Causality and Market Oriented Reforms

a small tweak in the rule of the paper river game led to

increased overall output without technological advancement or working harder

the paper river game created the incentive

for the math company to use paper efficiently

in the paper river game the aircraft company

spent less time cleaning the paper but more time making airplanes

in the paper river game

overall output increased

good institution leads to

positive change in the rule of the game leads to incentive structure leads to better economic output

what do you need for economic development?

strong and clear property rights, democracy, geography, education, market economy

“you need democracy for economic prosperity”

a causal claim

“you need democracy for economic prosperity” as a causal claim

“Democracy causes economic prosperity”

dry, hot and sunny summer weather is in a causal relationship with

ice cream and number of people in the pool

correlation does not necessarily mean causation

“Ice cream causes drowning.” vs. “Ice cream is just correlated with drowning.”

correlation

just a fancy way to say two things are associated or related

not all correlations are causations

in many cases, there might be a third factor, a real cause

smoking and depression

smoking is positively correlated with depression, “if you smoke, you will get depression”

A is correlated with B could mean:

Yes, A might have caused B

A is correlated with B could mean:

B might have caused A (reverse causation)

A is correlated with B could mean:

C caused A and B (A and B are correlated but A doesn’t cause B)

Be critical of causal claims even if

they are based on some statistics

Look for a causal link or mechanism

E.g. “How can an ice cream make people drown?” Without concrete mechanisms, it is likely just a correlation

Democracy is definitely “correlated”

with economic prosperity

Many successful emerging markets were

undemocratic when they were developing fast. Examples are China, South Korea, Taiwan, Singapore, and Hong Kong

Sometimes, economic progress

begets democracy

Deregulation and privatization

expanding the boundaries of the market

Deregulation case 1: airlines deregulation of 1978 in the U.S.

private companies were operating airlines

airlines deregulation but, federal government’s heavy regulations

Routes, Fares, Schedules, Market entry barrier

airlines deregulation was

public utility vs. business

The Airline Deregulation Act of 1978

lifted restrictions on market entry, fares, and routes

Airline Deregulation Act in a nutshell

airlines started to operate through the market mechanism, not through the state

airline deregulation act market competition introduced

New airlines formed: PeopleExpress, Presidential, New York Air, etc. They competed against established ones

positive outcomes of airline deregulation act

Price competition: Established airlines had to drop prices. Routes competition: Better routes were developed through market research. Quality of service competition

airline deregulation act overall positive outcomes

Overall efficiency; accessibility to airlines; more routes; more choices; affordability

The airline deregulation of 1978 was

a successful case of deregulation

deregulation case 2: electricity deregulation in California, why failed

manipulation of supplies and prices, poor government oversight

manipulation of supplies and prices example

"[S]ellers may have been withholding power from this market in order to drive up prices in other parallel markets."

manipulation of supplies and prices example

Demand was increasing, but companies hoarded the electricity, Released electricity when the price was jacked up

benefit of (successful) deregulation

Efficiency, Market competition is introduced so companies need to cut costs for better quality
(or better bang for the buck)

benefit of (successful) deregulation

Customers face better prices, better quality, and more choices

benefit of (successful) deregulation

new business opportunities: more profits

potential con of deregulation

Corporate malfeasance if the government does not oversee the industry carefully. Californian electricity companies’ cases

potential con of deregulation

If monopolized by private companies, the price might be higher than in regulated markets

privatization

commonly involves the transfer of the ownership of state property, commonly state-owned companies, into the hands of private individuals

examples of privatization

Transportation, electricity, roadways, water, airports, waste disposal, mail delivery, communication infrastructure, etc.

The privatization of Tokyo Metro, Japan

Japanese National Railways was privatized in 1987 and broken into six regional rail companies and one freight company, a successful case of privatization

privatization of Tokyo Metro

market competition, Increased efficiency: reduced costs and better services, They discontinued unprofitable routes and developed new profitable routes

new business models to

create profits

Japanese metro is a successful case of privatization

of public transportation

Other areas of possible privatization in many countries

Transportation, electricity, roadways, water, airports, hospitals, waste disposal, mail delivery, communication infrastructure, etc.

Privatization of prison?

it is a public service. Prisons have been high-cost in
the U.S. Maybe it can be done more efficiently by private companies. Looks like a promising
“market.”

private prisons

bidding competition among private prison services

private prisons for contractors

government pays per-inmate-day basis fees

private prisons companies assume

full responsibility for managing the day-to-day operations of a prison facility

There has been a rise of private prisons during the last two decades

with mixed results

mixed results of private prisons

Reduced costs in many states, But one paper reported that private prisons have greater recidivism among their inmates (Duwe and Clark 2013)

mixed results of private prisons

Some reported better working conditions and rewards for employees, But, more inmate misconduct, escapes, and grievances reported

private prisons mixed results

Lots of debates on whether it is right to outsource moral functions like punishment and rehabilitation to the private sector

example of electricity for deregulation

We rely on competitive markets to arrange delivery of most things. Clothing, cars, gasoline, phones, etc.

example of electricity for deregulation

If the rules are right, electricity, like any other commodity, can be arranged by the market. It
can be priced more efficiently by competitive market forces than it can be by regulators and
monopolists

example of electricity for deregulation

If profit is there, the industry will get more investments, which means more electricity will be
supplied, and its price will decrease further

concerns about deregulation electricity example

Electricity is not Q-tips and bubble gum. It’s an essential commodity that everyone needs every
day

Infrastructural industries like electricity:

Demand not elastic, Demand does not change a lot depending on the price

No substitution for electricity

Will you light a candle if you don’t have the power?

High capital entry cost

The reason why the market drives down costs is when incumbent companies are enjoying high margins, new companies are motivated to join the market too. And that means more competition and eventually lowered prices. But when the entry cost is high like electricity, you cannot expect many newcomers. And even when a newcomer is coming, it takes a long time to begin its operation

infrastructural industry features prevent the proper work of the

market mechanism. Thus, governmental regulations and operations in these industries are justified

the market mainly cares about

profits, which is its strong point. Society does not have to care if bubble gums are affordable to the general public, but it should care about electricity