Zoos and Endangered Species -- trade-offs in everything

Take a look at this article by Leslie Kaufman for the New York Times, "Zoos’ Bitter Choice: To Save Some Species, Letting Others Die." An excerpt:

As the number of species at risk of extinction soars, zoos are increasingly being called upon to rescue and sustain animals, and not just for marquee breeds like pandas and rhinos but also for all manner of mammals, frogs, birds and insects whose populations are suddenly crashing.
To conserve animals effectively, however, zoo officials have concluded that they must winnow species in their care and devote more resources to a chosen few. The result is that zookeepers, usually animal lovers to the core, are increasingly being pressed into making cold calculations about which animals are the most crucial to save. Some days, the burden feels less like Noah building an ark and more like Schindler making a list.

A core dilemma is whether zoos should be more focused on entertainment, which people are more willing to pay for, or on preserving biological diversity for the "public good."

In some cases, it seems like advocates in the latter camp are more concerned with shaping public preferences than responding to them. The article continues:

Zoos are essentially given a menu of endangered species that the association is trying to maintain and can then choose according to their particular needs. But final decisions are often as much about heart as logic.
St. Louis, for example, has committed $20 million — or the equivalent of 40 percent of its annual operating budget — to building an enormous exhibit for polar bears — complete with a fake ice floe — even though its last polar bear died in 2009 and the Marine Mammal Protection Act makes it illegal to remove or rescue the bears from the wild. The zoo hopes that in the five years needed to open the exhibit, it can argue for an exemption, import orphaned bears from Canada or perhaps secure the cubs of captive bears.
Dr. Bonner acknowledges that the polar bear project runs counter to many of his more practical convictions on the role of the modern zoo. He has insisted that his keepers spend what limited field conservation dollars they raise on threatened animals that are most likely to make a comeback in the wild. With sea ice disappearing at an alarming rate, polar bears do not fit the profile.
But he justifies the exemption as a lesson for zoo visitors: “I want people to see this beautiful creature and ask, ‘How could we have let this happen?’ ”

Personally, if I went to a public zoo and saw nearly half of its operating budget spent on an object lesson in how difficult it is to preserve polar bears, collective guilt over habitat loss would not be the first thought to cross my mind.

There is a valid argument to be made for preserving biological diversity. Fear of a catastrophic breakdown, expressed through a variety of vivid analogies, is one of the more popular arguments, although perhaps one of the less valid. This "invisible threshold" argument has become a rationale for preserving species within even the most marginal ecological niches.

Several large buckets of dirt are now home to the threatened American burying beetle, so named because it buries the corpses of small animals, like birds and squirrels, and lays its eggs around them. Once, the beetles, with their brilliant red markings, ranged over 35 states. By the time the United States Fish and Wildlife Service listed them as endangered in 1989, there was one known population left, in Rhode Island.
At the government’s behest, the St. Louis Zoo, in conjunction with a zoo in Rhode Island, has been successfully breeding them and returning them to the wild.
Mr. Merz says the effort was worthwhile because the beetle might play an irreplaceable role in the ecological web. He considers picking species worth saving akin to life-or-death gambling. “It is like looking out the window of an airplane and seeing the rivets in the wing,” he said. “You can probably lose a few, but you don’t know how many, and you really don’t want to find out.”

One has to wonder, if burying beetles and partula snails are so crucial to the ecosystem, why are they only surviving in the back closet of a zoo? The burying beetle has functionally vanished from the North American ecosystem for over twenty years. Why haven't we seen any consequences yet?

Of course maybe this is just one more "rivet in the airplane's wing", the loss of which pushes us imperceptibly closer to global disaster. But, when you have to compare the costs of saving potentially millions of different endangered species, it helps to have an idea of the probabilities, rather than saying they are all equally unknown and potentially deadly.

What is the chance that any one particular species is completely irreplaceable? It is incumbent on the defenders of biodiversity to make these estimations, instead of demanding that every species must be saved, regardless of the cost. Even zoo-keepers can't live up to such an unattainable goal.

Diablo III and the Newsvendor Model

How does a long-awaited sequel, which became the fastest selling PC game of all time, still end up with a 2-star rating on Amazon? Probably because so many people were excited to play it and then couldn't, due to Blizzard's "always online" anti-piracy strategy combined with shaky server support.

Diablo III has made tons of money, but still turned into a PR nightmare for its parent company. From an economic perspective, however, these two things are not necessarily in opposition.

The newsvendor (or 'newsboy') problem, popular in the operations management literature, gives some insight into this apparent contradiction. It models a retailer who doesn't know exactly how much demand there will be for his/her product in the next period, and has to decide on inventory levels now. The vendor knows quantity demanded will be pulled from some statistical distribution, and wants to maximize expected profits.

This situation isn't too different from a video game company trying to decide how much to invest in server capacity. Blizzard doesn't know exactly how many people will buy the game on its release date, although they probably have some estimate (based on pre-purchases or past sales totals for their games, for example). They ideally want to have just enough server capacity to let everyone play, and no more. Given uncertainty, however, that goal is hard to accomplish.

The newsvendor model would advise a firm to purchase the average quantity demanded, assuming the costs of over- and under-purchase are exactly equal. For Diablo III, costs aren't exactly equal: once someone has bought, they won't be able to return the game if servers are overloaded -- at worst, maybe they tell friends not to buy it. But, if Blizzard over-purchases in server capacity, they're stuck with those costs.

In this case, over-purchase costs are higher than under-purchase costs, so it's rational for Blizzard to buy less than the average expected demand for their server capacity... Much to the chagrin of their loyal fans.

Consumers have a right to be annoyed, but these opening-day server issues shouldn't be much of a surprise. Counter-intuitively, if everyone could play without any interruptions at all, that outcome would probably be even more inefficient, at least from Blizzard's perspective.

Don't interact with strangers' children.

The way current law is set up, being a Good Samaritan and trying to rescue someone else's kid can only get you in trouble.

Browsing the Internet, I've found a few anecdotes which support this view. I don't have any verification that they're true, so you'll just have to take my (and their) word for it.

First story: a young woman is waiting at a street corner. She sees a mother, who is not paying attention, whose child wanders out into the street in front of an oncoming bus. The young woman jumps out and pulls the child back onto the sidewalk. Her reward? The mother yelling "how dare you touch my kid!!" and our would-be hero is treated as a villain, and forced to flee the scene.

Second story: a young man is on the beach. He observes a small male child falling off his surf board a long distance from land. The young man swims out and rescues the child from drowning. On returning to shore, he's greeted by an irate mother who calls the police and wants to press charges for child molestation. Luckily, witnesses confirm the man's story and the cops let him go.

Following this second anecdote a (self-proclaimed) lawyer comments, describing how this situation could have led directly to the young man being registered as a sex offender. By the time police would have questioned the child, his head would be full of misinformation from the angry mom, causing him to tell the police what they "want to hear", possibly putting the Samaritan behind bars or at least requiring a costly and life-disruptive legal defense.

Now, I'm not blaming either the moms in this situation (they are probably freaked out and will naturally accuse the first person they see who might be responsible for their child's endangerment) or the harsh treatment of sex offenders (children should obviously be protected from predators). But it's worth noting the incentive effects that these sort of stories have on potential Good Samaritans.

My personal stance is to never interact with a stranger's child no matter what the circumstances are. I won't engage in conversation, nod, smile, or hold a door open. I was about to say that the most proactive thing I'd do if I saw a child in danger would be to record the incident on video to give to YouTube the authorities later, but even taking pictures of kids can get a guy in trouble... So I probably wouldn't even do that.

Being a Good Samaritan is really a lose-lose proposition. If I succeeded in saving the child, best-case scenario I get a pat on the back, worst-case is a sex-crimes trial that will haunt me for the rest of my life. If I fail to save the child (it still falls under the bus) then maybe I get accused of murder or assault because the angry parent saw me "push" the kid instead of trying to rescue it!

There is absolutely no upside to helping or interacting with a stranger's kid. Perversely, this fact makes being a Good Samaritan far worse: because rational people know it's a bad idea to help a kid, the people who do try to help are even more likely to be creeps or labeled as such (the selection effect).

In its efforts to prevent strangers from harming vulnerable children, society has also unintentionally deterred strangers from assisting vulnerable children. It's hard to say which impact is more important, but given the relative magnitudes (there are lots more healthy, well-intentioned people out there than sex offenders) it's very possible the overall effect has been negative for child safety.

Farm Subsidies: A Picture Worth 1,000 Words

Who ever said there's no skiing in Iowa? Source.

In other news, the Institute of Medicine is advising the government to adopt a series of policies to control the American "obesity epidemic." One such policy is a proposed "soda tax."

I have a better idea. Instead of taxing soda, why don't we repeal the subsidies which makes the primary ingredient, high-fructose corn syrup, so dirt cheap to produce?

Fish and Game Dept. targets Asian Supermarket - Flawed Economics in Action

A daring sting operation has brought down another set of dangerous criminals in our midst. The proprietors of Great Wall supermarket (located about 20 minutes from where I live) have been arrested for selling "wild" sea animals including live frogs, crayfish, turtles, eels, and more. The store owners say that all of their stock comes from farmed sources, but that does not appear to be convincing the crusading Commonwealth bureaucrats.

Officer Rich Landers, of the Virginia Department of Game and Inland Fisheries, had this to say:

“History has show when wildlife becomes commercialized, the population dwindles,” Landers said. “Whether it’s elephant tusks or whales, we are trying to reduce the chances that wildlife becomes commercialized.”

Lets take a moment and think of a heavily commercialized animal population, like cows. We may have another disaster on our hands: the cow population is down to the lowest level since 1958, with only 92.6 million in the United States! An estimated 25 million cows are slaughtered each year. That means that in less than four years, there won't be any cows left in the United States. Savor your steaks while you can!

See what's wrong with this story? While commercialization allows animals to be consumed, it also creates strong incentives to rebuild the population for future consumption as well. That's why the decline in the cow population has been in response to reduced profitability of cattle ranching... not an ecological shortfall. Why would this be any different for farmed eels, turtles, or fish?

The historical examples that Landers uses are all cases where no one had ownership rights over the stock of animals being hunted, and therefore no reason to maintain sustainable population levels. That is clearly not the case here when we are discussing farmed seafood.

If anything, the proprietors of Great Wall should be applauded, for meeting consumer demand for uncommon (by American standards) foodstuffs. That way, Asian families can eat farmed eels etc. and do not have to catch them wild or import from abroad, potentially bringing exotic animal diseases to afflict U.S. ecosystems.

I won't go so far as to accuse the Department of Game and Inland Fisheries of racism or xenophobia, as I'm sure they'd be just as happy to apply their short-sighted and fallacious brand of reasoning to a predominantly-American grocery store as well. But, charging honest business owners with felonies, for selling live turtles and bass, does not inspire much confidence in either the agency's competence or its underlying motives.

The Durable Goods Problem in Software

Being a monopolist isn't all it's cracked up to be. Produce a durable good, and you're functionally competing against yourself.

For a Durable Goods Producer with Market Power:
Problem 1: durable goods can be re-sold. If re-sale purchases are cheap and reliable, why buy new?
Problem 2: after selling at high price, the firm wants to reduce price to get more customers. So, if you're a customer, you shound wait for the lower price to purchase... If you're the firm, how can you ever manage to sell at the high price?

Software is perhaps the ultimate in durable products. Once you have the program installed, it never wears out. Resale is prohibited by license agreements and made impractical by other technical means, but the second problem remains. How can software companies prevent consumers for holding out and demanding cheaper prices?

Big players in the software industry have found various ways to overcome this durable goods problem.

1) Bundling. Most famously, Microsoft got its big start by combining the Windows operating system with IBM machines. While the software may be durable, the computer most definitely is not. Replacement of consumer products guarantees repeat customers for their OS. Waiting doesn't help the consumer, because they retailer they purchase from will have to get a copy of Windows regardless.

2) Ongoing payment schemes. Subscription fees, downloadable content, and micro-payments have been used successfully by companies from Blizzard to Zynga. In addition to providing a check against piracy, each of these pricing methods ensure the up-front cost is only a small part of what the consumer pays for that software. Holding out for a lower price on the base product doesn't exempt someone from paying for the extras.

3) Build price discounts into the sales model. Some video game marketing tools (I'm thinking of Steam, from Valve software) build semi-frequent sales into their distribution channel. Users can buy a new game when it comes out at full price; wait a few months for the game to go on sale at 33% or 50% off; or wait several years to get it at deep discount. The amount paid depends on the gamer's urgency in wanting the game. It's temporal price discrimination which separates out high- and low-demanding users.

Software companies still end up competing against themselves to some degree, but with these sorts of pricing mechanics they're able to keep revenue higher than it would be otherwise.

Light bulbs and implied discount rates

What does your choice in light bulbs say about your attitude toward the future? In terms of discount rates, quite a lot.

An incandescent 60W bulb costs around 50 cents to buy, while a 15W CFL costs about $9. The government estimates that an incandescent bulb will cost $4.80 in electricity annually, while the CFL will cost $1.20 if used an equal amount.

Assuming a five year time span - roughly how long a CFL bulb is expected to last, and during which a new incandescent bulb will have to be purchased every year - if you just add up the costs, the incandescent will cost $12 more. Why would anyone buy an incandescent bulb? The answer is time preference.

Plugging the numbers above into Excel and using "Goal Seek" finds an implied discount rate of 39%. That is, someone would have to value one dollar a year from now 39 cents less than a dollar today in order to be indifferent between an incandescent and CFL light bulb.

People discount the future when making decisions, and the discount rate is not always consistent between all activities. Few people would want to pay a 39% rate on a credit card, but some are willing to do the equivalent when the cost is on the electric bill instead of the credit report.

There are a number of other potential explanations: maybe some renters don't expect to stay a full five years or have electricity included with the rent; some consumers might be cash-constrained and can't afford the pricey bulbs; or there could be some cognitive bias or plain lack of information about electricity costs. But, given the plenitude of "green" or energy conservation campaigns and general worry about global warming, behavioral factors might also push in the other direction.

If varying discount rates are distributed throughout the population, there may be enough people in the "tail" - with extremely high discount rates - to keep incandescent bulbs on the shelves for some time to come.

The value of flexible labor markets

Three stories in the news today highlight the importance of labor market mobility.

The United States has had some good news lately. With job spurt, US economy races ahead of Europe:

Some 1.9 million US jobs have been created in the past five months, bringing the number of people working nearly back to the levels of late 2008.
Jacob Kirkegaard, economist at the Peterson Institute for International Economics, said the latest developments in the labor market show the resilience of the US economic model.
"When you're a US employer, you barely hesitate to hire because you know if you take a worker for a peak in business, you can easily lay off that person if it doesn't turn out as planned," he said.
"In Italy, in Spain, in France, in Greece, the costs for that are high." 

Those high costs are creating problems in Greece. Employed But Not Paid, Some Greeks Voice Protest:

If ALTER TV laid off these workers, the owner would have to pay millions in compensation. Under Greek law, white-collar workers, for example, with 24 years on the job are entitled to 28 months of severance pay.
These days, few employers can afford that, says Vassilis Masselos, a shop owner who has been pressing the government on business reforms.
"It's not a matter of choice, it's a matter of necessity," Masselos says. "They can't find the money to pay employees. They cannot fire them. So they are locked into a sort of limbo that nobody can get out of."

Inflexible labor markets make economic contractions worse, and also slow the pace of recovery. Meanwhile, Canada is offering visas to Indian professionals as their economy improves. Human capital is the largest resource in any economy, so allowing movement toward higher-valued uses is essential for productivity and growth.

Productivity is bad for job growth?

Scanning the news feed for something worthy of being shared with Twitter, I happened across this good news/bad news article from USA Today: Unemployment benefit claims, worker productivity fall. Less benefit claims is a sign that more people are going back to work, although drops in productivity temper optimism about the speed of economic recovery.

Instead, apparently the author of this piece took it be good news/good news, claiming

Weaker productivity growth can help boost hiring if economic growth picks up.

This argument is motivated by the lump of labor fallacy (the idea that there are only so many jobs to be done, so higher productivity will leave more out of work) and a preoccupation with firms as purveyors of jobs rather than producers of products. Both of these ideas are largely discredited among economists.

In reality, productivity growth is the driving factor behind economic expansion. For economic growth to pick up, we need the inputs of production (labor, capital, etc.) to become more productive, not slow down! This allows us to both become richer and create more jobs as a society.

At the micro-level, theory predicts that a firm will not pay a worker more than their marginal product; i.e. if a machinist can produce $50 worth of goods in an hour, a company that pays him/her $51 per hour will be losing money. USA Today misses the irony when going on to claim

consumers have been weighed down by wages that haven't kept pace with inflation.

If that is occurring, it's because worker productivity hasn't kept pace with other factors in the economy. This argument is made in more detail by several recent books: Race Against the Machine by Erik Brynjolfsson and Andrew McAfee, and The Great Stagnation by Tyler Cowen both explore the phenomenon of declining worker productivity, and neither are excited about that decline as a source of new jobs.

Lower productivity means reduced living standards for future Americans. It doesn't even rise to the level of a placebo for our current unemployment woes; generally, placebos are expected to do nothing, not make the problem worse.

The American Entertainment Industry's Death Rattle

It's obvious that the circumstances which allowed so much wealth to be accumulated in Hollywood by major record labels have changed, but the people at the top don't want to change with them. The industry's demise (at least in its current form) is evidenced by the great efforts being made to legislate demand for their products - through the SOPA/PIPA legislation in Congress, which led to a blackout of many popular sites yesterday, and today's effort to shut down Megaupload.com as a copyright infringer.

Piracy is not really the problem here, but a symptom of a larger issue: the entertainment industry wants to charge more for their products than people are willing to pay. Maybe people used to be willing to pay $15-20 for a CD, but no more. With digital distribution, artists can sell their music to fans directly, without the entertainment edifice standing in between. This is a better deal for both musicians and fans, but makes most of the music industry obsolete. The same is not exactly true in Hollywood - someone has to finance big-budget action flicks - but digital services such as Netflix Watch Instantly are changing the game there too. Why would I go pay $12 to see a movie in a theater, when I can pay $8 per month for more streaming content than I can watch in a lifetime?

Even if online piracy were eliminated completely, it wouldn't address the bigger issue facing the entertainment industry: substitution. Consumers have an increasing variety of entertainment options to choose from, many of which are free or extremely cheap. Now that online distribution is easy, there's really no need for the big industry surrounding content distribution. They can kick and scream all they want, but the entertainment industry as we know it is functionally doomed. It just doesn't realize that yet (or is trying desperately to deny the obvious).

One subsidy I can get behind: Public Defenders

Interpreted at the most literal (or cynical) level, public defenders can seen as a subsidy for criminals because society pays for their legal fees. Of course, not everyone who is arrested is guilty of a crime, but if police are doing their job correctly, most people who are arrested will be guilty of something.

To quote a former police officer: "I don't want to put anyone that's innocent in jail. But, I try not to bring anyone into the interview room that's innocent."

Free legal counsel reduces the cost of being arrested, increasing the net "payoff" to a life of crime. In an anarcho-capitalist system (which some of my classmates at GMU think would be just swell) there'd be no public defenders, the accused would pay the cost of legal representation, and in theory this would provide an additional deterrent to criminal activity.

That's all very well and good, as far as it goes. Ideally, the criminal justice system should take criminals off the streets, and also deter potential criminals with the threat of punishment.

But, there's also a very serious negative externality to the justice system when it puts innocent people in jail. This takes several forms: harm to the person imprisoned and their family and friends, but also society as a whole. People in jail become burdens on the taxpayer and produce nothing (except maybe license plates). The justice system loses credibility when it convicts the innocent. Finally, for each person wrongfully imprisoned there is a criminal walking the streets with impunity, out committing more crimes.

Economists are often skeptical of externality justifications for government subsidies. But, I'd submit that the harm of imprisoning innocent people is so great, that money spent on public defenders is well worth it. Even if career criminals benefit slightly as well, that's a tradeoff worth making (80% of people in jail confess anyway, according to the police officer quoted above, so the harm of that cross-subsidy is pretty minimal in my view).

A last tidbit for thought: being convicted in a criminal trial requires evidence "beyond a reasonable doubt" which amounts to 98% or 99% certainty from a jury. There are a little over 2 million people incarcerated in the U.S. currently. If 99% certainty means being wrong 1% of the time, that's 20,000 people sitting in jail for crimes they didn't commit, at the minimum. Combined with the over-confidence effect (people are lousy at estimating confidence intervals around what they are certain of) it's likely to be much more. A tragic situation, and one which might be made even worse without access to public defenders.

Why won't the U.S.P.S. just go out of business? Oh wait, they're not allowed to.

Ah, the Postal Service. Famous for friendly service, reasonable fees, and murderous rampages. In spite of birthing the saying "going postal" the USPS has still taken the coveted "most trusted government agency" for the last five years (probably because you have to give them your things before they break and steal them, unlike most other federal agencies). What I wonder is, if everyone trusts them so much, why can't they turn a profit? Let's find out.