The Price of Garbage

My good friend Piet responded to my old post on solid waste by recounting the waste reduction scheme used in Switzerland. In a nutshell, it involves making residents pay a per-bag charge to have their garbage hauled away. The results are that people make a serious effort to reduce the amount of garbage they produce and that the costs of providing trash service are imputed to users according to how much garbage they actually produce. It is a beautiful example of how prices act as signals to influence behavior.

It's so beautiful, in fact, that I wonder why we don't take advantage of price signaling more often. Consider, for instance, all the cities that are experiencing water shortages. Typically, water is provided as a public utility with prices set by local government. If the local government can't provide enough of it, why not charge more? Ideally they would set the marginal cost of a gallon of water at whatever level that would allow them to provide adequate water infrastructure. You could mitigate the effect on the poor by subsidizing usage up to some reasonable level, but after that everybody pays the actual cost for the water they use. The net effect should be that people with large lawns or otherwise wasteful habits would either cut back, or they would fund the construction of greater capacity. Either way, the problem would be solved, and local governments would not be in the odd position of begging people not to buy the product that government itself is supplying.

Similar arguments apply to other utilities that are stretched for capacity. By having people pay for the actual costs of providing those utilities we could fund upgrades and encourage conservation all at the same time. It, too, would be a beautiful thing.

The Onion News Network

The Onion takes on voters' number-one issue this election campaign, and it's about time, too. (Not work-safe, but if you're at work you shouldn't be reading blogs anyhow. Get back to work you slacker!)

Prediction Markets This Morning

I was feeling optimistic for the first time in a while about Senator Obama's chances for the Democratic party nomination, so I headed over to Intrade to see what the prediction markets were saying. I was a little surprised when I saw the following prices:

1. Hillary Clinton as Democratic nominee: 29.9
2. Hillary Clinton as General Election Winner: 21.5

This means that the Intrade market thinks that Clinton has a 29.9% chance to secure the Democratic Party nomination and a 21.5% chance to win the election. To see why these numbers are surprising, consider the following equation:

P(2) = P(2 | 1) P(1) + P(2|~1) P(~1)

That is, the probability of Clinton being elected is equal to the conditional probability of her winning in the event that she gets the nomination plus the conditional probability of her winning in the event that she doesn't. Since we know that she almost certainly can't win the election without getting the nomination, we know everything in the equation except for P(2|1). If we plug in the numbers we have from Intrade and solve, we find that the market's estimation of Clinton's chances of winning the election if she gets the nomination is 0.215 ÷ 0.299, or about 72%.

This seems amazingly high to me, in light of the fact that Clinton has not had a commanding lead in head-to-head polls. Moreover, McCain is trading at about 32% to win the general election, which suggests that one or both of them are overvalued (since 32% + 72% = 104%).

In practical terms this suggests that there is an opportunity for arbitrage in these markets. If a market were showing 32% and 72% for two mutually exclusive outcomes, for instance, you could bet against both of them for $96 and be guaranteed of winning $100, for a risk-free gain of $4. In practice this never happens because traders quickly recognize such absurdities and arbitrage them away. Unfortunately, I can't find a similarly sure-fire strategy for hedging irrational conditional probabilities. There are some strategies with positive expectation values, to be sure, but all of them have some scenarios in which they generate a loss (unlike the case above). This could mean one of (at least) two things:

1. I haven't looked hard enough (entirely possible, since I have a lot of other stuff to do).
2. I've botched the analysis (wouldn't be the first time).
   
3. Prediction markets can support irrational values for conditional probabilities implied by related (but independently traded) claims.

Thoughts?

I Still Haven't Found What I'm Looking For

Pulling together my last post took a lot longer than it should have. Not that I spent a tremendous amount of time thinking about what to say; even a cursory reading should give the lie to that theory. No, it took a long time because I had a miserable time finding that infernal article on the satisfaction poll. There is no reason why this sort of task should take so long. It is a relatively simple and well-posed question. I'm looking for "that article I read a while back that contrasted poll results with widespread concern about the economy."

The problem is this: even after all this time, search technology still sucks. I couldn't remember exactly who wrote the article or how long ago, but I was able to capture the concept of "an article I read" by searching within Google Reader. Still, searches within that fairly limited set turned up a whole lot of nothing. The ultimate cause of the failure seems to have been that Professor Roberts was talking not about people's "concern" or "worry" about the economy, but rather their "alarm" over the subject. I doubt that I would ever have thought of that. I finally found it by scanning through my shared items (which you can also sample in one of our sidebar widgets, by the way) by hand.

This absurd state of affairs persists every time I have to search, whether on the internet or on my local disk. If I can remember a few key words, or better yet a complete phrase, I'll do all right, but if all I can remember is the gist of the piece, or a concept, it's pretty hopeless.

I'll be the first to concede that this is a fiendishly difficult problem. I certainly don't have any promising ideas, or I wouldn't be wasting my time telling our entire readership what they both already know: it's hard to find anything useful on the internet. And as excited as I am about getting specially targeted ads, just for me to ignore when I read my email, it just doesn't get at the fundamental problem: the "Information Superhighway" is really more like a trackless desert.

I Read the News Today, Oh Boy

I noticed in the Washington Post today that pessimism about the economy is at its highest in 17 years. However, I can't help wondering how much of this sentiment reflects real weakness in the economy and how much is a reaction to the news media's endless predictions of DOOM! If you tell people ghost stories for long enough, eventually they'll get scared, and we've been telling some wicked ghost stories.

Every day we're served up a feast of statistics cataloging the latest terrifying trends. It's messing up the stock market, doncha know, and politicians tell us we need stimulus (and change!), and we need it fast, lest the DOOM! overtake us. Perversely, it seems the best way to get economic news with some perspective is to include the word "doom" in your search terms. Apparently professional doomsayers don't actually like to use the d-word. Go fig.

Meanwhile, last month I found this Gallup Poll on personal satisfaction in an article on Cafe Hayek. How to reconcile pervasive pessimism with general contentment? Apparently, people are pretty satisfied with their own lives, but they figure, what with all that DOOM! going around, that everybody else must be having a pretty rough go of it.

Siegel on the Stars and Bars

My good friend Mike Siegel takes on the Confederate Flag in South Carolina

Mike makes two observations:

(1) Even if the Civil War wasn’t “about” slavery, the issue was so entrenched with the war, the distinction is academic. Without slavery, there would have been no war.

(2) It doesn’t matter if blacks’ offense at the Confederate flag is rational or not. The flag is supposed to represent all the people of the state. If some fraction finds the flag offensive — whether their offense is reasonable or not — it should be changed.

It's pretty hard to argue that the Civil War wasn't about slavery, especially in South Carolina. Consider the following snippet from South Carolina's Articles of Secession:

[p17]
The Constitution of the United States, in its fourth Article, provides as follows:

[p18]
"No person held to service or labor in one State, under the laws thereof, escaping into another, shall, in consequence of any law or regulation therein, be discharged from such service or labor, but shall be delivered up, on claim of the party to whom such service or labor may be due."

[p19]
This stipulation was so material to the compact, that without it that compact would not have been made. The greater number of the contracting parties held slaves, and they had previously evinced their estimate of the value of such a stipulation by making it a condition in the Ordinance for the government of the territory ceded by Virginia, which now composes the States north of the Ohio River.

This is the first substantive issue raised in the document, and it recurs throughout. To me, that says that it was the most important issue on their minds.

On the other hand, I don't think that the display of the confederate flag today is about slavery or even racism. I think it stems more from the fact that all people, regardless of their station in life, want to believe that they are descended from distinguished and honorable forebears. I expect there is no history so infamous that the descendants of the perpetrators will not try to whitewash it, or failing that suppress it.

I'm generally sympathetic to this impulse. It seems unjust to hold people responsible for events in which they had no say. However, distorting the historical record is the wrong way to deal with the problem. The right way involves a frank admission of what happened in the past, a recognition that we are not our ancestors, and a resolve that we will be better than they were. That, however, is a lot of verbiage, so maybe we need a name for the concept that is a little punchier, something like "Truth and Reconciliation". It has kind of a ring to it.

That said, I do have to object to the "whether they are reasonable are not" comment. Surely what we mean by an "unreasonable" objection is that it should not be heeded. If not, then I wonder, what exactly is the difference between a reasonable and an unreasonable objection? Furthermore, rejecting any standard of reasonableness when "some fraction of the population" objects to something seems like bad policy. Surely there exists a fraction that is too small or an objection that is too wacky to merit serious consideration. The point is that that's not the case here. Trying to weasel on whether or not the objections are reasonable only weakens the argument.

Seven. Billion. Dollars.

Hold that number in your mind for a minute. Try to visualize it as, say, a stack of $100 bills (apparently about 7.5 km, in case you were wondering).

Now, there's this bank in France, see. And the bank employed this dude, you see. He was about 30 years old, and for some reason I imagine him having a goatee, but I confess that's just my own embellishment. So, you'll never guess what this dude did. Get this, he lost over $7 billion for his employer. Whoops. How does a 30-year old goatee-guy get hold of $7 billion without somebody, you know, asking him what he plans to do with it. I can't even get a measly $10k for new research equipment without navigating a labyrinth of forms and approvals, and I don't even have a goatee.

Sometimes You Even Need a Weatherman to Know Which Way the Wind Doesn't Blow

I'm not a big fan of January. It's cold, the sun goes down before I leave work, it's cold, there's salt all over the roads, and most of all, it's really, really cold. The one good thing about January, however, is that organizations like the American Astronomical Society and the American Meteorological Society hold their annual meetings, and for a brief time science gets to be in the news without being pressed into service as a foot soldier for politics.

This week's AMS meeting saw the publication of a study indicating that warmer oceans could reduce the number and intensity of hurricanes striking the US. This result is contrary to the conventional wisdom that warmer sea surface temperatures (SSTs) will result in more and stronger hurricanes. The culprit, it seems, is wind shear. Wind shear disrupts tropical cyclones, and the study finds that higher SSTs produce more shear; thus, fewer cyclones. One particularly interesting feature of this study is that it is based on observational data, rather than on climate model calculations.

If this study is borne out, then it will add an interesting new dimension to the climate debate. In practice it is unlikely that any climate change will be unambiguously good or bad; rather, there will probably be some who are helped and some who are harmed. This, then, is where the future of climate research lies: not in pointless debates over whether or not climate change is happening, but in serious study about the likely effects, for good or ill, of the change that is always happening.

We're back

It's amazing how much catching up there is to do after a measly two weeks away visiting the family. I finally managed to slap together a post tonight, and I've got a couple more things I want to write about when I have time; I think Jennifer does too.

Until then, um, well, Happy New Year?

The Daily Show - Wait and Switch

The Daily Show takes on lobbyists. Apparently there is a law afoot (for now, still just a bill) that would prohibit lobbyists from hiring people to wait in line for front-row seats at meetings of committee meetings and the like. My question: who wins and who loses if this bill passes?

First, let's set aside the notion, compelling though it may be, that lobbyists are anthropomorphic pond scum bent on buying out our government. There are good causes, and there are bad causes, all of which have lobbyists. For example, I once met a lobbyist for the National Science Foundation. I presume we can all agree that we're in no danger of the government selling out to… the government.

In fact, consider this: there are 300 million people living in this country. With only 535 members of the two houses of Congress, that's roughly 600,000 apiece. If a legislator spends all day, every day, 365 days a year talking to citizens, never stopping to sleep, that would give us each about 50 seconds a year to make our concerns known--to just one member out of 535. Clearly, we can't all go up to Capitol Hill and make our concerns known. What we can do, however, is to get together with a bunch of like-minded people and hire a spokesman to go up to Capitol Hill for us and tell our concerns to as many Congresspeople as will listen. That is, we could hire a lobbyist. In this sense lobbyists perform a valuable service. Without them, only a select few would get to express their views to the Congress, and I have a hunch that it wouldn't be you and me.

It's not a perfect system, I concede. People with more money can hire more and better lobbyists. Some lobbyists engage in questionable practices, if not out-and-out bribery; however, sadly, it's the best we've got.

But, we were talking about the effects of the new (proposed) law. It turns out that you have to wait quite a long time to get into these meetings where you can get on with educating legislators, expressing concerns, and whatnot. And it turns out that good lobbyists are in demand, so they command shockingly high salaries (as anyone who has competed in the housing market in the DC area will ruefully tell you). Consequently, having them wait around in a queue for the legislators to show up is a tremendous waste of money. Better to hire a bike messenger (or even an "unemployed puppeteer") at much less cost to wait while the expensive guy does something productive (inasmuch as the deadweight losses associated with influencing government can be considered "productive" -- work with me here).

So, what happens if you can't hire cheap placeholders for the line? Well, then you have to have the actual lobbyists do it, which means that each one accomplishes a lot less in a day. Equivalently, lobbying gets a lot more expensive. Who loses from this (apart from the placeholders themselves, of course--apparently the pay is pretty good)? At the margins, every cause will consume less political lobbying, but for interest groups who can already can afford to do only a little bit, that marginal decrease translates to a huge reduction in their effectiveness at influencing policy. Conversely, well-funded interests may at the margin get fewer hours of face time with legislators, but will overall be more effective due to reduced competition from other interests.

Conclusion: Congressmen Cohen's bill, however well-intentioned it may be, will probably have the effect of concentrating influence in the best-funded special interest groups while driving niche interests out of the political process.