the population collapses entirely, the population can recover. However, sand doesn't reproduce, at least not on the same timescale as trees or fish.

That makes a solution to the common resource problem for sand particularly difficult. The Nature article posits seven components of a sustainability plan for sand:

  1. Source - finding new sources of sand, such as in Greenland;
  2. Replace - finding alternatives to using sand, such as crushed rock;
  3. Reuse - using crushed demolition waste and concrete as an alternative to new sand;
  4. Reduce - cutting the amount of concrete use;
  5. Govern - an international framework to control sand extraction;
  6. Educate - making sure people know that sand is running out; and
  7. Monitor - keeping better track of available sand resources.
That seems like a lot of effort, but it made me wonder - why are we worried about this? I can understand worrying about trees or fish - if a species of tree or fish is over-extracted to the point of extinction, that tree or fish is never coming back (unless we develop Jurassic Park technology). However, sand is created by weathering and erosion of rocks. So, if sand runs out, we just have to wait for more to be created (or we have to make our own).

Moreover, if natural sand becomes scarcer, the price of sand will increase. That price increase creates incentives to find alternatives to using natural sand. We already have alternatives (crushed rock or recycled demolition materials) - they are just more expensive than natural sand right now. The same thing happened with rubber. When access to cheap natural rubber was disrupted during both World Wars, that spurred the adoption of synthetic rubbers (which were already available, just more expensive).

We don't need an international framework to control sand extraction. Sand isn't going extinct.

Saturday, 28 September 2019

The $8 bucket of movie theatre popcorn

I can't believe it's over five years since I wrote this post about pricing at movie theatres. I was reminded of it recently when reading this article in The Hustle about the pricing of popcorn:
In March of 2012, Justin Thompson, a 20-year-old security technician from Livonia, Michigan, decided to go to the movies.
Inside, he encountered an atrocity we’re all familiar with: the movie theater concessions stand, with its $8 popcorn, $6 sodas, $5 candy bars.
Left with no alternative, Thompson indignantly bought a treat at an 800% markup.
It's interesting to think about why popcorn is priced so high. In my ECONS101 class, when we cover pricing strategy, we talk about firms making strategic pricing decisions where they may not be profit maximising on one product, but that enables them to maximise profits from other products they sell. The obvious example of this is loss-leading, a relatively common practice at supermarkets for example. Supermarkets sell some of their products at a loss, in order to encourage more shoppers into the store, with the goal of getting those shoppers to buy other products that the supermarket can profit from. It seems that movie theatres are engaging in something similar:
When a theater wants to show a film, it must agree to pay the distributor a percentage of all ticket sales. This percentage is higher during the first few weeks of a film and decreases over time, but generally averages out to ~70%.
So, if a theater sells a movie ticket for $9, its cut is only $2.70 — and that’s without accounting for other expenses.
Theater owners could price tickets higher, but it wouldn’t do them much good since 70% of any increase goes straight to the studios. Instead, they think of movies as a loss leader: their primary goal is to get as many people through their doors as possible, even if it means breaking even (or losing money) on the price of admission...
Unlike tickets, concession sales are not shared: theaters keep 100% of the revenue they generate. And this revenue generates much higher profits.
The Hustle looked through annual reports (2015-2018) from two leading movie chains (AMC and Cinemark) and found that concessions account for ~30% of total gross revenue, yet make up 45-50% of gross profits. 
So, having priced the tickets low in order to get people to go to the movies (although, I leave you to judge whether the tickets are actually priced 'low' or not!), the movie theatre hopes to make profits from the concessions. The most interesting part of the article is this bit on the markups:


Why are the markups highest for popcorn (788%), and lowest for candy (313%)? My ECONS101 class should know the answer - popcorn must have the least elastic demand. That is, moviegoers are less sensitive to an increase in the price of popcorn than they are to an increase in the price of soda or candy.

The reason for that probably comes down to the availability of substitutes. Movie theatres have rules against you taking your own food in from outside (i.e. food not purchased at their concession stand). It's fairly easy to subvert this by bringing things in your handbag or pocket though. However, that works well only for small items (candy), and less so for drinks. Popcorn, on the other hand, you want to consume while it's hot, and it's a lot bulkier, so more difficult to conceal. So, substitutes are most available for candy, and least available for popcorn. The result is that the optimal markup is highest for popcorn, and lowest for candy. And that explains the $8 bucket of popcorn.


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Friday, 27 September 2019

Let's not revoke the ivory ban just yet

It's only a couple of months since I last posted about the ban on elephant ivory, but it's already in the news again. From The Economist:
This month’s [CITES] meeting will consider competing proposals about how absolute the ban should be, since in some countries elephant populations have recovered (see article). Countries seeking a modest relaxation have a strong case to make. But it is not strong enough. The ban must stay.
Just to reiterate my point from that earlier post, banning ivory sales (and, by extension, the sale of other parts of elephants) doesn't completely shut off the supply of elephant ivory, but it does decrease it because the costs of supplying ivory are higher (due to the penalties for supplying an illegal product). If you relax the ban, then the supply of ivory (and other elephant parts) will increase, and you'll end up back where you started, with elephants critically endangered. The Economist's article seems to agree:
To understand why these reasonable-sounding proposals should be rejected, consider what has happened to elephant numbers since cites most recently authorised some legal trade, when Botswana, Namibia and South Africa were allowed in 2007 to sell a fixed amount of ivory to Japan, as a one-off. Elephant numbers started falling again. A survey conducted in 2014-15 estimated that elephant numbers had fallen by 30% across 18 countries since 2007; another estimated a decline of over 100,000 elephants, a fifth of the total number, between 2006 and 2015. Increased poaching was at least partly to blame.
These numbers suggest that the existence of even a small legal market increases the incentive for poaching. It allows black-marketeers to pass off illegal ivory as the legal variety, and it sustains demand...
The objection to trade in products of endangered species is not moral, it is pragmatic. When the world is confident that it will boost elephant numbers rather than wipe them out, the ivory trade should be encouraged. Regrettably, that point has not yet come. And until it does, the best hope for the elephant—and even more endangered species, such as rhinos—lies not in easing the ban on trading their products, but in enforcing it better. 
Perhaps we could farm elephants, as I noted in this post from 2015:
As a totally different approach, what about farming elephants and flooding the market with cheap farmed ivory? The problem with wild elephants is that they are a common resource - rival and non-excludable. Rival goods are those where one person's use of the good reduces the amount available to everyone else, i.e. in this case one poacher killing an elephant reduces the number of elephants available to everyone. Non-excludable goods are those where you cannot easily prevent a person from obtaining the benefit from them, i.e. in this case it is difficult to stop the poachers from hunting. Farmed elephants (rather than wild elephants) would be private goods - rival and excludable. The farmers would (in theory) be able to exclude others from obtaining the benefits from the farmed elephants, and would have an incentive to sustainably manage their elephant herd. Farming as a solution for elephant poaching has been suggested before - see this piece by Shaun Jenkins last year as one example. Of course, others have criticised the suggestion (see here in response to the Jenkins article).
One problem with farming is that would spell the end for wild elephants (if you wonder why, consider how many wild chickens there are). However, one thing is clear - relaxing the current ban is not a good option.

[HT: Marginal Revolution]

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Thursday, 26 September 2019

Money isn't only what you think it is

When most ordinary people think of money, they think of the coins and banknotes that are increasingly becoming redundant. Maybe they think about the virtual balance in their bank account (it's virtual because the bank isn't physically storing that amount of money for you). However, when economists think of money they think of much more.

To an economist, money is something that fulfils three functions, which date back to William Stanley Jevons in 1875 [*]:
  1. It is a medium of exchange - you give it up when you buy goods or services, and you can receive it when you sell goods or services;
  2. It is a unit of account - you can measure the value of something using the amount of money it is worth; and
  3. It is a store of value - you can keep it and it will retain its value into the future.
Anything that fulfils those three functions can be considered money. So, coins and banknotes are money because you can exchange them for goods and services, you can use them to measure the value of things, and you can store them and use their value in the future.

The surprising thing is that we accept coins and banknotes as money even though they have no intrinsic value - we only value them because they can be used as money. They are used as money because the government has decreed that they have value - they are called fiat money because they are given value by government fiat. That distinguishes them from gold or silver, which were previously used as money, and had intrinsic value - gold and silver are forms of commodity money.

In some ways, commodity money is more interesting (to me, at least), because of the variety of ways it can arise. You might have heard of prisoners of war in POW camps using cigarettes as money, or the giant stone wheels (Rai) used as money on the Micronesian island of Yap. Or, my personal favourite, beaver pelts used as money by the Hudson Bay Company in Canada in the 18th Century.

I was interested recently to read this article in The Guardian by Richard Davies, who has a new book Extreme Economies: Survival, Failure, Future. The book looks interesting (expect a book review from me, but not for a while as I have a long backlog to get through first), but in the article there was a focus on money:
The use of dollars inside the prison is a puzzle. Anyone running a major drug operation is going to need to shift large cash balances, but dollar bills are something sniffer dogs can detect, and any digital transfers can be traced. It turns out that drug traders and smugglers face none of these risks, because Louisiana prisons have a remarkable new currency innovation. “Cash is contraband, but people have got cash,” the former prisoner explained, “but it is not cash like cash in hand. It is untraceable. It is all based on numbers. People pay each other with dots.”...
The name of the prisoners’ new currency comes from the popular Green Dot brand of these cards, which carry the Visa or Mastercard logo and can be used to make purchases wherever regular credit and debit cards are accepted. Some users have found ways to set up an account for the card without using their true identification details. They then buy a second card, this one a single-use scratch card called a MoneyPak, which is used to load the debit card with credit of anywhere between $20 and $500. Both cards can be bought pretty much anywhere: at Walmart, at CVS or any other pharmacy. Scratching away the back of a MoneyPak reveals a 14-digit number. This number, the “dots”, is the vital link, carrying up to $500 of buying power. The user goes online, logs in to their account and enters the number, and the credit appears, instantly, on their debit card.
The person buying the Green Dot card can pay in cash, as can the person buying a $500 MoneyPak, so there is no trace of who owns them. The beneficiary of the credit does not need to see the MoneyPak itself – all they need are the numbers. Texting someone the 14-digit “dots” using a contraband phone, sending them a photo or letter with the numbers, or simply communicating the numbers over a telephone call will do. The dots are a currency close to cash: an instant, simple and safe transfer of value over long distance.
To make a large cash payment, a prisoner asks a friend on the outside to buy a MoneyPak and to pass on the dots once they have done so. These 14 digits can then be exchanged with a guard or another prisoner for something in the prison, including drugs.
Are "dots" money? They are certainly a medium of exchange (that is their main function). Because they are dollar-denominated, they can be used as a unit of account. And because they can be stored and used later, they are a store of value. There is great variety in the forms that money can take, and technology is helping to identify new forms.


*****

[*]  Jevons noted a fourth function, a standard of value (a way of valuing debts), which we now consider to be much the same as a unit of account.

Wednesday, 25 September 2019

Strategic behaviour by Italian mayors differs by age

In my ECONS102 class, we cover a little bit of the theory of public choice. One aspect of that is the way that politicians behave. Of course, voters want politicians to act in the voters' best interests. However, there is a principal-agent problem here. Voters are the principal - they have engaged the agents (politicians) to act on their behalf. The problem is that politicians have their own motivations, which don't necessarily align with the goals of the voters, and if they aren't monitored closely, politicians will act in their own best interests (and not necessarily those of the voters).

That disconnect, between the goals of voters and the motivations of politicians, explains a lot of the reason why politicians act in ways that voters don't necessarily like. And, voters may let them get away with it because of rational ignorance. Monitoring the behaviour of politicians is costly to voters. If the costs of any negative behaviour of politicians is less than the cost of monitoring them, then it is rational for voters to avoid the monitoring costs and be rationally ignorant of the politicians' behaviour.

One of the things that politicians may do, which may not align with the goals of the voters, is engage in strategic behaviour designed explicitly to get the politician re-elected. They may provide 'favours' or re-direct resources to some groups of voters, or engage in high profile but costly (in terms of public welfare) activities that give them good press coverage. This strategic behaviour is likely to intensify in the lead-up to an election.

That brings me to this new article by Alberto Alesina (Harvard), Travis Cassidy (University of Alabama), and Ugo Troiano (University of Michigan), published in the journal Economica (ungated earlier version here). Alesina et al. use data on Italian mayors over the period from 1998 to 2014, to test how younger and older mayors behave differently.

In theory, there are a number of reasons to believe that younger mayors will behave differently from older mayors. Alesina et al. note that:
Younger politicians may differ from older ones for at least five reasons. One is that they have a potentially longer political career ahead of them and therefore have stronger career concerns. The second is simply that, as younger citizens, they have a longer horizon and therefore they may have an incentive to adopt more long-term policies... The third and more mundane reason is that younger politicians may be more energetic and productive at work. The fourth reason is that there could be different self-selection patterns by age: because people of different ages have different opportunities in the labour market, this may affect the decision to become a politician. The fifth reason is that politicians of different ages may have different political connections—innate or accumulated doing the course of their previous work.
The career-concerns reason is interesting to consider. Younger politicians have a potentially longer political career ahead of them. So, the benefits of engaging in strategic behaviour to ensure their re-election are higher for younger politicians than for older politicians. Alesina et al. find some support for this. After showing that younger candidates are statistically significantly more likely to be seek re-election, and more likely to be re-elected, than older candidates, they consider whether these results are indicative of younger mayors enacting better policies. They investigate this by looking at house prices (because areas with better local government policies would be attractive places to live in, so house prices would be higher). However, they find that:
...there is little evidence that house prices respond to the age of the mayor in office.
They also show that the age of the mayor has no effect on the speed of public goods provision (another indicator of the quality of governance). So, having established some evidence that younger mayors are not better politically than older mayors are, they consider how younger and older mayors differ in terms of local government spending. They find no statistically significant differences in local government revenue per capita or current expenditure per capita. However, with capital expenditure they find evidence of a political cycle in spending. That is, younger mayors spend more in the year immediately before an election, such that:
...a typical younger mayor will increase capital expenditure before the election by 9.66 euros per capita, while a typical older mayor will actually decrease capital expenditure before the election by 2.1 euros per capita.
Capital expenditure is attractive for political candidates to be strategic about, because it is highly visible (voters will remember the politician who cut the ribbon on their new expressway), and because unlike current expenditure it is less subject to balanced-budget rules.

If mayors are engaging in strategic behaviour, it is reasonable to consider how voters can respond to try to reduce this behaviour. Closer monitoring is unlikely to be effective because of rational ignorance. So in my ECONS102 class, we discuss alternative solutions to the principal-agent problem, one of which is paying an efficiency wage - effectively paying a higher wage to the agent, to increase the incentives for them to engage in behaviour that is aligned with the principal's wishes (otherwise, they lose their job and have to go work elsewhere for a lower wage). Interestingly, in supplementary results, Alesina et al. find that:
...the effect of age on political budget cycles is smaller when the mayor’s wage is higher...
So, maybe there is some support for increasing mayoral wages to reduce this strategic behaviour.

Tuesday, 24 September 2019

Some notes on the 2018 Census data

I was interviewed for The AM Show yesterday, and some snippets of the interview played this morning. Don't worry if you missed it - my moments of fame lasted about 40 seconds in total! However, the interview was much longer, and related to the first release of data from the 2018 Census.

Here's a few notes that I made before and after the interview, that might be of interest to some readers:

  • The Census usually resident population counts mostly reflect what we expected to see, given the historically high net international migration New Zealand has experienced over the period since the 2013 Census.
  • The New Zealand population grew by 10.8 percent, or 2.1 percent per year.
  • All regions increased in population, and all but two territorial authorities increased in population as well (the exceptions were Buller District and Grey District, both on the West Coast).
  • There were a few surprises (to me, at least). Far North District grew by around 9500 people (after decreasing by 100 between 2006 and 2013), and Rotorua District grew by around 6600 people (after decreasing by 600 between 2006 and 2013).
  • Wellington City was a surprise to me, because its population increase was about the same as between 2006 and 2013 (+11,800 between 2013 and 2018, compared with +11,500 between 2006 and 2013). All the other main centres grew by a lot more than they did between the previous two Censuses.
  • The population of Taupo District is now over 37,000. When does it get to call itself a city?
  • The number of people reporting Maori ethnicity grew at a faster rate (+29.6%) than the number of people reporting Pacific ethnicity (+29.0%). That probably reflects a lot of Maori migrating back from Australia in this period.
  • The number of people reporting Asian ethnicity (708,000) has almost caught up with the number of people reporting Maori ethnicity (776,000).
  • There were nearly 650 people aged over 100 years old!
For more Census facts, see here or here, or the maps here. The Spinoff summarised some of the more interesting facts here. The New Zealand Herald also ran an interesting story focusing on the religion question:

Destiny Church has less than half the number of members of the often mocked, but clearly more popular, Church of the Flying Spaghetti Monster in New Zealand.
The colander-wearing religious group has 4248 members in New Zealand, according to the latest census data, meaning there are more than double the number of Pastafarians in New Zealand than there are Destiny Church members.
If there was any doubt about how valuable the religion question is in the Census, the Church of the Flying Spaghetti Monster and the Jedi (20,409) pretty much put it to rest.

One of the outcomes from the Census data is that the number of electorates in the North Island is set to increase by one, as noted in this New Zealand Herald article. I made a few notes on that as well:

  • The number of South Island electorates is fixed at 16 by the electoral act.
  • Statistics New Zealand uses the number of people per South Island electorate (after subtracting those on the Maori electoral roll) to work out the number of North Island electorates.
  • Because the North Island population grew faster than the South Island population between the last two Censuses, the North Island gains one electorate.
  • This doesn't really reduce representation in the South Island, because the total number of MPs is fixed at 120, so one list MP is lost in the next election.
  • The Representation Commission determines the electorate boundaries, and then there's a period of public consultation. It had better happen quickly, since the election is next year!
  • The likely location of a new electorate is somewhere in the arc from South Auckland, down through the Waikato to Taupo, and east to Tauranga and the Western Bay of Plenty. That is where the electorates have grown in population the most.
There is more detail about the electorates here, and the mathematical calculations from the 2013 Census are detailed here.

Anyway, there's lots of detail to digest in the 2018 Census data. I'm sure there's much more of interest to be found, and I won't be the only one working with the data for years to come.

Monday, 23 September 2019

University study isn't a good deal, if you are going to drop out

This week in my ECONS102 class, we're discussing the economics of education. In class today, we covered the private education decision - rational individuals weigh up the costs and benefits of education, and will undertake further education if the benefits are at least as great as the costs.

The private benefits of education include the incremental increase in lifetime earnings (from receiving a higher wage or salary). There are also benefits in terms of higher productivity (which will be reflected in higher wages, but higher productivity in non-market activities is a benefit as well, which is not captured in wages), signalling (which is captured in the wage - see this post and this post for more on this), socialisation (building a social network, social and 'soft' skills, which again is probably captured in the wage), and a bunch of outcomes that improve with education, such as improved health, marital stability, better outcomes for children, and so on. The majority of the benefits arise from incremental income.

The private costs of education include tuition fees and other 'direct' costs (such as textbooks, stationery, uniforms, etc.), foregone income (from giving up some work in order to study) and foregone leisure. There may also be incremental accommodation and living costs, but only to the extent that those costs are higher than they would have been if the person were not studying. The majority of the costs arise from foregone income (and leisure).

For most people undertaking university study, the benefits (dominated by higher lifetime earnings) outweigh the costs (dominated by foregone income). But that is not always the case, as this Wall Street Journal review (possibly gated for you) of the David Kirp book The College Dropout Scandal notes:
As David Kirp notes in “The College Dropout Scandal,” “the contention that college is the engine of social mobility is false advertising for the 34 million Americans over twenty-five . . . who have some college credits but dropped out before receiving a diploma.” What is more, many such students “are worse off economically than if they hadn’t started college,” thanks to the money they’ve spent on tuition, not to mention the opportunity cost of the wages they’ve foregone.
If the benefits of education are dominated by incremental lifetime earnings, then a student really needs to be getting a better job at the end of their education. If not, then it is likely that the costs outweigh the benefits, and the student would have been better off not engaging in the education in the first place. This applies to university study, but also to any other private education decision.

Kirp's book focuses on the case of university (college) dropouts. University dropouts benefit from some skill development, but as Bryan Caplan notes in his book The Case Against Education (which I reviewed here), a dropout misses out on the 'sheepskin' effects associated with completing their degree or diploma. Even worse, dropping out provides a negative signal to employers, that this is a student who can't succeed at university, so it is more likely that they also can't succeed in the workplace. Dropouts face most of the costs of the education, with little of the benefits. Therefore, it is entirely possible that studying actually makes them worse of, on balance.

University dropouts aren't the only group where I see that the benefits of education may be less than the costs. In particular, I worry about students enrolled in low-value courses at private training establishments (PTEs), such as the many institutions found here in New Zealand. Sure, a student enrolled in a business course at a PTE is probably learning some useful skills, but the signal they are providing to employers is ambiguous - if the student completes the course, they are signalling that they are someone who can complete a PTE course. In the eyes of employers, that probably ranks the student above those who can't complete a PTE course, but certainly below polytechnic business students, and well below university business or commerce students. If on balance this is a negative signal, then the benefits from this education are going to be fairly low. And in that case, it may be that the costs of PTE training outweigh the benefits.

All students should understand the private education decision, but more importantly they should understand the importance of signalling.

[HT: The Dangerous Economist]

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Wednesday, 18 September 2019

Martin Weitzman, 1942-2019

I'm a little late to this news, but I was saddened to hear of the passing of the environmental economist Martin Weitzman a few weeks ago. The New York Times has a wonderful obituary that nicely summarises Weitzman's contributions to economics. Those contributions were many, including:
In an earlier influential paper, written in 1974, Professor Weitzman questioned the conventional view among economists that taxing pollutants was a more effective way to curb them than setting limits on how much pollution could be generated.
He argued that each approach created its own ambiguities: Levying a tax makes it easy to predict the cost of the policy, but not how much companies will continue to pollute. Imposing a cap makes the amount of pollution quantifiable, but not the cost.
His analysis helped lay the groundwork for the so-called cap-and-trade alternative, which imposes a ceiling on pollutants but lets companies set the price in the marketplace by trading permits to pollute within those caps. Cap-and-trade programs have helped reduce acid rain pollution in the United States and are being used to tackle climate change in California and the European Union.
This week in my ECONS102 class we covered the economics of pollution control, and Weitzman's work noted above is a key contribution to the topic. I also blogged about this back in 2015, but without reference to Weitzman. Understanding the theoretical equivalence of tradeable pollution permits and Pigovian taxes, and the benefits and limitations of those two options, is important.

Many economists were surprised that he didn't win the Nobel Prize, especially when it was awarded to William Nordhaus for his work on environmental economics (among other things). Apparently this hit Weitzman quite hard:
Colleagues said that Professor Weitzman had been despondent after he did not win the Nobel, and that his emotional state worsened in the spring, when, in a rare instance in his career, a fellow economist pointed out a mistake in a completed but unpublished paper that Professor Weitzman had circulated.
In a typewritten note that was found after his death, Professor Weitzman said his capacity to solve the kinds of difficult problems to which he had devoted his career was diminishing.
The saddest part of the story of Weitzman's passing may be that he was the second top economist this year to have taken their own life (after Alan Krueger). You can read more about Martin Weitzman's work on Wikipedia, or Bloomberg News or The Economist. He will be a great loss.

Tuesday, 17 September 2019

Crying babies and the Coase Theorem

This week in my ECONS102 class, we've been covering externalities. An externality is the uncompensated impact of the actions of one person on the wellbeing of a third party. Externalities can be negative (they make the third party worse off) or positive (they make the third party better off). We call them externalities because they lie outside the decision that create them - that is, some of the costs or benefits are external to the person whose action creates them.

A key part of the topic is understanding the Coase Theorem (named for the late Nobel prize-winner Ronald Coase) - the idea that, if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own (that is, without government intervention). It's an important idea because it is tempting to believe that, whenever there is an externality, it is the government's job to fix it, often through some form of regulation. But the theorem tells us that government intervention isn't always necessary.

The Coase Theorem first requires us to recognise the rights and entitlements associated with an externality. I'll illustrate with the example from this article in the New Zealand Herald last month:
A Sydney mother is "fuming" after receiving an "unbelievable" note about her parenting in her letter box.
The new mum shared a photo of the letter on Facebook, where the next door neighbours complained about her baby crying during the night.
"We would have called you but we are never sure when you are around," the note reads.
"We just wanted to let you know that unfortunately we have had a number of disturbed nights sleep recently due to the thinness of the walls between our units."
The neighbours added while they don't have kids of their own they're sure "it's not at all easy to soothe a crying baby".
"We really would appreciate anything you can do to help us get more sleep, particularly during the early hours," the note reads.
"Thank you for your consideration of this. I am sure we all look forward to more undisturbed nights' sleep."
A crying baby creates a negative externality - they impose a cost on the neighbour, who is losing sleep. How could the two parties negotiate a solution to this problem? It depends on the rights and entitlements.

Both parties have rights here. The neighbour has the right to quiet enjoyment of their home - they shouldn't have to worry about being disturbed at night. The mother has the right to have a baby at home, and babies are known to cry. So, there are competing rights. The bargaining solution will depend on which party has the overriding rights - whose rights are protected more under the law.

Let's work it through from both possible perspectives. First, let's say that the overriding rights belong to the neighbour - their right to quiet enjoyment will be protected. The default solution is that the mother has to quiet the baby in some way (or maybe they have to move somewhere else). The alternative solution is that mother and baby stay, but they agree to pay compensation to the neighbour for the neighbour's loss of sleep. The amount of compensation would have to be at least as much as whatever the neighbour values their sleep at (otherwise they wouldn't agree, and they don't have to, since under the default solution they would get quiet). However, the compensation has to be less than whatever the mother values staying in that home with their baby at (otherwise, mother and baby would be better off moving, rather than paying the compensation).

Now let's look at it the other way. Let's say that the overriding rights belong to the mother - her right to have her baby at that home will be protected. Now, the default solution is that the neighbour has to put up with the crying (or maybe they have to move somewhere else). The alternative solution is that mother and baby move away, but are paid compensation by the neighbour in order to do so. In this case, the amount of compensation would have to be at least as much as whatever the mother values living in that house with her baby at (otherwise they wouldn't agree, and they don't have to, since under the default solution the neighbour just has to put up with the crying). However, the compensation has to be less than whatever the neighbour values their lost sleep at (otherwise, they would be better off moving or putting up with the crying, rather than paying the compensation).

The Coase Theorem tells us how a bargaining solution could arise when there is an externality problem. However, it requires both parties to reach an agreement. In this case, given that the mother is already "fuming" about the neighbour's note, that seems unlikely.

Monday, 16 September 2019

The price of petrol and airfares are set to rise

The basic model of supply and demand is one of the most commonly used models in economics. That's because it does such a good job of explaining many of the things we see in the real world. Every day, you could pick up the newspaper and see an example that can be explained with this simple model. Take this example from the New Zealand Herald yesterday:
Motorists could see high petrol prices within days following Saturday's drone attacks on Saudi Arabia's oil facilities by Iranian-backed Yemini [sic] rebels.
"It's not a good sign," said Automobile Association spokesman Mark Stockdale.
"It remains to be seen what impact it will have, how markets respond. But certainly a reduction in the supply in oil could have a negative impact on commodity prices which could result in higher prices at the pump."
The drone attacks by Yemeni rebels will reduce the supply of oil. In this diagram below, this is represented by the shift from S0 to S1. The equilibrium price of oil will rise, from P0 to P1.


That's not quite the end of the story, though. The higher price of oil leads to higher costs of production for petrol and jet fuel (because crude oil is an input into the production of those refined fuels). Higher costs of production reduce the supply of those products too (because the supply curve shows the costs of production, higher costs shift the supply curve upwards, as in the diagram above). That leads to higher prices for petrol and jet fuel.

You can take it a step further even. Higher jet fuel prices increase the costs for airlines. They pass those higher costs onto passengers in the form of higher prices as well. [*]

If you ever wondered why oil prices are important to all economies, not just the economies of the oil-producing nations. This is a good example of why - those prices flow through to the prices of lots of other goods (and services) throughout the economy.

*****

[*] We could refer to the diagram above again. However, because airlines don't operate in perfectly competitive markets, it isn't quite correct to show their response in a supply-and-demand diagram. Having said that, the impact of an increase in input costs is qualitatively the same regardless of whether you use a model of perfect competition or a model of a firm with market power - prices increase and the quantity decreases. I make this point in my ECONS101 class - the standard supply and demand model is quite robust, if all you are interested in knowing is the expected direction (but not necessarily the magnitude) of changes in price and quantity.

Sunday, 15 September 2019

Recreational fishing and the sustainability of fisheries

In New Zealand (as in many other countries), we manage our fisheries using a transferable quota system. Quotas regulate the number of fish that are allowed to be removed from the sea in a given period of time. The total quota is set by determining a total allowable catch for a year (in theory at least this is roughly equal to the growth in the fishery stock), with some allowance made for recreational fishing. Quotas work well because they make fish excludable (no quota means no fishing) and are backed up by monitoring and enforcement. If we didn't have a quota system (or some other alternative), fish would be a non-excludable good (anyone could fish as much as they want), and that would make fish much more vulnerable to over-fishing.

Most of the time, we worry about commercial fishermen over-exploiting the fishery. This is because, while all fishermen as a group have an incentive to manage the fishery sustainably, each individual fisherman has an incentive to take as many fish as they can, in order to increase their profits from fishing. So, if the fishery isn't actively managed (through a quota system, or through some other means), it can quickly become unsustainable. However, in the quota management system we worry much less about the actions of recreational fishermen, so I was interested to read this New Zealand Herald article from last month:
Recreational fishers have dramatically increased their catch of snapper and kahawai in the Hauraki Gulf over the past 30 years, a new survey has found.
A Fisheries New Zealand national survey, conducted between October 2017 and September 2018, estimated there were nearly 2 million fishing trips taken across the country.
An estimated 7m individual finfish and 3.9m individual shellfish were caught in this period.
The survey also found the average recreational kahawai catch had more than quadrupled in the Hauraki Gulf in the past 30 years, while the snapper catch had nearly tripled, despite trending down since the last survey in 2012.
On the surface, that sounds bad for the fisheries. However, whether the increasing recreational catch is bad or not crucially depends on how much allowance is being made for recreational fishing within the rules, and how much the total allowable catch (plus recreational fishing) is, compared with the growth in the fishery stock. It seems that we might have the balance about right:
Fisheries New Zealand director of fisheries management Stuart Anderson said the results confirmed the popularity of recreational fishing among New Zealanders...
"There's been little change in the proportion of these fish caught by recreational and commercial fishers since 2012."
The survey contacted more than 30,000 people, and about 7,000 recreational fishers had their fishing outings recorded over a 12-month period.
Fisheries Inshore NZ chief executive, Dr Jeremy Helson, said the increase in snapper and kahawai catch showed stocks were in great shape and the quota management system was working.
"Like the commercial sector, recreational fishers need to respect the rules and contribute to managing our fisheries resources.
Given that the quota system has come in for some criticism of late (especially around enforcement), it is good to know that it is working well in at least some fisheries.

Read more:


Saturday, 14 September 2019

The share market effects of naming companies after blockchain

This past week in my ECONS101 class, we discussed financial markets. In particular, we discussed the efficient markets hypothesis - the idea that all publicly available information (good and bad) about an asset's future cash flows is already captured in the asset's price (in the strongest form of the efficient markets hypothesis, all private information is also captured in the asset's price). So, it was timely that the Economics Discussion Group discussed this article by Archana Jain (Rochester Institute of Technology) and Chinmay Jain (Ontario Tech University), published in the journal Economics Letters (sorry, I don't see an ungated version). The authors look at the impacts on the share price when a company adds changes its name to include "bitcoin" or "blockchain".

I'd already followed the news about one of these companies in late 2017 - Long Blockchain Corp, formerly Long Island Iced Tea - which has been in the news again recently. Jain and Jain looked at ten such companies, and compared their performance with the performance of other companies that are included in blockchain exchange-traded funds. If there was something important going on with blockchain, you'd expect it to be picked up in the share prices of these other companies as well. Instead, they found that:
...the firms that change their name to include blockchain in it had a negative return of 13.55% from day −14 to day −2. We see an increase in the return of these firms from day 0 to 1 at 34.29%. Over the five-day period from day −2 to day +2, all firms earn a strongly statistically significant abnormal return of 100.89 percent. Over a 30-day (60-day) period from +1 to +30 (+60), all firms earn a 81.47% (72.84%) percent return. However, over a 60-day period from +61 to +120, all firms earn a −56.32 percent return.
In other words, the companies that changed name were not doing well (in terms of share price) in the lead up to their name change. They then saw a massive increase in their share price, up to 30 days after changing name, presumably as investors looking to jump on the cryptocurrency bandwagon bought into the companies. Then the share price started falling back to its original level. In the meantime, it's likely that the original company owners cashed out a big payday, while the stupid investors who failed the due diligence test were left licking their wounds.

Jain and Jain's article is a brief "how-to" guide for making money from a vapourware holding company. Just add the latest buzzword to your company name, and cash out big (but make sure to do so before the SEC figures it out). It's also proof that the efficient markets hypothesis doesn't hold in the short run. Otherwise, investors wouldn't get suckered into this.

Wednesday, 11 September 2019

Pharmacies and market power

Following on from yesterday's post about market power in the market for diamonds, I was also interested to read this article in The Conversation last week, by Bruce Baer Arnold (University of Canberra), about retail pharmacies in Australia:
In Australia, you are broadly free to operate most retail premises in any location. Three coffee shops might sit side by side, along with two bike shops and a barber’s.
A consequence of the National Health Act 1953 and state and territory law is that pharmacies are different – that’s why you never see two in a row.
Location restrictions state that when pharmacies relocate, they must do so within 10km of the existing site.
The establishment of a new pharmacy must generally be at least 1.5km from an existing operation.
We also have restrictions on ownership. Pharmacies must be operated by a registered pharmacist. A single person or corporation can own no more than five pharmacies. (Though franchising – where individual owners pay for use of a national brand such as Amcal and for services provided by the brand owner – blurs that restriction.)
The current rules seek to ensure most Australians have access to a pharmacy staffed by a highly skilled professional with a pharmacy degree.
By not having too many pharmacies within the same area, and therefore reduced local competition, it increases the likelihood they’ll make enough profit to stay open.
Such restriction is pragmatic, although it discomforts free-market purists who believe fewer rules foster competition through lower prices and better service.
It's interesting to note that New Zealand currently has similar rules to Australia (although the Therapeutic Products and Medicines Bill was initially going to relax the restrictions, it seems from the latest version of the Bill that it won't - see here for more). And it doesn't take a "free-market purist" to see what is going on here. If ownership of pharmacies is restricted to pharmacists, the number of pharmacies each owner can own is limited, and regulations state that pharmacies can't be located close to each other, local competition is lessened and market power is created. Keeping competitors out of your local market is a pretty effective way of gaining and maintaining market power.

Why should consumers care? Among other things, market power for sellers leads to higher prices. We are probably paying more for medicines and other products sold through pharmacies than we would if the market were more competitive. We may also be seeing less innovation in the retail pharmacy sector - why would a pharmacy innovate if they are already making a cosy profit and their market position is protected by law?

The Australian government is worried about the market power that Facebook or Google have, and they are willing to engage in a costly regulatory battle to reduce that market power. Why aren't they worried about the market power that pharmacists have, and willing to lessen the regulatory framework that creates that market power in the first place?

Tuesday, 10 September 2019

Market power and disruption in the diamond industry

In both of my first-year economics classes, I use De Beers as an example. In ECONS101, it's an example of a firm that has market power. In ECONS102, it's an example of a monopoly firm. In both cases, it's a good example because of barriers to entry - in this case, barriers to entry that arise when a firm is the only owner of a key resource that is necessary to produce the good.

There are few real-world examples of monopolies that arise from a firm being the only owner of a key resource. That's because global competition makes it very difficult for any firm to have sole control over a resource. However, De Beers got close. In the late 1980s, De Beers controlled about 90 percent of the world's diamond supply. They owned the most productive diamond mines in southern Africa, and had supply agreements with the largest diamond producers in other countries like Australia, Canada, and the Soviet Union, who allowed De Beers to handle the wholesaling and distribution of their diamonds (see here for more on this). Controlling such a large proportion of the diamond supply gave De Beers a high degree of market power - they were effectively a monopoly.

De Beers isn't nearly as dominant now, with market share under 40 percent. However, 40 percent market share still conveys a lot of market power. But that market power might be about to fall further, as this article in the New Zealand Herald (republished from the Daily Telegraph) explains:
Diamonds may not be forever after all. The value of the gemstone is set to diminish and they will become common in computer chips, satellites and even medical implants within a decade — if Silicon Valley's avant-garde lab-grown diamond purveyors have their way.
"We want to drive prices down because we think there are going to be many more applications for diamonds at present," says Martin Roscheisen, founder of Diamond Foundry.
His company produces diamonds in a cluster of biotech start-ups. Engineers use proprietary reactors that mimic the extreme pressure and fiery heat that creates plasma that, with the addition of carbon, produces natural diamonds.
Carbon atoms are stacked one by one in a thin layer of diamond atomically and visually identical to gems in Tiffany's. Polishers in Antwerp buff each diamond up to 2000 times to create multiple facets that capture and reflect light. One carat of rough diamond takes "a few weeks" to produce and once polished, prices start north of US$1000 ($1556)...
One of the necessary conditions for monopoly is that your product has no close substitutes. A lab-grown diamond is a very close substitute for a natural diamond. If there are many (and/or close) substitutes available, then the firm's market power is diminished. It isn't all over for De Beers yet, though:
De Beers is limiting supply in the face of trade tensions between the US and China, the two largest markets. The impact of lab diamonds is still only about 1 per cent of the overall market and will rise closer to 3 per cent by 2035, Zimnisky predicts. He is reluctant to say lab-grown diamonds will crush De Beers, saying producers are more likely to focus on hi-tech applications.
So, De Beers probably has years left before lab-grown diamonds really start to cut into their profits. However, one thing is surprising to me. Why isn't De Beers investing in the market for lab-grown diamonds now? You would expect a rent-seeking monopoly like De Beers to recognise the threat and to try to act to prevent it. They could argue that lab-grown diamonds are in some way a poor substitute and should be banned. It seems like they might have tried this already, as the article notes that "US regulators ruled that the definition of a diamond grown in a lab or one chipped from rock as far as 600m below the surface were the same". Since that didn't work, then buying out your competitors might be an alternative option. A purely rhetorical battle like this is going to be pretty ineffective:
Bigger players insist mined diamonds can never be replaced. Nathan Strauss of Tiffany says it will not use lab diamonds, describing mined gems as rare and a "romantic symbol billions of years in the making with an intrinsic value far beyond their chemical make-up".
Some firms don't see disruptive innovation coming, until it's too late (see Kodak, or Nokia, for examples). De Beers probably needs to wake up, and soon, or they may only be a historical example for economics classes in the future.

Thursday, 5 September 2019

Gun buybacks and incentives

I was interested to read this article in the New Zealand Herald earlier in the week:
Some New Zealand gun owners are upset they're being compelled to hand over their assault weapons for money. Others believe a government-imposed ban on certain semi-automatics following a March shooting massacre is the best way to combat gun violence.
And The Associated Press has found at least one man may have tried to swindle hundreds of thousands of dollars from the system set up to compensate gun owners...
[Police Deputy Commissioner Mike] Clement said the man showed up at an Auckland buyback event with thousands of magazines seeking to collect hundreds of thousands of dollars in government compensation. A possible flaw in his plan? Clement himself happened to be at the event.
"It's one of those things that didn't look right, didn't feel right," Clement said.
He said police were keeping hold of the magazines and hadn't paid the man any money while they carried out their investigation.
Policy changes create incentives to change behaviour, by changing the costs and/or benefits associated with the behaviour. However, changing the costs and/or benefits can also have unintended consequences (which is something I have blogged about many times before).

In this case, the gun buyback scheme created an incentive to buy cheap gun parts overseas, import them into New Zealand, and then give them to the government as part of the buyback scheme. Any difference between what the gun parts were purchased for overseas (plus the importing costs) and the amount received from the buyback ("between 25 per cent and 95 per cent of the pre-tax price") would be pure profit to the enterprising gun part importer.

The man referred to in the article was doing something that should have been easily anticipated by the government. It's not clear whether his actions were illegal, but they certainly were not within the spirit or the intention of the scheme. That man was caught out, but it makes me wonder: how many others might have already done the same (although perhaps not to the same degree) and gotten away with it?