Grade inflation at New Zealand universities, and what can be done about it

Grade inflation at New Zealand universities has been in the news recently. This is a delayed reaction to this report from the New Zealand Initiative released back in August, authored by James Kierstead. He collected data on grade distributions from all eight New Zealand universities (via Official Information Act requests), and looks at how those distributions have changed over time. The results are a clear demonstration of grade inflation, and most clearly demonstrated in Figure 2.1 from the report:

Over the period from the mid-2000s to 2024, the proportion of New Zealand university students receiving a grade in the A range has increased at every New Zealand university, and by more than ten percentage points overall. Kierstead notes that:

Overall, the median proportion of A-grades grew by 13 percentage points, from 22% to 35%... The largest increases occurred at Lincoln, where the proportion of As grew by 24 percentage points between 2010 and 2024 (from 15% to 39%), more than doubling, and Massey, where they grew by 17 percentage points (from 19% to 36%) from 2006 to 2023.

A similar pattern of increases, although not as striking, is seen for pass rates, which in 2024 were above 90 percent at every university except Auckland. The results are also apparent across different disciplines, as shown in Figure 2.4 from the report:

Of course, this sort of grade inflation is common across other countries as well, and Kierstead provides a comparison that shows that New Zealand grade inflation is not dissimilar from grade inflation in the US, UK, Australia, and Canada.

Kierstead then turns his attention to why there has been grade inflation. He first dismisses some possible explanations such as better incoming students (NCEA results have not improved, although even if they had that might be due to grade inflation as well), more female students (the proportion of female students has been flat over the past ten years, while grades have continued to increase), better funding (bwahahahaha - in fact, funding per student has declined in real terms since 2019, while grades have continued to increase), and student-staff ratios (which have declined over time, but the student-academic ratio, which is the one that should matter most, has barely changed).

So, what has caused grade inflation? Kierstead describes it as a collective action problem, akin to the tragedy of the commons first described by Garret Hardin in 1968:

It is our contention that grade inflation is the product of a dynamic that is not dissimilar to the tragedy of the commons. Just like Hardin’s villagers, academics pursue a good (in this case high student numbers) in a rational way (in this case by awarding more high grades). And just as with Hardin’s villagers, negative consequences ensue, with a common resource (sound grading) being depleted, to the cost of every individual academic as well as others...

In the grade inflation game, the good that academics want to maximize is student numbers. Individual academics, on the whole, want to have as many students in their courses as possible. This suggests that they are popular teachers and can help get them promoted (and hence gain more money and prestige). It can also help make sure the courses they want to teach stay on the menu.

I like this general framing of the problem, where 'sound grading' is a common resource - a good that is rival and non-excludable. However, I would change it slightly, by thinking about the common resource as being A grades generally, which are depleted when the credibility of those grades reduces. In my slightly different framing, awarding A grades is rival in the sense that one person awarding more A grades reduces the credibility of A grades awarded by others. Awarding A grades is non-excludable in the sense that if anyone can award A grades, everyone can award A grades (while it is possible to prevent academics from awarding A grades, universities would probably prefer not to do so because that would reduce student satisfaction). So, while the social incentive for all academics collectively is to reduce the award of A grades to keep the credibility of those grades high, the private incentive for each academic individually is to increase the proportion of A grades awarded, leading to fame and fortune (or, more likely, leading to fewer awkward conversations with their Head of School as to why their grade distribution is too low, as well as better student evaluations - see here and here, for example). Essentially then, the incentives are for academics to inflate grades. The universities have few incentives to act to reduce grade inflation, since higher grades increase student satisfaction and lead to greater enrolments.

However, there is a problem. As Kierstead notes, grade inflation is well-termed because its effects are similar to the inflation that economists are more familiar with:

If universities hand out more and more As in a way that isn’t justified by student performance, the value of an A will go down. The same job opportunities will ‘cost’ more As as As flood the market. Students who worked hard will see the value of their As decrease over time, just as workers in the economy see their savings decrease in value due to monetary inflation.

So, what to do? Kierstead offers a few solutions in the report, including moderation of grades, reporting grades differently on transcripts, calculating grades differently, making post-hoc adjustments to grade point averages, having national standardised exams by discipline, changing the way that universities are funded to reduce the incentive to inflate grades, changing the culture of academics, and giving out prizes for 'sound grading'. I'm not going to dig into those different solutions, because sometimes the simplest one is the best one. With that in mind, I pick this:

Perhaps the simplest addition that could be made to student transcripts alongside letter grades is the rank that students achieved out of the total number of students on the course. So a student’s transcript might read, for example, ‘Classics 106: Ancient Civilizations: A- (27th of 252).’...

Adding ranking information restores some of the signalling value of grades without needing to reverse grade inflation itself. To see why, consider an example. If an employer has the transcripts of two students, one of whom got an A- grade in econometrics and ranked 17th out of 22 students, while the other student got a B grade and ranked 3rd out of 29 students, it's pretty clear that the grade might not be capturing the full picture of the students' relative merit. Kierstead worries about this simple solution because:

A limitation of rank-ordering is that it might suggest that students who achieved only a lowly ranking had performed badly, whereas they might well have performed very well in an especially difficult course.

Possibly, but the key point is not how well students did in the course, but how well they did relative to the other students in the class, which is exactly what the ranking provides. The benefit of this approach is that providing a ranking alongside the grade would reduce the incentives for students to cherry pick easy papers that award high grades, because a high grade on its own would not necessarily lead to a good ranking within the class.

Of course, there are potential problems with the simple solution. One such problem is that comparisons across different cohorts of students might not be fair. Taking the example of the two students I gave earlier, perhaps the student who got an A- grade and ranked 17/22 completed the paper in a cohort that was particularly smart, while the student who got a B grade and ranked 3/29 completed the paper in a cohort that was less smart. In that case, the grade without the ranking might be a better measure.

Kierstead's more complex solutions don't really deal well with the problem of between-cohort comparisons, and suffer from being more complicated for non-specialists to understand. A simple ranking, or a percentile ranking, is relatively easy for HR managers to interpret. Having said that, the between-cohort comparisons issue might not be too much of a problem in any case. My experience though, is for classes of a sufficiently large size (30 or more), the grade distributions do not differ materially (and if they do, it is usually because of the teaching or the assessment, not the students).

I can see some incentive issues though. Would students start to choose papers that they suspect that many weak students complete? Good students might anticipate that this would lead to a higher grade and a better ranking, which will look better on their transcript. On the other hand, is that really any worse than what students are doing now, if they choose papers that give out easy grades?

There are also potential issues with stigmatising students who end up near the bottom of a large class (how dispiriting would it be to have your transcript say you got a grade of E, and ranked 317th out of 319 students?). Of course, that could be solved to some extent by only providing ranking information for students with passing grades. And consideration would also be needed for how to deal with very small classes (is a ranking of 4th out of 5 students meaningful?).

Grade inflation is clearly a problem. It's not just nostalgia to say that an A grade is not what it used to be. Grade inflation has real consequences for employers, because the signalling value of high grades is reduced (see here for more on signalling in education). This means that there are also real consequences for high-quality students, who find it more difficult to differentiate themselves from average students. Solving this problem shouldn't involve government intervention to change university funding formulas, or trying to change academic culture. It shouldn't involve complicated statistical manipulations of grades. It really could be as simple as reporting students' within-class ranking on their academic transcripts.

The question now is whether any university would take it on themselves to do so. The credibility of university grades depends on it.

[HT: Josh McNamara, earlier in the year]

Read more:

• Teaching evaluations and grade inflation
• Grade inflation is harming students' learning
• A few papers on grade inflation at universities
• Grade inflation and college completion in the U.S.
• More on teaching evaluations and grade inflation

The economics of maps

I have always liked maps. When I was growing up, one of my favourite books was my Rand McNally atlas. I may even still have it, tucked away with its spine held together by masking tape (after years of overuse by my primary-school-aged self). When I'm reading some fantasy novel that has a map on the inside cover, I can find myself lost in the map before even getting to read the book, and then flicking back to the map any time some new location is mentioned. Right next to my laptop while I'm writing this is a sepia-toned desk globe than, in truth, takes up too much space on the desk but will not be foregone.

Given my interest in maps, I've been planning to read this 2020 article by Abhishek Nagaraj (University of California at Berkeley) and Scott Stern (MIT), published in the Journal of Economic Perspectives (open access), for some time (like many articles that have sat in my digital to-be-read pile for a long time). Nagaraj and Stern explain the economics of maps. This isn't the economics that uses maps, such as in the field of economic geography, but two other aspects. First, they review the economic and social consequences of maps. Second, they review the economics of mapmaking. Most of the article is devoted to the latter, and that's what I want to focus on as well.

First though, what is a map? In my classes, I use maps as an example of a model - an abstraction or simplification of reality. Nagaraj and Stern note that maps are composed of two elements: (1) spatial data; and (2) a design. As they explain:

At its core, a map takes selected attributes attached to a specific positional indicator (spatial data) and pairs it with a graphical illustration or visualization (design)...

Having separated a map into its constituent elements, Nagaraj and Stern then look at the economics of spatial data, and the economics of design. On data, they note that:

...mapping data is in many respects a classical public good. Almost by definition, mapping data is non-rival insofar as the use of data for a map by any one person does not preclude its use by others; moreover, the information underlying a given database is non-excludable because copyright law does not protect the copying of factual information. While the precise expression included within a database can be protected through copyright, the underlying geographical facts reflected in the database cannot be protected.

And just like most other public goods:

The combination of non-rivalry and non-excludability of mapping data makes its production prone to private underinvestment, providing a rationale for government support. Indeed, many of the most widely used maps rely on publicly funded geospatial data, including US Geological Survey topographical maps, Census demographic information, and local land-use and zoning maps.

On the other hand:

...there are important cases where mapping data is in fact excludable, either through secrecy or contract... Mapping data that allows for excludability exhibits properties more akin to a club good than a traditional public good. Specifically, the significant fixed costs of data collection combined with relatively cheap reproducibility creates entry barriers that supports natural monopolies or oligopolistic competition. It may be efficient for only a single firm to engage in data collection and for the industry to simply license these data (under agreed-upon contractual terms) from this monopoly provider.

Now, even when spatial data is protected and excludable:

...in the absence of perfect price discrimination, private entities may only provide mapping data at a high price (relative to near-zero marginal cost), reducing efficient access. Beyond pricing, the private provision of mapping data may additionally be concentrated in locations with high demand (such as urban areas) to the exclusion of less concentrated regions.

And that all accords with what we see. There are free sources of spatial data, which are public goods supported by governments or universities, alongside proprietary spatial databases that are club goods and only available at relatively high cost (to the dismay of researchers such as me!).

Turning to map designs, Nagaraj and Stern note that:

Like data, designs are also a knowledge good in that multiple individuals can use a particular map design (and so a design is non-rival) and the degree of excludability for a given design may vary with the institutional and intellectual property environment. With that said, a striking feature of a map design is that, almost by construction, a map is created for the purpose of visual inspection, and it is much easier to copy than a database (which might be protected by secrecy or contract). One consequence of this is that there may be underinvestment in high-quality and distinct designs for a given body of geospatial data.

They use this to explain why there is a lot of competition in the provision of map designs, which is why so many maps for particular purposes look the same. As Nagaraj and Stern explain:

A potential consequence of the non-excludability of mapping data and designs is inefficient overproduction of mapping products that compete with each other. Once a given map is produced for a particular location and application (say, a city-level tourist map), copycat maps can be produced at a lower sunk cost; because demand for maps of a given quality and granularity is largely fixed, free entry based on a given map involves significant business-stealing...

Taking both spatial data and map designs together, the role of intellectual property protection is important:

On the one hand, an absence of formal intellectual property protection leads to underinvestment in mapping data and high-quality map design, but inefficient entry by copycat mapmakers. On the other hand, a high level of formal intellectual property protection can shift the basis of competition away from imitation and towards duplicative investment. For example, over the past two decades, no less than four different organizations—including Google Street View, Microsoft StreetSide, OpenStreetCam project, and TomTom—have undertaken comprehensive and qualitatively similar initiatives to gather street-level imagery and mapping coordinates for the entire US surface road system.

So that explains why there are multiple Street View clones available. The firms are over-investing in goods that are protected by intellectual property. Do we really need multiple copycats of Google Street View? Also, in terms of intellectual property protection, I found this interesting:

In addition to employing copyright, firms often invest in additional strategies to protect their intellectual property. In particular, mapmakers have devised the idea of inserting fictional “paper towns” or “trap streets” in maps... This strategy allows them to detect rivals who might copy their data (rather than collecting similar data through an original survey) and thereby protect costly investment in original data collection. Such strategies are commonly deployed by mapmakers to this day for factual data...

Does that help to explain why people have been caught out following roads that don't exist, or trying to find towns that are misplaced? I guess that 'trap streets' or 'paper towns' are a good idea on a paper map, which requires a certain amount of attention to follow, but less suitable for digital maps that people follow blindly.

Nagaraj and Stern's article opens our eyes to the economics of maps, as well as their consequences. And now, I'm going to search my garage for my beloved Rand McNally atlas. If only I had a map to guide me as to where it is hiding!

A potential 'tragedy of the commons' for water services entities

My ECONS102 class covered common resources (sometimes called common pool resources) last week. Common resources are goods that are rival (one person's use reduces the amount of the good that is available for everyone else) and non-excludable (if they are available to anyone, they are available to everyone). Fish in the open ocean are one of the examples I use in class. Every time a fisherman takes a fish, there are fewer fish available for everyone else. And, it is difficult (if not impossible) to prevent fishermen from fishing in the open ocean.

Common resources lead to a problem that we call the 'tragedy of the commons', named after a 1968 article by the biologist Garrett Hardin, even though the key ideas go back to William Forster Lloyd in 1833. Lloyd's description of the problem goes something like this:

Consider a small medieval town. Many of the families in the town own flocks of sheep, and these flocks all graze on the land surrounding the town (called the Town Common). The town owns the land collectively.

As the years pass and the town’s population grows, so does the number of sheep on the Town Common. Eventually the land is grazed so heavily that it becomes barren.

The problem here is that the private incentives for each individual farmer (which are to increase the size of their flock in order to gain additional profits) are different than the social incentives for the farmers collectively (which are to manage the total size of the flock in a sustainable manner).

Most of the examples of common resources that we use in teaching relate to natural resources. However, those are not the only examples that are possible, where goods are rival and non-excludable. On the Asymmetric Information substack earlier this year, Dave Heatley provided an interesting example related to the New Zealand government's proposed water services entities:

The Water Services Entities Act 2022 created 4 water services entities (WSEs). Each WSE will be responsible for reticulated water supply, wastewater and stormwater infrastructure and services over a defined region of New Zealand.

Under the Act, mana whenua (tribal or extended family groups with authority or other customary rights or interests in an area...) may issue a Te Mana o te Wai statement for water services to the WSE (s143)...

There are many potential issuers of these statements — perhaps hundreds in North Island WSE areas. Each WSE must respond to all statements it receives, including publishing a plan of how it intends to “give effect to” the statement “to the extent that it applies to the entity’s duties, functions, and powers” (s144(2))...

The Act does not constrain the number and scope of statements. Individually, they could stretch from the small, reasonable and relatively costless; to the large, unreasonable or unworkably expensive.

The Act creates a commons, in which the capabilities, attention and assets of the WSE is the common-pool resource.

No WSE can give effect to all potential statements. Their ability to do so will be quickly exhausted. I fear they might, at best, only give full effect to the first few they receive.

The capacity of water services entities to give effect to statements is a good that is rival (one group issuing a Te Mana o te Wai statement reduces the amount of capacity for a water services entity to give effect to other statements) and non-excludable (any iwi or hapū may issue a Te Mana o te Wai statement). The capacity of the water services entities to deal with these statements could quickly be exhausted.

The 'usual' approach to solving a problem of common resources is to somehow make the good excludable. The government could grant property rights over the common resource (or keep the property rights itself). For example, the government created property rights in the form of tradeable fishing quotas to deal with the common resource problems in fisheries. However, that isn't going to work in this case, since it would involve limiting the iwi or hapū that are entitled to issue Te Mana o te Wai statements, and the legislation explicitly doesn't do this.

The other potential solution comes from the Nobel Prize winning work of Elinor Ostrom. Ostrom argued that, if enough of the affected community can work together (common governance), then the problem of common resources can be solved without government intervention. In this case, that would require iwi and hapū to work together to prevent overwhelming the water services entities. However, Heatley doesn't believe that this is feasible:

What are the chances of Ostrom-style communal management of these commons? Each claimant faces a prisoner’s dilemma... All claimants would be collectively better off if every statement was restrained, and if these statements were, in total, within the ability of the WSE to deliver. But every claimant runs the risk of another claimant lodging a statement before they do, and that such statements might be less restrained than necessary to achieve the collective optimum.

In this situation every claimant faces a very strong incentive to get in first with expansive statements. I doubt communal management can overcome this, as every potential claimant would have to trust every other potential claimant not to file a statement before collective agreement was reached. And further, each would have to believe that collective agreement was possible, given the likely quantity and diversity of claimants and statements.

Ostrom’s conditions for communal management, as summarised above, appear to be very difficult to meet in this instance.

I'm not so convinced that this problem is unsolvable with a collective approach. Ostrom's common governance solution required a few conditions, which I think can be met. First, the boundary of the resource and the group of users must be well-defined. These are clear and defined in the legislation that gives iwi and hapū the right to issue a Te Mana o te Wai statement. Second, the user community must be able to form a homogeneous group (within which trust is high), with common goals (and norms) for protecting and allocating the resource. All iwi and hapū have a common goal of protecting water quality and availability (at least, we hope that is their goal), so the common goal condition is met. Is there trust? That is something I cannot answer. There are notable conflicts between hapū (for example, see here), but there can be conflicts between people and groups that nevertheless maintain trust in each other.

The tragedy of the commons can be solved. If iwi and hapū recognise that there is the potential for a common resource problem here, then they may be able to work together to prevent it. The obvious way may be to issue joint rather than individual Te Mana o te Wai statements (which are allowed under section 143 of the Act). Or perhaps just wait and see, as National has indicated that they will repeal the Water Services Entities Act if they are elected next month.

Starbucks and the tragedy of the bathrooms

Back in 2018, Starbucks hit the news for its bathroom policies. As Vox reported at the time:

Starbucks will treat anyone who walks into one of its cafes as a customer, whether or not they buy anything, the company said on Saturday. The announcement is the latest step the coffee company is taking as part of its ongoing response to the public outcry over the arrest of two black men at a Starbucks in Philadelphia. The men were waiting for a business associate to arrive and had asked to use the bathroom in April when Starbucks employees called the police, eventually leading to them being arrested and escorted out...

The arrest of Rashon Nelson and Donte Robinson on April 12 in Starbucks kicked off a major firestorm. The company initially issued a less-than-satisfying apology, and CEO Kevin Johnson later issued a lengthy statement on the incident in which he apologized to the men arrested, laid out plans to investigate the incident, and affirm Starbucks’ stance against discrimination and racial profiling. “You can and should expect more from us,” he wrote. “We will learn from this and be better.” 

What effect did the change in bathroom policy have? In a 2020 paper, Umit Gurun (University of Texas at Dallas), Jordan Nickerson (MIT), and David Solomon (Boston College) investigated that question. They first collated anonymised cellphone location data from SafeGraph (which I really wish was available for New Zealand, but it turns out is only available for the US, UK, and Canada), and compared the change in monthly visits to Starbucks before and after the policy change, with the change in monthly visits to other nearby coffee shops, and the change in monthly visits to restaurants (essentially, this is what we refer to as a difference-in-differences analysis). Using data covering the period from January 2017 to October 2018, they find that:

...Starbucks stores experienced a 7.0% decrease in visits after the enactment of the policy, compared with similar coffee shops and restaurants... After the policy change, Starbucks saw a small time-series increase in visits, whereas absent the policy a much larger increase would have been expected. Put differently, the general boom in visits to all coffee shops at the time helped disguise the fact that the new policy appears to have significantly reduced visits to Starbucks.

So far, so unfortunate for Starbucks. However, Gurun et al. aren't done. They look at how the effect of the policy differed depending on the distance to the nearest homeless shelter, and find that:

Strikingly, the decrease after the policy enactment is significantly larger the closer the location is to a homeless shelter. Stores less than two km away experienced declines of 8.5% relative to nearby coffee shops, while stores more than 10 km away experienced declines of only 4.8%. Again, this decline in attendance is not from worsening economic conditions in these areas – rather it captures the change in Starbucks relative to nearby coffee shops experiencing the same local economic conditions.

Their results hold when they switch to a synthetic control method as a robustness check. Interestingly, they have some evidence that different types of customers are affected differently as well:

Starbucks also experienced a significant change in the demographics of who visited the store. Relative to other coffee shops and restaurants, Starbucks saw a larger decline in visitors from relatively wealthier home locations. The estimated income of Starbucks customers declined by 0.4%, relative to changes in other coffee shops and restaurants... Despite the racial angle on the initial controversy, we find no difference in the racial demographics of the home locations of Starbucks visitors after the policy. In other words, the new policy appears to have deterred both black and white customers in roughly equal amounts.

To summarise those results so far, Starbucks' change in bathroom policy decreased their customers relative to other coffee shops, and the effect was greater for Starbucks stores closer to homeless shelters, and presumably had a larger effect on its wealthier customers.

Was there anything good that came out of this policy change? Gurun et al. look at the effect on crime for a subset of cities where appropriate crime data are available (Austin, Denver, and Pittsburgh), and find that there was:

...a decrease in public urination citations near Starbucks locations relative to other areas after the policy change. By contrast, a wide range of other minor public order crimes show no significant changes or consistent signs of effects.

The other crimes that they looked at included disturbing the peace, simple assaults/fighting, marijuana possession, shoplifting, theft of service, threats/harassment, and vandalism. The overall question is whether this was a good policy change for Starbucks - Starbucks face all of the cost, but aside from some good press (or, more accurately, a reduction in bad press), the benefits are public. Gurun et al. link this to the private provision of public goods, concluding that:

Our results suggest that companies may be better off focusing on donating money to worthwhile causes, and effectively using a division of labor, whereby Starbucks specializes in making and selling coffee, and engages in CSR by supporting organizations who specialize in social policies. Our results show that trying to incorporate the two within a single company may result in outsized negative externalities for the underlying business that makes CSR possible in the first place.

I don't agree. Despite the adjective, public bathrooms are likely not a public good. Public goods are good that is non-rival (where one person using the good doesn’t reduce the amount of the good that is available for everyone else) and non-excludable (where the good is available to everyone if they are available to anyone). Opening your bathrooms up to non-customers changes the bathrooms from excludable to non-excludable. However, I'm not convinced that they are non-rival. Anyone who has had to queue for a public bathroom would have to agree - one person using the bathroom reduces the amount of bathroom capacity available for everyone else (and makes you wait). So, at least during peak times, public bathrooms are a rival good. Goods that are rival and non-excludable are referred to as common resources.

Common resources are vulnerable to a problem that we refer to as the Tragedy of the Commons, a problem that was first described by William Forster Lloyd in 1833, but was brought to modern attention by Garrett Hardin's 1968 article of that title published in the journal Science. In the Tragedy of the Commons, private incentives and social incentives differ. The social incentive is to keep the common resource well-maintained, so that it is available in sufficient quantities for everyone. The private incentive is to use as much of the common resource as possible, because each user faces the full cost of restraining their activity, but receives only a small share of the benefits of their restraint.

Turning back to the example of public bathrooms, users have a low incentive to keep them clean and tidy. Which is why, and I'm sure you can relate to this experience, public bathrooms may in general be some of the grossest places on the planet. It's little wonder that fewer people would want to visit Starbucks, if the quality of their bathrooms has degraded. The paper by Gurun et al. seems to focus attention on the types of people using the bathrooms (hence, the homeless shelters angle). However, bathroom users don't have to be homeless to fail to keep the bathroom clean.

So, Starbucks likely faces costs on two sides from their policy change - reduced foot traffic (relative to other coffee shops) as shown empirically by this study, and theoretically higher costs of bathroom clean-up as well. And Starbucks' only benefit appears to be avoiding negative attention. Is it paying off for Starbucks? It must be, because the policy remains in place today.

[HT: Marginal Revolution, last year]

The tragedy of the clinical commons

I've been meaning to write about this topic for months, but was reminded of it only when scrolling through my open browser tabs. One of the tabs was this blog post by Derek Lowe from last October, when the first clinical trials of coronavirus vaccines were about to start reporting results:

We’re getting closer to having to deal with a number of tricky issues around the first Emergency Use Authorizations (EUAs) for coronavirus vaccines. These have never quite come up in this way before, because (for one thing) EUAs for vaccines are relatively rare events, and (for another) we’ve never had so many simultaneous vaccine trials against the same disease before.

So let’s just stipulate that Somebody (be it Pfizer, Moderna, AstraZeneca, whoever) asks for an EUA before all the other Somebodies, and that this request is granted...

We may get into a situation where an interim readout of the data show that a vaccine may well be working, but that granting an immediate EUA has a real danger of blowing the statistics for the complete trial. That is truly the worst outcome: ending up with something that might be useful, but being unable (despite all the time and money and effort) to able to say if it really is. We’ve got to avoid that...

But the patients involved in all these trials may have other ideas. Each individual that decides to leave the trial protocol may feel that loss of their own data is not enough to affect the overall result, but if enough people think that way, that result will most certainly suffer – a tragedy of the clinical commons...

In the same way that you can’t force the participants of the emergency-authorized vaccine trial to stay in it, you also can’t force the participants in the other trials not to get the newly authorized one 

The Tragedy of the Commons arises in the case of common resources - goods that are rival (one person's consumption reduces the amount of the good available for everyone else), and non-excludable (if the good is available to anyone, it is available to everyone, and you can't easily prevent people from having access to it). How does this apply to the case of vaccine clinical trials? Vaccine trial participants are rival (since one participant leaving the trial reduces the number of participants remaining in the trial), and non-excludable (for medical ethics reasons, you can't stop a trial participant from leaving the trial). As each trial participant leaves the trial, fewer participants remain in the clinical trial, and eventually so few participants would be left in the trial that the results of the trial become meaningless.

The Tragedy of the Commons happens because private incentives and social incentives differ. The private incentive for the trial participants is to get vaccinated, even if in order to do so it means leaving the clinical trial they are enrolled in. The social incentive is for trial participants to remain in their clinical trial until it is completed.

Fortunately, we didn't find ourselves in a situation where one vaccine was given Emergency Use Authorisation well in advance of the others. Clinical trial participants mostly followed through on their commitment to complete the trial, and we ended up with several coronavirus vaccines that were shown to be effective. Fortunately, the 'tragedy of the clinical commons' was avoided.

[HT: Marginal Revolution]

Fresh water is still not a public good

Earlier in the month, this New Zealand Herald article caught my attention:

Will 2021 be the year the world really values water?

If Wall Street sets the tone, it will be.

For almost 230 years, agricultural commodities have been bought and sold in New York's finance district.

And now the Nasdaq stock exchange, which celebrates 50 years of activity next month, has put a price on our most vital substance.

Water contracts for five water districts in drought-prone California are being bought and sold.

The new water futures contract allows buyers and sellers to barter a fixed price for the delivery of a fixed quantity of water at a future date.

In December, for the first time, water futures for drought-hit California districts are also being traded on the floor of the world's second-biggest market.

The concept, which has been mooted for decades, finally came about in December.

That all seems pretty sensible so far. A futures contract allows the water user to 'lock in' a future price for water, reducing the risk that they will be caught out by unanticipated future price rises. However, then we get to this bit:

The move was quickly criticised by public health specialists.

Pedro Arrojo-Agudo, the United Nations' special rapporteur on the human rights to safe drinking water and sanitation, was direct in his opposition.

"You can't put a value on water as you do with other traded commodities.

"Water belongs to everyone and is a public good. It is closely tied to all of our lives and livelihoods, and is an essential component to public health.

"Water is already under extreme threat from a growing population, increasing demands and grave pollution from agriculture and mining industry in the context of worsening impact of climate change."

There are several problems with this line of reasoning. First, water is not a public good. As I noted in this 2017 post on the same topic, by definition a public good is a good that is non-rival (where one person using the good doesn’t reduce the amount of the good that is available for everyone else) and non-excludable (where the good is available to everyone if it is available to anyone). Unless you live in Ankh-Morpork [*], the first condition clearly doesn't hold - one person using fresh water leaves less available for everyone else. Fresh water is rival, not non-rival. A good that is rival and non-excludable is a common resource. However, that isn't the case for California water, which is allocated through water rights. You must have water rights to draw water, making water excludable. A good that is rival and excludable is a private good. Fresh water in California is, by definition, a private good.

Second, although the availability of fresh water may be under threat from increasing demand, putting a price on water is a solution to that problem, not something that exacerbates the problem. With a price on water, the price will dictate how much water people use. In times of drought, the price of water should rise (unless the price is controlled by the government, like it is in Auckland), and people will use less water. Goods that are scarcer have higher prices - as water gets scarcer, the price will rise. This is a means of better managing scarce fresh water supplies, not some nefarious plot to take water out of the hands of the people.

Third, water already has a price in California. To draw water, you need water rights, and those water rights cost money. The only thing changing is that a futures contract has been introduced, so that water users can better manage the future uncertainty of water prices. If a drought is expected in the future, then the price of the futures contract will rise. Water users will have an incentive to act now to ensure that their future water use will be lower. That probably makes water use more efficient.

You don't have to be a market fundamentalist to realise that prices can actually help. In the case of fresh water, the alternative is a free-for-all, where the water supplies will almost certainly be depleted faster.

*****

[*] Terry Pratchett noted that the water in the Discworld's largest city must be very pure, because of the number of kidneys it had already passed through.

Read more:

• Fresh water is not a public good
• Why we need tradeable fresh water usage rights

Rationing access to beaches, in a time of physical distancing

Last week, my ECONS102 class covered common resources and the Tragedy of the Commons. Common resources are rival (one person's consumption reduces the amount of the good available for everyone else), and non-excludable (if the good is available to anyone, it is available to everyone, and you can't easily prevent people from having access to it). The problem with common resources is that, because they are non-excludable (and therefore open access), they are over-consumed relative to the socially efficient quantity. Essentially, there is a difference between the private incentives (to consume as much of the good as you want to), and the social incentives (to ensure that the good is shared in some fair and equitable way).

Now consider public parks and beaches. In normal times, parks and beaches are non-rival (and non-excludable), because there is plenty of space available for everyone. However, in peak season they are clearly rival, and because they are non-excludable as well, they are common resources and so they are subject to the common resource problem outlined above. Everyone wants to be at the beach (the private incentive), but by everyone being at the beach, the beach becomes overcrowded and everyone's experience is all the worse for it. Fortunately, this is only a problem at times of peak demand.

However, what constitutes peak demand at beaches is redefined when physical distancing is important, as Time reported back in May:

Last weekend, images and reports of glutted beaches and parks have spurred several governors to roll back access to parks and shorelines for fear of a surge in new COVID-19 infections. At a certain point, it becomes physically impossible to pack so many people into six-foot intervals.

As summer approaches, and demand for outdoor recreation skyrockets even further, public space stands to become what economists call a “common resource” — something that belongs to no one, like fish in a lake, but can be depleted without a form of rationing. Already, New York City Mayor Bill de Blasio said Thursday that the virus-stricken city may limit entry to some parks.

“Space is now a resource that, in the foreseeable future, we’re going to have to ration in a way we’ve never had to ration before,” says Clemson University economist Michael D. Makowsky. “The outdoors used to be an inexhaustible resource. Human beings now require a lot more volume than they used to.”

The solution to a common resource problem is to make the good excludable, rather than non-excludable - essentially, to move from a resources that is open access, to one that is closed access (or where access is restricted). In the case of parks or beaches, the government can achieve this by rationing access to the resource. In the case of parks and beaches, the Time article notes three potential options:

The first and simplest approach would be to limit access to public places, like parks and beaches, based on some form of lottery. On Mondays, for example, Yosemite National Park might be closed to families in which the head of household had a driver’s license number ending in a 1 or a 2. On Tuesdays, on 3 or 4, and so forth — effectively reducing the potential crowd by 20%...

A second strategy could involve issuing permits for controlled spaces with discrete access points that can be sold or exchanged. It’s another idea that has already been tested in environmental policy — specifically, the “cap and trade” system, which created a marketplace for companies to buy and sell emissions permits while attempting to incentivize emissions reductions.

In the case of space rationing, an analogous policy would aspire less to incentivize isolation than to fairly distribute the limited resource of open areas. Under such a framework, cities would issue free permits to all residents to be used for access to the most popular parks, beaches and other coveted public areas. A person could choose to sell unwanted permits, or trade them for a different kind of permit (to a different park, or for a different day, and so forth.)...

A third option would be to impose new taxes on certain privileges that are currently shut down in many parts of the country, like dining in at a restaurant. “If ever there was a time for a dine-in tax, it’s now,” Makowsky says. Such a tax could be proportional to demand, with higher levies on weekends and other peak times, he says.

The first option is clearly open to abuse, since households with multiple vehicles (with difference licence plates) could skirt around the restriction quite easily. The third option doesn't regulate the number of people going to the beach directly, but simply makes it more expensive to do so (in essence, this potential solution isn't about making the good excludable, but about making it non-rival). Unless the tax varies based on beach-going demand, the tax would be too high on bad weather days, discouraging beach-going on days when people don't want to go to the beach, while simultaneously being too low on good weather days, where people would be more willing to pay the tax and still go to the beach. It likely wouldn't solve the common property problem at all.

The second option seems most feasible from an economic standpoint, and is quite similar to the tradeable quotas that are used to manage fisheries (another common resource). It encodes a property right for everyone (the right to go to the beach on a particular day), and then lets people trade between themselves to determine who actually takes up the right. The number of permits can easily be limited to ensure the 'right' number are available to ensure physical distancing can be maintained each day.

To be efficient (welfare-maximising), a property rights system needs to have four features:

1. Universal - In this case, everyone who wants to go to the beach must have a permit;
2. Exclusive - Only permit-holders are allowed to go to the beach, and all the costs and benefits of beach-going must accrue to the permit-holder;
3. Transferable - Permits must be able to be transferred in a voluntary exchange; and
4. Enforceable - There must be penalties in place that are sufficient to deter people without permits from attempting to go to the beach.

If those four features are in place, then the permit-based system is an efficient solution to the common property problem of how to make the beach (or park) closed access. The big problem then becomes, how do you allocate the permits in the first place? And of course, how do you administer the system? Those problems would first need to be solved in order for this system to be workable.

[HT: Marginal Revolution]

Fire protection as a private good, rather than a club good or public good

Two years ago, I wrote a post entitled "Why fire protection is (or was) a club good":

Some goods or services that are categorised as club goods may be contentious. For instance, according to the table fire protection is a club good - it is non-rival and excludable. Provided there aren't large numbers of fires, if the fire service attends one fire, that doesn't reduce the fire protection available to everyone else... So, fire protection is non-rival. Is fire protection excludable? In theory, yes. People can be prevented from benefiting from fire protection. Say there was some sort of fire service levy, and the fire service decided to only respond to fires at homes or businesses that were fully paid up.

Although my earlier post made the case that firefighting could be a club good, public firefighting is usually a public good - a good that is non-rival (one person’s use of the good doesn't diminish the amount of the good that is available for other peoples' use) and non-excludable (a person can't be prevented from using or benefiting from the service). However, now it turns out that some fire protection may be a private good - a good that is rival and excludable. According to this article from the AFP:

Kris Brandini and his crew had just returned from four intense, non-stop days battling fires in western Los Angeles.

They dashed to the neighborhood where wealthy residents like Arnold Schwarzenegger were fleeing their homes, then to the inferno that threatened the Ronald Reagan Presidential Library, then back again.

But unlike state firefighters, Brandini was not concerned with protecting most of the exclusive residences lining these valleys.

He and his team are private firefighters.

"I only protect the houses that are on my list," he told AFP. "I don't just go there randomly -- that's the difference between me and the state firefighters.

"They go out and protect every house. I protect the houses that are actually enrolled in the program."

If private firefighters will only protect houses that "are actually enrolled in the program", then that makes private fire protection an excludable good. Of course, private firefighting is excludable on the basis of price - not everyone can afford to pay for their own private firefighters. It's not time to do away with public firefighters just yet, because I don't think we would be willing as a society to price some people out of the market for receiving fire protection.

Unlike public firefighting, private firefighting is also a rival good, since there are only a limited number of houses that a private firefighter can protect (so, if they are protection House A, they may not have enough time or resources to also protect House B). However, in the case of large wildfires like those in the AFP article, even public firefighting becomes a rival good, since public firefighters also can't be in more than one place at a time. A good that is non-excludable but rival is a common resource.

That makes firefighting an interesting case study for my ECONS102 class - it is a good that can be characterised as all four classes of good - private good, public good, common resource, or club good - depending on the circumstances.

[HT: Marginal Revolution]

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.

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]

Read more:

• Saving the elephants, only for the hippos to be hunted
• The debate over poached elephants
• This couldn't backfire, could it?... Stockpiled ivory sales edition
• Because crushing ivory is so much better than burning it
• This couldn't backfire, could it?... Ivory burning edition

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:

• Enforcement is key for sustainable fishing quotas

Killing crocodiles might save crocodiles, but only with closed access

I've written a few times about endangered species, and about how assigning private property rights (such as through farming) might be one way to save them (for example, see this 2015 post about lions). This article in The Conversation yesterday, by Daniel Natusch (Macquarie University), Grahame Webb (Charles Darwin University), and Rick Shine (University of Sydney), makes a similar point:

Banning the use of animal skins in the fashion industry sounds straightforward and may seem commendable – wild reptiles will be left in peace, instead of being killed for the luxury leather trade.

But decades of research show that by walking away from the commercial trade in reptile skins, Selfridges may well achieve the opposite to what it intends. Curtailing commercial trade will be a disaster for some wild populations of reptiles.

How can that be true? Surely commercial harvesting is a threat to the tropical reptiles that are collected and killed for their skins?

Actually, no. You have to look past the fate of the individual animal and consider the future of the species. Commercial harvesting gives local people – often very poor people – a direct financial incentive to conserve reptile populations and the habitats upon which they depend.

As Natusch et al. note, if people can earn income from harvesting and selling crocodiles (or crocodile eggs), then there is an incentive to keep crocodiles around. The most straightforward example of this is farming. People are allocated private property rights over crocodiles (they own them in the general sense), and that creates an incentive for each farmer to sustainably manage their crocodiles.

However, in their article Natusch et al. are essentially arguing that the incentives are the same if you are thinking about maintaining wild populations of crocodiles. That is, if people can harvest from the population of wild crocodiles, then there is an incentive for people to maintain the population. However, while the authors appeal to previous research that supports their argument, they ignore an equally large literature on the Tragedy of the Commons. A population of wild crocodiles is a common resource - it is 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 killing one crocodile reduces the number of crocodiles 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 would be difficult to stop people from killing crocodiles.

The Tragedy of the Commons arises because the private incentive (to harvest as many crocodiles as you can, in order to maximise the income for your family) is not aligned with the social incentive (to keep the population sustainable). It leads to over-harvesting, and threatens the crocodile population.

Farming solves this problem by assigning property rights - it makes crocodiles a private good - rival but excludable (because only the crocodile farmers can kill them). However, what Natusch et al. are suggesting would not work without some other controls in place.

As the Nobel Prize winner Elinor Ostrom noted, the problem with common resources arises when they are open access - when everyone can access them freely with no restrictions. Private property rights are one way to restrict access, but not the only way. Another way to manage a population of wild crocodiles would be to issue harvest permits, with only permit holders allowed to kill crocodiles. This would make crocodiles closed access, and is similar to how we manage fisheries with the Transferable Quota system. This essentially creates a property right - the right to kill crocodiles.

Provided only a few permits are issued, the permit holders would have an incentive not to take too many crocodiles, because that would limit their future livelihoods. The more permit holders there are, the more the solution starts to dissolve into the open access Tragedy of the Commons, so limiting their numbers is necessary for sustainability.

So, as Natusch et al. argue, prohibiting the killing of crocodiles is not a good way to save them. However, incentives alone are not the solution. Some form of property rights needs to be created to ensure the long-term sustainability of the crocodile population.

Why Waiheke Island taxi drivers are like surfers

This New Zealand Herald article caught my eye this week:

Two Auckland-based taxi drivers claim they have been subjected to bullying, racist remarks and had their tyres slashed by local drivers while working on Waiheke Island.

Waiheke Island-based companies Island Taxis and Waiheke Five-O say there's been a recent spike in the numbers of "pirate" Auckland drivers bringing their cars over on the ferry and poaching business off them at weekends.

Island Taxis driver Richard Cannon told the Herald seven or eight drivers had been "clogging up the rank" at the Matiatia Wharf ferry terminal and poaching "about a third" of local drivers' income.

Taxi ranks are what economists refer to as a 'common resource'. They are rival (one taxi driver parking on the taxi rank reduces the amount of space available for other taxis), and non-excludable (it isn't easy to prevent taxis from parking at the rank). The problem with common resources is that, because they are non-excludable (open access), they are over-consumed. In this case, there will be too many taxis (including taxis from the mainland) competing for taxi rank places (and customers) on Waiheke Island.

The solution to the problem of common resources is somehow to convert them from open access to closed access. That is, to somehow make them excludable. And it seems that is what the vigilante actions of the Waiheke drivers is aiming to do - to exclude the mainlander taxi drivers from operating.

This is very similar to how surf gangs operate to exclude some surfers (particularly those who are not locals) from the best surfing spots, as I have blogged about before (see here and here). There is no government intervention to manage the common resource, so it is up to the user community (taxi drivers) to do so. As 2009 Nobel Prize winner Elinor Ostrom noted, this requires that the user community can form a homogeneous group (within which trust is high), with common goals for the resource (in this case the taxi rank); and that both the boundary of the resource and of the community are well defined. Local taxi drivers are a (relatively) homogeneous group, and the boundary of the resource (taxi rank and customers) and the community (taxi drivers must be licensed) are well defined. But only until the outsiders come in, at which point the group is no longer homogeneous, and the previous private solution to the common resource problem breaks down. Resulting in violence between local taxi drivers and mainlanders, which is similar to surf gang violence.

Read more:

• New research coming on surf rage in New Zealand
• The escalation of surf gang violence

Paying landowners to change land use

Economists recognise that people respond to incentives. If you increase the cost of doing something, on average people will do less of it. On the other hand, if you increase the benefits of doing something, people will do more of it. So, economists are less surprised than 'normal people' about things like this, as reported in the New York Times at the end of last year:

In environments as different as North America and Africa, new programs are preserving land through short- and-long-term deals that pay people to protect nature on their own land. The innovation makes it possible to transform a binary approach to land use — either devoting it to private development or turning it into a nature reserve — into something in between.

Consider how Airbnb works. Think of Minneapolis during the coming Super Bowl, when hotel rooms are scarce and residents will be enticed to rent their homes to football fans. Something like that happens in the environmental realm, too: There is a surge in demand for protected land when migratory birds are passing through an area or a threatened species is breeding.

In the United States, the nonprofit Nature Conservancy has been a pioneer in bringing the “sharing economy” business model to conservation. It has been temporarily expanding wetlands for migratory birds in California’s Sacramento Valley since 2014. In early fall, when birds head south for the winter, and again in early spring on their return journey, birds need larger protected areas than the current mix of parks and nature preserves allows, as the website Howstuffworks reported in August.

The big insight was realizing “we could use a rent rather than buy model,” said Mark Reynolds, an ecologist with the Nature Conservancy, which pays rice farmers to flood their fields for the few crucial weeks each fall and spring. Rice growers routinely flood their fields for irrigation and to decompose crop residue after harvest; through the conservation program, named BirdReturns, they do so during periods when the fields would have been dry.

So often, activists and environmental campaigners settle on a 'command and control' model as their preferred policy to ensure positive environmental outcomes ('command and control' policies are policies that say you 'must do' some things, or 'must not do' other things). As the New York Times article makes clear, a market-based approach can be just as effective, if not more effective, in some circumstances. A market-based approach doesn't rely on compelling people to obey, it relies on changing the incentives.

In this case, if you offer landowners a payment for changing their land use for part of the year (e.g. flooding their fields to make wetlands), then landowners can choose whether they want to do so. Landowners who face a low cost of changing their land use (maybe because their land is not highly productive so they won't be giving up much production) will be more likely to do so (because the payment will exceed the costs of land use change). Economists refer to the value of the foregone production for these landowners as an opportunity cost - it is the cost (to those landowners) of choosing to change land use. In contrast, landowners who face a higher cost of changing their land use (maybe their land is more productive, so they would be giving up more production) will be less likely to do so. For these landowners, there is an opportunity cost of not changing their land use - they are giving up the payment they would have received from the environmental group.

How do you work out how much to pay the farmers to get the right number of them to change land use? The article explains:

A team of ecologists and economists figured out how much to compensate the farmers for this change. They ran “reverse auctions” in which landowners specified the lowest payment that would entice them to flood their fields for a given four- to eight-week period.

This auction system adjusts payments to farmers’ costs. For example, flooding during the end of the spring migration season is trickier to fit into an annual rice-growing schedule, so bids — and payments — are higher then. The auction model is also flexible when the weather fluctuates. The early years of the program occurred during California’s prolonged drought, but abundant rainfall in 2017 meant that BirdReturns could dial back the amount of pop-up wetland it procured this year.

Note that the reverse auction is a good way for the environmental group to ensure that they can achieve their desired change in land use at the lowest cost, provided the landowners are genuine in specifying their opportunity cost for changing land use as the lowest payment they would accept. The italicised bit in the last sentence is important. You don't want landowners to simply hold out for higher payments. One way to avoid that problem is to ensure that you invite more landowners (with more land) than would be necessary to achieve your desired amount of land use change.

Finally, it is worth noting that this type of market-based system can't make farmers worse off. Since farmers are not compelled to participate, they will only do so if the benefits to them outweigh the costs. Markets aren't a perfect solution for every problem, but sometimes they can solve problems in a surprisingly simple way.

Why researchers need to name their teaspoons

The annual Christmas issue of the British Medical Journal always has at least one 'interesting' paper included. For example, I recently blogged about the study on Pokemon Go and obesity. I recently read this 2005 paper (open access) by Megan Lim, Margaret Hellard, and Campbell Aitken (all from the Burnet Institute in Melbourne) about the Institute's mysteriously disappearing teaspoons. The paper explains:

In January 2004 the authors found their tearoom bereft of teaspoons. Although a flunky (MSCL) was rapidly dispatched to purchase a new batch, these replacements in turn disappeared within a few months. Exasperated by our consequent inability to stir in our sugar and to accurately dispense instant coffee, we decided to respond in time honoured epidemiologists' fashion and measure the phenomenon.

Here's what they did:

At the completion of the pilot study we carried out a longitudinal cohort study. We purchased and numbered a further 54 stainless steel teaspoons. In addition we purchased and discreetly numbered 16 teaspoons of higher quality. The teaspoons were distributed (stratified by spoon type) throughout the eight tearooms, with a higher proportion allocated to those tearooms with the highest teaspoon losses in the pilot study.

We carried out counts of the teaspoons weekly for two months then fortnightly for a further three months.

They then essentially conducted a very simple survival analysis of the teaspoons. They found that:

After five months, 56 (80%) of 70 teaspoons had disappeared. The half life of the teaspoons was 81 days (that is, half had disappeared permanently after that time) compared with 63 days in the pilot study...

If you think this study is inconsequential, think again:

If we assume that the annual rate of teaspoon loss per employee can be applied to the entire workforce of the city of Melbourne (about 2.5 million), an estimated 18 million teaspoons are going missing in Melbourne each year. Laid end to end, these lost teaspoons would cover over 2700 km—the length of the entire coastline of Mozambique—and weigh over 360 metric tons—the approximate weight of four adult blue whales. 

There is an economics aspect to the study. Teaspoons in a common area are subject to the 'tragedy of the commons', as the authors explain:

The tragedy of the commons applies equally well to teaspoons. In the Burnet Institute the commons consists of a communally owned set of teaspoons; teaspoon users (consciously or otherwise) make decisions that their own utility is improved by removing a teaspoon for personal use, whereas everyone else's utility is reduced by only a fraction per head (“after all, there are plenty more spoons…”). As more and more teaspoon users make the same decision, the teaspoon commons is eventually destroyed. The fact that teaspoons were lost significantly more rapidly from the Burnet Institute's communal tearooms (the “commons”) compared with programme linked rooms, correlates neatly with Hardin's principle.

The tragedy of the commons arises because the resource (teaspoons) is rival (one person taking a teaspoon reduces the amount of teaspoons left available for everyone else) and non-excludable (it isn't easy to prevent someone taking a teaspoon). One solution to the tragedy of the commons is to create property rights, which would make the teaspoons excludable. In this case, everyone in the Institute would have their own named teaspoons, with a rule that no one can use others' teaspoons without some suitably dire punishment befalling them.

As with most of these BMJ papers, this one was an interesting diversion. Also, if you haven't ever heard of counterphenomenological resistentialism, I recommend you read the paper and be enlightened.

Fresh water is not a public good

The title to this post is deliberately provocative, but also entirely accurate. Fresh water has been in the news quite a bit recently, including this article by Kirsty Johnston in the New Zealand Herald today. Johnston writes:

Currently, common law dictates that naturally-flowing freshwater is treated as a public good, or that "no one owns the water".

By definition, a public good is a good that is non-rival (where one person using them doesn’t reduce the amount of the good that is available for everyone else) and non-excludable (where the goods are available to everyone if they are available to anyone). It is the first of these that is clearly not true for fresh water, and this should be clear from the first three paragraphs of Johnston's article:

It was the summer of 1983 when Poroti Springs first ran dry. The watercress stopped growing, the eels disappeared and the koura died, unable to survive as their habitat turned to dust.

Local hapu, the kaitiaki of the sacred Northland springs, were dismayed at the near-extinction of its mauri, or life-force, and the loss of their traditional food source.

The culprit? The Whangarei City Council, who, unable to get to the springhead because it was on Maori land, had drilled directly into the aquifer upstream and sucked up so much water for the town supply, the seemingly endless flow ran out.

Whangarei City Council drew water from the aquifer, and that left less water available further downstream - fresh water is a rival good, not a non-rival good. Goods that are rival and non-excludable are common resources. They are vulnerable to the Tragedy of the Commons, a problem that was first described by William Forster Lloyd in 1833, but was brought to modern attention by Garrett Hardin's 1968 article of that title published in the journal Science.

The problem with fresh water is that all users together (as a group) have an incentive to reduce the amount of water drawn from an aquifer (so that it doesn't run dry). However, no individual user has an incentive to reduce the amount of water they draw by themselves, because the cost of their action is spread over all the water users.

The first problem with the current regime is that many water catchments are clearly over-allocated, or else they wouldn't run dry. Over-allocation of water also has negative consequences for water quality.

One solution for common resources is to make them excludable, i.e. making them not available to everyone. That's what the water usage permits that regional councils issue under the Resource Management Act are designed to achieve. However, giving the permits away for nothing (or next to nothing) is clearly crazy. Johnston writes:

Figures obtained by the Herald found there are now 73 companies with consent to take up to 23 billion litres a year, for an average annual fee of just $200 each.

On a volume basis, that works out at one third of a cent per cubic metres of water (1000 litres). In comparison, an Auckland ratepayer is charged $1.40 per cubic litre [sic] by council, with the rest of the country paying anywhere from 70 cents to $3 to tap into their local supply.

That is ridiculous. Water in all uses should be priced the same. Otherwise, the allocation of water is bound to be inefficient, which is the second problem with the current regime. Although, I will point out that the cost of water drawn at the source (such as by a bottling company or an irrigation scheme) should be less than the cost of water at an urban home or business, because of the cost of the infrastructure (and other costs) associated with getting the water from the source to the home or business. But I very much doubt that the difference in cost is as much as a factor of 200 or more as in the paragraph quoted above.

The lack of a consistent price is not the only reason that the current regime is inefficient. The regional councils' permits create a property right over fresh water, which I wrote about in a post last June. To be efficient though, a property rights scheme has to have four key properties. The rights must be: (1) universal; (2) exclusive; (3) transferable; and (4) enforceable. Here's what I wrote in that earlier post:

Universality means that all fresh water use would need to be included in the system (so municipal water supply, irrigation schemes, industrial use, etc. would all have to have permits to extract and use water). There can be few exceptions to this - although hydro power (where the water is not used up or degraded - that is, its use is not rival, as it doesn't deprive others of also using the same water) may be one.

Exclusivity means that all of the benefits and costs associated with extracting and using the water must accrue to the permit-holder. This essentially means that there can be no free riders - no one benefiting from water who does not have a permit to extract and use that water.

Transferability means that the permits can be freely traded voluntarily. So, if you have a permit to extract and use water from a given river, and you find someone else who is willing to pay more for that permit than whatever you value it at (presumably, whatever value it provides to you), then you should be able to sell (or lease out) your permit. This ensures that water will be used in the highest value activities, and means that water has a price (representing by the price of the permits). Failing to sell (or lease out) a permit entails an opportunity cost (foregone income for the permit holder), so selling (or leasing out) a permit to someone else might actually be the best use of the permit.

The problem with the system that regional councils run is that the permits are not transferable - they can't be sold to those who are willing to pay the most for them. Notice that we've gone full circle now - if the permits were freely transferable, then the price of permits would be set in the market for permits, and all users would face the same price for permitted water allocation.

Fresh water may not be a public good, but it is in the public interest to get this right.

Read more:

• Why we need tradeable fresh water useage rights