Emerging Concepts in Market

Design
Joshua Gans
PerCapita, Policy Exchange
30th October, 2008
 Common advice

“Reduce the number of miles you drive by

walking, biking, carpooling or taking
mass transit wherever possible.
Avoiding just 10 miles of driving every
week would eliminate about 500 pounds
of carbon dioxide emissions a year!”

From: Inconvenient Truth Official Website

Is walking a low emissions activity?

0.9kg CO2
Driving for
4.8km

Walking for
4.8km
180 calories = 100g beef
= 3.2kg emissions

Chris Goodall, How to Live a Low Carbon Life

 What else donʼt we know?
•  Disposable vs cloth nappies
•  Organic-fed cows
•  Paper vs plastic bags
•  Burning vs recycling wood
Answer depends on science, behaviour,
substitution and mix of gases.

Key point: Only by pricing all of the

greenhouses gases can we possibly find out.
 The Task
•  Economic problem
–  Get resources to right people/uses
–  Central planners donʼt have all the information
–  Markets can aggregate that information
•  What happens when decentralisation
doesnʼt work?
–  Need centralised support
–  Set the rules of the game so markets can work
–  Planned markets
 Planned markets
•  Allocating public goods
–  Spectrum/Forests/Emissions
–  Public school places
–  Electricity
•  Managing businesses
–  Procurement/tenders
–  Job matching
–  Keywords
–  Parenting?

Since 1994, 16 Nobel prizes in economics

and 1 in peace related to market design
 Key Lessons
•  Details matter
–  Early Australian and NZ spectrum auctions
–  Implementation of the baby bonus
–  SO2 permit auctions
•  Non-economic constraints bind
–  Sometimes canʼt use prices
–  Sometimes canʼt trade
–  Sometimes hard to define property rights
 Rothʼs Criteria
•  Thickness
–  Effective markets require many buyers and sellers (cf:
current RMBS market)
•  Non-congestion
–  Need to ensure that transactions are not time
compressed (unraveling) nor spread out across time
(housing markets)
•  Safety
–  Market participation must not result in negative returns
(e.g., defining property rights in emissions trading)
•  Repugnance
–  Non-economic norms can act as a constraint on design
choices (e.g., water pricing, “ideas should be free”)
Kidney exchanges
 Opportunities
•  Sometimes repugnance can go away
–  “Right to pollute” is no longer a dirty word.
•  We should not fear unintended consequences
–  but should study them carefully and make them
known consequences.
•  We can facilitate better exchanges than a
unplanned markets
–  but we need to trade off complexity/cost with
efficiency gains.
•  We do not need to do market design on the fly
–  but we need to do it.