Knowledge Problem

MORE ON V2G TECHNOLOGY

Mike Giberson

On Sunday, I read the same Randall Parker post on "Vehicle to Grid" technology that Lynne discusses below. Then, just about 90 minutes later, the power went out in my neighborhood. Coincidence?

Monday morning I spent a few minutes chasing down links and reading a few concept papers. Pretty cool stuff. Here is an article by Steven Letendre and Willet Kempton that appeared in Public Utilities Fortnightly in 2002: "The V2G Concept: A New Model for Power?" (pdf).

The high value usages are in supplying a variety of high value power products like automatic generation control, responsive reserves, reactive power and real power supplies during system peaks.

Practical home applications involving resale to the local grid are probably a decade away, at least. (Maybe I'm wrong. Call your local utility and ask them how they feel about the idea.) I'd expect emergency home power replacement applications would come about much sooner.

V2G TECHNOLOGY

Lynne Kiesling

Randall Parker had a great post on Friday about hybrid and electric vehicles as electricity generation sources. Think about it: you come home from work, plug your car into your house, and use it to augment whatever other source of electricity you have, whether it's your own generator, a neighborhood combined heat and power facility, or centrally generated power that you buy and receive via the grid.

The days of the natural monopoly dwindle more and more quickly due to the ingeneuity of human mind.

SCOTTISH MUSIC FOR TYLER

Lynne Kiesling

In a post on his favorite things Scottish, Tyler Cowen comes up empty when looking for a favorite Scottish band.

I heartily recommend Snow Patrol. Jangly guitar, lyrics that are not banal, lyrical but not too melodic composition. Kind of in the intersection of Coldplay, Pearl Jam (and I largely say that because of some similarities of composition and lead singer's voice), Oasis and The Verve. Really neat stuff.

And, if transitivity holds, Tyler should like them given that he and I are fellow XTC-fan music nerds. I love XTC. Love them. Snow Patrol is not as Beatles-esque melodic as XTC.

ZEBRA MUSSELS AND MIKE LEAVITT

Lynne Kiesling

Here's an interesting article on zebra mussels in the Great Lakes, and EPA Director Mike Leavitt's face-to-face introduction to our little invasive species critters.

Handling a zebra mussel while hearing two longtime anglers say how the mussels have hurt fishing in the lake was the kind of experience Rep. Thomas M. Reynolds, R-Clarence, was hoping Leavitt would get when he invited him to come to Buffalo on Tuesday.

Leavitt has been put in charge of an effort announced earlier this year by the Bush administration to coordinate 10 federal agencies that administer more than 140 federal programs managing or funding Great Lakes restoration projects.

Zebra mussels are fascinating, essentially the shop-vac of the Great Lakes. One reason why zebra mussels harm fishing is that now the lakes are too clean! Great for us kayakers, not so good for fishies and the people who fish and eat fishies.

It's yet another example of having to adapt to external changes in complex adaptive systems.

OFFICIAL WELCOME TO MICHAEL GIBERSON!

After months of guest-posting and other various and sundry co-authorship, Mike Giberson has graciously consented to join Knowlege Problem in a formal capacity. He has a wide-ranging set of interests, only some of which intersect with mine (I think Lynne and Mike do not live by electricity alone ...), so look for more thought-provoking and novel content here in the future.

Welcome!

A Liberal Power Trip: Real capitalism at the movies

[Posting by Michael Giberson]

A documentary on the media, "Orwell Rolls Over in his Grave," opens today in the Washington, D.C., area, reminding me of the recent newspaper story in the Washington Post about the dominance of left-leaning view points in documentary movies ("Liberal Documentarians Are the Reel Majority"). The newspaper article by Tommy Nguyen asks why, while right wing viewpoints dominate talk radio and bookstores, documentaries seem to be almost exclusively from the left.

The views presented in the article don’t seem too thoughtful. In brief: from the left, documentaries come from the left because conservatives aren’t interested in changing the world; from the right, conservatives can’t get documentaries made because they don’t have friends in Hollywood. Read the article if you want the nuances.

I like the idea of political filmmaking in theory. In order to persuade other folks of your positions, you’ve got to connect up what you believe with what they value. It is a process more of rhetoric than rationality, and the rhetorical tools available in film are much richer than those available in print.

But a lot of political documentaries fall flat – failing as art, failing as a rhetorical effort. No one is persuaded. Judging from reactions, Michael Moore’s “Fahrenheit 9/11” falls into this category, though I haven’t seen it.

The other day during a late-night link-drunk blog crawl, I stumbled across remarks by Terry Teachout that seemed to get at the problem:

The insurmountable problem of explicitly political art, it seems to me, is that it is, literally, exclusive. As a result, it fails in what I take to be one of the defining responsibilities of aesthetically serious art, which is to aspire to universality, speaking (at least potentially) to all men in all conditions.

The only way art can do this is by reposing, in Dr. Johnson’s immortal words, on the stability of truth. By embodying and dramatizing truth, it brings us closer to understanding the nature of the human condition. And might such an enterprise be political? In a way, I suppose, though one must never forget that political opinions are epiphenomenal: they arise from experience rather than preceding it. (If they don’t, those who hold them are by definition out of touch with reality.)

Yes, political opinions arise from experience, and an effective documentary offers a bit of experience in a way that “brings us closer to understanding the nature of the human condition.” Anything that changes a person’s understanding of “the nature of the human condition,” is bound to have some political effects.

Andrew Jarecki’s "Capturing the Friedmans," though not an explicitly political movie, can contribute to a viewer’s understanding of the social nature of truth and the limitations of the legal process to uncover what “actually happened.” Unlike the naïve view that the “truth is out there” waiting for discovery, the documentary offers a more complicated perspective that should have political consequences.

Actually, I found Michael Moore’s “Roger and Me” to be both entertaining and effective social and political commentary about the interrelations between corporations and communities.

But the one of the best documentaries I’ve seen is "Power Trip," by Paul Devlin. Devlin’s film tells the story of the efforts of AES Corporation to succeed as the new owners of the privatized electric utility in Tbilisi, the capital of the former Soviet Republic of Georgia. Again, this is not explicitly a political film, but the viewer comes away with a better sense of the nature of the human condition.

The film offers a perspective on capitalism and corporations hard to get in the Western world, because in the West so much of the institutional framework is taken for granted. In the beginning only 10 percent of Tbilisi customers were paying their electric bills, because they were used to power being “free” (i.e. provided by the government). Of course, electric power was also unreliable (unless you had good political connections). In “Power Trip” you can get a flavor of such abstract phrases as “institutional framework,” and why they might matter to making the world a better place.

Should be required viewing for international development professionals and students of comparative economic systems, development studies, or the economics of institutions. Actually, everybody should go see it.

OPEN COMMENTS ON PREVIOUS ENTRY

BTW, I'm opening the comments on the previous post for a week, because I'm really interested in getting feedback on these ideas. They are core components to some ongoing research in the hopper. So substantive comments are welcome!

And yes, I know I need MT-Blacklist. But first I need to find the box where I've packed my server login info!

NETWORK RELIABILITY AS A PUBLIC GOOD, AND WHAT TO DO ABOUT IT

The ideas that have captured my attention recently (such as government funding of culture) have a central theme: the extent to which something is a public good, and what those public good characteristics imply for public policy. If a good (or service) has public good characteristics, does that fact necessarily imply that its provision should be centrally coordinated through regulation? Not necessarily.

One example I’ve been working through recently, and that I presented at the recent USAEE meetings in Washington, DC, is network reliability as a public good. Say there is a group of agents who are connected on a network, and their participation in the network generates benefits for each of them. In the case of electric power, being connected to the grid enables agents to buy power from agents who produce and sell power , meaning either that consumers don’t have to produce it themselves (which is prohibitively expensive historically, but becoming less so), or that they don’t have to buy it from the nearest producer.

Being connected through a network generates benefits for the connected agents, but these benefits come at a cost (duh). In addition to the cost of building the network, there is an additional cost of ensuring that the network will operate reliably for the agents using it. Ensuring a particular level of reliability requires investing in network capacity, particularly in peak hours, because one of the biggest causes of reliability reduction on all networks (electric, cell phone, Internet, highways, airports, etc.) is congestion. Does the network have sufficient capacity to provide reliable service in high-congestion periods?

Several different means exist for providing this capacity. One is to build more transmission wires, so the overall capacity constraint becomes less binding. Another is to build generation closer to consumer agents, using the network less. These approaches are costly in several ways. First, obviously, is high capital costs. Second, building more generation capacity closer to load has NIMBY costs, and in a large sense defeats the purpose of being interconnected on a network. But there are other means. We can use voltage-management technologies as springs or shock absorbers at various points in the network. We can ensure that we have good incentives and good capacity for reactive power to balance local network flows. And we can use demand response as a form of capacity building, empowering customers to choose from among a portfolio of contracts that could include real-time pricing, peak-load pricing, or fully-loaded flat rate pricing. Such pricing flexibility has proven and demonstrable benefits for networks, particularly in getting the most bang for the buck out of the existing network capacity without risking to o much loss of reliability. In other words, demand response promotes reliability by using price to increase the network’s load factor. Voltage management technologies and reactive power capacity also enhance network load factor without a cost of loss of reliability. They represent investments in reliability.

The thing about such investments, though, is that when one network agent invests in one of these reliability assets, all of the rest of the connected agents benefit, and the one who pays can’t always exclude the others from benefiting. So that makes reliability a public good, right? And if we apply standard neoclassical public good theory, the fact that reliability is nonexcludable and nonrival means that no one will want to invest in reliability because he/she will not capture all of the additional benefits from the additional investment. Thus we can expect underprovision of reliability unless we have some central coordination to require network agents to pay for the investments in reliability that benefit all of them.

This application of public good theory is misguided, and the resulting policy implications are likely to be inappropriate and costly (and therefore produce inefficient outcomes). For insight into why this pure public good treatment of reliability is misguided, I recommend to you an unjustly under-read paper in economics: James Buchanan and Craig Stubblebine, “Externality,” Economica 1962 [n.b. public goods are just a special case of externality]. Buchanan & Stubblebine start from a standard neoclassical model, where agents maximize utility subject to their budget constraints. But, as in the case of public goods, their agents have interdependent utilities in the sense that one good is consumed jointly, and the total amount available for consumption is a function of the choices of all of the agents. They then go on to derive efficient provision levels and optimality conditions for their model.

Buchanan & Stubblebine provide major insights in analyzing the reasoning underlying the “it’s a public good, and therefore underprovided in equilibrium” result, which I stated above as “no one will want to invest in reliability because he/she will not capture all of the additional benefits from the additional investment”. The flaw in this logic is a straightforward consequence of economic thinking: it’s incorrect because it overlooks the fact that if the agent’s marginal benefit from making the investment exceeds the marginal cost, she’ll do it, regardless of whether or not she can capture all of the marginal benefits. As long as she enjoys enough of them herself, she’ll invest in reliability assets, and there will be no underprovision in equilibrium.

The implications of this insight are profound. First, note that it takes advantage of the fact that different agents on the network are going to have different preferences over reliability. These different preferences mean that for a given level of reliability, some agents will have high marginal benefits and some will have low marginal benefits. That heterogeneity of preferences means that reliability is both a public good and a private good. Yes, individual production and consumption of reliability are interdependent, but when we recognize the diversity of preferences over reliability, the next logical step is to acknowledge that for high marginal value agents, reliability is a private good for which they are willing to pay beyond the lower levels that low marginal value agents would prefer.

That observation leads to the second major implication of the Buchanan & Stubblebine argument. If some agents are willing to pay for more reliability given that it does have private good aspects, then if left to their own investment choices, high marginal value agents would invest to a level beyond what would satisfy low marginal value agents. In other words, high value agents choosing to pay for higher reliability would satiate low value agents. Thus in the sense in which reliability is a public good, there are going to be cases in which the marginal value of additional reliability to a low value agent is essentially zero. In that case the low value agent is satiated, there is no externality at the margin, and any interdependency/externalities at the margin occurred at lower levels of reliability. High value agents wouldn’t stop there, though, if their private marginal benefit from reliability were still higher than their private marginal cost. Technically, this means that the interdependence experienced on the way to getting to equilibrium is a case of inframarginal externalities. Such externalities do not affect the amount of reliability provided in equilibrium, because at the margin the high value agents determine that level and the low value agents are satiated. The policy implication of this? If the low value agents are free riding, so what? It doesn’t affect the efficient outcome, if the environment is structured in such a way that the high value agents face incentives to “walk the talk” and invest in reliability (gee, like, maybe, markets …?). And if the low value agents are forced to invest, then in the worst case you get over-investment in reliability, and in the best case it’s an income transfer from the low value agents to the high value agents. How fair is that?

The third implication of this argument is that in an efficient equilibrium, there will still be un-internalized externalities. It’s just that the un-internalized effects, which are inevitable consequences of interdependence on networks, are small enough at the margin that even if they were internalized, they would not change the actual outcome, the actual investment in reliability.

The fourth implication is that the only externalities that should matter, i.e., be policy relevant, are those that would affect the actual outcome in equilibrium. That’s what economists usually mean when we say “underprovision”. But … if there are effects on agents’ values at the margin (if my failure to invest in reliability has a significant effect on your utility), that means that there are unrealized gains from trade and we are leaving money on the table if we don’t negotiate and figure out how to internalize the effects. We could self-internalize by you paying me to invest, and if your payment is enough to get me over the hump, then I do it. If it’s not, then it shouldn’t be done anyway. If this idea sounds familiar to you, it should – this is where the Buchanan & Stubblebine and the Coase “Problem of Social Cost” arguments dovetail. Externalities are not policy relevant if transaction costs are sufficiently low that we can negotiate to self-internalize them. In such cases contractual approaches to policy will lead to superior outcomes relative to regulatory approaches like the imposition of mandatory reliability standards on all agents. The policy implication of this? Focus on rules that reduce transaction costs and foster the development of markets, formal and informal, through which network agents can self-internalize the relevant, inevitable, value effects of their interdependence.

A (HOPEFULLY TEMPORARY) CHANGE IN COMMENT POLICY

For the moment I have closed comments as the default, although I will probably open the most recent ones manually. In the past 4 days I've been comment spammed to the tune of 16,000 comments. And that's with half of the posts already being closed!

Once we get my computers up and running at home I'll install the MT plug-in to deal with comment spamming. But for now, please be patient with the lack of public communication alternatives here.

MUTUALLY BENEFICIAL PEDANTRY

On Tuesday I had a pedantic experience very similar to the one that Russ Roberts had in Provincetown with his daughter. I was in Linens 'n Things, as one is when one moves house, and I ended up with more things in my hand than I expected. So I went back to the front for a cart.

The gentleman working the service desk asked me "can I get you a basket?" and I said "I think I'd better go for a cart." He smiled, and said "that's better, well, better for Linens 'n Things!" Being the pedantic economist I naturally responded "better for me too! You know, that whole mutually beneficial thing about commerce." To which he responded "yeah, you're absolutely right."

DOES LANCE ROCK OR WHAT?

There were a few cyclists at the IHS seminar at Bryn Mawr, and a few others following the Tour, so I did a good job of keeping up with the news through Friday. With the move (and the absence of DSL as of yet in the new home) I missed Lance's outstanding sprint finish in Stage 15 yesterday to take the yellow jersey, and today's victory in the time trial on L'Alpe d'Huez. 15.5 kilometers, 21 hairpin turns, in just under 40 minutes. My legs ache just thinking about it.

Now that I've been reunited with my bikes, I have to get back in the groove!

BTW, I think there's an interesting social science research project in analyzing the strategies that the cycling teams use in the Tour. Take the set of rules: different stages, individual time trials, team time trials, different types of winning jerseys (overall, sprint, best under 25, etc.). Take the fact that they ride as a team, with riders each having a specific role. How do you determine strategy in such a complex environment? How do you choose your team and compensate them to induce optimal performance? How would that team dynamic differ if the rules were different?

RISK TAKING AND OUR RENOVATION CONTRACT

One of the intellectually interesting things to me about this house renovation experience has been our relationship with the plaster and wood renovator. He and his team have done a great job with our walls, many of which needed some serious TLC, and the wood looks amazing. The economic side of it, though, has not gone so well for either side, and from a new institutional economics/transaction cost perspective, it's instructive.

We started out in late May with a fixed price contract for a certain number of items, to be completed by a certain time. Now, you know and I know, and I'm sure he knows, that a fixed price contract means that the contractor bears all of the risk of whatever is going on in those walls. In this case, once he stripped off the two layers of paint on top of the two layers of wallpaper in the living room, stairwell, and two front bedrooms, the bedroom walls needed more care and attention than he had anticipated. Fixed price contracts do not allow the flexibility to incorporate and adapt to unforeseen contingencies.

We had a contract, so I could have told him tough, he based his estimate on a probabilistic idea of how much work would be involved but the work was further out in the right tail of the distribution. Putting it that way casts the problem as one of ex ante risk sharing, where there is some probability distribution over the amount of work that the walls were likely to need. He made his ex ante assessment, gave us a quote, there you have it.

But he, naturally, started complaining about how much work the walls required, and how the electrician fishing for outlets degraded the plaster even further, so they were having to clean up after him, etc. etc. Then he did something clever: he showed me how easy it would be to strip the old varnish off of the wood, instead of just the cleaning and tung oil and polyurethane for which we had originally contracted. On balance, it wouldn't require a whole lot of additional work.

So mid-project we renegotiated. I agreed to an addendum, and the amount I agreed incorporated both additional funds to compensate for the additional plaster work and additional funds to strip and stain the wood.

Notice the important economic function of this renegotiation: it enabled him to share some of the risk with us. And because he and his team do good work, we were willing to take on some of it. And he knows that we are well enough informed about the market that we aren't suckers, so it's a split, not a push of all of the ex post cost on to us. He's eating some of that cost, as one does when one runs a business.

Now that we are in the house there are three unfinished items from the original contract. What will be interesting is to see how he will handle that, because he's already arguing that even with the addendum contract he's losing his shirt. Will we hold him to specific performance of the items stipulated in the original contract? Or will we just drop it? One of them is really important to me: power washing the basement with TSP. The other two are less important.

This experience reinforces the belief that I already had about the futility of the game theorist's quest for renegotiation-proof equilibria. Sure, on the computer screen renegotiation-proof-ness is a dandy equilibrium concept. But in real-world transactions, even in this simple environment where I've cast the problem as one of risk (i.e. known probability distribution) and not uncertainty (i.e., no known probability distribution), the ability to engage in ex post renegotiation may actually make both parties better off, relative to the real alternatives of either fixed price contracts or billing customers based on time and materials.

In fact, my husband said as much to our contractor. Apparently he was saying that if he had it to do over again, he would have proposed a time-and-materials contract to us instead of a fixed price contract, which would obviously have eliminated all of his risk but put it all on us. My husband pointed out to him that we would not have accepted his offer on such open-ended terms with incentives that are so prone to abuse (moral hazard, in this case).

The ability to renegotiate mid-stream allows two parties to share the ex post cost and is an institution that enables more, and more valuable, transactions to occur than would otherwise. Because of it we had them do more than we would have on a time-and-materials contract, and we are very happy with the result of what's actually been done. There's the value creation on the consumer side. The contractor and his team get paid, and while they didn't get rich on our job, they did cover costs and they didn't have anything else in the pipeline, so their opportunity cost was low. There's the value creation on the producer side.

THE HOMESTEAD

Well ... the move-in occurred Monday. Painless, really; much less arduous than moving out of the 4th-floor walkup condo. But the place is in total disarray, the DSL line hasn't been installed yet, and I spent most of Tuesday making the bathroom functional, although we haven't installed the medicine cabinet yet and my husband had a jolly time today shaving without a mirror!

I'm surprised at how good it feels to be reunited with the material trappings of our lives. I admit to being somewhat materialist, but I don't like "stuff for stuff's sake", so I guess that suggests that the material trappings are things that have real meaning to me. Even when they are still encased in cardboard.

MICHAEL DEALESSI ON OVERFISHING

And while you're at the Fraser Forum, also check out Michael DeAlessi's article on using property rights to combat overfishing.

Using property rights to address overfishing is a much-covered topic here at KP, and Michael's new article adds to the already voluminous evidence that property rights over natural resources produce superior outcomes.

CULTURE AND GOVERNMENT SPENDING

One of the delights of teaching at this IHS seminar this week has been getting acquainted with Jonathan Fortier, a specialist in romantic English literature who is a fellow at Liberty Fund. Jonathan and Jason Clemens of the Fraser Institute in Canada have written an article in the current Fraser Forum about government spending on culture in Canada. Their argument to “Liberate the Arts from the Culturecrats” is forceful and compelling. First they address the question of who gets to say what’s good culture and what’s not, deflating some cherished elitist sacred cows along the way:

[Canadian author Margaret Atwood] suggests that the market does not reward “artistically excellent” culture, but only that which is “marketable.” Who is to judge what is “artistically excellent”? Should we rely on the opinions of the culturecrats or some other self-appointed authority? In the past there were many self-appointed experts who laughed at writers like Shakespeare and Shelley, or derided painters like Titian and Van Gogh. … There is no guarantee that the market will always recognize artistic talent (it rewarded Shakespeare during his lifetime, but not Shelley), but there is still less of a guarantee that a committee of culturecrats will recognize excellence when it appears.

Jonathan and Jason do something here that is really important, but that many people (including well-trained economists) fail to do – they fail to commit the Nirvana fallacy. Instead of comparing the recognition risk that artists face in markets with some idealized notion of artist recognition, they compare their risk in markets with the risks they face in government committees.

Not surprisingly, the article is extremely well written and entertaining while making very important substantive points about markets and culture. One of my favorites:

H.L. Mencken said that a Puritan is a person who fears that someone, somewhere, is having a good time. Is it possible that a culturecrat is a person who fears that someone, somewhere, is buying and enjoying cultural experiences that the elite did not formally approve in a committee meeting? What it comes down to is that the culturecrats believe that we, as private individuals in the marketplace, will make the wrong decisions with our money.

I recommend it to your consideration.