Saturday, March 31, 2007

The cost for having religous preference

During our term in the U.S., my wife and I once had lunch in the student cafeteria of Brandeis University in Waltham, Mass – some 40 minutes from our place in Cambridge. It was an 'all-you-can-eat' type of café; you can take everything for a flat charge.

Being a Jewish institution, the café served kosher meals. According to the Jewish rule, the kosher and non-kosher food must not be processed together. Not only that, the cutleries must also be separately treated. So they divide the café into the kosher and non-kosher sections. The cutleries are provided in two different colors. I forget what they are, but I think blue for the non-kosher, and green for the kosher section. Although no separator for the two sections, you can not buy your meals from one section and eat it in the other one. Same thing applies for the cutleries. And after you finish, you must bring your cutleries to different return trays. (Maybe the green ones will go to heaven, and the blue go to hell?)

As the kosher food is the closest one to halal food, and I was in the mood for being a good Muslim at that day, I chose the kosher ones. Then, I found out that the kosher food costs about a dollar more than the non-kosher one. It was my fault, anyhow, as I did not read the price list before.

I started to wonder, why should it cost more? I guess because processing kosher food adds to your production cost. You need to manually slaughter the animal, means additional procedures to process the food. You may also have to pay to have the food examined by some kind of religious council, another extra cost.

More interestingly, what makes someone – anyone – pay more for kosher-but-not-necessarily-more-delicious meals? The extra dollar may serves as the 'premium' for... well, being religious. Perhaps this is similar to insurance premium. You are willing to pay more to get some degree of certainty to your expected wealth. For the believers, the extra dollar, maybe, is your ‘post-life’ insurance.

Another way to see this is ‘consumer discrimination.’ Consider the term discrimination in its generic meaning: ‘being selective over a product that is made only by certain people or using certain procedure.’ Milton Friedman and Gary Becker once said that if you are being discriminative, the market will punish you by limiting your choice, so you’ll have to pay more. However, as long as:

  1. you are willing to take that price
  2. nobody forces you to take that price
  3. you don’t force anybody to take that same price
  4. you don’t force anybody to pay that price for you
  5. you don’t prohibit other people to take other choices (with different price)
  6. the price you pay is the result of voluntary actions (and exchanges)

then it does not make any problems. Violation to any of the above conditions is coercion, hence unjustifiable (see this posting).

Note that the price for your religious preference does not need to be explicit. Sometimes the price is your ‘search cost’ (you must travel a bit far to find halal meat). Sometimes it is has no monetary value, but in terms of depletion of your social capital (love this term!). Think about your being exclusive, having to reject dinner invitation, or having to refrain from enjoying delicious meal in a party.

As for myself, actually I kinda regretted my decision to go to that kosher section. I don’t think that extra dollar guaranteed me a place in heaven. But after all, nobody forced me to do that anyway…

Side story. By the way, my wife was a bit annoyed by having to pay more. As a non-Muslim, she did not have to bother eating kosher or halal food anyway. In other words, she experienced a negative externality from my religious preference-of-the-day. However, we can settle this issue internally and domestically. Like Aco said, the intervention from government is not needed, nor from anyone or anything.

Back in the U.S.A.

What you first notice if you're in America after six month in Indonesia.

It is obvious, but: The wealth. The things. The overall abundance. (And, yeah, well, that you can speak English.) Plus, how clean the air is, and how many trees and birds and flowers there are, and how few unfinished edges — open ditches, stacks of construction beams — you come across.
Well, those were James Fallows' words, not mine (for 'Indonesia', substitute 'China'). The Atlantic Monthly journalist and national editor who has been residing in and reporting about China since last year reflects on how things are different between the two nations.

But they could've been my words too as I am also back in America after seven months being away. And I'd like to add one more thing to Fallows' list: the predictability. Things are much more predictable here than they are back home. Which is another way of saying things are often more exciting (if suspenseful) back home.

Here's the rest of Fallows' interesting observation:
I realize an error of logic I had been making. China is so fast-changing, so ambitious, so covered with construction cranes, so on-the-move and on-the-rise, so dotted with localized pockets of affluence and big new projects like its Olympics sites and its giant factories and its “Mag-Lev” trains, that I had begun, without thinking, to assume that it was “rich.” Not even close. I am reminded of where the country actually stands.

Friday, March 30, 2007

Externality misunderstood

We were about to take off. That guy sat right next to the window with emergency exit sign on it (and a red handle to open it). Then this stewardess came. She told the guy that because his seat was the closest to the exit, he needed to read the information on how to quickly act in case of emergency.

The guy asked the stewardess, "Do you think it is fair? Why is it me who should be the responsible passenger? I believe I paid the same fare with this man (he was pointing at me, who was sitting right in front of him)". The stewardess looked confused. She said hesitantly, "Ugh, Sir, it is the rule. We've been doing this ... ugh, forever". The guy insisted, "But, look. I don't care how long you have been doing this stupid rule, but if you want me to be the exit handle guy, you should pay me".

Alright, that's it. I stood up. "Dude, I guess you learned econ?". Yup, he said quickly. He said he is doing econ in one of those big name universities. "No wonder! Your argument is familiar to me," I said, "But you are ... wrong, dude".

So I spent the next three minutes humiliating him (OK, maybe I was trying to impress the poor but rather cute stewardess). I told him that in case of emergency, he has the biggest chance to get off the plane first. Compared to me and other passenger, he is relatively luckier. But we paid the same fare. Is it fair? Yes, I said. Because that guy also had to be the one who should read that information leaflet and who should pull up the handle. In other words his cost of assuming the responsibility cancels out his benefit of sitting in the supposedly safest place.

OK, I made the story up. But this could have happened in that Fokker 100.

Theoretically, the canceling out might not be perfect (i.e. the cost might be slightly larger than the benefit, or just the opposite). In such case he could have demanded payment from the rest of the passengers for his being the handle guy, and other passengers might have demanded payment from him to compensate for their relative disadvantages as far as seatings were considered. But the cost of managing all this transaction is prohibitively high. That's why it's not normal for passengers to negotiate seats among themselves.

You might say, hey, what if that dude is more risk taking, compared to others in the plane? That is, what if he values the safe seat less than other guys? That might happen. In this case, the best solution is actually to give any seat to the highest bidder. But again, transaction cost would be extremely high.

My point in fact is, don't be too quick in calling a problem an externality and demand a money compensation to 'internalize' it. Transaction costs might as well be too high, you don't want to 'internalize the externality'.

And again, I owe this to Coase (1960). I hope I got it right.

Tuesday, March 27, 2007

Should 'halal' certificate be compulsory?

According to some reports, the Majelis Ulama Indonesia (MUI; Indonesian Council of Ulema') is considering to issue fatwa regarding some products which halal status is in doubt. Its chair also thinks that the current law on consumer food (sic?) to be amended to make the halal certificate compulsory, not optional.

There are two issues here - first is the fatwa. I am not a theologist. But from what I know, according to the Sunni tradition, fatwas are non-binding. Therefore, I will respect such fatwa just as guiding principles. But whether or not I would consume the products listed in the fatwa, if it were to be issued, that would be my personal discretion.

Second, the more problematic one, is the proposal for a compulsory halal certificate. Let's for a while forget the halal part of the phrase, and focus on the certificate. Why do we need certificates or labels on any products? Sure, the answer is to protect the consumers by providing necessary information. License for chefs means we can be assured that our meals in the restaurant are made by Certificate on airline safety helps the consumers distinguish which airlines has met the certain standard. Certificate on genuine software product helps consumers know that a software is pirated. Green certificate helps consumers who are aware on environmental degradation avoid furnitures assembled using illegal logs.

(At least that works theory. In pratice it may nor work as expected. Similarly, the consumers may not care. But that's another issue. On the other hand, Aco may have different opinion - price is enough to create the necessary certificate).

But certification can (and will) also increase production cost. On the darker side, it can (and will) create the room for rent-seeking activities. Also, instead of giving protection for certification may in fact be the protection device for uncompetitive producers. Think about local producers who screamed that the second hand electronic goods imported from China are illegal, hence they need to be certified.

Now, back to the laptop... I mean, the halal certificate. What use of such certificate? Well, to protect the Muslim consumers (to be precise: those who care) from consuming non-halal food. Fine. It works so far, in the sense that it helps the consumers who care, it does not matter for those who don't, the cost is not significant for producers. And it is not compulsory, meaning that if you want to target Muslim customers, you'd want to invest on such label. If you don't, or you don't think your customers don't care, then you can skip the process.

However, making the certificate complusory is problematic. It won't matter for big producers (like Indofood). But it will matter for small and medium producers because they should bear additional costs for getting the certificate, while the benefit for the may not be significant. As this guy argues, SMEs in small, remote cities will be mostly hit as they may need to 'invite' the MUI officials, provide transports and accommodation etc.

Hence, can we find a way to be religious (if one wants to) without sacrificing efficiency? There is one thing: don't make such certificate compulsory, and leave the religious way of life as a personal choice. We don't need the state to nanny us. In Australia, the Islamic Council periodically issues a list of products that may be consummable by Muslims. The list includes some toothpaste, marshmallow, baking powder, and the addresses of butchers selling halal meat. And it works.

Thursday, March 22, 2007

(Mis)understanding the externality

The concept of externality is again easily overplayed.

When you and I transact and somebody else gets affected (in a good or bad way) without any compensation, externality arises. That is more or less the standard definition in almost all textbooks. That definition is dangerous. Because, come to think of it, almost every transaction therefore causes externality.

The second, and even worse, misunderstanding is that in the presence of externality, you should call for government intervention. This is a fallacy. Believe me, if you don’t like me smoking next to you, we can work it out by you pay me not to smoke, or I pay you to suffer. We don’t need the government to ‘internalize that externality’. But let’s do some simple arithmetic to make this argument clear.

Suppose A pollutes and B is harmed. If B would pay Rp XXX to avoid such harm, and if A would have to incur an additional cost of Rp YYY to eliminate the pollution, then if XXX is less than YYY, the government should do nothing.

So if instead XXX is greater than YYY, the government should do something, you say? It depends. If XXX is in fact greater than YYY, then B should have offered some money to A in the first place, so as the latter did not pollute, don’t you think? But why hasn’t B made a bargain with A? Because, that might have required some costly process (think about tiring negotiation or time costs or lawyer’s fee, for an example). In other words, there is a non-zero transaction cost, say Rp ZZZ. So, here, it must be the case that ZZZ > (XXX – YYY). Then what is the answer to the question ‘should the government do something?’ Well, remember, intervention can be costly, too. First, the government should calculate XXX. Next it should also discover YYY. Finally, it should administer the scheme (costly, too) – whatever it is. If the total cost of undertaking these three tasks is WWW, then only when WWW < (XXX – YYY), the government intervention is justified.

More on alternative solutions later.

Note: Of course I owe this argument to Coase (1960, The Problem of Social Cost, The Journal of Law and Economics)

Wednesday, March 21, 2007

Econ 101: Welfare Measures

Again, assume a typical consumer whose preference is rational, continuous, and locally non-satiated (I know it’s been a while, so please help yourself: refreshment is on the sidebar). We are interested in the following question: suppose there is a change in price level (say, due to a change in tax policy). Is an average consumer better off or worse off? We say he is better off if his utility now is higher than that before the change. He is worse off otherwise. Meet equivalent- and compensating variation.

Equivalent variation (EV) is the amount of money that you are indifferent to accept given that the alternative is to experience the price change. (Or, quality change – everything can be priced). Compensating variation (CV) is the money equivalent a planner (e.g. the government) compensates you with after the price change, so as to bring you back to your initial utility level. Think about Jakarta’s plan to build monorail in the city.

Suppose that you would like it if Jakarta has a monorail system. Then imagine that somebody is offering you money if you want to give up the monorail. First, you ignore the offer. Then that somebody increases the offer. Again, you refuse. He increases it again, until you become indifferent (here, if he increases it yet again, even by Rp 1, you would take the money and forget about the monorail). Then this amount of money (that makes you indifferent) is the equivalent variation. (If you hate the monorail, your EV is negative).

Now, suppose as the monorail project is completed, Governor Sutiyoso is to take you back to your initial situation, i.e. to your utility level before the realization of the monorail. The natural question here would be: why in the world would he take us back to the lower utility? Don’t worry, this is hypothetical. We just want to imagine that there is an amount of money as net revenue of Governor Sutiyoso the planner. It is like a money equivalent of his success to make you happier, by providing the monorail. This is the compensating variation. (Again, if you dislike the monorail, the CV would be negative).

Why do we need these measures? We might not really need them. But the government sure does. If the government is planning to impose a policy (new tax, subsidy, etc.), then it needs to be able to anticipate the effect. Think about compensation scheme like cash transfer, raskin, etc. These measures help figure out, say, the right level of compensation.

But why two measures? Because in reality you can’t really know the exact level of compensation. The EV and CV give a range where the true measure might be. Can the two be the same, though? Yes, if the change induced by the policy does not affect your wealth. In such a case, the EV is equivalent to CV, and they both are equivalent to another measure, namely the change in consumer’s surplus. The latter is defined as the change in the difference between the total amount you are willing to pay and the total amount you actually end up paying.

Note: EV and CV are due to Hicks (1939), consumer’s surplus is due to Marshall (1920).

Monday, March 19, 2007

... at a diner on the corner

Having breakfast or brunch at a diner is something I particularly missed. Diner is a specific American culinary culture – the East Coast, or Northeast, to be more specific. The choice of brunch menu at every diner is quite typical. That’s a kind of place I can find a burger, a true one, not the junk food version, good pancake, and coffee. Just coffee; no latte, au lait or frappe. I don’t know the local equivalence for diner in Indonesia, but maybe Warkop is the closest one.

Unfortunately, not many diners around the Harvard Square part of Cambridge, Mass. I had to go to Davis Square, Medford, or Brighton Avenue on the way to Waltham. There are more choices in New York City. My friend used to take me to one near NYU, in the Union Square neighborhood. And of course, the famous Tom's Restaurant on the corner of Broadway Avenue and 112 Street, Upper Manhattan, near Columbia University. This place had been the regular meeting place of Seinfeld and co. It was also featured in Suzanne Vega’s single hit, Tom’s Diner, in the late ‘80s (I am sittin’/in the morning/at a diner/on the corner).

Last long weekend, my wife and I found one ‘American Diner’ (that’s what the place claim itself) in Kemang, about five hundreds meters down the street from my high school (as well as Sjamsu’s and Ujang’s). They do offer diner-type menu. The taste and quality was OK. Not great, but not bad. However, it was not the type of setting I expect from a diner. For one, the place was too fancy, too colorful and too decorated for a diner. And the guests, I think they are over-dressed to go to a diner.

But maybe it is just me. It is Kemang, and it is ‘American’ gitu loh… Expecting informality and casualness from the place is perhaps too much, or too few. And maybe it will be the same thing if sometimes Warkop becomes a global culture, or a place for socialites.

Saturday, March 17, 2007

Ahmad Dhani the researcher

Perhaps the biggest challenge for a researcher is to show causality – that X is causing Y. Most of the time, at best we can only claim that the two are correlated. Even if we do some fancy econometric techniques, we need to be careful in making claims about the coefficients. Usually, we phrase our conclusion as “higher/lower X is associated with higher/lower Y.” We tend to avoid saying things like “higher/lower X is causing higher/lower Y” due to reverse causality and omitted variable biases.

(Even if we just claim an association, we also need to be careful. Otherwise, we’d say things like "people born under the astrological sign of Leo are 15% more likely to be admitted to hospital with gastric bleeding than those born under the other 11 signs," as this article quoted.)

If" we want to claim causality, we need to think about counterfactual: “what would have happened to Y if X had not existed or happened.” Think about X is a policy or any kind of intervention, and Y is the outcome. Let’s say that X is classical music, and Y is baby’s IQ. Some people said that classical music increases (that is, causing in a positive way) baby’s intellectuality. Truly, I don’t know how true the research was; perhaps it was, perhaps it wasn't. The point is, all the researchers need is to provide a counterfactual: that babies who did not listen to classical music have lower IQ scores that those who have been exposed to classical music.

But simply comparing two babies (or two populations of babies) will not solve the problem. We may think that parents’ taste of music is correlated with wealth. Hence babies who were exposed to classical music are more likely to come from wealthier parents who can feed them with better nutrition or supply them with more IQ-stimulating games. This is what we call ‘omitted variable bias.’

A perfect research would be making a clone of a newborn baby, treat them equally the same except for the exposure to classical music. Then measure their IQ after several years. Note that a research involving human cloning will not pass the ethical committee, at least until now. The next best thing we can do is to perform the so-called randomized experiment (like these guys, as well as this friend of us have been doing).

But Dhani (the musician, not our friend Dhani the real researcher) had a different idea. In his latest appearance in an infotainment (indeed, watching infotainment is better than listening to football commentator during the match break. By the way, Dhani appeared with his three boys but without Maia), he said that his boys must like rock music, because it is a ‘man’s music.’ His conclusion was based on a ‘study’ over some ‘sample’ – his so-called ‘sissy, queer’ (bences-bences) friends. His ‘sample,’ he claimed, do not like rock music. So look at the result. (The presenter asked Dhani’s kids whether they listen to Dave Koz, which answer was ‘no.’ Dhani then added, “Of course they don’t listen to him – they like Iron Maiden instead…”).

I enjoy Dhani’s music. I respect him as a musician. I never like his male-chauvinist antics and remarks. And definitely he is not a researcher.

Friday, March 16, 2007

Oh My God, Social Capital Exists!

Last week before lecture, I had lunch with Aco at our own Faculty of Economics refectory at Depok campus. As years gone by, only few familiar faces I know at otherwise very crowded lunchtime in that place. One of them is my good friend Topik. He is the waiter, well, not really a waiter, but the man who gives us here luxury to have our ordered (cheap) student's meal delivered to our table. Eight years ago he was with the ice tea outlet, but now with less frequent traffic of chicken noodle delivery.

I told him that I did not feel like having chicken noodle at that time, and asked what is the best food in the refectory. Aco might think that I was crazy asking such stupid question on the quality of competitor's product, but Taufiq gave me his suggestion anyway . Mutton tongseng (ask google, if you don't know this), he said. I trusted him and we both had that meal. It was good.

On our way to the class rooms, Aco, himself the great skeptic of social capital, said that this should be blogged in the cafe. The title: "Oh my God, social capital exists!". It means if you invest in social capital (or trust), by befriended with Topik, it will help you to get the information, make the right decision, and raise your utility (good tongseng)

I think AP, the fan of Robert Putnam, would love to say to Aco, "I told you so"

Thursday, March 08, 2007

On the Tasteless Garuda Billboard

When my relatives came to visit us in Yogya about two weeks ago, one of them saw the billboard above, towering over the intersection between Jl. Kaliurang and the northern ring road, and he said: "Wow, that's such a bad taste, unethical to say the least". The ad says,
Finally, safety, timeliness, comfort, of your flight become your first priority.
Yes, it's a Garuda ad, and the billboard first went up not long after Adam Air KI 574 went missing. Tasteless. Unethical. There is an illusion of safety with Garuda, and the airline doesn't shy away in exploiting it. Unspun may have commended Garuda's Emirsyah for doing a good job in the aftermath of the GA 200 accident, but someone should tell the president director about those ads his company been running since early this year.

Do people buy into it? I can say I did. I had to fly back and forth between Yogya and Jakarta in the past 4 months and since the KI 574 accident, I fly only with Garuda. The fact that Garuda could afford to run those ads without much of a backlash show that the illusion of safety is widely held.

Seeing the billboard, my other guest went as far as saying it's almost inevitable that the ad will backfire in one way or another. It's a jinx, "pamali", "takabur". Well, I was never into superstitions - I am more concerned with the conditions of the runway at Adisutjipto - short and bumpy.

I agree with Rizal that it is not the time to play the blame game, and I certainly wouldn't blame recent airline disasters on competition. What we need is indeed a thorough audit not only on airlines but on the whole aviation infrastructure (see Roby's comment here).

Wednesday, March 07, 2007

Who's afraid of banana?

My baby boy loves banana. I was told by his doctor that banana is good for babies. I so assume that many parents feed their babies with bananas, too. For them, and for the babies' sakes, less expensive banana is therefore a good thing.

Apparently, the government (and Indonesian Banana Association -- of course this is not their name, I made it up) disagree. So far, Indonesian banana market has been a good sale place for cavendish bananas from the Philippines. Last year, the price was good (as consumers, we don't care why it could be less expensive, we only care that it was relatively not expensive). As it turns out, and if the government accusation is correct, them Philippinos were doing a dumping strategy. That is, they were selling bananas at lower price to us than to their own folks.

And the government had to do something: cheap bananas are not good for the economy. So they came up with a decree imposing an anti dumping tariff on cavendish bananas from the Philippines (if you are curious, it is the Ministry of Finance's Decree No. 81/PMK.010/2006).

Ah, again.

Help! Can't reinstall that 'recent comment' thingy

Dear Visitors,

While you're enjoying Rizal's story on our date below (I don't usually date a guy, so don't trust Rizal's account completely), may I ask for a favor?

Call me a lousy manager, but yes I'm dumb in HTML code. I've been trying to re-install the "recent comments" widget on the sidebar with no avail. We had it before, until Blogger forced me to switch to the new system -- I lost it!

So, what should I do? Appreciate any help.

Friday, March 02, 2007

Signaling Gone Too Far

Last Friday after the prayer, I went for lunch with the Manager in, well, again, School of Dentistry's refectory. Over the lunch, we had this conversation.
Manager : I have this, the theory. You write it down to the cafe, I might be a lesbian, but I don't want to be accused as sexist.
Me : Is that the theory?
Manager : No, you idiot.
Me : So what's that?
Manager : Here. On Friday lunchtime, refectories, not only here, are more packed with girls.
Me : That's your observation, not yet a theory. Did you say every refectory?
Manager : Yes, and only on Friday at very specific hours, 12 to 1 pm. I recall AP's self-absorbed theory on his lousy Harvard T-shirt. What was that? Signaling?
Me : Yes. But what signal do the girls send?
Manager : They might send signal that they're available, but more importantly, it's for them sorting the signal from the boys.
Me : Now, I am officially puzzled.
Manager : One of desirable qualities of a man is him being religious --not like you, liberal (sic!). But who knows this? You called it what? Asymmetric information? All the girls can do is to catch and decipher the signal leading to that quality.
Me : I am religiously listening to you. Carry on.
Manager : So they are gathered on places where signals of high quality men strong, that is, refectories on Friday
Me : And why on Friday, may I know?
Manager : It is very likely those hungry high quality men would flock in refectory after Friday prayer. You see, there, the signal is clear, and even stronger if he takes with him a prayer mat.
Frankly, I was impressed with this manager and her signaling theory. But not for so long. A couple days afterward, I came up with a much simpler argument. During that lunch hour, practically almost all activities are halted and shut since men go to the mosque. One among few places that remain open is the refectory. The ladies, left with limited option to spend the hour, naturally would head to that place.

No signaling whatsoever. So boys, restrain yourself, I am afraid it's a hasty assertion. And I think the Manager is indeed sexist.