Random thoughts of an economist

The cost of regulation

Posted in Economics, Hong Kong, Regulation, teaching by kafuwong on February 6, 2014

Several ferry lines have been closed or about to close. You know why? It is an aftershock of a ferry tragedy off Lamma Island in 2012 (39 persons died).

The scale of the casualty in 2012 was mainly due to the mistakes in shipbuilding and inspection. In part, Marine Department gave the operation permit to the ship without doing a thorough inspection according to the safety rules. That was why the ship sunk so fast, causing so many casualty.

Safety is a function of capital and labor. Safety can be improved by a better inspection of the ships before they are allowed to operate, the provision of enough life-jackets in case of accidents, more stringent training and test requirement on the caption, and more crew members on the ship. Marine Department was right that such additional measures would reduce the chance of ferry accidents and the scale of casualty.

Additional safety regulations can kill some of the ferry business. The additional safety measures add to the cost of operation. A ferry line that was making break-even profit would begin to incur a loss with the requirement of additional crew members on board.

That is exactly what we are seeing on the ferry services between Mui Wo and Discovery Bay. A single journey from Mui Wo to Discovery Bay will take about 25 minutes by ferry but 75 minutes by bus. The ferry has been doing a great service to the 40 Mui Wo children who attend school in Discovery Bay, at the very least. Of course, the ferry operator has been earning a reasonable profit. With the requirement of additional crew member on board, the ferry operator had planned to stop its services because the operation would induce a loss and such loss situation could not be resolved by charging a different fare.

Glad to know. Finally, the Marine Department approved the exemption to this specific operator. The specific operator will not need to meet the requirement of adding an additional crew member on board. I am sure this is the result of the lobbying effort of the Mui Wo and Discovery Bay residents. The Mui Wo and Discovery Bay ferry services have been a safe one before the Lamma tragedy. Why do we need additional safety measure after an “unrelated” tragedy? The across-the-board increase in safety requirement was unreasonable!

Life is full of tradeoffs. There is a cost to everything. We want to improve the safety of ferry services, we will have to commit real resources on it. The two parties involved will determine jointly the optimal level of safety, based on their preference and financial constraints (and many other things, such as technology). They engage in trade only because both parties find the trade beneficial. An additional requirement imposed by a third party (say, the government) can disrupt the mutually beneficial trade; the benefits to the original involved parties will likely be reduced. That is, improper regulations can hurt the economy.

Regulators, be mindful about such tradeoffs. The ferry services between Mui Wo and Discovery Bay would be a good case to keep in mind.

[Additional reading: “Reprieve for Discovery Bay Ferry”, South China Morning Post, February 6, 2014.]

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Dreaming of a more efficient allocation of birth quota

Posted in China, Economics, Population, Regulation, teaching by kafuwong on November 16, 2013

China has the one-child policy. The constraint seems to be binding to most families. Casual observation says that almost all married couples want to have two or more. Some would have them illegally, risking the penalty on the extra child. The one-child policy has also caused a gender imbalance due to the traditional preference for boys.

Today, it is reported that the one-child policy may be relaxed, giving the high hope to some of my younger mainland friends to have a second child. The still-in-the-air discussion of two-child policy aims at creating a sustainable population growth, essentially at slowing down the aging process of the population. I can see that some families want to have two or more children and some less than two. Thus, the policy may not achieve the goal of slowing down the aging of the population.

I dream of making the quota tradable as a solution. Give two birth quota to all adult women. They can use it themselves or sell it to someone else. Make a national market of quota trading. By allowing the quota to be tradable, the quota will be used efficiently. That is, the quota will be translated into the population growth as desired.

I demand a stricter enforcement of traffic regulations in Hong Kong!

Posted in Economics, Hong Kong, Life, Regulation, teaching by kafuwong on October 6, 2013

This is one of my worst days. A former student of mine was hit by a truck on a pedestrian crossing in TaiKooShing yesterday and then flew 20 meters before she landed. She is now in critical conditions. I wish her the best.

Twenty meters! Near pedestrian crossing, the speed limit must be low. The truck must have been over the speed limit by a lot.

Shit happens! Such shit happens because the traffic regulations are not observed. The fundamental reason is that regulation is not properly enforced. Nowadays engines are more powerful. Control of the steering is much improved. Speeding is tempting and has happened much more often. And, drivers are also tempted to use their cell phones while driving. Using cell phones during driving distract our attention from the road. Personally I see an increase in speeding on the road and the use of cell phone while driving in recent years.

To avoid similar accidents in the future, we need to rethink a proper separation of human flow and vehicle flow, traffic regulations and their enforcement! Meanwhile, I will try to be very careful in crossing any road.

Everyone be safe.

An example of price ceiling

Posted in China, Economics, Regulation, teaching by kafuwong on July 20, 2013

From SCMP today (July 20, 2013), “Petrol and disel Prices to rise on mainland”.

“The mainland will riase its retail ceiling price for petrol by 325 yuan a toone and that of diesel by 310 yuan from today, energy consultancy ICIS reported yesterday, in the largest price change under a pricing mechanism launched in March. The increase for petrol is roughtly 3.6 percent, with that for diesel about 3.8 percent.”

The news article reveals that there is a price ceiling on petrol and diesel in mainland China. Indeed, around the world, retail energy prices are often regulated.

Timing of deregulation

Posted in China, Economics, Regulation, teaching by kafuwong on July 20, 2013

Notice a piece of news of deregulation of mainland China:  “Floor on lending rates axed by PBOC” (China Daily, 2013/07/20, available online).  According to the news, China scrapped the lower limit on bank lending rates on 2013/07/19, in a major step toward liberalizing interest rates. (In Economics jargon, the lower limit is called a price floor.)

Most economists would see minimal impact of this deregulation because  currently, most loans are priced at a higher rate than the lower limit.

Why deregulate now when the deregulation has minimal or no impact?   There a deregulation has big impact, some parties who are adversely affected will protest, making the deregulation difficult to pass.  When the deregulation has minimal or no impact, there will be less parties who will protest.

[Additional thought:  Who would support such deregulation?  Lenders or borrowers?]

Road Pricing

Posted in Economics, Environment, Hong Kong, Regulation, teaching by kafuwong on May 8, 2013

According to the Transport Department of the HKSAR, Hong Kong’s car ownership per length of road has increased by 22 percent in the past 10 years. (Car ownership per 1,000 people rose to 63.4 cars in 2012, 25 per cent up on 2002 figures while the length of road per person for the same 1,000 people rose by only 1.7 per cent for the same period, according to a report by SCMP, May 4, 2013.)

This increase of car ownership per length of road needs not call for government action if Hong Kong has a small number of cars per length of road in 2002, or the additional cars are run on the less congested roads.  Unfortunately, that is not the case.  The roads in Hong Kong are getting more congested.  A couple years back, the government had a debate whether to build the Central-Wan Chai waterfront bypass in order to ease the congestion in the Central and Wan Chai district.  Back then (2007), my colleague Dr. Tim Hau (an expert of transport economics, also my co-author of a teaching case Road Building or Road Pricing?) called for road pricing as an alternative or a parallel measure in the long run.  Of course, as we all know, the bypass is scheduled to open in 2017.

Frustrated, aren’t we?  To economists, the market will adjust itself if we allow the commodity to trade in the market freely.  Shortage will almost never happen.  When there is an increase in demand, the price will rise.  The increase in price will cause the suppliers to supply more.  If the supply cannot response to the change in price, we simply have the price to increase by enough so that there will be no shortage.  In short, price is the key!  The beauty is when market functions, we do not need the government intervention.

Roads are different because the usage of roads causes externality.  My use of a road potentially causes an increase in your travel time on the same road. When everyone considers their own cost and benefit in making their decisions whether to drive on a road (not considering the impact on others), we end up doing too much of the activities from the social perspective, economists have discussed how to solve similar problem of externalities.  A simple solution is to tax the usage of roads, a higher tax during more congested times and on more congested roads.  Taxing the usage of roads is not new.  Tunnel and highway tolls are examples.  When tolls are set appropriately, we do not see too much of congestion and there will be saving of resources (our precious and productive time, among other things), from the social perspectives.  Of course, if we can save more resources, we can always think about redistributing them to make everyone happier.

Road pricing is not that different from highway tolls.  Take the highway tolls to the extreme and imagine all roads in Hong Kong are connections of many (potentially infinite) segments of roads.  Each segment has its own toll.  The toll will also change the condition of congestion.  For the uncongested segments, the tolls will be zero.  When the congestion reach a certain threshold, a higher toll will kick in.  We can have many such thresholds corresponding to different toll for the same segment.  Many years ago, while conceivable to economists, such implementation of different tolls on different segments of roads and different congestion situations would be un-imaginable to lawmakers.  The advancement of technology has made road pricing quite feasible.

Various form of road pricing has been adopted in other cities that are as congested as Hong Kong (Singapore, London and New York).   I strongly believe that it is time for Hong Kong to think about it.

 

Hong Kong is a free port. Let’s keep it that way.

Posted in Economics, Hong Kong, Regulation, teaching by kafuwong on February 1, 2013

HK is a free port.  Potentially, we have unlimited supply of milk formula from the rest of the world.  If parallel traders from mainland want to buy a lot of milk formula through Hong Kong, we should welcome them.  As middle men, we gain.  The more parallel traders, the more we gain!

Some people feel that their lives are affected because the parallel traders from mainland are here to compete for everything we have in Hong Kong.  Can we do something to keep our role as middle men (and hence the gain), and yet reduce the disruption?

Parallel traders have no intention to go for a long distance to buy things they need.  The best scenario is to for them to go across the border and bring back what they need within minutes.  That way, they can make many rounds of trade and hence profits.  Once we understand the parallel traders, we can easily see that we can minimize their disruption to HK people’s life by creating a special trading zones for them.

The best places are the places near the borders.  Indeed, the parallel traders choose Sheung Shui, the town on rail line that is closest to the border (Lo Wu).  Now, imagine we create a special trading zone closer than Sheung Shui, to the parallel traders.  They will choose to go to the more convenient special trading zone over Sheung Shui.  What would be better to set up special trading zones at Lo Wu and Lo Ma Chau, our border checkpoints?  They can come here to buy unlimited amount of milk formula and many other things.

If we want to, as a landlord  at those Lo Wu and Lo Ma Chau buildings, the Hong Kong government can get additional revenue, benefiting Hong Kong people.

Will the life of people in Sheung Shui be disrupted?  No.  The milk formula in Sheung Shui will continue to be available to HK citizens.

Hong Kong is a free port.  Let’s keep it that way.

(This writing is my response to a proposal to introduce export tax on milk by a prominent columnist/economist.)

An ipad for a kidney. Anyone?

Posted in Economics, Help the poor, Regulation, teaching by kafuwong on May 30, 2012

Read from the news that some teenagers sell their kidneys at the price of US$3500 per kidney in China (http://www.npr.org/blogs/thetwo-way/2012/04/07/150195037/chinese-teen-sells-kidney-for-ipad-and-iphone).  The kidney trade is illegal in China and many other countries.  The illegal trade exists because there is a great demand for kidney transport and there is only few donations.  To rely on donations, a lot of patients will die before they receive any transplant.  Some of these patients are willing to pay a lot to get kidneys.  What is life worth?

The high willingness to pay by the dying patients invites illegal kidney trade.  Teenagers are easy targets.  Some want an iPad but they cannot afford it.  Selling their kidney gives them quick money.   Sad.  Isn’t it?  I hate those people taking advantage of the ignorance of the teenager.  Do you? 

Given the great demand for kidneys and the limited supply (mainly through donations), the market price should be 1000 iPads per kidney!

Imagine that kidney trade is made legal.   Eliminate the middleman.   What do we expect to happen in this kidney market?

Understanding the apparent conflict between the taxi drivers and taxi operating license owners

Posted in Economics, Hong Kong, Regulation, Taxi industry by kafuwong on May 24, 2012

“The landlord of a local shopping arcade wanted its tenants to raise their sale price by 5%.  The tenants refused.”  No.  This is not a true story. 

Something similar did happen though.  Recently, in Hong Kong, the taxi operating license owners wanted to see a HK$2 rise in flagfall (Flagfall is the charge for the initial fixed distance travelled by taxis.  Beyond that, the fare will increase with additional distance travelled.  Flagfall signifies the turning down of a  lever to start the fare metre.).  The taxi renters/drivers opposed the rise. 

In the case of a shopping arcade, landlords cannot force its tenants to raise their sale prices by 5%.   In the case of taxi, it is possible because taxi fare is regulated by the government.  The taxi operating licence owners can lobby the government to raise the taxi fare and hence impose it on the taxi renters/drivers.  The owners would get what they wanted if the taxi drivers could not get organized to oppose it. 

 According to  South China Morning Post (“Taxi driver leaders oppose fares rise”, May 24, 2012, page C3), the proposed flagfall rise by the Transport and Housing Bureau was meant to compensate the higher operating costs of taxis (also see the report by Hong Kong Standard, available online http://www.thestandard.com.hk/news_detail.asp?sid=36466396&art_id=122657&con_type=1&pp_cat=30).  The taxi drivers are smart people.  Their experience tells them that the rise in flagfall only benefits the taxi operating license owners.  Why?

In Hong Kong, there is an abundant supply of taxi drivers.  One can qualify to drive a taxi if one has certain years of driving experience and passes a written test (multiple choices).  Of course, he/she will need to rent a taxi, or more precisely a taxi operating license.   When driving taxis earn more than the best alternative jobs available in the economy, we expect to see more people becoming taxi drivers.  These potential taxi drivers will have to compete for the taxi rental (or taxi operating licence rental).  The competition will ensure the taxi rental to rise.  So would the price of taxi operating license (which can be thought as a discounted stream of rental income)!  That is, the change in profit of operating a taxi will eventually turn into the change in taxi rental.  Thus, the taxi owners will benefit from an increase in profit of operating taxis.  At the end, the taxi drivers do not get any benefit if the increase in profit is converted into rental completely.  The percentage of conversion depends on the bargaining power of the two groups — individual taxi drivers/renters and taxi owners (concentrated in a few companies).  Due to the abundant supply of taxi drivers/renters, the bargaining power of taxi drivers/renters is weak. 

A visible fare hike will cause an expectation of higher profit of operating taxi and thus will justify an increase in taxi rental almost immediately.  And, taxi rental appears rigid downwards.  Thus, the fare hike benefits the taxi owners but not the taxi drivers. 

Now, consider the similar case of shopping arcade.  Suppose there is a bigger demand for goods and services offered by the shops (tenants of the shopping arcade), say due to the increase of tourists from mainland China.  The price of goods and services will rise.  Shops will be earning more profit.  Can the shops continue to enjoy the profit for very long?  Who are the winners eventually?

Flies-targeting

Posted in China, Environment, Parenting, Regulation, teaching by kafuwong on May 24, 2012

The recent standard set by Beijing’s Municipal Commission of City Administration and Environment might appear laughable at first glance.  According to a BBC report(http://www.bbc.co.uk/news/world-asia-china-18170693), 

Authorities in the Chinese capital have set new standards for public toilets, including a stipulation that they should contain no more than two flies.

I am sure the authority must have thought about it carefully.  Hmm …  Our objective is to ensure cleanliness of public toilets.   Suppose that cleanliness will be ensured if the washroom cleaning workers work hard enough.   Then, we just have to ensure that the washroom cleaning workers exert their effort.   Monitoring one’s effort is not easy.   Why not use some indicators?  Possible indicators include smell, germs, etc.  Smell and germs are difficult to measure objectively without some “advanced” tools.   Luckily, we know that flies are attracted to dirty toilets and flies can be counted by visual inspection.  It may not be easy to meet the standard of no flies.  A small number of flies should be acceptable.  Any number bigger than three is often interpreted as “several”.  Perhaps “two” is right as “two” is not yet in the range of “several”. 

Note that the flies targeting is only among the several measures.  Among the measures include that the waste be collected within half an hour (http://www.chinadaily.com.cn/cndy/2012-05/24/content_15372766.htm).  Of course, the two-flies standard is widely reported because it appears so laughable to most of us. 

For those who laughed at the two-files standard, may I challenge you to come up with a proposal to improve the cleanliness of public toilets in mainland China as if you were the authority?

 One possibility is to measure the effort of the washroom cleaning worker.