Monthly Archives: March 2012

210 – Under-estimating the costs of environmental protection

The costs of running effective environmental projects can be very high. In Australia I have observed that we often try to get away with running environmental projects on a shoestring and then are disappointed about the poor results. Unrealistic costing of projects is damaging to the environment and to the community in several ways.

An example we’ve looked at in detail is the Gippsland Lakes in eastern Victoria. The Lakes have a serious problem with algae blooms due mainly to nutrients coming from agriculture in the surrounding areas. A group of government departments and government-funded organisations set an official target of reducing nutrient flows into the Lakes by 40% — enough to make a worthwhile difference to the frequency of blooms.

Public funding to try to achieve this target varies from year to year but has averaged a few million dollars per year. However, in a detailed analysis published recently (Roberts et al., 2012), we concluded that the cheapest possible combination of strategies that would reduce phosphorus inputs to the Lakes by 40% would cost around $1 billion over the next 25 years, or the equivalent of about $70 million per year – vastly more than the existing budget.

Even $70 million understates the full cost because it deals only with phosphorus, whereas the 40% target also applies to nitrogen. It’s also highly likely that a real program would not use the cheapest possible combination of strategies, so the actual cost would be higher again.

Clearly, the level of funds allocated to the Gippsland Lakes had been determined without any consideration of whether it would be sufficient to achieve the official target. And conversely, the target had been set without considering what would be realistic given the available budget.

There are a number of potentially serious problems that flow from this sort of disconnection.

Firstly, and most obviously, under-funded projects fail to achieve the objectives set for them. In part, this reflects the failure of environmental organisations to conduct serious feasibility assessments of environmental projects, including economic costing. The sort of feasibility study that is routine in commercial businesses that are contemplating investing in large projects is almost unheard of in government-funded environmental programs. Tragically, the result is that a lot of the money we spend on the environment is not achieving worthwhile environmental benefits. Serious feasibility assessments should be standard requirements in all significant environmental programs.

It seems to me that part of what is going on here is an unwillingness to confront the reality that the budgets of environmental programs are often not nearly sufficient to fix all the problems that they are intended to address. People would rather avoid hard questions about budgets and technical feasibility because they expect that the answers will be unpalatable. The result is that we end up investing in many more projects than we can afford to do effectively. By pretending we can achieve more than we really can, we end up achieving much less than we could.

A second consequence that flows from failing to get good information about the costs required for a project to be successful is that we choose the wrong projects to invest in. In any sound process for choosing projects, information about the total costs to achieve a particular outcome is an essential consideration. Failure to consider cost information properly can make a major difference to which projects come out looking best – very poor projects can end up looking good.

Thirdly, if we try to design environmental projects to fit an inadequate budget, rather than allocating appropriate budgets to well-analysed projects, the common result seems to be that we rely on cheap but inappropriate policy mechanisms. An example of a major program getting this wrong was the National Action Plan for Salinity and Water Quality, which relied heavily on extension (awareness raising, information provision, etc.) and small temporary incentive payments, so that it could reach as many farmers as possible. In most areas, these were fundamentally the wrong policy mechanisms for addressing salinity (Pannell and Roberts, 2010). As a result, enduring benefits from the program were few and far between (Pannell and Roberts, 2010).

This use of cheap but ineffective policy mechanisms leads to the fourth problem I’ve identified: it burns up the good will and trust of private citizens whose cooperation and contributions are needed for project success. I’ve observed farmers who previously donated time and resources to environmental programs getting jaded and cynical as a result of the failure of programs like the National Action Plan for Salinity and Water Quality.

Of course, the inability of such programs to demonstrate that they are achieving outcomes cost effectively also raises concerns in bodies like the Department of Treasury and Finance and the Australian National Audit Office. Thus there are longer term consequences for future programs, not just the current under-funded programs.

References

Pannell, D.J. and Roberts, A.M. (2010). The National Action Plan for Salinity and Water Quality: A retrospective assessment, Australian Journal of Agricultural and Resource Economics 54(4): 437-456. Journal web site here ♦ IDEAS page for this paper

Roberts, A.M. Pannell, D.J. Doole, G. and Vigiak, O. (2012). Agricultural land management strategies to reduce phosphorus loads in the Gippsland Lakes, Australia, Agricultural Systems 106(1): 11-22.    Journal web site here ♦ IDEAS page for this paper

209 – The economics of the music industry

In my early 20s I was in a rock band, The Bargains, playing the hotels of Perth. We got to be reasonably successful within the limited confines of the Perth original music scene at that time, playing about 150 shows and supporting some pretty prominent touring acts.

On Saturday night, I re-lived those fun days with a one-off reunion of the band, most of whom I hadn’t seen for 30 years. It was just fantastic. With not much rehearsal, we were able to pick up the old songs and put on a really satisfying show to a  highly appreciative audience, some of whom had seen us play way back when.

The event was organised to mark the 10th anniversary of the death of one of our members, Dave Rose, who was a great singer and songwriter. You can imagine that it was pretty emotionally intense at times, but it was also joyous to see old friends and perform together again.

Back in 1980-81, I wasn’t an economist, but I certainly got some experience of the economics of the  music industry. Like other areas of the arts, it can be really tough. A tiny, tiny percentage of performers become hugely rich, but for many who don’t make it into that elite level, financial security is a struggle.

It’s not too hard to explain this – it’s largely a matter of supply and demand.

There are many highly talented musicians trying to make a living from their music, so it’s a buyers’ market. Musicians have to compete with each other for a share of the market, and so the prices of music services are bid down. In another industry, like say plumbing, if incomes were that low, many plumbers would quit and do something else, allowing the incomes of plumbers who remained in the industry to rise.

Music is different. Many musicians can’t bear to face the prospect of giving up their music career. They are totally passionate about it, and are prepared to put up with poverty if that’s what it takes to keep playing, at least for a while. For myself, it was a huge wrench when I gave up performing in order to complete my degree.

There are also some who stay in music in the hope of hitting it big and getting rich, although that’s only a minority, I think. For most, it’s their passion for music that keeps them going. Clearly, music consumers benefit from this. In economist speak, the supply of musicians is high and the price elasticity of supply is low (i.e., even if you don’t pay them much, they’ll keep playing). These are both circumstances that  favour music consumers rather than musicians.

Another factor that helps to keep most musicians poor is the highly skewed demand for music. Most music consumers mainly purchase music media or concert tickets for very well known acts, who are the tip of the music industry iceberg. While this is understandable, it means that the huge number of less well-known acts are competing for a small share of a small proportion of the total income generated by the industry.

Musicians also cop it in the markets for inputs that they must purchase to undertake their work. My band used to spend an obscene share of our modest earnings to pay for the sound equipment (and someone to operate it) that we had to hire for each show. Good musical instruments, amplifiers, sound effects and so on are expensive, but they simply have to be purchased. In fact, many musicians end up buying many more instruments and much more equipment than they really need, because it’s their passion.

The result is that people in the industries that provide services and equipment to musicians do pretty well, even though most of their musician clients and customers are not well off. In economist speak again, the demand by musicians for services and equipment is price inelastic, meaning that they’ll keep buying them even if the prices rise – clearly a situation that favours suppliers over musicians.

Of course, there are other relevant factors as well, like the monopsony power of large music companies when negotiating with musicians (there are many sellers, but only one or two buyers, so the buyers are favoured), some unscrupulous business people in the industry, the naivety of many young musicians when it comes to business, the culture within musical circles that values originality and artistic integrity over commercial success, the faddish nature of musical trends, and the hedonistic lifestyles of some musicians. Overall, the poor economic conditions faced by many musicians are not at all hard to explain.

But enough of that … back to the music. Maybe you’d like to hear some. I haven’t yet got a copy of the recording of our reunion performance, but I do have studio versions of three of the songs we played (Hungry, Cunning Brew and On The Seventh Day), which are available for downloading from my page of home recordings, here.