Coase and Kansa

November 22, 2007

On the flight back to Bangalore from Delhi, I was on seat 16D. There was a kid on 16C. There was another kid on 14C. And yet another somewhere around row 20. And they all howled through the flight.

Howling kids are always annoying but the problem is even worse on a flight. You can’t walk away to a quieter place. The kid can’t be taken away to a quieter place. You’re basically trapped listening to the howling kid.

In many ways, the situation is the reverse of Alex Tabarrok’s flu vaccination:

People who have the flu spread the virus so getting a flu shot not only reduces the probability that I will get the flu it reduces the probability that you will get the flu. In the language of economics the flu shot creates an external benefit, a benefit to other people not captured by the person who paid the costs of getting the shot. The external benefits of a flu shot can be quite large. Under some conditions each person who is vaccinated reduces the expected number of other people who get the flu by 1.5.

Since a large fraction of the benefits of the flu shot, perhaps even a majority of the benefits, go to other people and not to the person paying the costs, the number of people who get a flu shot in the United States is well below the efficient level.

In the case of Alex Tabarrok’s flu vaccination, there was an external benefit. However, in the case of howling kids, there is an external cost. The kid is suffering, but the kid’s howling makes all the other people in the aircraft suffer more.

What are the implications? Well, Alex Tabarrok is asking people who are benefiting from the positive externality to send him money to compensate him for creating the externality:

I just had my flu shot. Please send your checks to my George Mason address.

I only got the shot because, as you well know, I’m altruistic. I care about you. But do send your checks, that will help.

Applying the situation in reverse, the parents of the howling kid should give all the other passengers money to compensate for the suffering they have inflicted on them through their inconsiderateness. This has staggering implications. If each of the passengers is to be compensated 500 rupees for the suffering they have endured, that raises the cost of carrying a kid on board by 9 kilorupees. The best way to implement this would be to make the price of the ticket for a kid 9 kilorupees – in sharp contrast to Simplify Deccan’s abominable policy of letting infants travel in laps for only a 250 rupee surcharge- and give all other passengers a five hundred rupee discount or rebate.

Alex Tabarrok also says:

Of course, we know from the Coase Theorem that there is an alternative approach. We could charge people who do not get their flu shots. (Thus, if you haven’t had a shot you must still must send me a check.) Or to reduce transaction costs we could fine people who get the flu.

The equivalent of the fine in this case would be making the cost of the ticket for the kid 9000 rupees, but not distributing the extra money to the passengers. That would still have the beneficial effect of making it too expensive to carry your kid on board a flight.

Of course there is a way to cut out transaction costs entirely. You can bring in the Kansa Society, which will slaughter the kid. No howling, and no worrying about surcharge transfers. Oh sacred simplicity!

Noblesse Oblige and Merit Based Gifts

November 21, 2007

This year, Diwali was not as renumerative as it used to be. This is because I am now a grossly overpaid MBA (who is also no longer forking half his salary over to a Parsi thatha in Malabar Hill as paying guest charges) and noblesse oblige demands that:

  1. I no longer accept gifts from grandmothers with no independent income.
  2. I no longer rely on my parents to finance Bhai Dooj chanda for my sisters.

Conscience and noblesse oblige may not be neglected. Social traditions which promote the voluntary transfer of wealth from the earning and productive to the weak and unemployed encourage the spread of Edwardian values. Failure to carry on such traditions will lead to a society in which free exchange and taking responsibility for one’s property are abandoned, precipitating the collapse of enlightened civilisation. Thus, all cash which came in on Diwali went out equally rapidly to sisters two days later at Bhai Dooj.

However, I face a dilemma. I would rather cut down upon cash gifts to the sister who brought shame upon the clan by marrying into a family of uncultured barbarians who steal electricity and whose approach to religion is to feed goats. The cash saved could then be given to the sister who brought honour upon the clan by eloping. And yet, I shy away from making gifts on the basis of virtue, when tradition demands that sisters be given gifts of equal value. More so because deviating from established processes on the basis of arbitrary valuations of virtue violates Saivite tenets of adherence to eternal law.

However, in this as in most other things, Tyler Cowen provides a solution: merit based gifting. Instead of giving people gifts on occasions like birthdays or Christmas (or indeed, Bhai Dooj), give them gifts at random times based on how much you value them.

This is excellent. Tradition only specifies giving gifts of equal value at Bhai Dooj. But I can give merit based gifts throughout the rest of the year, at random occassions. Edwardian objectives of rewarding virtue can be achieved after all!

I think the best way to do this going ahead is to avoid Bhai Dooj gifts completely. However, since all the sisters have kids, give the kids gifts in proportion to their virtue. This is a good thing, because:

  1. Noblesse oblige is even more vital when it comes to being a rich uncle who can give gifts to children with no source of income whatsoever.
  2. Nephews and nieces whom I approve of (because they bugger off to a secluded room and engross themselves in Roald Dahl) can be rewarded with more Roald Dahl (or Phillip Pullman for that matter). Gifts to nieces who watch Shah Rukh Khan movies and nephews who bite can be cut back accordingly.
  3. Gifting to nephews and nieces is an investment, while gifting to sisters is merely an expense. Investment is more Edwardian than expense.

The virtue of nephews and nieces must therefore be tracked going forward.