Tag Archives: economics

Changing the story

Insurance seemed like betting against your death or misfortune and some people don’t want to bet on your personal downfall so they don’t want to buy insurance. For years, the industry have been trying to change the story and they settled on the idea of protection, financial protection against those misfortune.

In principle, that works theoretically but the issue is that a lot of what you pay for is sales and distribution. The structure of the industry is such because insurance works well only when the risks are being pooled. That means having lots of people paying the premiums in order to support payouts during adverse events. As a business though, it means that the firm is ultimately a sales and marketing organisation. Costs will have to weigh disproportionately on the distribution side of the business.

This is a shame because the society needs insurance. Yet it is a market failure; the market system allocates resources poorly in this market. It can be better designed through a mix of regulation and making it mandatory to have certain amount of cover. The government should not think the market will help reduce cost of insurance through competition because the basis of competition in this market isn’t so much pricing. It is more sales, marketing and tactics.

But isn’t it just like many other products? For luxury products, yes. Basically for things people don’t actually need, you can allow the whims and fancies to be shaped by the market. But when it comes to insurance, you want the market to deliver an outcome so you need to design the boundaries and structure to make it work.

The story of insurance should be that of mandates, regulation, and basic necessity and right of people. We come together to live in highly urbanised environment and it should be a no brainer for us to risk-pool and mutually insure. There’s no excuse for this market to be hijacked to support high-flying salespeople.

Two-part tariffs

In economics, when there’s even some monopoly power, the business can set prices and still have people buy their products. There is monopoly power everywhere; local convenience stores can price the way they do because there are some customers who are unable to switch providers or move. And so the businesses can price their products and somehow structure the pricing to be two-part tariff, which mean they can charge you a fixed fee and then layer on additional charges per unit of consumption.

They can take various forms. For example, a bakery can charge you $10 annual membership and give you 10% discount off the breads that you buy from them for the entire year. This way, they charge you a fixed fee and then get you to pay for more per marginal unit of consumption. The gym charges you a single registration fee and then monthly membership. Even devices such as reMarkable which is an e-ink writing tablet is selling its tablet and then charging people for a monthly subscription that allows people to sync their notes to various platforms, have unlimited storage, etc.

Even the smart phones involves getting you to pay for the device, then charging you for apps or gaining more revenue from additional services you use on the phone. The tariff structure has an alluring quality of pricing the overall good at almost marginal cost. Or does it? That’s what economic theory suggests but it is unlikely to be the case on digital goods and services. They are probably being priced at the long run marginal cost plus a premium to support long term development and innovation. Is that an efficient outcome? It’s hard to say.

What is more interesting, is that the two part tariff structure creates more stickiness for the customer to the producer. Having already paid for the first part, the customer tries to make more use of that, averaging down his/her cost per unit of consumption. This is the use of sunk cost fallacy and faulty thinking to trap consumers.

Unfortunately, it does work.

Moving solar around

You might have seen solar panels ground-mounting on vacant land in Singapore. Today I was on a cab when the driver told me about this and thought it is such a waste of land in Singapore.

So I explained the idea that our government agencies had and the tender they designed. The projects are actually to maximise the use of land rather than waste them. In Singapore, there are plots which are left vacant for future development – they may not be empty for the full period of a solar farm, but at any one time in the island of Singapore, there should be enough space to hold a certain amount of ground-mounted solar. So the plan is to move the panels around to a vacant lot once an existing solar farm land is needed for development.

Such a model seems common sensical but requires a great deal of coordination and detailed thinking. But in the grand scheme of trying to produce more green electricity for our island state, this is not exactly a great solution. And this is an example of the challenge that Singapore faces when it comes to being innovative and scaling solutions. We have requirement for unique solutions that serves us well but probably no one else – nor are we able to easily adapt our solutions to other places.

Not sure who else would want to be moving their solar panels around.

What are prices for? II

Can prices make the world better? Perhaps one could argue that it already did! Yet for the first in history, putting a price on something free could very well allow us to step into a future that’s remarkably better than the status quo. And that’s the price on carbon.

For the longest time; perhaps for far too long, emitting carbon dioxide is free. To be fair, when we breath out, we emit carbon dioxide. But that is through the food, grown during our lifetimes. One may argue of course that cows belching and the dairy industry creates a lot more greenhouse gas emissions in the form of methane as well.

Brushing food industry aside, let’s ask ourselves how a carbon price makes the difference. By charging industries for burning fossil fuel and emitting carbon dioxide through whatever industrial processes, we are saying that the release of carbon dioxide into the atmosphere when it should rightly be stored in minerals and in the ground as oil, gas and coal is harmful to the world. We are saying that people ought to pay a price for releasing the carbon dioxide in the air and causing climate change.

The issue is that we all live in a single atmosphere but the carbon price is different everywhere and we allow people in their own countries to somehow set this price or a regime to manage this price. And then we call it a carbon tax. Or in other places, we put a trading system around it and the traded price becomes the carbon price. There are times when prices work better when they are different in different places. But perhaps not this time. The fact carbon is free or much less costly in one place but not another is just going to encourage more gaming of the system.

The world needs to set a price, and really align on it. There is nowhere in the world where it is cheaper to emit carbon in terms of the environmental and climate costs.

What are prices for?

The cynic knows the price of everything and the value of nothing

Oscar Wilde

I don’t think this is the first time I’m putting up this quote. But I’m just wondering today. What are prices for? Why are there prices for things? What does a price mean? If anything at all?

Prices are signals from the perspective of economics. The level that clears the market; where demand matches supply. A high price or low price doesn’t really mean much. It’s unclear if the prices reflects costs of production because there can be market power driving margins. Besides, when storage costs are expensive, a producer might be keen to sell excess supply at lower than production costs.

But prices drives behaviours; they create some kind of incentive to produce, to trade, to buy, and sell. It is some kind of benchmark against which we evaluate our preferences. Because we’d try to figure out if something was ‘worth the price’. And so the market moves; and people try to justify prices with attributes, features, emotional storytelling. And prices in turn drives those stories, emotional expression and comparisons.

Blue bins

In the first episode of my recently launched podcast, I kind of ranted about the blue bins in the National Recycling Programme that Singapore has. My major gripe was that the system for blue bins which was completely open access and operated by riding on the back of the public waste collection system was designed to fail because by seeking to include everyone, it made securing a clean stream of recyclables harder.

I noted that an alternative system where people sign up to gain access to the blue bin, and pledge to abide by the ‘rules’ of using the blue bins could do better. They could pledge the following:

  1. they will use the blue bin only for recycleables allowed,
  2. they will ensure the items are cleaned and ready for recycling,
  3. they will only access the blue bin themselves,
  4. they will ensure the blue bin is locked after their use,
  5. they will not deposit into the blue bin when it is full or when they note it is contaminated

Friends at Upcircle has shown that by giving assurance to people who care and show up for the environment that you are able to deal with the recyclables properly, you can actually obtain good quality post-consumer recyclable stream. By preventing those who doesn’t care about recycling from taking part in pseudo-recycling by their own terms, we can actually do better.

Recycling better by excluding people isn’t exactly the best narrative to the ears but in due course, that can actually change the culture.

Mondo Gondo

This is the first time I utter this two words that don’t really mean anything but definitely not the last time. I started a podcast (yes, finally!) and it’s called Mondo Gondo. I picked those words because it rolls off the tongue well. And it’s probably a whitespace in the minds of people what it could mean.

So yes, Mondo Gondo. It’s like a trip into my mind. I’ll be ranting, riffing, ideating, and mostly talking. I wished I could ramble but I designed them to be concise and <15minutes pieces. One of the requirement I have for myself is that they must have some ideas (not answers, just ideas) to make things better.

And why did I do that? Because it’s always worth taking action that allows each and everyone of us to step into a future that we all want to be in. At least one that I’d like to be in. So yes, a podcast. With some show notes here. And thank you in advanced for listening.

What about the baseload?

I get asked this question a lot; by the people operating power systems, by the Oil & Gas industry, and the traditional old school bankers. They also ask about price of intermittent renewable energy plus energy storage; and when that will reach grid parity. Essentially, they are saying that the new innovations cannot replace the current technologies because the cost don’t stack.

I’m not sure those are the right conversations to have or the right questions to ask. Economics do drive a lot of systems and considerations but they probably should not be hijacking our priorities and our realities. Climate change is real; and if we are to put our best foot forward to make the difference, we are not going to make it. Putting our best foot forward is about using our minds, engaging our hands and changing our lives.

Yes, baseload power will be changed, energy prices will increase, perhaps our spaces, our wealth will have to be sacrificed. But our earth can remain a sanctuary for life, and our world can remain intact; if only we are putting our best foot forward. Not dragging our feet, not trying to maintain status quo. Not trying to exercise malicious obedience.

Economics of whatever

In my line of work as a strategy consultant, I sometimes work on techno-economic studies. Using a combination of statistical analysis, forecasting techniques and calculations, we estimate various different cost trajectories, and examine the economics of something. It could be a project, a technology, or a decision that a company is trying to undertake which has some cost impact and some benefits somewhere else.

In economics, we can only perform estimates when we assume all else equal. That’s the only way to perform proper sensitivity analysis. When you change more than one parameter, then you’d call it a scenario analysis. There are infinite possible scenarios when there is infinite parameters to shift or parameters with continuous range of possibilities. So when we model the economics of something, we’d always be varying something that we think we have control over, or that we expect will be changing in the near term, and see the effects on the economics.

Yet we often think that the economics of a technology or something will remain the same unless something drastic happens. More often than not, economics of technologies shift when various players in the market make different investments, either in the underlying technologies, manufacturing capacity for the gears and components, or simply into research and development. The actions of many different parties can have a collective impact of making the economics work when at first it doesn’t seem to work.

When we critique the economics of a new innovation or project, we often forget we are comparing them against the status quo where many are already very well-invested into. The years, decades and even centuries of using a technology, manufacturing it, creating complex supply chain and auxiliaries around the status quo. It is naturally hard to beat. But what is critical about a new technology is that the incremental investments can make a large impact, small changes to scale can also make a difference. Coordination and changing expectations play a big role.

Will the economics of new innovations change overnight? Unlikely, but they typically change faster than you and I can work out the math for the economics of it.

Malicious obedience

I have been going through Bob McGannon’s Linkedin course on ‘Leading with Intelligent Disobedience‘, he brings up the concept of ‘malicious obedience’. It is the behaviour that follows from ‘well, if that’s what you want’. And it is probably what we engage in more often than we are proud of.

I think by juxtaposing intelligent disobedience with malicious obedience, one suddenly recognise rules for the place they should be. Yet more often than not, we follow rules somewhat blindly, out of laziness, fear or lethargy, when there might be more wisdom and intelligence in breaking them. Of course, here, we recognise another dimension for following the rules – it is to do so with malicious intent.

Of course, the malicious intent might not spring up overnight. It could be employees who knew something was wrong and sounded the alarms but the management refused to heed. It could be a child protesting the stupidity of a rule at home and not having received the appropriate explanation for why the rule was in place. So the risk of not empowering others with the ability to disobey intelligently is that we send the wrong message about what obedience is about.