We’ve all been in a situation where a professor is teaching and everyone in the class is lost. Often in those situations no one raises their hands even though everyone in the class would benefit. Why?
It turns out game theory has an answer. We discuss this phenomena with Professor Joel Blit. We also discuss other, more serious situations of this game and some potential actions one can take to change the game.
I don’t think the British had cobras roaming the street. Wild guess, I know, but it probably explains why they were so surprised to find them in Delhi during the colonial period. One can hardly blame them for wanting to remove them.
So they came up with a simple plan [1]. Have the citizens kill the cobras, show them the skin of the cobras as proof of the kill, and they would be given a payout for their work. It sounds ingenious. You don’t have to hire a lot of people to hunt cobras – imagine how much you’d have to pay them – you’d have more eyes on the problem, and you have the community involved.
Just one problem. The population of cobras went up.
What happened was that a part of Delhi’s population started to farm cobras. As smart as the bounty scheme sounded, Delhi’s population was even smarter. The citizens of Delhi figured out that the cobras had a dollar sign attached to them, so why not make more of them? So, a portion of Delhi’s population started breeding cobras. Of course, the British panicked and ended the bounty scheme. And in response the population released the cobras, because if they no longer have dollar signs attached to them, what use are cobras?
There is an important lesson to be learned from this anecdote: public policy is hard. What the British did not realize is that they weren’t playing a game against the cobras, they were playing against the entire population of Delhi when they initiated this scheme. A game that is much harder to win. This is not an argument against all public policy, but it is important to remember that when you are fighting against the self-interest of many other people, you better be ready for unintended consequences.
Consider the case of the UN trying to mitigate a coolant gas [2]. The structure was – again – simple. Companies could earn one credit if they reduced the amount of carbon burned by one ton. But if they reduced the use of this coolant gas by one ton, the companies would get 11,000 credits. The credits could then be sold for millions of dollars a year. The reason the coolant gas was worth so much more was because it was much worse for the environment. So what do the companies do? They use more of the coolant gas. This way, they could start reducing their use of the coolant in exchange for carbon credits, which turned into money for them. A colossal waste of money for the UN, and the environment suffered, even though the UN was actively trying to do the opposite.
A different version of the unintended consequences problem [3] occurred after the Exxon Valdez oil spill of 1989. In order to prevent such spills from happening, states introduced legislation that placed unlimited liability on such operations. This meant that big companies with the most modern technology no longer performed services there, leaving these tasks to be completed by smaller, less safe operations who would more readily accept that risk.
Of course, we all remember the problems of price control from Economics 101. If a certain good starts becoming very expensive, then the public complains, politicians promise to control the prices, and the supply of that product goes down, since there is no longer any incentive to produce it. The government tries to create a policy to make a good more readily available, but it actually becomes harder to obtain, because fewer people are offering it.
This phenomenon exists in more popular government policies as well. Take social security in the US for example: because everyone is guaranteed a cheque issuing a basic standard of living, people started to save less privately [4]. This means there are less savings available as a whole, which in turn reduces investment, slowing the economy and growth of wages.
Of course, this doesn’t mean that all public policy is a lost cause, or even that we shouldn’t keep these policies, but all of these examples should remind us of one of the fundamental parts of economics: people respond to incentives. It is probably going to be impossible to avoid all of the unintended consequences in a free-market, but when enacting or arguing for certain policies, it is important to remember incentives and it is probably best to keep things simple. Unless you want cobras roaming the street.
[1] – http://freakonomics.com/podcast/the-cobra-effect-a-new-freakonomics-radio-podcast/
[2] – http://www.nytimes.com/2012/08/09/world/asia/incentive-to-slow-climate-change-drives-output-of-harmful-gases.html?pagewanted=1&_r=2&hp
[3] – http://www.econlib.org/library/Enc/UnintendedConsequences.html
[4] – https://www.cbo.gov/sites/default/files/105th-congress-1997-1998/reports/ssprisav.pdf
Do you remember when Canada got rid of the penny? There was months of advertising, plenty of time for planning, and thus it was relatively easy to exchange pennies for other forms of money. But many people didn’t bother exchanging, as Canada’s economy is not exactly dependent on the penny, and most people in Canada don’t use cash for transactions regularly anyway [1].
Now imagine if 78% of transactions in the country were done in cash. And then one day, without warning, the government got rid of the most used bank note in the country – say the $20 bill. Imagine the chaos that would ensue. That is what happened in India.
On November 8, 2016, Prime Minister Narendra Modi announced he would be getting rid of the old 500 and 1000 rupee bank notes, and issuing new 500 and 2000 rupee bank notes. The deadline for the exchange was December 30, 2016. In addition, people could only exchange a certain amount of money per week. Finally, large exchanges – over $3600 – were subject to a tax.
The reason for PM Modi’s decision was to tackle crime and corruption in the country. It is easy to see why cash transaction would be so helpful for different kinds of criminals. It is extremely hard to track. This leads to huge amounts of tax evasion and an easier time for underground criminals.
In a month and a half, roughly USD 183 billion dollars were exchanged. The process, was unsurprisingly rough. Since the decision was such a surprise to everyone, people had to line up for hours. As well as that, there was an initial shortage of new banknotes, and people living in small villages had a hard time even getting to banks. Many Indians didn’t even have a bank account. This was an unmitigated logistical mess – especially early in the transition.
Because Modi decided to get rid of about 86% of all currency in circulation, there was a tremendous shortage of cash – in a country that runs on cash!. This is causing a slowdown in the Indian economy. Investment, real estate, and the automobile industry are all down. And perhaps most devastatingly, farming is down, too [2].
The slowdown hurts the poorest Indians the most. Those living on the edge of poverty, now have to reduce consumption. This might be okay in a developed country, like Canada, where incurring a slowdown may help to solve such a problem. But for those on the poverty line, a reduction in consumption means eating less food [3].
The question remains, what about the corruption that was going to be combated? Well, the evidence on that question has yet to come in. There is, of course, the fundamental question, what is stopping criminals from switching over to the new cash system – especially when more cash becomes available? It is true that more tax than usual was paid over the last two months, but beyond that, this policy won’t shift India into using plastics overnight. Overall, expert opinion seems to say that crime will not be too affected by this new policy.
The dream of Modi, to turn India into a cashless society and to combat crime and corruption, is worth striving for – considering the level of tax evasion. But an aggressive policy like this targeted toward an India that is simply not ready to become cashless is a misguided move that will continue to have harsh economic consequences.
[1] http://www.bankofcanada.ca/wp-content/uploads/2015/05/boc-review-spring15-fung.pdf
[2] http://www.npr.org/2017/01/03/507983996/indian-farmers-hit-hard-by-governments-currency-restrictions
[3] https://www.nytimes.com/2017/01/02/world/asia/modi-cash-ban-india.html
[4] http://blogs.wsj.com/briefly/2016/12/30/50-days-of-indias-war-on-cash-the-numbers/
[5] https://www.bloombergquint.com/business/2016/12/30/50-days-after-demonetisation-real-estate-deals-remain-few-and-far-between
[6] http://www.livemint.com/Industry/SIK34NIedgYQjLwFHmy6BI/Demonetisation-takes-a-toll-on-automobile-sales-in-December.html
[7] http://www.livemint.com/Politics/5vmA6lF40HFY3P381uzkTJ/Demonetisation-takes-toll-on-investment-manufacturing.html
Canada’s sharing economy is booming. According to Statistics Canada, almost 3 million Canadians spent over CAD 1.3 billion participated in the sharing economy [1]. Companies like Uber and Airbnb are revolutionizing their respective industries. And with Uber set to enter into British Columbia by the end of this year [2], the impact of the sharing economy will only grow.
However, there is a major problem that tax collectors are starting to find – Canadians aren’t reporting income generated from the sharing economy. According to an article from the CBC, the misconception occurs because many people are new to self-employment[3].
Uber has solved the problem for sales taxes, though. Since it doesn’t add in the cost of taxes to the amount the rider pays, what Uber does is take the money straight from the consumer to Uber itself, and then pays the rider with taxes deducted. So, essentially the driver is getting paid less than what the consumer pays. Unfortunately, this isn’t as simple to do with income tax, as it is far more complex than sales taxes.
To counter some of these problems Airbnb is sending out reminder emails letting hosts know to declare their income. Meanwhile, Uber and Airbnb both are partnering with different tax preparing companies, like TurboTax and H&R Block, to help their users get the taxes right [4].
As the sharing economy continues to explode, it will be interesting to see how tax collectors respond, to ensure tax evasion doesn’t continue to grow with it. Thus far it still largely remains an underground sharing economy unknown to tax authorities.
References
[1] http://www.cbc.ca/news/business/statistics-canada-sharing-economy-1.4004993
[2] http://www.huffingtonpost.ca/2017/03/07/bc-taxi-industry-uber_n_15223560.html
[3] http://www.cbc.ca/news/business/taxes/tax-time-2016-uber-drivers-1.3462006
[4]http://globalnews.ca/news/3305907/canadians-in-the-sharing-economy-are-running-out-of-excuses-not-to-pay-taxes/
GMOs have been the centre of a political debate for a long time. Now, a product made in Canada will serve as a major indicator to where that debate is in the public conscience. This debate could open up the floodgates to the GMO market, and result in a major shakeup to the food industry as a whole. If the Arctic Apple succeeds, many other products in other industries may be opened up to GMOs as well.
The Arctic Apple underwent limited release in midwestern markets on February 1. The company believes that the apple could be available in Canada in the form of slices by 2019.
The attraction to the Arctic Apple is that it will not brown. The hope for the Okanogan company is that this feature will compel people to try the product, and then hope they will like the product. In fact, they see it more as a matter of convenience, rather than an issue of GMOs. The argument for them, is that every consumer will want an apple that doesn’t brown.
The idea came to the company after realizing if baby carrots can become as popular as it had, because of convenience, then apples should be able to do the same. The company also hopes they can help reverse declining apple consumption.
Historically, GMO-style products have failed in the market. GMO products have been greatly limited in specific markets like corn, wheat, tomatoes, and more because of efforts from Anti-GMO groups.
Despite, the nine years of testing, Anti-GMO groups say the apple is understudied, and believe that consumers will not have any interest in modified apples – citing inability to measure freshness of apples without natural browning.
There is major hurdles that all GMO companies must overcome. In a poll conducted by ABC News, 52% of Americans believe that GMOs are unsafe to eat [1]. That is the environment that the Arctic Apple will walk into.
It should be noted that both the World Health Organization [2] and the National Academies in Sciences [3] have said there is no danger to human health from genetic modification.
Also, after three years of review [4] by Canadian Food Inspection Agency and Health Canada, CFIA said “[Arctic Apples] are as safe and nutritious as traditional apples, while Health Canada said the apple is safe to consume, and has the same nutritional value.
The big test for this particular apple, is whether or not the convenience of the product can overcome negative connotations of GMOs. If the apple can overcome the negativity surrounding GMOs, it will be a major turning point in the GMO industry. Which, in turn, will result in a big shakeup in the entire food industry.
References:
[1] http://abcnews.go.com/Technology/story?id=97567&page=1
[2] http://www.who.int/foodsafety/areas_work/food-technology/faq-genetically-modified-food/en/
[3] https://www.nap.edu/catalog/23395/genetically-engineered-crops-experiences-and-prospects
[4] http://www.ctvnews.ca/sci-tech/canadian-created-non-browning-arctic-apple-opens-gmo-debate-1.2295324