Student performance and legal access to marijuana

This post might be viewed as a sequel to this 2016 post on access to alcohol. In a recent article by Olivier Marie (Erasmus University Rotterdam) and Ulf Zölitz (Maastricht University), published in the journal Review of Economic Studies (ungated earlier version here), the authors report on an interested natural experiment in the Netherlands:

We exploit a temporary policy change in the city of Maastricht in the Netherlands, which locally restricted legal access to cannabis based on individuals’ nationality.

Specifically, access was restricted so that only citizens of the Netherlands, Germany or Belgium could purchase marijuana, and citizens of other countries could not. The authors then look at the impact of that policy on student performance (for over 4400 students) in the business school at Maastricht University. The find that:

...the temporary restriction of legal cannabis access had a strong positive effect on course grades of the affected individuals. On average, students performed 10.9% of a standard deviation better and were 5.4% more likely to pass courses when they were banned from entering cannabis shops... Sub-group analysis reveals that these effects are somewhat stronger for women than men and that they are driven by younger and lower performing students.

This is a useful study because it is difficult to find natural experiments where the change in legal access affects some groups but not others - most studies compare differences between areas with and without legal access, where spillover effects are likely to be meaningful. I note that the results suggest an effect that is quite a bit larger than the Lindo et al. paper on the impacts of alcohol on student performance I discussed back in 2016, but not too much larger than this 2011 study by Carrell et al. (ungated earlier version here), also on alcohol.

Some of Marie and Zölitz's other results are interesting as well, such as:

...previous research has documented that cannabis consumption most negatively influences quantitative thinking and math-based tasks... Therefore, we split all courses depending on whether they are described as requiring numerical skills or not and test whether such course grades are differentially affected. We find that the policy effect is 3.5 times larger for courses requiring numerical/mathematical skills: a result in line with the existing evidence on the association between cannabis use and cognitive functioning.

In their other results, they show the good news that there are no teacher effects - that is, there was no difference in student outcomes between those whose teachers were unable to purchase marijuana after the policy change and those who were still able to. So I guess if you want to pass an economics paper, it pays to stay off drugs, but it doesn't matter if your lecturers do.

[HT: Marginal Revolution, last August]

Read more:

• Student performance and legal access to alcohol

Floating plug-in power stations are finally here

When I was an undergraduate student, one of the examples that one of my economics lecturers (perhaps John Tressler?) used in class was that of a plug-in power station floating on a barge. This example was used to illustrate how 'specific capital' creates a barrier to entry, especially for natural monopoly firms. Or at least, that's what I remember (who knows? It was a long time ago. It might have been an example used to illustrate a totally different point).

Specific capital is capital that is specific to that particular market (as with many concepts in economics, there's no mystery to the naming of it). If the firm later leaves the market, they lose all of that capital (because it was specific to that market). Some types of capital can be moved or used in other markets, but specific capital cannot. So, if a firm needs to invest in specific capital in order to enter a market, then that will make the firm nervous. What will they do if there is a sudden decrease in demand and they start making a loss in the market, if they can't easily move their capital elsewhere? The nervous firm might decide that it is better not to enter the market if there is a chance that they will waste their specific capital.

Specific capital can be a serious problem for a natural monopoly firm. A natural monopoly firm has economies of scale, and those economies of scale usually arise because there is some large up-front cost that the firm faces (and so, as they produce more or service more customers, that large up-front cost can be spread over a larger market, lowering the firm's average costs - what economists refer to as economies of scale). If the large up-front cost is specific capital (which it often is), it is easy to see that firms will be nervous about making the investment. This is why it is not always a good idea for governments to heavily regulate natural monopolies - it reduces the incentive for the up-front investment.

Aside from the threat of regulation, specific capital is also a problem if the firm is worried that the government might expropriate their specific capital (and especially a problem for natural monopolies). This is a serious problem in many developing countries, where an autocratic leadership might expropriate foreign-owned assets at any time. This makes foreign firms, which have a lot of financial capital, reluctant to invest in large assets in developing countries. An example of a large asset conducive to natural monopoly that foreign firms would be unlikely to want to invest in is a power station. Once the foreign firm has made the investment, the government could simply expropriate the power station, and there is little the foreign firm could do about it. Given this risk, there is less foreign investment in natural monopolies (e.g. large infrastructure projects) in developing countries than would be optimal.

A solution to the problem of specific capital, at least in the case of power stations, is to put the power station on a barge and float it from country to country, simply plugging it into the electricity network. Then, the firm can move it elsewhere if it feels that the political climate becomes too risky. It's still a large up-front cost, so still a natural monopoly, but at least the capital is not specific to the market that the barge is parked in, because it can be relocated. In the past, this solution was almost purely theoretical. But no more, as the New Zealand Herald reported on Wednesday:

If a Russian state-owned company has its way, remote regions of the world will soon see giant, floating nuclear reactors pumping power to port cities and drilling platforms.

It would be a real-life version of the Soviet reversal joke: In Russia, 70-megawatt nuclear reactor comes to you.

The reactor in question is called Akademic Lomonosov. Once the barge is wired into the electrical grid in the Arctic town of Pevek in 2019, it will be the world's northernmost nuclear reactor, capable of powering a town of 100,000 people with what its manufacturer, Rosatom, calls "a great margin of safety" that is "invincible for tsunamis and natural disaster."...

By 2019, the first-of-its-kind rig will provide power for the port town and for oil rigs.

For Rosatom, it is buoyant proof of concept that a floating sea-based reactor can work. Rosatom is already in talks with potential buyers in Southeast Asia, Latin America and Africa, according to Russian television station RT, which estimates that 15 countries have shown interest in the floating plants.

Critics are focused on the potential environmental downside to a floating nuclear reactor, but there is an upside. This could be exactly what is needed to encourage investment in at least some of the infrastructure needs of developing countries.

Book Review: Trillion Dollar Economists

I just finished reading Trillion Dollar Economists by Robert E. Litan. The subtitle is "How economists and their ideas have transformed business". The book is separated into three sections, and the first section really does look at how economists' ideas have transformed business. Sometimes. Litan takes a fairly broad view of who counts as an 'economist', and in many instances makes claims that because someone 'thinks like an economist' then they can be counted. So, the claim that economics and economists' ideas have had a trillion-dollar impact on business is probably fair, but not all of the illustrative cases used in the book are. Despite that issue, the first section of the book does a good job and it is easy to see by the end of the third chapter (on pricing) that the trillion-dollar claim is probably not overstated.

The second section of the book focuses more on policy, and especially on U.S. policy. This might be interesting to some readers, but I felt that this section took the book in an entirely different direction from where it started. To be fair, regulation and policy are Litan's forte, but the promise of this book (in the subtitle) was about business. And while policy certainly is important to business, the second section had an entirely different vibe from the first. In fact, at that point it almost felt like two separate books glued together. Moreover, the claims of the role of economists are even overplayed in the policy section. Consider this bit:

Likewise, had the build out of the Internet come several years later it is entirely possible that one or more of the Net-based companies that are now household names never would have launched. In some respects, then, these businesses and their founders may have the breakup of AT&T to thank. Economists who played some role in the events and decisions that ultimately led to AT&T's dismantling also deserve some of the credit.

No doubt, economists deserve credit, alongside the manufacturers of energy drinks, and the parents of those Net-based companies' founders, who let them work in their basements or garages. And countless other peripheral players.

In the final section, Litan talks about his views of the future of economics, but is fairly conservative in those views. He seems unwilling to go out on a limb and make any bold predictions. Which is fair - bold predictions do have a habit of coming back to bite the predictor. But if you're going to hold forth on the future of the discipline, why hold back?

Despite some good bits in the first section, I felt the book was distinctly below par. Even the first section had some weird moments, such as the long section in the fourth chapter that attempted (mostly unsuccessfully, I thought) to explain linear programming and the simplex algorithm (pretty ambitious for a book targeting a general audience!). And this bit that appears to conflate regression analyses with showing causality (when, except in specific circumstances, they only show correlation):

Regression analyses enables economists (or other social and physical scientists) to understand the relationships of different variables. In the farming example above, an economist or statistician would estimate an equation to understand how different independent factors (such as the special supplement, the fertilizer, the amount of rain, the days of sun, the temperature, and so on) cause an effect on crop output - the dependent factor. [emphasis mine]

This misunderstanding about causation vs. correlation was eventually cleared up, but not until five pages later, and even then it only drew a couple of sentences of comment. Litan was over-cautious perhaps in the final section of the book, but perhaps he could have re-distributed some of that caution into his description of regression analyses.

Overall, I wouldn't recommend this book to the general reader. Readers with a business focus (or business students) might find some value in the first section, but probably won't find it worthwhile to persist past there.

The shocking truth about retail fuel pricing has been revealed!

Thanks to some outstanding investigative reporting (read: a leaked email), the shocking truth about fuel pricing was revealed yesterday:

A leaked email has exposed the pricing strategy underpinning the petrol industry.

In the email obtained by Stuff, BP pricing manager Suzanne Lucas outlined a plan to counter dwindling sales in Ōtaki, where the price of fuel was 20 cents more expensive than in nearby town Levin.

Instead of reducing the price in Ōtaki to make the station more competitive, Lucas proposed an increase of the fuel price across the entire region, with the expectation that competitors would match the new price.

"We have already increased all three sites mentioned by 5cpl [cents per litre] and have found that the Z [Energy station] in Paraparaumu has already matched our pricing," Lucas wrote.

Imagine that! Fuel pricing is not just based on costs of production, but competition makes a difference! Yawn. Anyone with a modicum of economic literacy could have pointed this out, but politicians and the media are not well known for their understanding of basic economics. And so we end up with stories like this:

A National Party MP and the Automobile Association (AA) are calling for the fuel industry to be more transparent about its pricing after a leaked email from BP lifted the lid on the company's petrol pricing strategy...

Jonathan Young, National's energy spokesman said the BP email was very concerning.

"I think the Commerce Commission would be very concerned about this as well."...

It's time for a reality check. The Commerce Commission has better things to do than follow up on this. To save them some time and effort, I can summarise BP's pricing strategy (not to mention the pricing strategy of every other fuel retailer in the world) in two bullet points:

• If costs of supply go up, put prices up, and if costs of supply go down, put prices down; and
• When there is less competition, put prices up, and when there is more competition, put prices down.

In every principles of economics course, students learn that the profit-maximising price for a firm with market power occurs at the quantity where the marginal revenue curve meets the marginal cost curve. In other words, costs are not the only thing that matters in pricing - revenue matters too. If there is less competition in the market, then consumers will have relatively less elastic demand for the good - they will react less if prices are increased. So, when there is relatively less elastic demand, firms can add a higher mark-up over their costs (and so the market price will be higher).

So, it is incredibly naive to believe that only costs matter in pricing decisions. Given that, this should come as no surprise:

Motorists are right to feel they are being unfairly treated after revelations about how BP sets its petrol prices, Prime Minister Jacinda Ardern says.

"Certainly what's been revealed today probably wouldn't surprise some motorists," Ardern said at her weekly press conference on Monday.

"But to hear so blatantly that pricing decisions are being made that sit outside of the price of crude oil, that sit outside the exchange rate, or that sit outside operating costs will no doubt be raising eyebrows with consumers."

Ardern is at least right about the fairness aspect though. Research by Nobel Prize winner Daniel Kahneman (and described in his book Thinking, Fast and Slow as well as Richard Thaler's Misbehaving: The Making of Behavioral Economics, which I reviewed here) shows that consumers are willing to pay higher prices when sellers face higher costs (consumers are willing to share the burden), but consumers are unwilling to pay higher prices when they result from higher demand - they see those price increases as unfair. The latter point almost certainly extends to consumers' views of the unfairness of higher prices that would result from less robust competition between firms.

So, we should not be surprised by the behaviour of fuel retailers and their pricing decisions. From the BP email, it doesn't seem that there was any overt cartel behaviour (or collusion between 'competing' retailers), so there was no illegal behaviour that the Commerce Commission would be interested in. However, we might rightly question the fairness of BP's pricing behaviour (especially if you live in Ōtaki!), and BP will probably face negative consequences (if only in terms of adverse publicity) for doing something that it is almost certain every fuel retailer would do in the same circumstances.