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Abundance Mindset: Exploring the Super Abundance Thesis w/ Marian Tupy, Cato Institute – EP258

Post author By Alec Krishna
Post date October 16, 2024
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Marian Tupy, a senior fellow at the Cato Institute, discusses his book “Super Abundance” with Gene Tunny. Tupy argues that resources are becoming more abundant relative to global population, a concept he calls “super abundance.” He explains that human ingenuity has led to cheaper commodities over time. Tupy refutes Malthusian predictions of resource scarcity, citing examples like the Haber-Bosch process for synthetic fertilizer. He also addresses environmental concerns, emphasizing that economic growth and technological advancements can mitigate issues like ocean and air pollution and resource depletion.

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com or send a voice message via https://www.speakpipe.com/economicsexplored.

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

About this episode’s guest: Marian Tupy, Cato Institute

Marian L. Tupy is the founder and editor of HumanProgress.org, and a senior fellow at the Cato Institute’s Center for Global Liberty and Prosperity.

He is the co-author of the Simon Abundance Index, Superabundance: The Story of Population Growth, Innovation, and Human Flourishing on an Infinitely Bountiful Planet (2022) and Ten Global Trends Every Smart Person Should Know: And Many Others You Will Find Interesting (2020).

His articles have been published in the Financial Times, the Washington Post, the Los Angeles Times, the Wall Street Journal, The Atlantic, Newsweek, the U.K. Spectator, Foreign Policy, and various other outlets both in the United States and overseas. He has appeared on BBC, CNN, CNBC, MSNBC, Fox News, Fox Business, and other channels.

Tupy received his BA in international relations and classics from the University of the Witwatersrand in Johannesburg, South Africa, and his PhD in international relations from the University of St. Andrews in the United Kingdom.

Source: https://www.cato.org/people/marian-l-tupy

Timestamps for EP258

Introduction and Overview of the Podcast (0:00)
Explaining the Concept of Super Abundance (2:30)
Methodology and Stylized Facts (6:48)
Julian Simon and the Bet with Paul Ehrlich (9:46)
Future Prospects and Human Ingenuity (12:45)
Environmental Concerns and Degrowth (22:59)
Population Growth and Resource Use (33:11)
Final Thoughts and Future Prospects (34:08)

Takeaways

Tupy argues that human ingenuity continuously expands the resource base, making resources more abundant even as populations grow.
The concept of “time prices” shows that resources are becoming cheaper relative to wages, supporting the thesis of super abundance.
The famous Simon-Ehrlich bet demonstrates that commodities became cheaper over time, disproving doomsday predictions about resource depletion.
Technological advancements, such as desalination and agricultural productivity, are key to sustaining resource abundance.
Economic prosperity and technological innovation are essential for environmental protection.

Links relevant to the conversation

Marian’s book Superabundance:

https://www.amazon.com.au/Superabundance-Population-Growth-Innovation-Flourishing/dp/1952223393

Simon–Ehrlich wager Wikipedia entry:

https://en.wikipedia.org/wiki/Simon%E2%80%93Ehrlich_wager

Regarding the question, “Is it true that the majority of plastic in the oceans comes from Asia and Africa?” see:

https://www.perplexity.ai/search/is-it-true-that-the-majority-o-3aYOSMTyT6m9CcULDm7Iug

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Promo code: 10EXPLORED

Transcript: Abundance Mindset: Exploring the Super Abundance Thesis w/ Marian Tupy, Cato Institute – EP258

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Marian Tupy 00:03

The air in western rich countries is now cleaner than it has been since before industrialization. If you look at the Yale index of environmental protection and then you compare it with GDP per capita. If you combine these two statistics, what it shows you is a very strong correlation between income per capita and Environment Protection.

Gene Tunny 00:35

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show. Today, I have a fascinating conversation with Marian TUPE, senior fellow at the Cato Institute, and co author of the book super abundance. Marian dives into an optimistic view of the future, highlighting how human ingenuity has consistently overcome perceived limits on our resources, even with a growing global population, we delve into the famous Simon Ehrlich wager with Marian, explaining how exploration and innovation mean that we continue to defy Malthusian predictions of decline. Toward the end of the episode, we shift gears and discuss migration, exploring its impacts on housing affordability, public service delivery and social cohesion. Thanks to Lumo coffee for sponsoring this episode. This grade one organic specialty coffee from the highlands of Peru is jam packed full of healthy antioxidants. There’s a 10% discount for economics explored. Listeners. Details are in the show notes. Okay? Without further ado, let’s dive into the episode. I hope you enjoy it. Marianne TUPE, welcome to the program.

Marian Tupy 02:14

Thank you very much for having me.

Gene Tunny 02:17

It’s excellent to have you on so you’ve written a really interesting book called super abundance, and it’s on an issue that I think about a lot, which is on the Limits to Growth, whether there are limits to growth, whether we need to move to something called degrowth, which is becoming popular in certain circles. To begin with. Marion, could you tell us a bit about what is this concept of super abundance that you have? Please?

Marian Tupy 02:49

Well, super abundance is not just name of the book. There it is. It is also a it’s got a technical term, which is to say, when resources are becoming abundant at a higher rate than population growth. Because, why? Why bother about the link between population growth and and resources? Because, because, when people think about population growth, they usually think that there is sort of a fixed pie of resources, and the more people you have, the fewer resources you end up with. So you know, if you have 10 people at dinner, you know you have so much food to go around. If you bring 100 people to dinner, everybody has to do with a small plate, because, you know, more people are going to exalt resources more quickly. But of course, humanity is different. Humanity can grow the size of the pie. Humanity can bring additional resources to dinner, so that even 100 people can get fed, even 1000 people can get fed, or, for that matter, 10 billion people can get fed. But anyway, the point is that for the longest time, people were worried that as population increases, we will run out of resources. And in fact, what we found was that resources are becoming cheaper. And in fact, abundance of resources increasing at a faster pace than population. That’s what we call super abundance,

Gene Tunny 04:05

right? Okay, so what sort of resources do you mean are becoming cheaper? This is the majority of commodities you studied. Could you tell us a bit more about that please?

Marian Tupy 04:15

Yeah, I guess it’s useful to actually start by defining resource, if we can. You know, people talk a lot about natural resources, but I think that’s a bit confused. I think that you should really start by thinking about natural endowment, or you should talk about raw materials. You know, raw materials such as whatever minerals in the crust of the earth, metals, things like that. And when you apply human intelligence to raw materials, you end up with a resource. So take just soil, you know, it’s a it’s a raw material. It’s it’s that. But when you apply human ingenuity, such as, you know, using it in order to grow crops. Then the resource becomes wheat, right? And so in the book, we look at hundreds of different types of commodities, really, which is to say food, fuel, minerals, metals, and even, actually some services. But that’s that we can talk about it later. But the bottom line is that we look at, we could look at traded commodities, anything from uranium to zinc to iron to wheat and barley and oil and natural gas. Basically, you know, we start with the big 50, which are, which are measured, or rather, which are, which are being tracked by the IMF and the World Bank, and then we expand it going back 170 years. But yes, so, so there are these raw materials, and when you apply human intelligence to them, you get resources. That’s essentially how we define resource.

Gene Tunny 05:54

Okay, so have you established some stylized facts about the prices of these resources? Is that the main point of the book, and can you just go over that again? I just want to make sure I understand is, are you saying there’s a general tendency for them to become cheaper, or is it on average, they’re becoming less expensive, or is it the majority? Or is it a just one, a bit bit more to understand. Is it? I mean, are you trying to are you proclaiming a general law of super abundance? I just want to understand what, what your thesis is exactly.

Marian Tupy 06:27

Yeah. So usually, when people look at resources, they look at a real price of resources, meaning, you take a price of resource in, say, 1900 you compare it to a price of resource in 2000 you discounted for inflation, and that tells you whether something has gotten more or less expensive. Now, we were dissatisfied with this kind of analysis for a simple reason. We wanted to take the resources back in time as much as possible, and we wanted to include as many countries as possible. Now, when you start looking at resource abundance from a global perspective and over hundreds of years, you quickly run into a problem, which is, you know what happens to exchange rates? You know what happens to inflation rates? What if you don’t have inflation rates in 1850, or 1900 you know, how do you deal with it? And so we came up with a different methodology, which is called time prices. Basically, what we look at is nominal wage per hour, and we look at nominal price of a resource. So let’s say, let’s, let’s give a stylized example, a pound of beef costs you. Let’s say that you are making $20 an hour in the United States, and a pound of beef costs $20 Okay, so a pound of beef will cost you an hour of later, but if in 50 years time, the price of beef may go up to $40 an hour, but you are now making $80 an hour, then now you have two pounds of B for an hour of work. So everything we do, we do in terms of time cost or time price, it’s really the nominal price of something relative to nominal wage that you are making at the time of the purchase. And the beauty behind time prices is that inflation doesn’t matter because you are only dealing with nominal prices and nominal wages. So it doesn’t really matter whether the inflation is 10% or 1,000,000% over the intervening period, because you’re looking only at nominal prices, then it doesn’t really matter. And also, an hour of work is the same in Australia as in the United States, as in China. So that way you can basically make these comparisons between different countries over different periods of time, in in a in an intellectually honest and methodology methodologically sound way. Did that make that make any sense? Yeah,

Gene Tunny 08:56

yeah, that that does make sense. Understand what you’re what you’re doing there. I mean, I think the general point you make is a is a good one. And I mean, you go back long enough. I mean, you go back to the I mean, I remember when I was in school and we were hearing about the limits of growth and all of that, and and then that was, you know, before we had the rise of China and India and, you know, massive expansion of global trade world, GDP. More recently, we’ve had peak oil. That was prior to the financial crisis, that that proved not to be really something that we’re at yet, or at least doesn’t, we don’t appear to be at it. And so, yeah, I guess I’m very sympathetic to the argument about about super abundance. Can I ask? Is this a continuation of the work that Julian Simon has done? Is this because I see on your CV or your bio, you’re part of something called the Simon. Project. Could you tell us what that is and whether this is continuing his work? Yes, yes,

Marian Tupy 10:05

yes, absolutely. So. Julian was a, obviously, a huge inspiration, but so he was actually a senior fellow at Cato before I joined the Cato Institute. He died in 1998 but he was senior fellow there, so we never met. But what I wanted to do back in 2017 is to look at his work and update it, you know, to the present. And I found that his bet with with Ehrlich, he would still win. In other words, commodities continued to get cheaper, at least the ones that Julian looked at, but I was using the old methodology. I was just looking at real prices of commodities. And my co author, Gail Pooley, got in touch with me, and he says, well, let’s turn them into time prices. Let’s look, let’s look at the price of commodities relative to wages, how much more you can buy for an hour of work than your ancestors could. And then we published a paper in 2018 with this new methodology. And indeed we found, once again, that Julian was right. And then we decided to turn into a book which goes back to 1850 and basically what we find is that commodities, relative to wages, are constantly getting cheaper. If it’s a long enough period, everything is getting cheaper, including gold. The only thing that continues to become more and more expensive over the centuries is human labor, essentially the human input. And we might as well talk about Simon and Ehrlich wager, right? Yes, yes, yes, yeah, please. So Julian Simon, since we mentioned him, he was an economist at the University of Maryland, here in the United States, and he was basically looking at the data. And he was noticing that things were getting cheaper, even though population was expanding whilst over in California, at Stanford University, Paul Ehrlich, who is still alive, he’s 93 years old now, was predicting doom and gloom. He was basically saying, you know, as population increases, we are going to run out of everything, and there’s going to be mass famine. And, you know, starvation of hundreds of millions of people. And so they had a bet between 1980 and 1990 on the price of five commodities, nickel, tungsten, tin, chromium and copper. And basically, they made a futures contract for $1,000 and when the period came to an end in 1990 Ehrlich had to send a check for $576 to Simon, because commodities became 36% cheaper. Had Simon implemented our methodology, he would have won even bigger. He would have won by about 40, 42% rather than 36

Gene Tunny 12:45

very good. Yes, yeah, that’s, I’ll put a link in the show notes to that, that wager. Yep, I remember that because I think that was still very when I, when I first started learning economics, I think that wager had just, it had just been decided, and yes, it Yeah, certainly in Simon’s favor. But yep, I mean in terms of this idea of the limits to growth, or the, you know, how many earths we need to support ourselves, which is something I think you and your co author, Gail, were were reacting against, because in the blurb for your book, it goes generations of people have been taught that population growth makes resources scarcer in 2021 for example, one widely publicized report argue the world’s rapidly growing population is consuming the planet’s natural resources at an alarming rate. The world currently needs 1.6 Earths to satisfy the demand for natural resources, a figure that could rise to two planets by 2030 now what I’m interested in, Marion, have you thought about like your analysis? You’ve looked at it over. Was it 150 years or a couple 100 years? 170 170 What are you by the way,

Marian Tupy 14:05

it’s 170 because that’s, that’s all the data that we could get. Yeah. Gotcha, yeah.

Gene Tunny 14:09

What are your thoughts on where we’re going? Because we’re still, I mean, up until, say, 2070 or 2080 we’re still going to have growing global population. We still have rising living standards in well, we’ve got convergence catch up in China, India, other emerging economies. Do you think this super abundance thesis will hold despite this continuing economic growth? Or do you have any? Do you have any concerns? How confident are you in the this super abundance hypothesis?

Marian Tupy 14:47

I’m 100% confident I’m not investing in commodities, and I wouldn’t, unless you know I think that there would be a good hedge against inflation. But. No, I don’t think that commodities are going to, you know that they are, that they are going to somehow explode in price. Now, before I answer that question, let me make a couple of points. So the world’s population is going to peak at about 18, sorry, 2065 maybe 2017 and it’s going to start declining. But the question over population growth and resources that’s remains relevant, even if population plateaus and even starts declining, because the expectation is that as we become richer, we are going to be using more resources. We are going to be consuming more resources. So it’s very important to understand the exact relationship between population growth and resource abundance. But but my prediction is that even if that, even if population continues to grow, or even if plateaus, or even if we just start consuming much more resources than we currently do, we are still going to have more abundant resource based and then we currently do for a simple reason that human ingenuity just doesn’t stop. I mean, human ingenuity depends on population growth. So the more people you have, the more ideas you are actually going to have in order to increase your resource base, right? So as I said, you know, in the olden days, maybe you could produce 40 bushels of corn or wheat per acre of land. Now you have 200 bushels of wheat per acre of land. That’s human ingenuity that is applying scientific methods, GMOs, genetic modified organisms, that is applying modern fertilizer, modern watering techniques and whatever else, and pesticides and fungicides in order to produce more food. That’s, that’s, that’s really, that’s all comes from the human mind, right? And so the more people you have, the the more opportunity you have to come up with new ideas. So what are the new ideas? One we can increase the supply of resources simply by discovering new fields, or, for example, oil, gas or whatever else, much of them continues to be unexploited, and certainly on much of it hasn’t even been properly, properly. You know, checked for for resources, we don’t really know how much oil or gas we have, how much iron we have, how much, how much other metals or minerals we have, because we have only explored a tiny percentage of the world. Secondly, we can of the planet. Secondly, of course, we can increase our technology so it enables us to get to resources which were previously uneconomically expensive. So you know, many of the oil fields and gas fields which we are exploring and exploiting here in the United States were prohibitively expensive under the old drilling methods, but are perfectly economical based on fracking, right? Recycling is is another way of doing it. Dematerialization is a great way of doing it. You know, if we can, if we can, if we can do more with less meaning. 20 years ago, you walked into any, any hotel room and it would have a thick copper cable running from the wall to your computer. That’s the only way that you could get on the internet. Now it’s been completely dematerialized. We can do that functionality without actually using any materials whatsoever. We can dematerialize our car fleet. For example, if we can have cars which are powered by AI, cars are 90% of the time cars are not being used. So basically, we could get rid of 90% of cars, including all the metal and plastic that goes into them, and simply have autonomous vehicles picking us up when we need it. So that’s another way of going around the problem of material use. So efficiencies, you know, we can have relative as well as absolute efficiency. So, you know, a can of Coke or water or whatever else uses much less materials than it used to in the past. But also when, when, when you look at very sophisticated economies such as the United States and the United Kingdom, what you observe is that the total, the absolute amount of resources they use every year in order to produce GDP, is actually decreased things. So there has been a certain level of decoupling between resource use and economic growth. So that’s that’s also important. So there are many different ways in which you can actually increase your resource base, but it all requires innovations. It requires new ideas that are born in human mind.

Gene Tunny 19:46

Yep, gotcha. And I mean, that requires that we have a, you know, a good education system, too. And I mean, well, that’s another that’s an issue for another, another podcast. But I was,

Marian Tupy 19:55

in case, I was, I was going into too many details. Let me put it this way. Yeah. Today’s population is 8 billion people. Half of us would be dead if it if it wasn’t for artificial synthetic fertilizer. Our ancestors, 200 years ago, used horse manure, and they used even human excrement. They would compost and do all sorts of other things in order to produce very little yield in agriculture today, what we are using is ammonia, which is essentially a compound made from natural gas. We are using natural gas in order to create artificial synthetic fertilizer, which enables our crops to grow very fast and very big and and who would have thought that you can use natural gas in order to fertilize our crops? But haber bosch discovered this process in the early 20th century, and ever since then, half of humanity has depended on this kind of fertilizer in order to feed humanity. But it was born in human mind.

Gene Tunny 20:56

Oh, exactly. And that’s, that’s one of the points that I think Ed Conway makes, in his book, material world, a substantial story of our past and future, which I’d recommend if you’re listening. And do you want to learn more about what’s been happening with our use of resources and materials, that that book’s absolutely fascinating. And, I mean, I’m sure yours will go along that. I mean, you’ve, you’ve got some great reviews already on on your book, which is terribly just on the I’d like to talk about this issue of exploration, because, yep, that’s, that’s one of the ways that we get around this, this constraint, because of it as if things do become scarcer, then the price increases, and that sends a signal that makes it economic to mine less, you know, deposits that are of that are harder to get to. It makes it economic, or it can support exploration activity. Have you crunched the numbers on to what extent is your super abundant story being driven by, you know greater discoveries. You know exploration, finding more reserves of resources. To what extent is it driven by increases in the efficiency of extraction? Or you haven’t, no okay, because

Marian Tupy 22:19

we didn’t break it down like that. And I don’t even know if anybody has done that, but, but the main point of the book is is things are getting cheaper because of human innovation.

Gene Tunny 22:32

Yeah, yeah. And so the other option is that it could be because of general productivity, the productivity more broadly, because we’re becoming wealth, more productive, wealthier,

Marian Tupy 22:44

sure, but of course, but productivity is just another word for innovation, right?

Gene Tunny 22:49

Yeah, yeah, yeah, absolutely, yep. I think it’s a valid hypothesis. Before we sort of wrap up, I just want to ask whether you think there are other constraints on growth like this is something that I’m confronted with. You know, I generally think, I think this whole degrowth argument, I’m not a fan of it. I’ve, I’ve argued against it in various places, so I’m not a supporter of it. What the degrowth advocates will argue is that we’re reaching these planetary boundaries. I mean, one, we have concerns about climate change, and that’s in their view, that’s leading to, well, there’s the increase in temperatures, there’s the concerns about heat stress and whether humans can cope with that. There’s concerns about, I mean, all of the concerns about what it means for agriculture and and also natural disasters. So there’s that, there’s also, there are concerns about ecological collapse, in some cases. To Have you thought about those issues at all. Marion, are you concerned? Do you see any limits to growth coming from from other issues, some other environmental issues?

Marian Tupy 24:00

Yes, so I try to think about it as much as I can, as time permits. But okay, so we need to distinguish between what I would call the primitive version of degrowth, which is the claim that we are going to run out of oil, or we are going to run out of pound or something like that, and then a more sophisticated version of degrowth, or the degrowth criticism, which would be something like, we are going to poison our oceans, we are going to run out of the biosphere. We are going to kill all the animals, etc, etc. Now, this is a huge subject, and I’m very happy to come on to your program in the future, but, but let’s, let’s take as many as we can within a within a reasonable time window. Let’s think about plastics in the ocean, and let’s think about pollution of the oceans. 90% 95% of all plastic in the oceans comes from eight rivers, all of them are in. Asia and in Africa. Two are in Africa. Six of them are in Asia. What does that tell us? It tells us that when a society is rich, such as Europe, you know, Australia, North America, people are so rich that they insist on living in a clean environment and being protect and protecting their environment, which is why stuff doesn’t plastic and other poisons do not emerge from our rivers into the oceans. It’s the poor countries that do that. So the answer to having clean oceans without plastic is actually economic growth and prosperity, which will allow Asia and Africa to implement the kind of environmental policies that we have in order to prevent poison from running into the oceans. Let’s look at a second subject, which could be something like the biosphere. So I’m an environmentalist as much as you are, and probably anybody else, in a sense that we like clean environment, we like animals, we like plants. We don’t want to destroy the Earth. I love nature. So now what is, what is the best way to protect the biosphere? What is the best way to ensure that there is plenty of acreage in the world where animals can thrive. Well, the best way to do it is to have hyper efficient agriculture so that we can produce more food on fewer and fewer acres of land. If 8 billion people in the world today lived on the same amount of land as our hunter gathering ancestors, we wouldn’t need one planet, we would need 10 planets, right? But because we can produce a lot of food on acre of land, and then we can produce twice as much food in 50 years, and maybe another twice as much in another 50 years, that should enable us to feed more people on less and less land, which means that we can return land back to animals. Jesse asubel from Rockefeller University once calculated that if the world’s farmer, the average world’s farmer, became as productive as the American farmer, we could return the land mass the size of India, back to nature. So it’s all about agricultural productivity, right? The more we can make our land, the better we are water. There are concerns over running out of out of fresh water. I’m not concerned because I know that this Desalination is absurdly cheap. Israel now recycles 98% of its water and it desalinates the rest. The ideal version of desalination is to combine desalination with solar or wind power. And in fact, Israel not just supplies its own water, but it actually supplies palestines and Egypt and Jordan with fresh water out of desalination, recycling. What else is there? Fresh air. Sorry, clean air. So this is something that obviously requires global action, because, you know, there are no property rights in in the atmosphere. However, I would like to point out that the air in western rich countries is now cleaner than it has been since before industrialization. So the particulate map in the air has been declining. And in fact, if you look at the Yale, the Yale index of environmental protection, and then you compare it with GDP per capita, if you combine these two statistics, what it shows you is a very strong correlation between income per capita and environmental protection. So we talked about, you know, animals and plants preserving biosphere, but by returning more land to nature, we are talking about our oceans. Now, another thing which we could talk about is overfishing. This is something that a lot of people are concerned with, and here the answer, of course, rests in aquaculture. Already, 50% of all the fish that are being consumed around the world are being grown for the specific purpose of being eaten by essentially seafood farmers. Right? These are not fish from the wild, and obviously what we want to do is to get to 100% as soon as possible. So there are all of these different ways in which we are supposed to bump against planetary, planetary boundaries, but, but when you look at again human ingenuity and the way that we’ve been able to tackle such things as, I don’t know, desalination or aquaculture, agricultural production, it. Gives you hope that we’ll be able to do this in the future. Just more of it.

Gene Tunny 30:06

Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny 30:41

now back to the show. That figure you gave about plastics in the ocean that was striking. 95% of the plastics in the ocean come from eight rivers in Asia and Africa. I mean that that’s that’s extraordinary. I’ll have to look that up, because that’s a I know a lot of people who’d be, who’d be fascinated by that, and I know my the producer of my podcast, Josh, has asked me about that Pacific Island garbage patch in the past, and has said I should cover it on the show. So it’s, it’s interesting to know what the source of those plastics, predominantly is. Do you remember where that where that comes from is that one of Bjorn Lomborg figures. Would you know this?

Marian Tupy 31:29

I can’t remember, and I sure as hell hope that I’m I’m 90 How about this? I’m 95% right that it’s 95% of plastics out of plausible. We can

Gene Tunny 31:40

go, it sounds plausible, because I imagine that, yeah, because when you think about it, yeah, be we, like in Brisbane here, we’ve done a lot of work cleaning up the Brisbane River, so it looks a lot better than it did 20 or 30 years ago. So, I mean, it’s, it’s plausible. I mean, I know that, yeah, a lot of the environmental, uh, problems we see that, yeah, they they see more acute in those in those emerging economies. So anyway, I’ll have a I’ll have a look for that. I agree with your, your general point. The other thing that your remarks, what had brought, what came to mind in the 2000s here, we had a thing called the Millennium drought in Australia, and there were concerns that, oh, it’s never going to rain again, or we’re going to have much lower rainfall than ever. And you know that people were linking this to climate change. And then we had, and then we had record, or near record rainfall, or whatever it was, in 20, 1011, it just kept it just rained for weeks, and all the cashflows got soaked, and there’s massive flood. So Brisbane flooded. I was caught in the flood at Toowong, and, yeah, but prior to that, we were worried about water security, and we went on a recycle we built a recycle water plant, then we built a decal plant, a desalination plant at Tugan for I don’t know whether it was a couple of billion, it was a lot of money, and we, we hardly ever use it. We use it occasionally, for brief periods. It’s, it’s, it’s not, it wasn’t really required. It just goes to show you, if you, if you make your decisions based on some imagined catastrophe in the future, you can end up making some, some really bad, really bad decisions. So that was a you

Marian Tupy 33:27

I remember distinctly, I was skiing in Whistler in Canada in 2014 and, you know, the the old dogs who’ve been skiing there for, for for decades, were absolutely certain that 2014 was the last year in which it was going to snow. Because, you know, the year before there was more snow, and the year before there was more snow, and now it seemed like there was ever less snow up there. But these things are not linear. And of course, all the predictions about, you know, snow free winters, remember those from 20 years ago, all gone broad. You know, Arctic, ice free, Arctic that never happened. So, you know, the earth is warming. Planet is changing. Climate change is not a myth. It is not a lie. It is it is really happening, but figuring out what exactly is happening the exact consequences of climate change on the planet, that is much more complicated, and we certainly have time. Look, I’m not suggesting this is not a problem. What I’m saying is that the notion that we have six years left, or when, when Prince Charles was still Prince Charles, before King Charles, he said something like, you know, we have 48 months to fix the world, or something ridiculous. The point is that. The point is that a lot of people have been burned by making predictions about how the world is going to end. And we it’s not that we have five years or 10 years. We have decades in which. Need to think about maybe burning less fossil fuels, maybe having more nuclear, maybe having fusion energy, but we have time to adjust. And, you know, the world is not running out of anything, and we just have to be, you know, we just have to apply our ingenuity to fixing our problems. We have. We have fixed tremendous problems before. Let’s remember that life expectancy around the world, until recently, was 35 years. 50% of babies before the age of 15 died due to natural causes, and famines were omnipresent. 10s of millions of people died every year due to famine. We have solved a lot of problems, and there is no reason to think that we cannot solve them in the future. We are a very special animal. We can think. We can long term plan. We have reason, we have cooperation, we have trade. So you know that there’s there’s rational grounds for rational optimism. Absolutely,

Gene Tunny 36:02

very good. And it’s about ingenuity and relying on on free markets letting you know, providing the incentives for people to to innovate and to reap the rewards of their of their innovation. So very good. Mario Toby, anything else before we wrap up? I really enjoyed this conversation, and it’s a good start to the day. I’m in Australia, and it’s just it’s gone past 630 so it’s a really good start to the day for me having this conversation. Anything else before we wrap up?

Marian Tupy 36:36

I would just say I very much enjoyed my trip to Australia. You are the lucky country. Very beautiful. A lot of resources. Lovely people. Keep it going. I understand you are going to build some nuclear power stations. Is that true?

Gene Tunny 36:49

Possibly, I’m I think, I think they’re worth exploring. I’m skeptical about whether we will ever build them here in Australia. I think there’s too much of a an environmental movement here in Australia for us to ever build nuclear power. I could be wrong about that. It’s looking like the cost of moving towards 80% or 90% renewable energy, or whatever they want it to be, that’s just going to be too high. So we’re going to have to do something else that possibly could be nuclear. But just knowing the Australian, Australian politics of people, just how prominent the Greens movement is, I think it’ll be hard to get nuclear reactors built in Australia. But having said that, I mean, they could end up being the path of least resistance, or there is no alternative, because the alternative, at the moment, looks to be hideously expensive electricity due to this rollout of renewables and that are unreliable, we’re trying to build this Snowy Hydro. I don’t know if you’ve heard about our Snowy Hydro 2.0 project that that was initially supposed to cost. I don’t know. Maybe it was 10 billion. Now it’s blown out to 20 billion or so. I’ll put the right numbers in the show notes. So it’s just keeps blowing out, because I have all sorts of issues. We we ended up with one of the tunnel boring machines stuck in the rock, okay, like this is, it’s been stuck for months, and this is just this. It’s just symbolic of just how dread, hopeless this project has been. So we’re having to do these, you know, massive engineering projects to back up all of the intermittent wind farms and solar farms. And it’s just, yeah, it’s a, it’s a, well, you never know.

Marian Tupy 38:43

You never know. You know. In Europe, 10 years ago, it looked like the greens, the Climate Lobby was all powerful. They’re losing power all over the place because, basically, energy became so expensive that Europe industrializing. People’s standards of living are decreasing because energy and electricity is so expensive, and energy goes into everything. It goes into literally, it impacts the price of price of tomatoes in the shop. So you never know. We certainly see very positive changes amongst environmentalists here in the United States, they’ve now recognized the importance of nuclear. If you want to get away from, from from fossil fuels, at least to some extent. We are never going to get away from completely from fossil fuels. That’s just not possible. There is not going to be energy transition. We are just going to add new stuff to energy. We are still burning coal and sorry, we are still burning wood. So you know that’s not going anywhere but, but we can. We can. We can certainly limit it, and I’m a huge proponent of nuclear especially if we can learn to make it cheaper. So we’ll see. But certainly, congratulations on being born in such a beautiful country, and I hope that you can keep it prosperous and happy. Yes,

Gene Tunny 39:59

yeah. Yes, I hope so too. I mean, one, one thing I should note, because it just comes up with this issue of population, just if you got another second, because I did what I did want to wrap up, but I thought there’s one thing, one point you made about population before I agree with you. Over the long term, I think for any individual country, this relates to your last your concluding what, what was going to be your concluded covid, about Australia, and I think you’re generally right. I mean, it is a prosperous country. It is the lucky country. We’re facing big challenges in the short term or over the next few years, because we’ve had a massive surge in population post covid, which is related to very lax immigration policy settings that are very favorable to overseas students. So then possibly rorting of the student visas, because it’s, you know, it’s a way you can get access to the Australian Labor Market. So I think that’s one of the issues we’ve got to grapple with. I know that’s an issue in other countries too, but that would just be my one qualification to this general optimism about, you know, having a larger population, more more ingenuity, that sort of thing. So I just wanted to make that that comment, it just occurred to me. But if you’ve got any reactions to that, please, please, let me know.

Marian Tupy 41:22

I mean, the question is, the question is, what? What is the negative effect? Is it? Is it increases prices of real estate, like increasing

Gene Tunny 41:30

real estate, just general congestion, I think, an inability of public services to keep up with the the population growth, yeah, just a general feeling that the country has, the country’s changing in a way that, yeah, think things just don’t seem to work as well, or it’s not the same country as generally, not as friendly or as Welcoming as it once was that would be, that would be the, my sort of take on it, yeah. But generally I think, yeah, it’s the housing issue, where it comes up the most, but it’s congestion in other areas too, well. I

Marian Tupy 42:12

mean, obviously I think that every country has a right to decide who comes in. You know, you know, I’m very I’m very liberal on immigration, but I do think that we need to know who is coming in. Are these people posing any kind of terrorist threat? Do they have criminal records? We just don’t know, because a lot of people come in illegally. I wish we could go back to the time from 20 years ago, when you know people would come in legally, and they would go through the process of having background checks and whatever else, and if they can contribute to the economy, then so much the better. And when it comes to housing, look, if Australia cannot solve it, I don’t know who can, because you’ve got a lot of land. One thing which puzzles me is that we have stopped building new cities, which is kind of bizarre when you think about it. People used to, yeah, cities left and right. And it seems just so difficult nowadays in the West to actually start properly, start a new city. You know, there are states in the United States where the federal government owns 90% of the land. If the federal government just gave it back to the States, and the states simply said, Go forth and conquer and build new cities. You know, it could be done. But ultimately, I don’t think that the issue here is lack of land. I don’t think there are the issue is lack of resources. I think the problem here is tends to be over regulation and governments putting putting barriers in in the way of human ingenuity and human enterprise. So, you know, there’s that’s certainly the case in the United States when it comes to housing. Yeah,

Gene Tunny 43:48

absolutely okay. We might end there. I think that was a good point to end on. Barry and Tubi from the Cato Institute. Thanks so much for all your work, for a great conversation, and I’ll put a link in the show notes to your new book, super abundance looks terrific and all the best for the future, and I hope to catch up with you sometime again soon. Thank

Marian Tupy 44:09

you very much. All the best.

Gene Tunny 44:12

Righto, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics, explore.com or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you, then please write a review and leave a writing. Thanks for listening. I hope you can join me again next week.

Obsidian 44:59

Thank you for listening. We hope you enjoyed the episode for more content like this, or to begin your own podcasting journey, head on over to obsidian-productions.com you.

Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.

Tags agriculture, climate change, commodities, degrowth, economics, growth, migration, pollution, productivity, resources

Podcast episode

Efficiency and Externalities: A Q&A on Market Failures – EP254

Post author By Alec Krishna
Post date September 23, 2024
No Comments on Efficiency and Externalities: A Q&A on Market Failures – EP254

Show host Gene Tunny responds to listener feedback about the private versus public sector’s role in wealth creation, particularly addressing externalities like environmental harm and whether governments should fund facilities like Men’s Sheds. He also explores the efficiency of the private sector compared to government spending, weighing the evidence on both sides.

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com or send a voice message via https://www.speakpipe.com/economicsexplored.

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

Timestamps for EP254

Introduction (0:00)
Externalities and Market Efficiency (4:47)
Government’s Role in Addressing Externalities (11:30)
Coase Theorem and Market Failures (19:43)
Government Spending and Efficiency (26:31)
Men’s Sheds and Government Support (32:51)
Scott Prasser’s Critique of Government Spending (39:43)
Balancing Government and Private Sector Roles (45:49)

Takeaways

Externalities in Wealth Creation: Private markets can overlook externalities such as pollution or public health impacts, justifying government intervention in some cases.
Incentives for Efficiency: Due to market competition, the private sector generally has stronger incentives for efficiency, while government projects may lack the same discipline.
Government Spending Criticism: Many government projects, particularly those done for political reasons, are inefficient and do not consistently deliver expected benefits.
Cost-Benefit Analysis is Crucial: Government spending should be evaluated through thorough cost-benefit analysis to avoid wasting public funds.
Coase Theorem and Market Solutions: While private negotiation can theoretically resolve externalities (as per the Coase Theorem), it typically does not work in practice due to high transaction costs and imperfect information.

Links relevant to the conversation

Relevant previous episodes:

Government vs Private Sector in Wealth Creation:

https://economicsexplored.com/2024/07/05/government-vs-private-sector-who-generates-wealth-ep247/

White Elephant Stampede:

https://economicsexplored.com/2022/10/17/white-elephant-stampede-w-scott-prasser-ep161/

Coase theorem paper – “Does the Coase theorem hold in real markets? An application to the negotiations between waterworks and farmers in Denmark”

https://www.sciencedirect.com/science/article/pii/S0301479711003331

Urbis review of Men’s Sheds:

https://www.health.gov.au/sites/default/files/documents/2022/01/review-of-support-for-the-men-s-shed-movement-current-state-report_0.pdf

Beyond Blue Report on Men’s Sheds:

https://mensshed.org/wp-content/uploads/2022/05/Ultrafeed-beyondblue-Mens-Shed-in-Australia-Final-Executive-Report-2013.pdf

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Transcript: Efficiency and Externalities: A Q&A on Market Failures – EP254

Scott Prasser 00:03

The governments love to, love to announce iconic projects. When I hear the word iconic, I run a mile. Okay, this is Danger, danger, or this is going to be a landmark, or they want to have a vision. I don’t want governments and visions. Thank you very much. It’s usually the wrong ones, and so it’s this thing of meeting the electoral demand to be doing something, instead of saying nothing can be done. Okay, that in some cases it’s not government’s responsibility to do it, and if we do anything, it doesn’t, doesn’t have any effect.

Gene Tunny 00:40

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show this episode. I want to respond to a question from a listener about a recent episode, government versus the private sector who generates wealth. And then I also want to respond to some feedback from another listener about a previous episode. So I really value getting your feedback and your questions. It all helps me think about what I should cover on the show and the types of guests you want to hear from so please keep it coming. You can get in touch with me via the contact details in the show notes. So yep, I’d love to hear from you before we get into it. Thanks to Lumo coffee for sponsoring this episode. This grade one organic specialty coffee from the highlands of Peru is jam packed full of healthy antioxidants. There’s a 10% discount for economics explored listeners. Details are in the show notes. Okay, the first thing I want to do is to cover a great question that came from a listener named Mark. I’ll read out the email that I received from Mark. I’m a non economist in the Queensland public service, and as such, very much. Enjoyed your recent ish episode, government versus private sector who generates wealth? One of the arguments in the podcast was that consumers demonstrate how much they value goods and services produced by the private sector in their purchasing decisions, and that these purchases are evidence that the sector is generating value for the public sector, though it was pointed out that government spending is often inefficient and can even create a net loss, for example, because of poor discipline on business cases or spending. And Mark goes on to note, this seems to be comparing the Theory of Value slash wealth creation in the private sector with the practical realities of it in the public sector, and it ignores the externalities in private markets. Is it fair to say that, in practice, the private sector can produce profits and services that create harm to society, ultra processed food, tobacco products that cause environmental harm, etc, and this needs to be factored into an evaluation of its ability to generate wealth. And Mark goes on, this is a bit of a long winded way of raising an old argument. I guess. The response is, these harms are a result only of market design, and companies are merely following the incentives placed upon them. I’d be interested in your views, including, how do you think government should respond to the issue? So that’s a very good question. And I thought, yep, I should respond to this in the podcast. So my my quick answer to Mark’s question is yes, it is fair to say that the private sector can produce products with harmful effects. And Mark indeed gave some examples there, and he he mentioned the important concept of externalities. So these are external costs on to others other than the parties to the transaction so things like pollution, etc, or it could be cost to the public health system. So people, you know, if they smoke too much or they drink too much, then that will end up costing not only the individual who makes the choice to do those things, but others in. The society. I’ve covered externalities in previous episodes, but I probably should have mentioned them in the government versus the private sector episode, because, yep, they are an important qualification to the presumed efficiency of market outcomes. That’s absolutely correct. What I might do is I might play the segment from the episode that Mark has asked about, just so we can, I can think about exactly what I said, and we can talk about that, and can provide some more more commentary on in response to Mark’s observations and his questions. Okay, so let me play the relevant clip now. But generally speaking, and this is the point I will often make when I’m thinking about, well, when I’m talking about these issues, the incentives for efficiency are better in the private sector, and I think there’s a lot of evidence for that that came out of when governments were reforming public enterprises in the 80s and 90s, we learned about the significant efficiency gains that can come from that when governments outsource more of activity, outsourced more activities from the public sector. Clearly, there are failures. I’m not going to deny there have been challenges. There have I mean, there have been those botched privatizations in the UK, for example, particularly in rail and it looks like water, so I’m not going to be too I’m not going to be unrealistic or just assume, Oh yes, the market is always going to do things better. But I think generally the evidence is that the private sector is going to be more well, it’s got greater incentives for efficiency, because if you’re not efficient, you go out of business, whereas governments could, you know, governments keep going, and we tend to see that well, I mean public sector unions, for example, or construction unions, which where they Have a lot of members working on government projects, they can be very, very influential and affect the efficiency, affect the costs and the efficiency of government programs and spending. I think that is something that is worth thinking about here. I should make the standard point that economists always make, that it’s important to crunch the numbers. So we always should be doing cost benefit analysis of programs and projects. In some cases, we want to do a comprehensive cost benefit analysis. In other cases, it’s maybe it’s a much smaller amount of money, and it’s more of a it’s not the full blown let’s, let’s do a comprehensive economic study where we’re trying to estimate all of the relevant costs and benefits. It might be more of a desktop exercise. A simpler type of analysis, but we should be thinking whenever we’re spending money on on government goods as government purchases of goods and services. We should be thinking about the costs and benefits, the pros and cons, and to the extent that we’re not getting that those net benefits, to the extent that we’re not getting to benefit to cost ratio above one, a return on investment, we’re effectively burning money the government is then detracting from the wealth of the community, in my view, because that money would probably would have been Better if that activity was not done if it was, if it if some other activity occurred, possibly in the private sector. And I mean, the last governments have funded many poor projects. They continue to do so, whether because of politics or they they think that there’s some social benefit that mean, or equity benefit that means that the project should go ahead. Okay, so that was a clip from my government versus the private sector episode, and that’s what Mark was was asking about. Now, even though I didn’t explicitly mention the concept of externalities, they may have been in the back of my mind when I was when I was talking there, particularly when I was talking about the need to consider all relevant costs and benefits. I’ll note that I did try. Talk about the externality, or I’ve talked about externalities, and specifically the externality relating to greenhouse gas emissions in another recent Tish episode. So episode 243, the revival of industrial policy. Should governments pick winners. So what I might do is I’ll play a clip from that episode, because I think it, it does help provide that fuller picture when we’re thinking about government versus the private sector. So I mean my presumption, and this goes back to Adam Smith, right? I mean that if you’ve got two parties engaged in in trade or in exchange, you assume it’s mutually beneficial and that it adds to the well being of the community. Now, of course, if there are third parties that are affected, then that presumption is won’t be won’t be realized. I mean, we have to think about how these the actions, how the trade, how the exchange, could affect third parties, and particularly if there’s no scope for them to negotiate, for the third party to come into the negotiation, whether because of, well, there’s a lack of knowledge or there’s transaction costs involved. So what I’m alluding to there is the Coase theorem, which I might talk about after I play this clip. Now, what government should be doing is, to the extent that there is this externality from greenhouse gas emissions, we should put a price on that externality, which is the idea of a carbon price. And you know, you can do that in various Well, a couple two main ways. You can have an emissions trading scheme. You can, you can create a market, and then you have a carbon price that falls out of that. Or you can have a carbon tax. And those are alternative ways of of putting a price on carbon dioxide emissions, or and CO two equivalent emissions. Now you know that most economists would say that is the best way to do it if you’re going to do something about it. And you know that’s sending the signal to the market that there’s a cost to the environment of of this pollution. And you know, you leave it up to the industry to sort out the most cost effective way to reduce those emissions. You don’t go and, you know, actively promote particular solutions and and in Australia, there’s a there’s a growing concern that maybe we’ve been pushing too hard on renewables policy measures and subsidies, etc, have favored renewables, and we had, we’ve had too fast a pace of development, and that’s creating issues for the reliability of the electricity grid. Okay, so I was using a carbon price as an illustration of one way that governments can address externalities, and that is through corrective taxation. That’s that’s one way the the carbon tax, or it could be setting up a market based mechanism, such as an emissions trading scheme, which would impose, and you’d have a carbon price drop out of that. And there’s a debate about, you know, which is, which is the better mechanism, but both sort of pretty much get you to the same outcome. We won’t go into the into the specifics of that debate there, but the idea is to have the the cost of the externality internalized, to bring it into the decision making of the firms and the households in the economy. So that’s, that’s the idea. And I mean, climate change is one obvious example. I know there’s a controversy about, you know exactly how we should respond, how we the pace at which we respond. I was just using that as I recognize that controversy. I’m just using it as an example. And you can think of various other examples. There’s a debate about whether we should impose a specific junk food tax, so a tax on sugary drinks, and, you know, other items of junk food to help prevent or to reduce the incidence of overweight and obesity, diabetes, etc. And that can be viewed as a. Corrective tax, of course, you might have to think about any equity issues there, particularly if poorer households are more likely to consume those those products that have been taxed then richer households. But the idea is that a corrective tax might make sense there and correct the well, the the outcome, the sub optimal outcome that comes from private decision making. On the other hand, you could think of, or you could think of some activities that would be under supplied by the market naturally, and that there could be a case for governments to promote so that’s the other side, or the other possibility, that there could be a case for a subsidy of some kind to subsidize activities that are that are considered beneficial. Now, I think this is, you know, this can be problematic because I think often subsidies come about because of lobbying. So there’s political considerations. I think the case for subsidies can often be weak. Some people, maybe some people, argue that the EV subsidies are justifiable from an efficiency point of view. Maybe they argue, or they possibly do argue that, because there’s such a well you need a critical mass of EV users, so electric vehicles to support the all the charging infrastructure, maybe there’s a case to subsidize the purchases of Ev. So you’ll find at different times various various people in the policy debate making an argument on efficiency grounds for subsidies, and that’s that comes out of that same framework of of market failure that the externalities are part of. You can think of like, typically we talk about negative externalities, such as pollution, but you can also think of positive externalities, so I might have to have another episode where I go into some examples of of that. The key point is that, yep, Mark is correct. I agree with him that the the existence of these externalities is an important qualification on the efficiency of market outcomes. One example of a positive externality that has just occurred to me is the so called Knowledge spillover. So there’s recognition that the knowledge generated by businesses, the R and D that they undertake, that can spill over to other businesses, and you know that’s that’s beneficial to society, and hence that can justify subsidies or favorable tax treatment for research and development expenses. And you do find that in various countries. So, I mean, if we think about the or the development of, you know, various products, there’s R and D that that goes into them, and the whole community ends up benefiting from that, because not everything can be patented, not everything can be protected. I mean the idea of the smartphone, for example, that that Apple invented with the iPhone, while it can protect its own proprietary technology, the the fundamental idea of, or the concept of having, of having a smartphone, of demonstrating that that is indeed possible, that has provided benefits to to other businesses, to the community, because we end up with with competitors copying that concept. So there are these, these external benefits as well. And I think we might come back to this issue of externalities in a in another episode, because there are some really juicy issues to cover. And I’d like to give some really well thought out examples there. The other thing it would be good to talk about in a in a future episode is this concept of the Coase theorem that comes from Ronald Coase, who’s a Nobel Laureate, who was a British economist, but ended up, you know, spending most of his working life in the. The US. I’ve previously done an episode on Coase regarding his theory of the firm, but he’s famous for another theory which is received the name of the Coase theorem. And what that theorem tells us is that in certain circumstances, the private sector agents that are affected by an externality can actually negotiate and reach a an optimal solution, and that optimal solution doesn’t in any way depend on the allocation of property rights, whether it doesn’t depend on whether a particular party has has a right to pollute or a right to to be able to extract A resource free of pollution. So it’s quite a powerful fear, and this idea that you may not need government to impose corrective taxation or a subsidy or regulation, you can have private sector actors figure this out for themselves, and that it doesn’t actually matter who, what the allocation of property rights is. It’s a very powerful concept, and it’s it’s very much consistent with the Chicago School view. So if you’re regular listener, or you study economics, you know there’s this thing called the Chicago school, people like Milton Friedman, George Stigler, which is associated with very pro market or laissez faire thinking, and the Coase theorem fits rather, you know, it’s compatible with that. And indeed, Ronald Coase was a professor of economics at the University of Chicago Law School. So he’s definitely part of that, that Chicago school so very powerful fear, and we might cover this in another episode. I mean, the challenge with it is that, I mean, it’s very elegant, it’s a great theory. It’d be extraordinary if, if it really did work out, it’d solve a lot of our a lot of our problems. But I guess the general consensus among economists is that while you you can see some examples of this happening in practice, and you can see these negotiations, they’re not necessarily widespread. This is not a general solution. This is not a reason. We should just say, oh, let’s leave everything to the market, because the conditions for the Coase theorem are very stringent, so they’re very tough conditions. And there’s a paper that I’ll link to in the show notes. It’s a 2012 paper from the Journal of Environmental Management. Does the coast theorem hold in real markets an application to the negotiations between water works and farmers in Denmark. So the water works are the the businesses or the utilities that are providing water to the town, and the farmers will there. They’re doing things on their farm that can affect the quality of the water through the use of pesticides and and fertilizers. And so there’s a an externality there. And so what this study looks at in Denmark is to what extent private negotiations between the water works and the farmers can help resolve the the externality can can lead to what you’d say is an efficient outcome, and what it concludes Is that okay, so it considers the results of Danish Water Works attempts to establish voluntary cultivation agreements with Danish farmers. A survey of these negotiations, I’m reading from the abstract of the paper, a survey of these negotiations show that the Coase theorem is not robust in the presence of imperfect information, non maximizing behavior and transaction costs. Thus negotiations between Danish water works and farmers may not be a suitable mechanism to achieve efficiency in the protection of groundwater quality due to violations of the assumptions of the Coase theorem, the use of standard schemes or government intervention, eg, expropriation May, under some conditions, be a more effective and cost efficient approach for the protection of vulnerable groundwater resources in Denmark, right. Oh, okay, so, yeah. That’s a that’s a bit of a negative finding about the Coase theorem. I mean, it’s incredibly elegant, and I think it’s an important concept to learn as an economist, but in practice, it, it doesn’t really seem to to help us out a lot. But let me come back to that in a future episode. I think it probably does warrant a whole episode on its own. And yeah, that’s something you want to hear, hear about, or if you’ve got any views on the Coase theorem, or if you know of any, any studies or examples that you know show the a better result for the Coase theorem, then, then let me know. I’d love to I’d love to hear them, and I’d love to hear from you. Okay, we’ll take a short break here for a word from our sponsor.

Female speaker 25:51

Gene Tunny 26:20

now back to the show. Okay, so talked about externalities before we go on to the the other part of this episode, I want to go back to this point about there being this presumption that the the private sector will be more likely to be efficient and to provide what people want than the government. I guess I’m a little bit biased. I think that is true, and partly this goes back to, you know, when I first started learning about economics and studying economics. It must have been when I was in high school, and I remember my mother picked up a copy of Milton Friedman’s Free to Choose at a flea market somewhere. I think it was. And I remember reading that and just being struck by the incredible logic that that Milton and Rose Friedman advanced in that. And there’s a, there’s a great quote from Friedman. I found this on the net. I’m not sure whether this one was in free to choose, but something very similar would have been, and that this, certainly this concept is, is in Free To Choose. And Friedman’s other books, like tyranny, the status quo, and this concept, or this, this quote, which I think you know very much, summarized very well, summarizes his thinking, if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government, okay, so he’s talking about spending other people’s money on other people. And that’s the, that’s the situation where the people doing the spending have probably take the least care. Okay, so we’re, we’re going to be most careful and make the best decisions where we’re spending our own money on ourselves. So in the case that that Friedman’s talking about, there’s little incentive to economize or control costs, to ensure the money spent effectively, to maximize the value for for the recipients. I mean, I guess there is some, there is some pressure, because governments, they do have to, ultimately, there is a budget constraint, so they have to, I suppose they have some concern about the effectiveness of the spending, but it’s not as great as it would be if you’re spending your own money on yourself. I think that that’s fairly intuitive, so what we end up with is that we just end up with, you know, quite a significant amount of of wasteful, inefficient spending, spending that’s done for political reasons to get a political win for the government. I think we all can concede or accept that that is that something that happens. Okay? And then I’m just thinking you might if you think about that as a quadrant, so you’re either or a matrix, and you think of the different quadrants in the matrix, there are four different possibilities. You’re spending your own money on yourself, where you’ve got the most care and concern. You’re spending other people’s money on other people where you’re you’ve got the least concern or care. And then there are situations where you’re spending other people’s money on yourself. So if there’s a gift that someone will gives you money, say at Christmas, and then, therefore. I mean, I guess you do try and maximize your well being, but maybe you’re not as careful with your spending decisions. Maybe you see psychologically, even though this is not economically rational, maybe you see it as, Oh well, it’s a gift. It’s free money in a way, and I can afford to splurge, or I might buy something that I wouldn’t if it were my own, you know, if I had to work to to get the money. I mean, I certainly know that when I get gifts of gift cards for for books, I’m possibly more willing to experiment and buy a book that I I wouldn’t normally do, or I’ll just buy more books than I would when I go into the bookstore at one time rather than save that up for another time. So perhaps I am less discerning or less careful, but I’m still not completely careless. And then the other quadrant, there’s the quadrant of when you’re spending your own money on other people, so you’re giving a donation, or you’re, you’re, you’re engaging in some charitable activity, and sure, I guess you want to, you do want To make sure that you’re not wasting the money, but perhaps you’re not as careful as you would be if you had to spend it on yourself. You might, you might think, Oh, well, this, this will do. This is enough for I’ll make the judgment as to what’s best for the people. I’m, I’m, you know, buying this, this item for these clothes for, you know, maybe, oh yeah, they’ll, they’ll be happy with the socks I get them for Christmas. Yeah. I mean, I think we can all think of examples of where we we spend money on, on other people, and maybe, maybe we don’t put the time or attention into it that we’d put into it, we’d put into the decision if we if we were spending the money on ourselves. So I think, I mean, that’s going to differ for different people, of course, and maybe I’m over generalizing, but I do think that Friedman’s way of of thinking about it is useful, and I certainly agree with him about how I think we spend our own money on ourselves with much more care than the government spends other people’s money on other people, right? Oh, okay, well, that was, yeah, that was actually, there’s quite a lot to think about with, with Mark’s comment and his his questions. So Mark, thanks for that. Please continue listening, and please write in with with future comments. And indeed, if you have any reactions to what I’ve what I said today, I’d love to hear them. I’ll go on now to some feedback from another regular listener, John. I mean, John provided me with a heap of comments, and unfortunately, I don’t have time to cover them all in this episode, particularly since I spent so long talking about what Mark what he commented on. So sorry, John, but I will, I will respond to one of your specific comments, and John is, John’s pushing back or on some of the more free market or more libertarian guests and views that, that that I’ve had on the show. And this is, I think this is an interesting comment, and yeah, I’ve got some thoughts on it, so I want to read it out. I’ll read out the comment first, and then I’ll play the audio that that John’s responding to. One of the bits of audio John wrote, government does not necessarily mean centralized. There’s the Men’s Shed, which is a counterpoint to the criticism your co host on the ATA. So that’s the Australian taxpayers Alliance podcast made. I can’t remember who that was. It would have been John Humphries or Saxon Davidson, I imagine, but I’ll I couldn’t find the bits of audio that John was talking about. But anyway, I can imagine that’s that’s the sort of thing they would have would have said. And John goes on some central money, but also real dispersion of decision making and autonomy. Equally, your guest on the white elephant stampede episode. So he’s talking about Scott prasser there. So equally, your guest on another podcast criticize the Men’s Shed. Now, if there’s a credible cost benefit analysis that said that says the Men’s Shed is not useful, well, fair enough, but I’d be really surprised. The Men’s Shed supports a local repair. FA I’m involved with and maybe you’ve seen their things around made for the community. John concludes, while we’ve while we have personal freedom, the government has a legitimate role in helping us make better decisions. I understand we have lower rates of skin cancer from the slip slop slap campaign and a lower road toll resulting from government initiatives over drink driving and seat belts. Yes, I think that’s a fair points from John. That’s that’s absolutely, absolutely correct, and definitely the data supports that. I’m just thinking of an example in my state, in Queensland and Australia, there was a lot of controversy, gee, maybe it was in the 70s or the the 80s, about the introduction of making a compulsory for people to wear seat belts. And, you know, people had could rationalize not wearing seat belts in all sorts of ways. Oh, that, you know, cost us a lot of time, or it’s a distraction and it’s or won’t help us, because if you’re in a crash, then you’re actually better off being thrown out of the car. I mean, all sorts of odd rationalizations for not wanting to wear a seatbelt. And there was a there was a famous study, I’m pretty sure it was by Alan Layton. Yeah, Alan Layton was one of the authors a famous study on the effectiveness of seat belt legislation on the Queensland road toll. And this was an Australian case study in intervention analysis. So this is a paper that was published in 1979 in the Journal of the American Statistical Association. Alan Leighton was one of the co authors. He was at University of Queensland at the time. He went on to have a distinguished career as an econometrician, a great guy and what they did was that they found so they used some time clever time series analytical techniques. I’ll put a link in the show notes to this paper. It’s it’s a great bit of work. They showed that the long run legislative effect was quantified at a specific level of the explanatory variable to be a 46% reduction in deaths. Okay, so the seat belt legislation did have a significant impact, and it resulted in a major reduction in fatalities. And I think you’d be I think that’s probably a case where some type of government paternalism is is justifiable. So look, if you’re a regular listener of the show, you probably figured out I’m not an extreme libertarian or anarcho capitalist. I would describe myself as a classical liberal. I do believe in in liberalism and freedom, but I do accept that in some cases, there could be a role for some paternalistic policy measures. And I think John is is on the right track there regarding Men’s Sheds, I must say, I forgot that the Men’s Shed came up in in one of my podcast episodes. So, I mean, they seem reasonable to me. I have a couple of friends who are involved with Men’s Sheds. So the idea is that men generally of a certain age, I think it tends to be mature age, and senior men, they may have had some issues in their lives, and they get together, and they will do all sorts of, you know, manual, manual work. They’ll do some gardening, or they’ll do some woodwork or some metal shop, and it seems to be something that really helps them out with their mental health. And, you know, men need friends, and I think there’s a concern that just with developments in society, that men don’t have the traditional networks or support that they once did, and particularly with the rise in divorce so so many men, their social life is essentially organized by their wives, and so if they have a divorce, then they’re in all sorts of trouble. They lose their network, their their social support. So look, there could certainly be a case for the Men’s Sheds. What I might do now just go back to the the bit of the episode that John’s reacted to, so I can understand his feedback more fully and also understand what what Scott said in that episode. Now, Scott’s a great guy. He’s a former academic. He’s a former ministerial advisor. He’s. And he’s one of the editors of the 2022, book from Connor court, titled white elephant stampede case studies in policy and project management failures. And we talked about all sorts of big projects that turned out to be white elephants, like desalination plants, etc. I forgot he mentioned Men’s Shed. So let’s, let’s go back to that, and I’ll offer some thoughts after I play the clip.

Scott Prasser 40:27

Government is involved in too many areas. Okay, the government tries to do too much, yeah, and the government is seen as the savior of so many things. So if government could not be involved in so many things and just focus on it, on the core business, what should be, you know, good infrastructure, good roads. And what sort of thing so government is, is often called upon to be doing things now, politicians reaction to that is, something’s got to be done. This is something we can do, right, okay? And they have no concept of of financial limitations. So governments often, we saw that during the covid thing, where governments were running around doing all sorts of things. Sorts of things which were completely against the evidence. Just remember, in Queensland, we were formed by the Chief Health Officer. We and it was mandated we should wear a mask in our car. Just think about this. And we should wear a mask walking around a park. Just think about this. Now, I didn’t do that. I refuse to follow the law. So that’s an example where governments have got to ratchet up activities, to do things. Also, governments love to love to announce iconic projects. When I hear the word iconic, I run a mile. Okay, this is Danger, danger, or this is going to be a landmark, or they want to have a vision. I don’t want government visions. Thank you very much. It’s usually the wrong ones. And so it’s this thing of meeting the electoral demand to be doing something instead of saying nothing can be done. Okay, that’s, in some cases it’s not government’s responsibility to do it. And if we do anything, it doesn’t, it doesn’t have any effect. So, you know, it’s like, you know, why does the Commonwealth government spend $5 million on men’s work sheds? I mean, what has that got to do with the Commonwealth Government? There’s like, a little mini, a mini white elephant, because they want to be seen to be giving out money for some minority group calls or something. So it’s politics. It’s politics. The other factor is that all the organizational things inside organizations, group think happens, yeah, okay. Now, if you worked in the public bureaucracy like me, it’s sometimes very hard if you if you want to be the lone person that says, I think that’s a dumb idea. Yes, right? Yeah, it doesn’t go well with the rest of the team and the hierarchy, which so you’ve got to have in the bureaucracy someone willing to say no. Right now, our public services have become politicized. That is, people are on short term contracts. They give the government what they want, not what they need. So this sort of Once Upon a Time, treasuries would have said, and that’s why, under Joe, we had permanent public servants. Okay? Job Peterson, Premier, there were permanent public servants. Queensland didn’t have a zoo. Queensland didn’t own a bank. Okay? Queensland didn’t do all the crazy things that Joe won’t do, because the treasurer Leo hilcher and crowd will say, No, Joe, you’re not going to have it right now. I don’t think that happens anymore, because all the senior public servants are on five year contracts. They want to get their contract. We knew they will give in to the political will all the time. So that’s one of the one of the issues that helps help throughout, why we’re getting more of these things, and why Frank and fearless advice is no longer being given. I don’t want to sound too precious, but it is. It is very hard in the bureaucracy. If you’re in the hierarchy and you want to get a promotion in the future and you write a memo to the premier. This is a really dumb idea, and I have done this myself, and I have saved the taxpayer money, I can tell you right here, and that’s because I had a very good director general in the Premier’s department. But it’s hard all those organizational factors, the political factors and government and all the interest group pressures now, interest group pressures on wanting to get something from government. Australia has always looked more to government than other countries. You know, we’ve always we founded by government. Australia was founded by, you know, sending out convicts. Here it was a government, yeah, thing in America. America was founded by people trying to get away from government. They want a religious freedom. Okay? So there’s a difference, yeah, sort of context. So all those factors have driving that. Plus, I think economic theory, more, you know, modern monetary theory, so it says, oh, spend as much as you want. It doesn’t matter. It’s all right. You know, there’s no, there’s no limitation on what government. Can spend. So the idea of balanced budgets, being careful and frugal, has sort of gone by the by, if you like. So all those factors, to me, are contributing to this sort of galloping syndrome of white elephants.

Gene Tunny 45:17

Okay, so I think Scott made a lot of a lot of very great points there. And I think that observation he makes about the differences between Australia and the United States and how they were they were founded, I think that’s, that’s rather that’s rather clever. That’s a really good insight there. And perhaps that does explain some of the reasons for differences in in policy choices. Who knows? I’m not a political scientist, but I thought that was a rather. There was a there were a lot of insightful things that that Scott said there regarding Men’s Sheds. Look, I honestly don’t know whether it makes sense for government to to to subsidize them or not, or to provide funding to them. I mean, my my bias, would be to say, Well, look, this government really doesn’t have a role here. I mean, if men want to get together and have Men’s Sheds, then then fair enough go for it. Does the government need to provide some support? Well, look, I mean, there could be a case. I wouldn’t rule it out completely, but you would need to have a it’d be good to see a cost benefit analysis of subcard. Does it make sense to provide funding for the Men’s Shed? Does this help improve mental health outcomes so much or sufficiently that it justifies the government chipping in some money? Look, it’s possible. Maybe it does. Maybe it improves well being. It avoids health costs in some way, it prevents suicides, it it prevents alcoholism, which leads to all sorts of problems. Who knows it? They could have some positive outcomes. And it looks like there have been, there has been a little bit of of research, but that’s not, it’s not no comprehensive studies, or CBAS, from cost benefit analysis studies, from what I can see, I’ll link to a couple of those in the show notes. I think there’s definitely a rationale for the Men’s Shed in how they address social isolation and help improve men’s health by getting them working together, collaborating on woodworking, metalworking, gardening, community projects, etc. So I think they’ll provide some benefits, and I’ll link to some studies that I’ve found. So there’s a report that was prepared for Beyond Blue back in 2013 and what that shows, or what that finds, is that there are clear health benefits associated with Men’s Sheds, Particularly when compared with less socially active men and they have some some data here. So it looks like it’s it’s from a survey shows that the shed members scored significantly higher physical functioning, physical roles, general health, vitality and mental health in non shed members, as measured by this, this survey instrument, it looks like that they use. So there’s some, some evidence looks like it has a, yeah, I mean, they may well be statistically significant. I’d have to think about the the sampling error around the reported stats. But I’ll put a link in the show notes there. You can check that out. There’s that you know that would be of interest. If this is a report by there’s another report by Urbis review of support for the Men’s Shed movement, current state report. And, yeah, generally, it reports on how well it argues that these Men’s Sheds are valuable spaces for men to get together, reducing socialized isolation, improving well being. They have the men the Shedders, so that’s what they call the people who go to the Men’s Shed. They have increased engagement with and across communities, and they recognize that the shed, the Men’s Shed, as a social amenity available to the whole community, thereby increasing social capital within communities. Okay, so some benefits, but these are things that are, you know, could be a bit they are intangible in a way. They’re difficult to measure, but I’ll put a link to this day. Be in the show notes as well. And yeah, thanks John for your comments. And yeah, if you want to, I’m willing to have a chat about Men’s Shed sometime in the future and all of the issues around them. It’s interesting. Yeah, I’d never thought there’d be a big controversy about Men’s Sheds. But yes, I guess it’s a it’s something that government has been contributing a little bit of funding to. It doesn’t look like it’s a huge amount. And yep, as with all government spending, we should be thinking about whether that is a good use of public funds or not. And there can be legitimate debates about what we’re spending money on, and whether that money should be spent on something else, or indeed return to taxpayers. Because, I mean, the the tax burden is seems to be ever increasing, and we have to think about whether spending by governments is is essential for the community. Well being Righto, thanks to Mark and to John for their comments, for their questions. Really appreciate them listening. If you’re listening, you have your own thoughts on either the episodes I talked about today or other episodes. Please get in touch. I’d love to hear from you. Love to reflect on your feedback and to help clarify concepts, provide examples. So yes, please do get in touch. You can find my details in the show notes. Okay, I’ll wrap it up there, and I’ll talk to you next week. Thank you, righto. Thanks for listening to this episode of economics explored if you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you, then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week. You

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Tags climate change, economics, efficiency, externalities, government, market failure, markets, pollution

Podcast episode

EV taxes, congestion charges & taking high-polluting trucks off the roads w/ Marion Terrill – EP155

Post author By Alec Krishna
Post date September 5, 2022
No Comments on EV taxes, congestion charges & taking high-polluting trucks off the roads w/ Marion Terrill – EP155

An electrified vehicle fleet will mean lower fuel tax revenues for governments and possibly greater traffic congestion as EVs are cheaper to run. Governments around the world are having to reassess how they charge for road use and one Australian state, Victoria, has introduced an EV tax based on distance traveled. In Economics Explored EP155, Marion Terrill from the Grattan Institute discusses what a rational road user charging system would look like. She also talks about Grattan’s truck plan, which is designed to get high polluting old trucks out of major Australian cities.

This episode’s guest Marion Terrill is Transport and Cities Program Director at the Grattan Institute. Marion is a leading transport and cities expert with a long history in public policy. She has worked on tax policy for the federal Treasury, and led the design and development of the MyGov account. She has provided expert analysis and advice on labour market policy for the Federal Government, the Business Council of Australia, and at the Australian National University.

You can listen to the episode via the embedded player below or via podcasting apps including Google Podcasts, Apple Podcasts, Spotify, and Stitc h er.

Links relevant to the conversation

Marion’s bio: https://grattan.edu.au/expert/marion-terrill/

Grattan Institute on Twitter: @GrattanInst

Marion’s Australian Financial Review article “Electric vehicles: Feds should pave way for gold standard road user charges” (pay-walled)

Grattan’s 2019 report Right time, right place, right price: a practical plan for congestion charging in Sydney and Melbourne

The Grattan truck plan: practical policies for cleaner freight

Previous episodes featuring Marion:

Megaprojects with Marion Terrill from Grattan Institute | Episode 62

Unfreezing Discount Rates with Marion Terrill of the Grattan Institute | Episode 42

Transcript: EV taxes, congestion charges & taking high-polluting trucks off the roads w/ Marion Terrill – EP155

Gene Tunny 00:00

Coming up on Economics Explored.

Marion Terrill 00:01

As we get more and more electric vehicles, great in many ways, and they’re much cheaper to run than internal combustion engine vehicles. But if they’re cheaper to run, it means people will be inclined to drive more. So I think unless governments take some kind of action on congestion, this is a recipe for gridlock.

Gene Tunny 00:26

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is episode 155. On road user charges, what’s the right way to charge for road use, particularly as we switch to electric vehicles and governments lose revenue from fuel taxes. My guest this episode has been thinking a lot about this. It’s Marion Terrill, who was transported cities programme director at the Grattan Institute, a leading Australian Think Tank. You may recall I previously spoke with Marion and on the podcast, we spoke about mega projects in Episode 62. And about discount rates in Episode 42. I’ll put links to those episodes in the show notes along with other relevant links. In the show notes, you can also find out how you can get in touch with me. Please let me know what you think about either Marion and I have to say in this episode, I’d love to hear from you. Right now from my conversation with Marion Terrill on road user charges. And we also chat about Grattan’s new truck plan for Australia. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it.

Gene Tunny 01:47

Marian Terrell from the Grattan Institute Good to have you back on the show.

Marion Terrill

Hello, Gene.

Gene Tunny

Yes, good to see you, Marian. I’m keen to chat with you about the piece you had published in the financial review last week on road user charges. And also I know that Grattan released a new truck plan. So I’m keen to, to chat a bit about that as well. Now in the financial review, last week, you had a piece that was titled, Feds should pave way for gold standard road user charges by and by feds, you mean federal government. And there’s a sub heading here, which may have been written by their sub editor. I’m not sure. But we can. I’d like to sort of launch off from this. It says that regardless of what the High Court decides, fuel excise duty, should be killed off quickly and give way to a smarter way to pay for roads. By mentioning the high court you’re referring to this. There’s a challenge isn’t there that some people are challenging? This new Victorian electric vehicle tax and the Commonwealth has got involved? Can you tell us about that, please?

Marion Terrill 02:58

That’s right. So Victoria introduced new charges on electric vehicles in July of last year. So, the rate that they pay is 2.6 kilometres, or sorry, 2.6 cents per kilometre for an electric vehicle and 2.1 cents per kilometre for a plug in hybrid. And New South Wales is also planning to impose similar charges from 2027, or whenever electric vehicles make up 30% of new car sales, whichever comes sooner. And there was a plan to do this in South Australia. But when the government changed, I understand it’s been canned. So but I think there is, there has been, some coordination across the states to do this. That’s what the charge is. And then what’s happening here in Victoria, is that electric vehicle drivers have been up in arms about it. And two of them are challenging it on constitutional grounds. And so they’re saying, as I understand that this the argument is that it is a tax on kilometres is actually an excise or ad valorem tax, if you like for your business. And so this all hinges on how broadly or narrowly you define an excise because only the Commonwealth can charge an excise. So that’s the basic argument. I don’t know how that will play out. There would have been other ways to implement this tax or this charge this charge on electric drivers but this particular method of charging it does permit space for this constitutional challenge.

Gene Tunny 04:54

Right and what was the justification that these EVs aren’t paying, well, there’s no fuel excise paid by the owners of the EVS because, well, they, they’re powered by electricity. And presumably, this is the reason why the hybrid charge is lower because the they would be saying, well, they are at least contributing somewhat in terms of the fuel excise the 44 cents a litre. Yeah, so that must be the justification. But it is a bit cheeky, isn’t it? Because it’s the federal government that collects the excise, isn’t it? Is that right?

Marion Terrill 05:31

That’s right. That’s right. It’s a little bit of a rat’s nest here. So the, the rationale is, as you say that these drivers are not paying fuel excise, therefore, they’re not contributing, some people say contributing to the upkeep. But it all goes into one big pot really. But the other the other way of making that argument is a fairness argument to say, Well, how is it fair for this driver over here to be paying like this, and this driver over here not to be paying? So those are the arguments, but I think there is a further argument that doesn’t get so much of a public hearing. But that, and I guess this is what I’m pointing to in my, in my article that really, you would imagine that fuel excise is a even though it’s kind of not declining. Today, it is in structural decline as the fleet electrifies. And so it will become increasingly unfair because the because electric vehicles are more expensive to buy, the people who most quickly get out of paying it, those who can afford a more expensive vehicle and, and that I think that will become acute as a political pressure. And so the federal government has got the option to let it just wither on the vine, and become kind of increasingly unpopular. Or another option is just to say, Okay, we’re gonna kill it off now. And we’ll hand over the responsibility for taxing the taxes on driving to the States, but we’ll also hand over a funding responsibility to go with it.

Gene Tunny 07:17

Yeah, yeah, I think that could be there could be some attraction there or there could be an attractive option. I mean, it’s good to have that funding, the ability to fund it and the spending responsibility in the same place. Okay, so yeah, I guess it is a big issue, isn’t it? Because the is it 11 billion a year or something is is raised in fuel excise by the Commonwealth? Yeah.

Marion Terrill 07:41

That team in net fuel excise. It’s the actual amount is somewhat higher. It’s about 19 billion, I think. 18 or 19. But then seven, and a half of it is, is rebated throw the fuel tax credit. So the net amount that 10 million, so it’s, it’s about five? Well, yeah, it’s sorry, it’s about two and a half percent of Commonwealth taxman news, the net amount?

Gene Tunny 08:10

Yeah, and you mentioned all goes into the same or a bit the big pot of money that is consolidated revenue, so it’s not earmarked or hypothecated. Is that correct? That’s right.

Marion Terrill 08:21

Not in any meaningful way. It was last hypothecated in 1959. Right. 59, it was hypothecated. There is a little bit of it, that’s hypothecated. So this is getting a bit in the weeds, but basically, it wasn’t indexed for a period from 2001 to 2014. And when the indexation restart, and the index amount is hypothecated, but it’s gonna not meaningful, because it’s such a tiny amount and far less than what the current spends on roads.

Gene Tunny 08:58

Okay. Yeah. I’ll have to just look at that that small bit, just to make sure I’m across all the detail. Yes, because there is that common understanding. People seem to think that well, this pays for roads. And I mean, I guess it does go into the pot. And so it does help pay for roads, but then you can’t say that any that particular dollar raise from fuel excise is what actually pays for roads, because money is fungible, as they say,

Marion Terrill 09:22

Because the amount that is raised through fuel excise and about 10 billion is more than the Commonwealth spends on transport infrastructure, which is usually it’s lumpy, but it’s usually seven to eight. So, I mean, kind of where you draw those lines, I think, is an open question. But yeah, the amounts Don’t bear any relationship to one another.

Gene Tunny 09:44

Yeah. Have you looked at whether the fuel excise and motor vehicle registration fees at the state and territory level combined? Do they add up roughly to what is spent on roads by federal and state governments? I heard that some One quarter that I’ve heard or quoted in the last few months, but I’ve never been able to verify whether that’s the case or not I’ve ever seen that

Marion Terrill 10:08

We have been looking at that sort of thing. And the short answer is no. Okay. What we have noticed those and as a trend is that the the share of road related tax revenue raised by state seems to be rising. But it’s harder to discern a trend on spending, because it is so lumpy, from, as you know, from one year to the other, to the next, it does jump around a bit. So, which would be a problem if you did try to hypothecated? Actually, because they’d be it’d be quite difficult to predict how much you’d have to spend, but you do need to predict because the roads take time to plan. So yes. They there’s, there is a lot of, or there’s a lot of reasons why Hypothecation isn’t a great idea, but people do really believe that. It’s hypothecated. And even if not formally, that it’s somehow it is informally hypothecated.

Gene Tunny 11:12

Yeah, yeah. Yeah. I’m not a big fan of earmarking, because it reduces your, your flexibility with your budget. Okay. Do you know what’s happening in other parts of the world? Marion? I mean, you look, you mentioned Victoria’s, it’s tried to impose this. EV tax. Sa was going to but then there was a change of government, New South Wales is considering it. Are we leading the world on this? So do we know if other countries are looking at this sort of thing as well?

Marion Terrill 11:43

I’m not too sure. Who is I think, at the time when the Victorians announced this tax, there was a lot of media. And it’s sort of painting in quite extreme terms, even calling it the worst EV tax in the world. That I think a lot. I mean, we’ve been looking at the different fuel excise type regimes around the world. And, and sort of, I think, by global standards, a couple of things I’d say on this and one is we don’t charge much in fuel excise or similar types of taxes compared to other countries, particularly similar countries to us. And we see genuine the like, and we also don’t have any congestion charging or that kind of thing. So on the whole driving, is, appears to be relatively lightly taxed here, compared to in many other countries.

Gene Tunny 12:42

Yeah, I’ll have a look for whether there’s any OECD table. I seem to remember one years ago. Is it the case that, UK has high excise or taxes on fuel? I’m guessing the Germans probably do.

Marion Terrill 13:00

Yeah. Continental Europe does. Yeah. Sorry. I don’t know off the hoof.

Gene Tunny 13:06

level. I’ll have a look. Yeah, I agree with that general point you made? I think that yeah, I have seen some data on that. So that’s good. might be good to go on to what you’re arguing in that piece? Because you said that? Well. Yeah, this EV tax? Well, it’s probably not the way you resolve this problem we’ve got with this The problem we’ve got with fuel excise duty disappearing. This EV tax probably isn’t the right way to go about addressing what you might see as a an issue there. Could you explain what your argument is, Marion? I mean, what do you think would an optimal policy would look like and first, am I right that you don’t agree with this EV tax just for just to be clear on that.

Marion Terrill 13:56

I don’t think it’s the worst tax in the world. I think it’s fair enough for the states to raise this revenue. And I would also say, given that you’re running an economics podcast, perhaps I can make the point that the people’s, like if you think about fuel price, elasticities, they’re pretty low, are not likely to change their behaviour much in the presence of a modest tax. And this is very modest. I think the estimates are that the typical driver might pay $300 a year. So I would have thought it was a reasonably efficient base. And I think it is arguably laying the groundwork for it to become to spread to other types of vehicles and to be paid at a higher rate over time. So I think all of that is fine. I guess I think well, if you just think about it as a revenue base, that you know, this low elasticity is a good thing. But I think a lot of the debate does sort of invoke the fact that EVs are better or better for the community because they aren’t producing the carbon emissions. And so they should be advantaged not disadvantaged. And I think that that’s in the absence of an economy one carbon price. That’s absolutely right. But I think in the the point of taxing driving, that I think makes the most sense is to try to bring about an efficient use of the road network. And by that, I mean that you should be charged, little or nothing, if you’re driving at a time of day in in a place where there’s no congestion. But if you want to contribute to congestion in peak hour, then you should be paying for it. So here, it’s an externality argument. So what you really want to do is set it at a low rate, so that you just deter that driver who can be most flexible, who cares the least about being there, they’ll put their trip off or take it another way. And that’s an efficient outcome. But if you do that, you won’t raise much revenue. So I think that governments are confronted with a choice. But I suppose I think in the road network is so important to the economy and society that what you really want is the latter. So I would like to see road user charges that vary by time of day and location, and vehicle size. So the Commonwealth can’t impose that kind of charge, because it cannot charge different Taxs, to different parts of the country, under the Constitution. So this has got to be in state based charge. And so that’s why I think, well, perhaps it is time for the governor for the federal government to step out of its role in taxing driving and hand that job over to the States because the technology has now improved. And it’s it is now much more realistic for states to do sort of fair and precise charging in a way that probably wasn’t feasible, even 10 years ago.

Gene Tunny 17:23

Right. So by the technology has improved. You mean that there are ways of tracking people. I know that if you’re going on toll roads here, in Queensland, you’ve got a tag or something that pings or that that tells the toll road company when you go on the toll road? So imagine there’d be some device, is that what you’re thinking?

Marion Terrill 17:47

Or you can do that, I think, look at the I think the most foolproof way is to use number plate recognition cameras, which are more up to date technology really than those tollgate. But I think people are foreshadowing when we’ll be able to use GPS to do this. Now, my, my feeling that that is it will happen. But we’re not really there yet. That no country has used GPS to introduce a road pricing scheme across the board. But they’re so let’s sort of see what Singapore does, really, but I think that that is becoming increasingly likely, but number plate recognition cameras, much less kind of unsightly and obtrusive than Tollgate entries. And so that that’s definitely a way that you can do it. In the shorter term.

Gene Tunny 18:45

I should have thought of that because I’m a big fan of British crime shows and often they will catch people with that, that number plate recognition, technology or they’ll know where they’re going. So I should have thought about that.

Marion Terrill 19:00

It has improved a lot and become that technology. So yeah.

Gene Tunny 19:03

Okay. And one point that one of my guests will Tim who was on the show, last week I was chatting with about EVs. One thing he was concerned about is this issue of well, it’s surveillance where our privacy is being compromised. Have you thought about that at all? Is that often raised as an objection to this sort of thing?

Marion Terrill 19:25

Yeah, I think it’s, I agree with him. I think people are very quick to dismiss it. It is actually another reason why I’m dubious about GPS technology, because there’s sort of a few different ways in which Surveillance can be a problem. One is that the government can surveil you. The other one is the company can surveil. Yeah. And maybe market at you or, you know, interact with you in a unwelcome way. So both of those are concerns I think. So really what you want is the, you need to set up a structure I think where you have the information, that’s the image of you, or image of your vehicle is sent to a place in the encryption key that links that image to you is in a different place to protect people’s privacy, but I do think in this country, we do have, we have had a long history of the, of the, of privacy. The Privacy lobby, I think, is quite effective at unraveling government ideas, too, to act in ways like to make use of technology in ways that could be prejudicial to people’s sort of freedom to go about their lives anonymously.

Gene Tunny 20:52

Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny 21:26

Now back to the show. So Marion, have you looked at how this is working? Or how road user charges have worked in other countries? I mean, you mentioned? Well, I mean, there’s the UK. I mean, there’s the the infamous congestion charge in central London. That’s probably the only one I’ve experienced. But I understand. Well, I’ve heard that there’s this sort of thing is there this sort of thing in Singapore and is it germany you mentioned?

Marion Terrill 21:55

Well, it’s interesting this, there’s established congestion charging in quite a few cities around the world. So Singapore was the first London, Stockholm and other countries, other cities are thinking about it. But what’s happening these days is now low emission zones are coming in. And so in London, for example, the low emission zone is layered on top of the congestion zone. And really these many, many, many cities are doing low emission zones. And they kind of like a coordinate around the central part of the city, that now the motivation, we’re recommending that for the major capitals here in Australia, because the the effect of exhaust pipe pollution from trucks is so terrible for health. But it’s interesting, because in some cities like Milan, for example, there is a low emission zone, but the reason for it is to preserve the beautiful buildings rather than to preserve people’s health. So there’s, I think there’s certainly a significant, a significant global movement towards this sort of thing. And it can usefully be combined with congestion charging, because what you’re really doing is you’re trying to deal with two externalities at once. And you can calibrate your instrument to do both of those things. Because where there’s a concentration of vehicles, that’s where you get obviously, congestion, but also concentration of exhaust pipe pollution.

Gene Tunny 23:28

Right. Okay. Okay. Yep. So with the congestion charging, that’s almost like a syntax is it or it’s a form of corrective taxation, or you’re making the driver face the marginal social cost of them going on the road network at that particular time in that particular place?

Marion Terrill 23:50

Yeah, that’s right. And people have different sort of strength of desire to use the roads at peak periods. And so it would be a poor result, to put off too many people. So don’t want to set your charge too high. And you certainly want someone who’s going to a job interview or an important appointment, you don’t want to put them off. But if you are thinking about someone who’s perhaps a retired person going to a medical appointment, for that person, it may be very low cost to do it at 11am, not 9am. And so to send a signal to such a person, to that gets them to take into account their contribution to slow it not only being slowed down by everyone else, but also to slowing everyone else down. And I think this is going to become more acute Gene because as the as we get more and more electric vehicles, great in many ways, and they’re much cheaper to run than internal combustion engine vehicles. But if they’re cheaper to run, it means people will be inclined to drive more. So I think unless governments take some kind of action on congestion. We really are. This is a recipe for gridlock. I think is very strong for governments to act on congestion charging, and preferably to do so early. And so that to go back to the we were talking before about our electric vehicle chargers. Yeah, I think, you know, this is the side of it that the current charges in Victoria and on the table elsewhere, don’t really take account of at this point

Gene Tunny 25:31

Right Yeah, I look, I think what you’ve, what you’ve said, and what you wrote in that piece is great. I mean, as an economist, it definitely appeals to me. I’d like to see the model, though, of course, as you would do, you know, if anyone’s developing this, what this could look like, what the parameters would be, what those charges would be. When, I mean, how would the prices be set? Would it be? How regularly they would they be reviewed? Is there some algorithm involved? Have you thought about how this would work? In practice? Is anyone developing a model for this, Marion?

Marion Terrill 26:08

Yeah, we’ve developed a detailed model for it, actually. So yeah, we published it in 2019. So we designed in detail, a congestion charging scheme for Sydney, and Melbourne and one for Melbourne. And what we did was we in terms of phasing, just start with a cordon around the CBD. And we worked out exactly where the cordon would go, and how many detection points you would need. Look through all the different technologies that’s really rare came to the view that number plate recognition was the way to go. And then we looked at the, we looked at traffic data and worked out when peak hour and when the shoulder period should be. And finally, we worked out the what we thought were the appropriate charges to levy taking into account the cost of public transport into the CBD. And then we worked with Veitch Lister Consulting who did the demand modeling for us to see what the impact on congestion would be? So all of that detail is in a report called ‘Right Time, Right Place, Right Price’ up on the grattan website. So we did do that. And so that was on congestion charging. I guess. This week, we put out a report on trucks, Grattan truck plan, and one of the recommendations was to introduce a low emission zone. And we didn’t scope that up in detail, because I think it is the subject for reporting its own right. It’s quite a complex area. But we are, we’re planning to do that report and publish in 2023. With detailed design for how to, and this takes into account, things like how much proximity matters to a main road. How much sort of how much difference it makes when when you’ve got a more vulnerable population in one way or another. So and what kind of mitigations you can take in terms of sort of greening and that sort of stuff, so that we can come up with a detailed design, but at this point, our recommendation is that trucks manufactured before 2003 should be banned from the densely populated areas of the major cities.

Gene Tunny 28:30

Yeah, I wondered about that. And I was stunned. Looking at the figures you had in that report regarding how much worse they were or trucks that were, you know, over 20 years old, how much worse they are in terms of the the toxic particles that come out and the in the exhaust? Or how much worse than more modern trucks? Is there some reason you chose 2003? Was there some change in technology?

Marion Terrill 28:58

There was. Yeah, so the pollution levels for trucks are the international standards and known as Euro standards. And before 1996, there were no standards at all, so anything goes and those trucks are the worst. So a pre 1996 truck emits 16 times as much particulate matter, and eight times as much of the poisonous nitrogen oxides as a truck sold today. And then in the when the Euro standards were first adopted in Australia, Euro one the first level, operated until 2003. And that is better than nothing but still, by today’s standards, very lenient standards. And so, the reason all this matters is that more than a quarter of the trucks on the road today 2003 or earlier, and 14% of them are these pre 1996 ones which are particularly toxic. And that’s if they’ve been properly maintained, some of them will be worse. So, over time the standards have increased have become more stringent. At the moment, we’re on Euro five standards, we have been since 2011. We’re a decade behind kind of most major markets, which have been on Euro six for a long time. And so we’ve been agitating to get on to Euro six. But even this year, Euro seven is coming out. So we’re, we’re so far behind. And so of course, the track operators don’t really have an incentive to adopt these standards, because it costs money. So it really is a matter of for government regulation to prevent the interaction of really dirty old trucks with densely populated areas.

Gene Tunny 30:51

Yeah. So have you thought about how this would impact the industry? I’m sure you have. I’m just interested in your thoughts on it. Because I mean, there could be significant short run costs, you could have a lot of probably smaller operators, leave the market if they can’t use their truck anymore. I mean, imagine that the bigger operators have more a more modern truck fleet, but then there’s a lot of smaller operators that have the older trucks. Could this impact our supply chains? I mean, we’ve had all the logistics problems this year and associated with people being off work or in isolation due to COVID. Things haven’t been turning up at the supermarket. Have you thought about how this would? What impact would have on the industry and how that could be mitigated Marion?

Marion Terrill 31:36

Yeah, we have some I’m very alive to this. I think you’re absolutely right, that the big fleets of trucks are generally pretty new. And they’re the ones that kind of get sold on and feed through the chain. So at the at the oldest end of the spectrum, it is a lot of operators who might struggle to get them to upgrade the truck. So a couple of things, I’d say. One is that we don’t really the compromise that we thought was reasonable was that these trucks would be able to operate but not in the densely populated area. So, for example, a lot of trucks that do farm runs can be quite old. And it’s if they’re in an area where there aren’t many people will, the harm is much less. Now that’s not any good if you’re the actual driver, but it’s some some mitigation, that you’re not going past childcare centers and spewing out poisons at the kids. So there is one comment I’d make. The we did. We did recommend, though, that the government should assist by sort of with a track replacement fund or scrappage fund. Basically, we thought it should have a tender based programme where truck owners can make a binding bid for how much they’d be prepared to accept to scrap their truck. And because government’s got to be bit careful not to overpay for this stuff. In the end these traps have been allowed perfectly legally, to create quite a public health hazard. And we think that should stop, but we, you know, recognising that there are implications and that the government might want to assist with the scrappage fund.

Gene Tunny 33:39

Yeah. And so are you confident that this would pass the cost benefit analysis tests, if there was a regulation impact statement arrears on this, you’d be able to demonstrate that the avoided costs of the community through the fact that these particulates were causing an elevated level or incidence of disease in the community? And if we tried to put some, you know, put a figure on that, what you’d be willing to pay to avoid that? What it’s costing the economy in terms of the well, having to replace that truck fleet, any disruptions associated with that. Are you confident that that equation would be in favour of this measure? Have you done any numbers yourself?

Marion Terrill 34:26

Yeah, look, the government’s done a raise. And, and there are clear social benefits to doing it. So we’ve updated that and I think the, the basic figure is like the health benefits or health costs avoided, if you like, like by 2014, would be of the order of 1.7 billion in a year. Yeah. So yeah, very considerable health benefits. And just just to clarify for your listeners by health benefits, or health costs, avoid I don’t mean In the costs of treatment in hospitals, it’s the pain and suffering of, of getting the disease. Like, they’re the diseases that you get from these poisons, or you get, obviously, respiratory illnesses. But because the particles are so fine, they get into your bloodstream. And so you can get cancer type two diabetes, stroke, can affect it affects children in particular and vulnerable people, even in children in the womb. And it also even when it’s not causing diagnosable disease can impair cognitive function. Then every time the World Health Organisation or researchers do research on this, they find Oh, it’s worse than we thought

Gene Tunny 35:41

Right? Yeah, yeah. So this really is I’ll have to have a look into this. So this has already been done. Do you know how recent it is? I mean, is this on the agenda of governments to do something about?

Marion Terrill 35:54

Yeah, it’s been on the agenda of governments for quite a while. The I think the reason is about five years old, yeah. So we, we’ve updated that. But it’s, if anything more compelling now than it was then.

Gene Tunny 36:13

Yeah. Yeah. But they’ve obviously that there, someone in government has been concerned about what it mean for the industry. Maybe they’ve been lobbied on it. I’m just wondering why they haven’t done anything. But it looks like you’re, you know, have been I mean, I guess, assuming that these numbers are right, I mean, hopefully, your report does motivate some action in this on this issue.

Marion Terrill 36:39

Yeah we are really hoping so. And I think by doing some follow up work in 2023. We’re working with some students at Monash to get more sort of air quality data, and to just enrich our understanding so that we can do detailed design, that that should be pragmatic and practical and effective. So it’s it. I think it’s a big issue. And it’s, I think it’s an under researched issue, actually.

Gene Tunny 37:10

Yeah. Yeah. Okay. Just final question. When I read the press release, and I had a quick look at the report, it looks like you’re focused on Sydney and Melbourne. Why not Brisbane, one at the third largest city in Australia.

Marion Terrill 37:26

Oh, we had a lot of debate about this actually, Gene. And I absolutely think that Brisbane should be in this, Adelaide in particular has got almost it’s got 45% of its trucks, pre 2003. So, so. And people have said to me, Well, what about Wollongong? And what about Newcastle? Absolutely. So in Europe alone, there are 250. More than 250 Low Emission zones. This is not a big deal. But we, yeah, we’re so we do plan to unfold more on this, but I think you’re absolutely right that Brisbane has got I forget the exact figure but approximately 20% of trucks. Pre 2003. It’s too many.

Gene Tunny 38:13

Yeah, yeah, I wouldn’t be surprised. I mean, there are still a lot of old trucks out there for sure. Okay, Marion, this has been fantastic. I’ll put links to all of these reports that have been mentioned in the show notes. I’ll put links to your social media. Anything else before we wrap up?

Marion Terrill 38:32

Oh, no, I reckon that’s about it for now.

Gene Tunny 38:35

Great. Yeah. Well, thanks, Marion. And that’s been terrific. Good. A good summary of all of these issues, and I’ve learned a lot. I mean, I always think I’m keeping up to date with what different think tanks are putting out and including Grattan’s. But maybe I sort of in the back of my mind, remember that that congestion charging one but I’m gonna have to revisit it this ‘Right time, Right Price, Right Place’. Yeah. And, and have a close look at that. So that’s terrific. So yeah, again, thanks so much for your time. I really enjoyed the conversation.

Marion Terrill 39:13

Me too. It’s always a pleasure. Thank you, Gene.

Gene Tunny 39:17

Okay, that’s the end of this Episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com And we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye

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Tags australia, congestion, congestion charge, economics, electric vehicles, EV, government, pollution, road user charge, roads, tax, trucks