class: center, middle, inverse, title-slide #
Waterways as Public Capital
## Economic Development & Construction 0008 ###
Dr. Kumar Aniket
### Lecture 3 --- class: inverse, center, middle # Kerala Fish Market --- # Coastal Fish Market in Kerala Fish is the staple diet in Kerala, India Kerala has a long coastline with fish markets dotted along the coast Fisherman have a choice of which markets they want to land their fish in .pull-left[ Fisherman face an information problem after they catch their fish They do not know the **price of fish** in each market on a particular day. ] .pull-right[ <img src="images/lec3/kerala.jpg" width="100%" style="display: block; margin: auto;" /> ] --- # Kerala Fish Market Jenson 2007<sup>1</sup> studied of 15 fish markets along the 225 km Northern coast of Kerala to understand whether the market for fish was working .footnote[ [1] Jensen, Robert (2007). The digital provide: Information (technology), market performance, and welfare in the South Indian fisheries sector.” The quarterly journal of economics. ] --- # Kerala Fish Market Jenson 2007<sup>1</sup> studied of 15 fish markets along the 225 km Northern coast of Kerala to understand whether the market for fish was working - Fisherman had to **choose** the port/market where they would get the best price for their catch - Fish merchants bought the fish from the fisherman and sold it to the consumers - If fish merchants already had enough fish on the port they landed, the fisherman would just **jettison** their catch Fish *prices were high* and fisherman’s *profits low* due to **wastage** and **bargaining power** of fish merchants who bought from the fisherman and sold to the consumers --- .center[**Market Conditions on 14th January 1997 in Fish Markets in Kerala**] <img src="images/lec3/f0.jpg" width="80%" style="display: block; margin: auto;" /> .pull-left[**Badagara**: 11 boats jettisoned their catch due to excess supply] .pull-right[**Chombala**: 15 buyers left unable to purchase fish at any price ] --- .emn[**Notes** Markets stop working if there is either excess supply or excess demand. - If there is **excess supply**, the prices drops to zero. - If there is **excess demand**, the price rises initially but the price of last few transactions don't signify anything once there is no fish left for customers to buy, at any price. - The **market clears** if the demand and supply are equalised. The price in these markets are above zero and below the price in the markets with excess demand. ] --- .center[**Average market price across markets**] .emb[Excess supply] .tab[] | .tab[] .emd[Market Clearing] .tab[] | .tab[] .ema[Excess demand] :---:|:---:|:---: ₹ 0 | ₹ 5.9 | ₹ 9.3 <img src="images/lec3/f0.jpg" width="80%" style="display: block; margin: auto;" /> --- # Sequential roll out of mobile phone coverage <img src="images/lec3/f1.png" width="60%" style="display: block; margin: auto;" /> --- .emn[**Notes** We can see in the previous figure that the mobile phones were rolled out sequentially in the three areas (Region I, II and III) the paper studies. What is striking is the *drop in volatility of daily prices* as the mobile phones are rolled. The drop in volatility of price leads to both fisherman (people who supply the fish) and consumers (people who demand the fish) being better off. Consumer price drops and the fisherman's profits increase. This is because the **transaction cost**<sup>1</sup> in the market has decreased. In the fish market, the cost of acquiring information was a large part of the the transaction cost. The transaction cost dropped because of the introduction of a **public good**, i.e., the mobile phone network. It is public good that would have been too expensive for the fisherman to provide for themselves because of the increasing returns to scale.] .footnote[ [1] **Transaction cost** is simply the cost in making a economic trade. ] --- # Introduction of mobile phones <img src="images/lec3/f2.png" width="75%" style="display: block; margin: auto;" /> .pull-left[Sharp decrease in .embb[price] volatility. Reduced .embb[waste] & elimination.] .pull-right[Fisherman's .embb[profits] went up by 8%. Consumer .embb[prices] decreased by 4%] --- .emn[ **Notes** Mobile phone network is public good that has a very *high increasing returns to scale*. The **scale** here is the **number** of people who have access to mobile phones. If the number is small, the benefits are more limited. As the numbers increase, the benefits increase too. If we start from a very small scale, say one-tenth of the population being covered by mobile phones and double the network, so that one-fifth of the population is covered, it is intuitive that the pecuniary and non-pecuniary benefits accrued will be more than doubled. This will keep happening till the full population is covered. Mobile phones have two components in its provisions. The first one is establishing the network. This entails creating a regulatory framework within which mobile operators operate. Only once this regulatory framework is established and mobile phone operators obtain their licence to operate that they start making their private investments in building mobile phone base stations that facilitate mobile phone communication. The *private investment* (private capital formation) only happens once the *public good* (public capital formation) is in place. ] --- # Market Efficiency Introduction of mobile phones made the fish market more efficient .center[i.e., .embb[a Pareto Improvement]] - Reduced waste & elimination - Sharp decrease in price volatility - Fisherman’s profits went up by 8% - Consumer prices decreased by 4% --- # Adam Smith's insight .mybox[ .center[Well-functioning **markets** are Pareto **efficient**. ] ] That is *all mutually beneficial trades are undertaken* and no trades than can make someone better off without making anyone worse off are left unexploited. **Well-functioning markets: ** - No one has market power - No information problem between the buyer and the seller - No externalities --- # Water bodies .pull-left[.embb[Water bodies] as .emai[natural automated surfaces] on which people and cargo can move easily ] .pull-right[Water bodies are crucial to development of markets in early .embb[urban agglomerations] or .embb[markets] *Varanasi* *Venice* *Suez Canal * *Erie Canal*] .pull-left[Large parts of Asia, Africa and Latin America are .embb[landlocked] with very little access to automated surfaces] .footnote[ **Automated surfaces** are surfaces which reduce cost of moving people and cargo ] --- # Erie Canal .pull-left[Opened on October 26, 1825. It ran 584 km from Hudson River to Lake Erie. ] .pull-right[It was faster than carts pulled by draft animals and cut transport costs by about 95%. ] <img src="images/lec3/erie.jpg" width="90%" style="display: block; margin: auto;" /> --- # Alternatives **Well-functioning markets** are crucial for development .pull-left[**Railway** and **roads** can play the same role in creating market in the absence of water bodies ] .pull-right[Increasing returns to scale Requires upfront .embb[fiscal capacity] because they are *non-rival* and *non-excludable* ] .footnote[ **Fiscal capacity**: a country's capacity to tax the economic activity and spend it in a productive way on public capital so that it creates economic activity. ] --- class:inverse, center, middle # Public Goods --- # Rivalry .pull-left[**Rivalry:** consumption by one person reduces the amount other people can consume *Food* *Public garden* *Space in bus* *Education* *Law and order* ] .pull-right[**Non-rivalry:** consumption by one person .emb[does not] reduce the amount other people can consume *Air* *Water* *Smell* ] --- # Excludability .pull-left[**Excludable:** people can be excluded from benefiting from it, either naturally or through some contrived process *Food* *Public garden* *Space in bus* *Education* *Law and order* ] .pull-right[**Non-excludable:** people .emb[cannot] be excluded from benefiting from it *Air* *Water* *Smell* ] --- # Public Goods: <rr>Examples</rr> | | .emb[Rivalous] | .emb[Non-Rival] | |---:|:---|:---| |.emab[Excludable] .tab[] | Food, Housing | French motorways, Apps, Gym | |.emab[Non-excludable] .tab[] | Pond, Sea fish, Commons | UK motorways, National defence | --- # Public Goods: <rr>Types</rr> | | .emb[Rivalous] | .emb[Non-Rival] | |---:|:---|:---| |.emab[Excludable] .tab[] | Pure private goods .tab[] | .emc[Club goods] | |.emab[Non-excludable] .tab[] | .emc[Common-pool resource] .tab[] | Pure public goods| --- class: inverse, center, middle # Property Rights --- # Property Rights .pull-left[What are property rights?] .pull-right[ .embi[how are property rights enforced ]] -- .pull-left[Who owns property rights over natural resources? ] .pull-right[ .embi[right to pollute] .embi[right to have a clean environment] ] .pull-right[ E.g. noise .ema[right to make noise] .ema[right to pin drop silence] ] --- # Conditions for markets to function properly .pull-left[ .embb[Private property:] people have the right to buy and sell things - Either .emai[social norms] are such that property rights are universally respected - Or institutions like the .emai[government] enforces property rights through its judicial system ] .pull-right[Ability to write .embb[complete] and .embb[enforceable contracts] that can be *enforced* in a court of law ] --- # Conditions for markets to function properly .pull-left[.embb[Symmetric information:] buyers and sellers know everything about each other and the transaction - Market for lemons. .ema[Akerlof (1970)] - Efficiency wages. .ema[Shapiro Stiglitz (1984)] ] .pull-right[.embb[No externalities:] all costs and benefits are internalised by the buyers and sellers - Pollution - Smoking ] .pull-left[.embb[No market power:] buyers and sellers have no market power and market - Monopolies - Labour unions ] --- # Market supporting government regulations .pull-left[.embb[Symmetric information:] buyers and sellers know everything about each other and the transaction - *Health and safety law* ] .pull-right[.embb[No externalities:] all costs and benefits are internalised by the buyers and sellers - *Smoking ban in public places* ] .pull-left[.embb[No market power:] buyers and sellers have no market power and market - *Competition policy* ] --- class: inverse, center, middle # Public Capital --- # Solow Growth Model **Output** gets transformed into **private capital** through the .embb[saving channel] <img src="images/lec3/solow1.png" width="40%" style="display: block; margin: auto;" /> --- # Aniket (2018) **Output** also gets transformed into **infrastructure** through .embb[fiscal channel] <img src="images/lec3/solow.png" width="50%" style="display: block; margin: auto;" /> --- # Poverty Trap: <rr>Nutritional Pathways</rr> <img src="images/lec3/poverty1.png" width="75%" style="display: block; margin: auto;" /> --- # Poverty Trap: <rr>Role of Public Capital</rr> <img src="images/lec3/poverty2.png" width="70%" style="display: block; margin: auto;" /> --- # Role of Public Capital in Development Creating the .embb[right kind] of .embb[public capital] is crucial for economic development - Public capital can encourage factor accumulation - Public capital can enhance the productivity of factor inputs - Public capital can facilitate well-functioning markets and encourage economic activity There is a .embb[feedback loop] between economic growth and public capital. .pull-right[Economic growth requires public capital. Yet, creating public capital requires economic growth at the first instance. This is the .emab[Development Trap] that countries find very difficult to break out of.] --- # References Aniket, Kumar (2018). "Solow-Swan growth model and the fortunes of the commons. MPRA Paper No. 87921 | [Paper](http://www.aniket.co.uk/research/Solow_Commons.pdf) Deep-dive reading Jensen, Robert. (2007). The digital provide: Information (technology), market performance, and welfare in the south indian fisheries sector. The quarterly journal of economics, 122(3):879–924, | [Paper](http://www.aniket.co.uk/teaching/ucl/condev/readings/engerman2006digging.pdf) S. L. Engerman and K. L. Sokoloff. Digging the dirt at public expense: Digging the dirt at public expense erie canal and other public works. In Corruption and Reform: Lessons from America’s Economic History, pages 95–122. University of Chicago Press, 2006 | [Paper](http://www.aniket.co.uk/teaching/ucl/condev/readings/engerman2006digging.pdf) --- # Additional References These are references that were mentioned in the lecture but are not part of the reading list. **Market Failure**: *Second-hand car market* Akerlof, George A. "The Market for" Lemons": Quality Uncertainty and the Market Mechanism." The Quarterly Journal of Economics 84.3 (1970): 488-500. **Market Failure**: *Why workers are paid a wage premium?* Shapiro, Carl, and Joseph E. Stiglitz. "Equilibrium unemployment as a worker discipline device." The American Economic Review 74.3 (1984): 433-444. **Automation** Autor, David H. "Why are there still so many jobs? The history and future of workplace automation." Journal of economic perspectives 29.3 (2015): 3-30. | [Links](https://economics.mit.edu/files/11563) --- **Railways and Market towns:** *Decline of market towns in 19th Century Britains due to expansions of railways* Tu, Lanxi, Leigh Shaw-Taylor, and Kumar Aniket. "The decline of chartered markets in 19 th century Britain." (2017). | [Link](http://www.aniket.co.uk/research/markets.pdf) **Social norms:** *Fines for parents who are late in picking up their children from day‐care centers.* Gneezy, Uri, and Aldo Rustichini. "A fine is a price." The Journal of Legal Studies 29.1 (2000): 1-17. | [Link](https://playvolutionhq.com/wp-content/uploads/2019/06/fine.pdf) **Rural Banking**: *Expansion of banking to rural India* Burgess, Robin, and Rohini Pande. "Do rural banks matter? Evidence from the Indian social banking experiment." American Economic Review 95.3 (2005): 780-795. | [Link](https://www.aeaweb.org/articles?id=10.1257/0002828054201242) <style> h1, h2, h3 { color: #EC5800; } p { line-height: 1.5em; } rr { color: #002E63; } a { color: #002E63; } .inverse { background-color: #D2691E; } .tab { display:inline-block; margin-left: 15px; } .ema {color: rgb(43,106,108);} .emb {color: rgb(184,13,72); } .emc {color: #1034A6; } .emd {color: rgb(64,64,64); } .eme {color: #614051; } .emg {color: #6D351A; } .emgr {color: #696969; } .emn {color: #796878; } .emo {color: rgb(229,65,6); } .emob {color: rgb(229,65,6); font-weight: bold;} .emoi {color: rgb(229,65,6); font-style: italic;} .emz {color: #004225; } .emzb {color: #004225; font-weight: bold;} .emzi {color: #004225; font-style: italic;} .emab {color: rgb(43,106,108);font-weight: bold;} .embb {color: rgb(184,13,72); font-weight: bold;} .emcb {color: #1034A6; font-weight: bold;} .emdb {color: rgb(64,64,64); font-weight: bold;} .emai {color: rgb(43,106,108);font-style: italic;} .embi {color: rgb(184,13,72); font-style: italic;} .emci {color: #1034A6; font-style: italic;} .emdi {color: rgb(64,64,64); font-style: italic;} .emdb {color: rgb(64,64,64); font-weight: bold;} .footnote {color: gray;} .red { color: red; } .mybox { color:#3D2B1F; background-color:#3D2B1F10; margin:1em; padding: 1em; border-radius: 10px; } .thebox { color:#704214; background-color: #F5DEB320; margin: 0.1em 0.5em 0.1em 0.5em; padding: 0.1em 1em 0.1em 1em; border-radius: 10px; border-color: #704214; border-style: solid; border-width: 2px; } </style> <!-- rgb(184,13,72) #plum rgb(242,151,36) #orange rgb(43,106,108) #dark-teal rgb(64,64,64) #dark-grey --> <!-- #386890 #A40000 #FFB347 -->