The visible hand in economics

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Lately, water shortages, and in particular rural droughts, have been in the news. While the farmers in many regions certainly are suffering, and there are definitely enough meaty economic issues around farmers’ current water allocations and associated issues, I want to concentrate on economic issues around water use by (mainly urban) households, and what role demand management should play.

For the most part, New Zealand has heaps of water. Yet in Wellington, where I live (for instance) sprinkler usage is currently rationed, and there is talk of an all out sprinkler ban if a big downpour doesn’t happen soon (the recent trickles are only holding things off for a while). That is because the main sources of drinking water in the region – the water catchment area in the rimutukas (near Wainui), the Hutt River near Kaitoke, and the Aquifers under the Hutt Valley, are all at about the limit of what they can give without incurring major damage, due to the recent low water flows.
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So, the Real Estate Industry of New Zealand has censured a member for advertising it’s services by citing the general level of service in the industry, which it claims has customers paying “too much” for not good enough service. Sounds like a competitive claim to me.

But not to the Real Estate Institute of New Zealand (REINZ). REINZ was set up under the auspices of the Real Estate Institute of New Zealand Act 1976, and all licensed real estate agents are required to belong to it and abide by its rules.

The REINZ is one of a class of industry bodies that has been given government recognition. In many other industries, there is no government recognition/compulsion, yet the motivation for setting up the bodies is largely the same. These industries usually have some kind of bar to entry, but it is not one that is strictly prohibitive – for instance a professional qualification may be needed (eg estate agents license, admittance to the bar to practise law). Ostensibly, the bodies regulate the behaviour of members, who ordinary people cannot fully understand or regulate themselves because of the informational difficulties (cannot tell them apart, do not understand things like lawyer-client privelige or are in a compromised position (you are at the mercy of your lawyer in the middle of a trial) etc). It is argued that it is more efficient for the body to regulate, as it is cheaper than legislation, more adaptive to community needs etc.

Sometimes, the industry bodies are formed by members to prevent government regulation – leading members set the bodies up and claim to be preventing poor conduct on behalf of the industry, to stop the government doing so, presumably because they believe that the rules will be less onerous if they write them themselves.

Where this happens and a kind of defacto-power is given to these bodies (or actual power in the case of the REINZ), problems emerge. Often hurdles to competition and industry entry are set up under the semblance of increasing standards – higher qualifications required, minimum practise times, a majority of members need to approve their power to practise. In the end, without actual and real government oversight it is almost innevitable that these bodies move to become quasi-cartels that aim to protect their members under the guise of protecting the helpless consumer. So it is that the REINZ has censured a member for seemingly only competing.

Which brings us to the question of what good it is having them. If without government oversight these bodies invariably abuse their position, why have them and not simply have the government set the rules? I personally find this compelling as an alternative to compulsory industry governed bodies. However voluntary bodies should not necessarily be treated the same, particularly where those who are non-members can be recognised by the public and accordingly treated with due care. If these ‘rebels’ prove reliable enough, there is no reason why they can’t establish their own reputation for protecting consumers etc, and set up their own bodies with their own rules in competition with the established one. If sufficient information is out there for competition to emerge, the two watch dogs will compete on keeping their members in line. The key here is that there is an ability to compete rather than a defacto cartel. On the other hand, cartels running themselves clothed as consumer interested altruistic organisations are no good, and have no place in the New Zealand economy.

Over the weekend, Australian Prime Minister John Howard said that countries who supported reducing GHG emissions must support nuclear energy. Of course the one does not presuppose the other (non-sequitur), and New Zealand politicians came back saying that it was not for New Zealand. In reaction, I note a number of ‘straw-polls’ on websites such as Stuff and NZHerald, where more than half of self-selecting participants said that they wanted nuclear power in New Zealand.

I am not against nuclear power in New Zealand if a robust economic case can be supported for its use, relative to other generation sources. This case would, of course, have to internalise the probability of a nuclear disaster multiplied by the expected costs of such a disaster, and also the real difficulties of disposing of nuclear waste. On the other hand, the emissions of alternatives (such as coal thermal generation) would need to be internalised as a negative for them in comparison to nuclear.

I support analysis that works to such a framework as being a crude but generally good way to rank alternative generation sources, taking into account all of the many pros and cons of each. Unfortunately, most New Zealanders seem to think that because the only raw materials used in generating power from nuclear is a plant and a bit of Uranium, it must be cheap in comparison to a wind farm or photovoltaic (solar) generation, let alone coal or other thermal generation sources – which in New Zealand just is not true. This was best exemplified by a column by Michael Laws in yesterdays Sunday Star Times. Besides describing George W Bush as a very smart man, it suggested that nuclear was more cost effective than wind power and geothermal power (among others), and that an oil price of $2million a barrel was needed to justify the costs of marine energy (plain wrong) and that solar is not an opportunity for future generation (actually, solar is currently non-viable, but not anywhere near as what Mr Laws suggests. In 10-15 years it will probably be a goer).

Let us get some perspective here. With current nuclear technology, the cost of nuclear generation is around twice the current cost of generation in NZ. Wind is actually much more efficient than nuclear, does not emit, generate nuclear waste, or risk catastrophe. There is some visual impairment. But the cost of this is much less than that of storing nuclear waste, or the risks of nuclear disaster. Indeed, marine would at the very least appear to be roughly as economic as nuclear for NZ (and in terms of scale is much more economic), without counting the risk of catastrophe and the costs and risks of nuclear waste disposal.

I am not against nuclear power for NZ per se, but the debate needs to be grounded in economic facts. New generation nuclear technology, probably emerging in 10-15 years may be more suitable for New Zealand than current technology. We should keep an open mind when this comes, but also not just jump on it as an easy fix and a solution to all of our problems – there are a lot of things to think about and internalise when comparing different generation options, and this should be done with care. Knee jerk opinions such as Mr Laws’, based on nothing but perception, do not represent good economic analysis.

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