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Emerging Concepts in Market Design

Joshua Gans PerCapita, Policy Exchange 30th October, 2008

Common advice
“Reduce the number of miles you drive by walking, biking, carpooling or taking mass transit wherever possible. Avoiding just 10 miles of driving every week would eliminate about 500 pounds of carbon dioxide emissions a year!”
From: Inconvenient Truth Official Website

Is walking a low emissions activity?
Driving for 4.8km 0.9kg CO2

Walking for 4.8km

180 calories = 100g beef = 3.2kg emissions

Chris Goodall, How to Live a Low Carbon Life

What else donʼt we know?
•  •  •  •  Disposable vs cloth nappies Organic-fed cows Paper vs plastic bags Burning vs recycling wood
Answer depends on science, behaviour, substitution and mix of gases. Key point: Only by pricing all of the greenhouses gases can we possibly find out.

The Task
•  Economic problem
–  Get resources to right people/uses –  Central planners donʼt have all the information –  Markets can aggregate that information

•  What happens when decentralisation doesnʼt work?
–  Need centralised support –  Set the rules of the game so markets can work –  Planned markets

Planned markets
•  Allocating public goods
–  Spectrum/Forests/Emissions –  Public school places –  Electricity

•  Managing businesses
–  –  –  –  Procurement/tenders Job matching Keywords Parenting?

Since 1994, 16 Nobel prizes in economics and 1 in peace related to market design

Key Lessons
•  Details matter
–  Early Australian and NZ spectrum auctions –  Implementation of the baby bonus –  SO2 permit auctions

•  Non-economic constraints bind
–  Sometimes canʼt use prices –  Sometimes canʼt trade –  Sometimes hard to define property rights

Rothʼs Criteria
•  Thickness
–  Effective markets require many buyers and sellers (cf: current RMBS market)

•  Non-congestion
–  Need to ensure that transactions are not time compressed (unraveling) nor spread out across time (housing markets)

•  Safety
–  Market participation must not result in negative returns (e.g., defining property rights in emissions trading)

•  Repugnance
–  Non-economic norms can act as a constraint on design choices (e.g., water pricing, “ideas should be free”)

Kidney exchanges

•  Sometimes repugnance can go away
–  “Right to pollute” is no longer a dirty word.

•  We should not fear unintended consequences
–  but should study them carefully and make them known consequences.

•  We can facilitate better exchanges than a unplanned markets
–  but we need to trade off complexity/cost with efficiency gains.

•  We do not need to do market design on the fly
–  but we need to do it.