Under pressure with deadlines?

Consider what one ‘student’ can achieve.

“On any day of the academic year, I am working on upward of 20 assignments.”

There are so many economic concepts in this piece that a whole course could be built around it.  The key – people respond to incentives. Always. Even Charles Dickens.

People respond to incentives - the rubbish edition

RTE report on the move today by Dublin City Council to abolish the waiver of domestic waste charges that was in place for low-income households. These households will still be exempt from playing the standing charge, currently €96 per annum, and will get four free lifts per year but will have to pay a charge when they put out their bin for collection after that.

The charge per lift is €6. The average household not on a waiver puts their bin out 16 times a year. A household that puts their bin out 60% of the time (16 times a year) will incur a charge of €6 x 12 = €72. Why did the Council seek to have this change introduced? City Manager John Tierney provides the answer.

Mr Tierney added that the waiver scheme had not been an incentive to minimise output as those on waivers had been putting out almost double the amount of refuse as other households.

Those that did not have to pay a charge per bin lift put their bin out for 100% of collections (26 times a year). Those that have to a pay a charge per use put their bin out for 60% of collections (16 times a year). More here.

People even respond to rubbish incentives.

Tax something and you get less of it

The only certain things in life may be death and taxes. In Economics we are certain that people respond to incentives, just not always in ways predicted. This gives rise to The Theory of Unintended Consequences. It's just a theory but the evidence to support it is manifold. [Aside: A super little example can be seen in this report on attempts to preserve fish stocks in the Pacific.]

Anyway back to the taxes. Last week the Chancellor of the Exchequer in the UK, Alastair Darling, announced a super-tax on bankers' bonuses of 50% on all bonus payments above £25,000. This tax was targeted at those who had allegedly caused the finanical crisis and to offset the "bailouts" given to the financial sector.

In this instance a quick look at the incentives should clearly lead to the unintended consequence of this action. Rather than pay the tax, financial firms and their employees will just leave. It seems this may already be happening. Sky News' Business Report Mark Kleinman reports:

I have learned that Tullett Prebon, one of the largest independent financial trading firms in London, is offering its employees the chance to relocate to its offices in Switzerland, Bahrain and Singapore as a result of the uncertainty caused by last week's Pre-Budget Report (PBR).

Whether they will actually move is debateable. And also, it is actually too late for Tullett Prebon's employees to avoid the once-off super tax for this year, as the BBC report. However in an email to staff last week, the Chief Executive of Tullett Prebon (a company which received no "bailout" money), Terry Smith said:

"It is not clear how if at all the Chancellor's announcement yesterday will affect us, but his proposals regarding the way that bonuses are to be treated this financial year, coupled with the explicit refusal to guarantee that similar "one off" taxes will not be imposed next year and in subsequent years, has caused a number of you to once again raise the matter of relocation out of the United Kingdom."

The uncertainty alone may cause some employees to move to Tullet Prebon's offices in Switzerland, Bahrain or Singapore.

Alastair, my darling, surely you know that a bit of something is better than a lot of nothing.

Getting smarter?

In last week's Budget Brian Linehan formally introduced the 50c per medical prescription for medical card holders that had been flagged over the previous few weeks. It seems we are taking at least one leaf out of the Singapore book. Well a bit of a leaf anyway. Singapore combines government subsidies with patient co-payment for virtually all medical care.

When a consumer is insulated from cost they have no incentive to weigh up the costs and benefits of a decision. Once the costs are zero any benefit (or even a perceived possible) benefit will encourage over-utilisation. This is what has happened when medical prescriptions have been free with people collecting the prescription even if they didn't actually need it. In a letter to The Irish Independent one person wrote.

As a public health nurse visiting homes on a daily basis, it is astonishing to note the vast amounts of excess and unnecessary medication which accumulates in people's homes.

There is also other anecdotal evidence of the families of recently deceased relatives returning thousands of euro worth of prescribed medicine to the HSE that had been collected but never used, simply because there was a prescription for it. As the HSE can not vouch for the medicine it must be destroyed. The above letter continues

Despite the fact that many monthly prescriptions are not used in their entirety, and despite both patient and pharmacist being alerted to this, the system allows the entire monthly prescription to be reissued regardless. There is little or no appreciation or consideration of the cost, particularly as this flawed system is paid for by the taxpayer, who, by the way, is not entitled to free medical care or medications.

Many years go when I lived and worked in the UK, a charge was payable for each prescription. The busy GP might have been quick to issue the prescription but I had a little more time to consider if the purchase was essential enough for me to hand out the charge rather than the easier option of obtaining the item, knowing someone else was paying for it. The 50c per item fee is negligible and will go some way to reducing the vast mount of unnecessary prescribing and waste.

This public health nurse would make a fine economist.

We are finally cottoning on to the idea that anything free will be over-utilised. And that even a small charge can have a big impact. The blight of plastic bags was "cured" when a small charge was introduced that made people consider whether it was actually worth using a plastic bag to home a pint of milk and a packet of biscuits. When A&E visits were free (in money terms) many patients who should have gone to their GP made unnecessary trips to an Accident and Emergency Departments in situations that were neither an accident or an emergency.

Of course, the issue of setting the appropriate charge remains. The plastic bag levy began at 15c in 2002 and is due to be increased to 44c next year. A&E charges currently stand at €100 compared to an average of €60 for a visit to the GP.

People respond to incentives - the science cheat edition

As we well know all of economics can be summarised by just four words - "people respond to incentives" - the rest is commentary.

Thierry Henry handled the ball because the benefits of cheating were greater than the cost. What incentives can we find that underlie the academic and scientific fraud that has taken place at the Climatic Research Unit in the University of East Anglia for at least ten years?

A quick check of this spreadsheet reveals some of the answers. Click it and see where the money to keep Phil Jones and his buddies happily engaged in fraud in the CRU has come from.

The file reveals details of 53 projects in with Prof Phil Jones is the sole or a joint PI (principlal investigator). The 53 projects see Jones allocated £13.7million pounds at an average of just over £250,000 per approved grant application. That is a lot of money to be playing around with.

Where did this pocket money come from? Prof Jones and his cronies are hugely grateful to the taxpayers of the UK, the US and the EU for funding as they have received grant after grant from the UK Met Office, the US Department of Energy, the EU Commission and several other public bodies.

If somebody has a story they want told and are willing to pay to have that story told it is only human nature that someone will gladly help them out when the right incentives are in place. This is a superb explanation of what happens.

Universities and departments have set policies to attract climate science funding. Climate science centers don’t spontaneously spring into existence – they were created, in increasingly rapid numbers, to partake in the funding bonanza that is AGW. This by itself is not political – currently, universities are scrambling to set up “clean energy” and “sustainable technology” centers. Before it was bio-tech and nanotechnology. But because AGW-funding is politically motivated, departments have adroitly set their research goals to match the political goals of their funding sources. Just look at the mission statements of these climate research institutes – they don’t seek to investigate the scientific validity or soundness of AGW-theory, they assume that it is true, and seek to research the implications or consequences of it.

This filters through every level. Having created such a department, they must fill it with faculty that will carry out their mission statement. The department will hire professors who already believe in AGW and conduct research based on that premise. Those professors will hire students that will conduct their research without much fuss about AGW. And honestly, if you know anything about my generation, we will do or say whatever it is we think we’re supposed to do or say. There is no conspiracy, ust a slightly cozy, unthinking myopia. Don’t rock the boat.

People respond to incentives - the parent's edition

As Steven Landsburg put it "economics can be summarised by just four words: 'people respond to incentives'. All the rest is just commentary".

Expectant parents are people too and when faced with incentives they will respond too. You might think that economics and incentives have nothing to do with the natural process of birth, but how wrong you could be.

Two examples show that when faced with simple monetary incentives expectant parents will either accelerate or delay the birth of their new baby.

The first example comes from the US and is reported here.

Since the early 1990s the federal government has been steadily increasing the tax breaks for having a child. For parents to claim the full amount of anyof these breaks in a given year, a child must simply be born by 11:59 p.m. on Dec. 31. If the baby arrives a few minutes later, the parents are often more than a thousand dollars poorer.

The result:

about 5,000 babies, of the 70,000 or so who would otherwise be born during the first week in January, may have their arrival dates accelerated partly for tax reasons.

To see an example of parents delaying the birth of their child we move down under where it is reported that

On 11 May 2004, Peter Costello brought down the budget in which he urged Australian families to have “one for mum, one for dad, and one for the country”. And because Treasurers can put their money where their mouth is, he promised that every baby born on or after 1 July 2004 would receive a $3000 Baby Bonus.

The result:

the 1st July, 2004, had the most number of births in a single day over the entire 30 years of data we had (almost 11,000 days). The 2nd July was no slouch either, being the 7th highest day. This was a big effect.

People respond to incentives.

Parking, Driving, Drinking and Printing

On the 1st of December Dublin City Council increased city centre parking rates from €2.70 to €2.90 per hour. The council’s justification for this was to limit the congestion caused by people cruising around looking for a parking space. The increased cost aims to do this by discouraging commuter parking and encouraging short term parking. Looking at it another way they are trying to reduce congestion by allowing the cars that are moving to stop and getting the cars that are stopped to move. In the words of Thomas Schelling they have fallen foul of “the inescapable mathematics of musical chairs” as all they have done is change the categories while the total number of cars remains unchanged. More on congestion later.

On the 1st July the government introduced changes to the Vehicle Registration Tax (VRT) and annual motor tax on new cars that had been announced in the previous December's budget. The new rates are based on the carbon dioxide emissions of the car rather than the size of the engine which was the determining factor under the old system. When announced in Brian Cowen’s last budget the stated aim of this new system was to assist the environment by reducing carbon dioxide emissions. Granted the system may cause some people to alter their car buying decision but once a person has bought a high emissions car they can drive, and pollute, as much as they want and not face any additional cost.

The new system has changed the average cost of a polluting trip but it has not changed the cost of the next polluting trip, the marginal cost. Consider the example of student parties from Tim Harford’s book The Undercover Economist. The clubs and societies in Tim’s university organised large parties with two types of entry tickets; ‘Alcoholic’ tickets allow unlimited drinking and ‘Sober’ tickets made warm orange juice the tipple of choice. ‘Alcoholic’ tickets were sold for €20, while ‘Sober’ tickets were free.

After buying the more expensive ticket it makes little sense to have two or three drinks and leave as quietly as you entered. So people either bought the ‘Alcoholic’ ticket and drank as much as they could, or went for the ‘Sober’ option and left as quietly as they entered. Drinking in moderation was a rarely seen phenomenon. To counter this excessive drunkenness the college decided their only option was to make drinking more expensive so they mandated that the cost of ‘Alcoholic’ tickets be raised to €30. Can you guess what happened?

For some people this increase in price might cause them to go down the ‘Sober’ road. But most of the students would cobble together the €30 and get as drunk as they had got before. The university hadn’t solved its drinking problem at all. Replace ‘Alcoholic’ with gas guzzler and ‘Sober’ with fuel efficient and you will see that the government has made that exact same mistake in trying to curb carbon emissions that the university made in trying to curb excessive drinking.

Both thought correctly that the cure was to raise the price of the harmful activity; unfortunately they both raised the wrong price. By raising the up-front fee you are raising the average price of the activity. The government has raised the up-front fee on high emission cars with the VRT changes. However we don’t base our decision on average prices. Drivers ask what the next trip will cost them. With the emissions based VRT this is an up-front fee so the marginal or extra cost of the next trip is zero. Like the students who kept drinking the SUV drivers might as well keep on driving. The changes in VRT do little to help the environment.

An up-front fee does not change behaviour. Of course, it could be argued that the annual motor tax has also been changed to tie-in with carbon emissions and that this will solve the problem. But once again it is the case that when this is paid drivers are free to drive as much as they wish. And it can be assumed that the person would have considered the annual motor tax when they initially bought the car.

If you want to limit pollution the only effective way is to change the marginal cost of driving, the cost of additional trips. The changes to VRT and motor tax were introduced under the guise of “environmentally friendly” taxes but they are nothing of the sort. They are just taxes. If you want to curb pollution you must tax pollution. Cars don’t create pollution, driving cars does.

The government hasn’t always shown such a poor appreciation of how changing incentives affect behaviour and that people respond to marginal and not average prices. In 2002 the government looked to address the use of plastic bags for shopping. It was decided that a tax or charge was the best instrument to limit the use, and ensuing littering, of plastic bags. The tax resulted in a 94% drop in the use of plastic bags in Ireland.

The levy was initially set at 15c and increased to 22c in July 2007. How did such a small charge have such a large effect? The tax increased the average and the marginal price of plastic bags. Every time a person wanted to use an additional bag they had to pay an additional levy, the cost of the next bag was greater than zero. The tax was designed to change people’s behaviour and it achieved that.

University College, Cork looks like it hasn’t learned from their colleagues in Tim Harford’s university or the success of the plastic bag levy. The problem they face is not that students are drinking too much; it is that they are printing too much. There is unlimited free printing for students on campus. UCC wants to address this issue by introducing a charge for printing. In a recent piece in the University paper (University Express, 18th November) the registrar and Professor of Zoology Paul Giller showed a good grasp of basic economics when he stated that “a free good is be abused”. However, this is the limit of their understanding. The solution proposed by the bursar Diarmuid Collins to the printing problem is that an extra €15 charge to be added to students’ registration fee at the start of the year.

Increasing the pricing of ‘Alcoholic’ tickets at parties did nothing to stem the flow of drink. Charging students €15 at the start of the year will do nothing to stem the flow of ink. UCC may have raised the average price of printing but the marginal cost of the next page will still be zero so students will print as much as they did before. Of course, if the university is looking for a scheme to raise almost a quarter of million euro in revenue from the University’s 16,000 students they have hit on a winner.

So what of congestion? Well it’s actually not that much different from pollution. It is not parked cars that cause congestion; moving cars do that, even if they are moving at a snail’s pace. If you want to limit the number of cars on city streets you must charge for driving on city streets. Otherwise people are free to drive as much as they wish, and city centre traffic will testify that is exactly what they do.

Oh and make city centre parking cheaper not dearer (unless the only aim is to raise revenue that is).