The parking problem in malls

How fair is it to charge shoppers a fee to merely enter the shop? If there is a premium experience attached to shopping there and a demand for that experience, it is appropriate to impose an entry fee. In its absence, it may not be economically viable for the shop to charge an entry fee as a commercial revenue stream. So how is it that large shopping malls in many Indian cities collect parking charges from their customers vehicles?

I can think of two possible reasons.

1. From the demand-side, the consumers/shoppers may value the mere experience of shopping in these malls and therefore may be willing to put up with having to pay the parking charge as an entry fee. The mall operators ride on this demand and capture it in the form of parking charges.

2. From the supply-side, the parking charges, which are often exorbitantantly high in cities like Hyderabad, have become a significant revenue stream for the Mall operators. In fact, the returns (by way of sales and profits thereon) from the premium outlets may be comparable to the parking charges collected from the visitors to the same outlets.

Does this "free-market determined pricing model" lead to economic efficiency all round? As could have been expected, the free-market price determination process inevitable results in the fragmentation of the different activities into separate revenue streams with their respective distortionary effects.

1. The shop-owners/franchises get away by socializing a major negative externality. They do not pay the price for the negative externality created by their customer's vehicle parking. Since this is not internalized into their costs, the shop-owner pays a smaller rent than would have been the case if all externalities were internalized. It distorts their incentives. They offer numerous promotional and other offers to attract more customers without having to bother about its social costs.

In fact, the shops make free money here. Since all these mall shops are outlets peddling branded products, their sale prices are fixed, irrespective of whether the parking charges are internalized or not. In the circumstances, by having palmed off the responsibility of arranging parking facility to the mall operator, the franchisee would see a mall space as being more profitable that having his own exclusive separate shop, where he would have to himself arrange for separate parking.

2. Instead of viewing parking as an accompaniment service to be bundled with shops, the mall operator sees the parking charges as another full-fledged commercial service from which they seek to make more money. Given the large volume of shoppers, they view it as a revenue stream with considerable commercial potential. In fact, many mall operators outsource this to another service vendor, with a contract aimed at maximizing their returns. This parking operator would naturally be left with no option but to increase the parking fees and maximize his revenues.

3. As both the aforementioned points convey, in the absence of its internalization, the price of the negative externality is now completely borne by the customer. Admittedly, the shopper has to pay the cost of the convenience of using a car for his shopping. But it is only fair that he shares it with the shop from where he makes the purchases.

This again raises the issue of whether free-markets always lead to the most efficient outcomes. A more efficient system would be one where it is regulated that parking in all malls should be free and the mall operator should collect the cost of maintaining the parking facility from the individual shops. There are several ways to apportion the parking costs on the shops. Even if some reasonable charge is collected, it could be reimbursed to the customer on production of the shopping bill. Interestingly, some shops do this, but not others. This will also help the operator gather data on which shop is the largest source of parking externality.

For sure, such regulations may create their own distortions. But I am inclined to believe that its distortions are likely to be far less inefficient than that created by the current free-market price determination model.

Migration of health personnel and market failure

The international market for highly skilled workers is a Chicago economist's dream. On the one hand, between the developed economies and the least developed economies, there exist vast differentials in pay and opportunities for skill development for professionals. On the other hand, immigration rules in developed countries, many of whom face a shortage of such professionals, are very liberal and welcome, even incentivize, such migration.

It is therefore no surprise that large numbers of professionals - doctors, engineers, scientists, mathematicians etc - migrate from the least developed countries to the most developed ones. Free-market advocates would rationalize this trend as efficient - professional workers improve their skills, are better remunerated, and are happier. If questioned about its adverse impact on the parent country (due to say, doctor migration), they would point to the long-term trickle down beneficial impact - flow of remittances, skilled doctors returning back and setting up specialty hospitals and transferring expertise to local doctors, and so on.

However, in the real world, such long-term trends take time and its costs are catastrophic. There is a clear market failure. Nowhere is this impact most debilitating on the parent country than in case of medical professionals, especially from the least developed countries. An excellent report in the Times examines the impact of migration of doctors from Africa to the United States. It writes,

About 530 Ghanaian doctors practiced in the United States in 2006, which amounted to about 20 percent of the doctors left in Ghana, according to an article in The New England Journal of Medicine. Zambia... had no surgeons performing this (laparoscopic surgeon) less-invasive surgery, though the Netherlands had recently donated a laparoscope... the median salary of a surgeon in New Jersey is $216,000. In the main hospital in Lusaka... a surgeon makes about $24,000 a year.

In this context, the Times report points to a study published in The Lancet in early 2008, which reveals the shocking impact of migration of medical professionals - doctors, nurses, and pharmacists - on the parent countries of sub-saharan Africa. The authors, a group of doctors, argue that active recruitment of health workers from African countries is a systematic and widespread problem throughout Africa and should be viewed as an international crime. They write,

Overall, there is one physician for every 8000 people in the region. In the worst affected countries,such as Malawi, the physician-to-population ratio is just 0·02 for every 1000 (one per 50000)... the UK, for example, has over 100 times more physicians per population than Malawi. Furthermore, almost one in ten doctors working in the UK are from Africa... An estimated 13272 physicians trained in sub-Saharan Africa are practising in Australia, Canada, the UK, and the USA. Around a third of medical graduates from Nigerian state medical schools migrate within 10 years of graduation to Canada, the UK, and the USA...

In Malawi, for example, there has been a 12% reduction in available nurses due to migration. In 2000, roughly 500 nurses left Ghana, double the total number of nursing graduates for that same year... Liberia has a pharmacist-to population ratio of only one to 85 000, 77 times lower than that in the USA. In 2001, more pharmacists emigrated from South Africa (600) and Zimbabwe (60) than graduated (500 and 40).Many pharmacy outlets have closed because of a scarcity of trained pharmacists and pharmacy technicians.

Assuming the trend rate of physician attrition rate due to migration and incidence of HIV in sub-Saharan Africa, the paper projected the impact on HIV treatment. In the 2006-12 period, it estimated an almost three-fold increase in the number of patients per physician (from about 9000 to 26000) and an overall decrease in the number of physicians treating patients with HIV from 21000 to about 10000.



In this context, an Econ 101 analysis of this trend in the field of health care teaches us that such migration is efficient if the total gains from it offset the losses suffered. In other words, the financial rewards and professional skill addition gains to the individual health worker and the benefits accruing to the host country should exceed the obvious losses suffered by the parent country. However, as the Lancet report and the shocking state of health care indicators in sub-Saharan Africa shows, the losses suffered by these countries are of a much higher magnitude.

Cost of medical care - pricing failure

The Wonkblog has an excellent interactive graphic that captures the average cost of different types of surgical procedures. Two things stand out. One, United States is a consistent outlier in the high cost of treatment. Two, India stands at the other extreme, offering the cheapest procedures.



Conventional wisdom would have it that the higher cost of medical care in the US is because Americans use more health care services, see doctors more frequently and stay in hospitals longer. However, as Ezra Klein highlights by pointing to this 2003 paper by Uwe Reinhardt and Co, the reality opposite on all these counts. The real reason for the higher cost of medical care in the US, as the graphic makes amply clear, is due to higher prices.

The higher prices in the US health care market is yet another illustration of the failure of price signals in ensuring economic and allocative efficiency. In the United States, outside of the government run Medicaid and Medicare, prices are negotiated in a free-market between insurers and service providers. As Uwe Reinhardt has shown here and here, providers largely charge what they can get away with, often offering different prices to different insurers, and an even higher price to the uninsured.



Prof Reinhardt writes,

On average, the prices for health care goods and services negotiated by private health insurers in the United States tend to higher — about double or more — than prices for identical services and goods in other countries of the Organization of Economic Cooperation and Development. It is in good part so because insurers do not seem to have sufficient market power, especially vis à vis hospitals, to resist very rapid price increases.The varying degrees of market power among private insurers in the United States have led to pervasive price discrimination among payers, with prices for identical goods or services varying among payers by factors as high as 10.

In contrast, health care prices in the other countries is regulated, with the result that prices are considerably lower. Ezra Klein writes,

Other countries negotiate very aggressively with the providers and set rates that are much lower than we do... They do this in one of two ways. In countries such as Canada and Britain, prices are set by the government. In others, such as Germany and Japan, they’re set by providers and insurers sitting in a room and coming to an agreement, with the government stepping in to set prices if they fail.

I have blogged earlier highlighting the market failure problems associated with purchasing and pricing health insurance service.

Economic History of the past 40 years of US in a graphic

The Times has this superb graphic that captures the contrasting tales of the US economy in the two halves of the post-war era.



(Click on the graphic to expand)

Robert Reich has an excellent assessment of this period, and his conclusion that sustainable economic growth is impossible with this type of concentration of wealth (and thereby political power) could not have been more accurate. The productivity boom of the past thirty years have resulted in disporportionately shared income gains, thereby concentrating wealth at the top in an unprecedented manner. Middle class consumption over the past forty years was sustained initially by the sharp increase in women working and later, more damagingly, by different forms of debt.

He laments that the Great Moderation and the economic opportunities presented during this period of stability was not used to shore up America's human resources development infrastructure and broaden and increase the quality of its social safety net. Instead, tax cuts and other enabling policies helped businesses retain and appropriate the overwhleming share of the windfall incomes.

Any visitor from outerspace, examining America's economic history of the past 40 years will readily agree with Robert Reich's assessment and conclude that American economic history of the period is a classic example of a market failure. As economic power gets concentrated, checks and balances get dismantled, and policy distortions are an inevitable concommitant.

The crowds are not always wise!

James Surowiecki's best selling book, The Wisdom of Crowds, popularized the belief that the collective wisdom of a group of people was superior to the individual wisdom of even experts. It has generated considerable interest in the design of systems that seek to channelize the knowledge of large groups of people to say, predict events and prices. See Justin Wolfers' paper on prediction markets here.

It is based on the statistical phenomenon by which individual biases cancel each other out, distilling hundreds or thousands of individual guesses into uncannily accurate average answers. However, it assumes that the members of the crowd have a variety of opinions, and arrive at those opinions independently.

A new study of this phenomenon by Jan Lorenz and Heiko Rahut finds that contrary to conventional wisdom, groups insights could go awry if participants were influenced by the guesses of their peer group. They found that though groups are initially wise, "knowledge about estimates of others narrows the diversity of opinions to such an extent that it undermines” collective wisdom". Moreover, they found that "even mild social influence can undermine the wisdom of crowd effect". In this context, as the Wired article points out, computer modeling of crowd behavior also hints at dynamics underlying crowd breakdowns, with the balance between information flow and diverse opinions becoming skewed.

The authors recruited 144 students from ETH Zurich, made them sit in isolated cubicles and asked them to guess various indicators like Switzerland’s population density, the length of its border with Italy, the number of new immigrants to Zurich and how many crimes were committed in 2006.

At the end of each round of questioning, they were given small payments for coming close to the actual answer (signified by the gray bar). At left is the range of responses among participants who received no information about others. The findings of the study participants who were asked how many murders occurred in Switzerland in 2006 is shown in the graphic below.



The Wired article concludes,

"As testing progressed, the average answers of independent test subjects became more accurate, in keeping with the wisdom-of-crowds phenomenon. Socially influenced test subjects, however, actually became less accurate. The researchers attributed this to three effects. The first they called "social influence": Opinions became less diverse. The second effect was "range reduction": In mathematical terms, correct answers became clustered at the group’s edges. Exacerbating it all was the "confidence effect", in which students became more certain about their guesses."

As the authors claim, such false beliefs are commonplace in society, politics and markets. The herd behaviour of investors in financial markets is driven by excessive confidence generated by social influences. Opinion polls and the mass media largely promote information feedback and therefore trigger convergence of how we judge the facts and potentially create overconfidence in possibly false beliefs. Social fads and beliefs, some of which are of questionable value, become popular for no apparent reason.

In all these areas - markets, society, and politics - there are people and groups with an interest in influencing the beliefs of participants. They are vulnerable to being manipulated to suit the requirements of these vested interests. Such dissonances constitute failures in markets, politics and society.

Information over-load and health care

Standard explanations trace market failures in health care in general and health insurance in particular to information asymmetry (patients knowing more about their condition than the insurers and doctors knowing more about treatments and diagnostic procedures than patients) and its resultant adverse selection problems, and moral hazard (insured patients having no incentive to curb treatment and costs) concerns. Here are two less-discussed dimensions to this debate, both of which highlight the complexity involved in managing health care markets.

First, Tyler Cowen makes an important distinction between information asymmetry and information overload, and feels that adverse selection is less a problem. He writes,

"When it comes to the elderly, adverse selection as a problem is overstated. The real problem is usually a high degree of information about many conditions, so often insurance is difficult per se. It’s not the asymmetry of information that is the core issue, it is the existence of lots of information, and that is one of Arrow’s subtler points. That distinction matters a good deal for mechanism design.

An old person might know better his health care condition, but not know better his expected health care costs. That is a critical distinction. You can’t reach age 60 and credibly say: "I’ve been healthy so far, I guess my lifetime health care costs will be low." It’s not even clear whether the healthy or the unhealthy will have lower health care costs in their later years; the unhealthy might die rather quickly and decisively. Adverse selection on the grounds of health care costs need not be high and arguably actuaries can estimate those as well as the individual himself."

Another manifestation of information over-load involves the problem of patients being unable to effectively discriminate between multiple treatment options. For example, a patient exposed to two different sets of diagnosis, struggles to make a choice, leave alone the correct choice. Also, though the patient can avoid subjecting his/her body to all diagnostic tests if he/she can trust the doctor's clinical skills, such trust, for various reasons, is an increasingly rare commodity.

Further, most often, in their anxiety, patients end up following the herd and over-treating themselves. Unfortunately, the incentives of the doctors and the diagnostic service providers too are aligned towards leading patients down the path of the herd. In all these cases, it is not information asymmetry, but information over-load that either paralyses decision making or leads patients to make the wrong choices.

Co-payments and deductibles, while trying to incentivize patients to optimize on their treatment, does not always, atleast among those at the top half of the income ladder, curb over-treatment. Awareness campaigns and focussed information dissemination about medical conditions and treatment options can play an important role in helping patients make informed treatment choices.

In another post, Paul Krugman makes the point that health care recipients cannot be exact substitutes for "consumers" in the general marketplace. He writes,

"Medical care is an area in which crucial decisions — life and death decisions — must be made; yet making those decisions intelligently requires a vast amount of specialized knowledge; and often those decisions must also be made under conditions in which the patient is incapacitated, under severe stress, or needs action immediately, with no time for discussion, let alone comparison shopping.

That’s why we have medical ethics. That’s why doctors have traditionally both been viewed as something special and been expected to behave according to higher standards than the average professional. There’s a reason we have TV series about heroic doctors, while we don’t have TV series about heroic middle managers or heroic economists."

The term consumer-choice becomes meaningless in case of patients fighting to save their lives. The choice is mostly a fait accompli. As Krugman argues, it is indeed surprising that even forty years after Ken Arrow wrote this seminal paper distinguishing health care from other markets, the issue still evokes confused rhetoric. See also this post on the shockingly low levels of health care literacy even in the US.