Tag: public goods

Regulation in capital cities

David Henderson notes that taxicab fares in Washington DC are much lower than anywhere else in the US, and for this he mentions the fact that Congressmen are frequent taxicab consumers in DC, and thus oppose any move to restrict supply, as is the case in other American cities.

But, I tell my students, there is one big counterexample: Washington, D.C. Why? Because Congress has a lot of say over the running of the D.C. government. So here the consumers, whose ranks include Congress and Congressional staffers, have a great deal of leverage over the regulators. Result: No way will Congress cooperate in artificially restricting supply and driving up cab fares that they themselves pay. That’s why cab fares in D.C. have traditionally been so low compared to fares for a given distance and time in other U.S. cities.

By that logic, Delhi and other state capital cities should have great public transport and infrastructure since MPs and MLAs are consumers there, and they wouldn’t want to impose higher costs on themselves. Why hasn’t that happened?

The simple answer is that as far as “government servants” in India are concerned, there is private provisioning of such goods. Thus the state takes care of accommodation and transport for these people. Since they live in a concentrated area, such areas are much less likely to suffer power cuts compared to the rest of the city. If you are a more senior government officer (of the grade of minister or chief minister or prime minister, say), you even get right of way on the roads and are not stopped by traffic.

Because we have elected to solve these problems for “government servants” in India by private provisioning rather than public provisioning, such “servants” are not consumers like anyone else. And thus, their presence in a city has no impact on public goods in the same city!

The long-term effects of government failure

In a good blog post on FirstPost, R Vaidyanathan writes that one of the possible reforms for the new government to take up would be to invest massively in electricity and water supply infrastructure and ensure 24 x 7 supply of these two commodities throughout the county. In his post, he explains that a move such as this will help Indian households (especially “middle class” households) and industry save a sum total of Rs. 1 lakh crore per year. While his numbers are not particularly convincing, his point is well taken – that irregular supply of basic infrastructure leads to additional private investment in such infrastructure which is an unnecessary cost. Electricity and water supply have “natural monopolies” and it helps to have a single supplier (in a local area at least) supply these goods rather than people making their own private supply arrangements.

Setting aside the problem of creating capacity for 24 x 7 universal power and water supply (priced at marginal cost, I assume), the problem reform such as this is likely to face is that there will be entrenched players who have a vested interest in such reform not taking place. And the  reason such vested interests exist is because of past government failure.

In the absence of reliable public supply of infrastructure, private companies have come up to fill in the gaps. You have, for example, companies that manufacture invertors (to store and supply electricity in times of power failure), those that manufacture diesel generators, companies that supply water in tankers when there is none in the pipes (or worse, pipes don’t exist) and so  forth. None of these companies will like the reform that Vaidya has proposed – for reliable supply of water/power will put them out of business! Hence they can be expected to lobby against such reform! Notice that the primary reason such companies exist is because of past government failures. Had past governments intervened and invested at the right time to provide reliable power and water supply, there would have been no gap in the market for such companies to fill.

Power and water supply are only two of several examples. Take for example the basic public good of law and order (strictly speaking power and water supply are not public goods). The lack of effective law and order enforcement by the state governments has led to a mushrooming of private security agencies. Every apartment building, every office building, malls and hotels are all now patrolled by a heavy posse of private security guards. In the presence of effective policing, these agencies have no business being in business (except perhaps in very limited cases)!

The point I’m getting at is that government failure at a particular point in time can lead to continued government failure. When we encounter policy paralysis, it is not just a temporary slowdown in decision-making and policy-making we face – it can lead to significant long-term consequences.

Here is an old related blog-post on my personal blog on private supply of what should be provisioned by the government.

 

ATMs and their security

Paul Volcker, former chairman of the US Federal Reserve and proponent of the Volcker Rule following the financial crisis of 2008 once remarked that the only useful financial innovation in the last twenty years is the ATM. The biggest advantage of the ATM is that because you can get money at any point of time on demand, you don’t need to keep too much of an “emergency stash” at home. For example, you are now extremely unlikely to find more than five thousand rupees in hard currency in my house at any point of time (including my wife’s and my wallets, and our “emergency stash”). In the pre-ATM era, when we would have to wait to visit a bank branch to withdraw money, we would have to keep a much larger sum at home as an emergency fund.

So how does this help the economy? Lesser cash in people’s homes and wallets means more cash in the banking system. Which means that at any given point in time, the banks have more money to lend out, and so the supply of credit is higher, reducing the cost of credit. Reduction in the cost of credit improves investment and thus leads to higher economic growth – which is good for everybody. The ATM is thus pareto-positive in stimulating economic growth.

And this is not all. The presence of the ATM has meant that one of the basic activities for which people would visit bank branches – to withdraw money – has now declined massively. Thus, it is possible for banks to run with much leaner branch infrastructure and this again pays back to the general public in the form of a lower “spread” between the cost of a deposit and the cost of a loan. I read on twitter yesterday (unable to find link now) that the average cost of servicing a customer at a teller counter is Rs. 176 while at an ATM it is Rs. 6. This order of magnitude difference is hard to ignore.

And we are not done yet, for we haven’t yet factored in the ease of drawing money now in the age of the ATM. Ten years back I remember having to wait at the bank branch at IIT for about twenty minutes to withdraw cash. I would have to fill up and submit a form, collect a token and wait till my number was called before I was handed my money. The transaction cost (for the customer) of withdrawing money was way too much. And one had to go during the branch timings. It is all so different now!

Now that we have established that ATMs have a socially and economically useful purpose, let us get to their security. On Tuesday this week in Bangalore a woman was mugged at an ATM when she had gone to withdraw money. The assaulter threatened her with a pistol and a machete, and assaulted her anyway and decamped with her money. The event was caught on the CCTV camera at the ATM and the footage was played out on national television.

http://www.timesnow.tv/India/Woman-attacked-inside-ATM-in-Bangalore/videoshow/4441948.cms

Following this incident the Home Minister of Karnataka has given a directive that banks appoint security guards at ATMs or shut down the ATMs. Initially he gave an ultimatum of three days to implement this rule, but then the impracticality of the suggestion dawned on him and the deadline has now been extended. The question, however, arises on who is responsible for safety of the ATM.

There are two components to safety at an ATM – safety of the cash and safety of the customers who visit it. The cash at the ATM is the bank’s private property, and the bank has chosen to put the cash there (and not somewhere else), so it can be argued that security of the cash inside the ATM machine is the bank’s responsibility. I don’t think there needs to be too much debate on this.

What is debatable, however, is the responsibility of security of people visiting the ATM. The question is if it is the responsibility of the bank or as a public good it is the responsibility of the government. Let us draw an analogy. Let’s say you are visiting my house, and at exactly the same time a robber happens to pay a visit. In the course of the robbery you get injured. Can the state hold me liable for your injury for not securing my house enough against the robbers? Isn’t it the state’s responsibility in the first place that the robbers were on the prowl and they just happened to rob my house when you were visiting?

Public safety is a public good. To get technical, it is non-rival (by keeping the streets safe for you, the streets are also kept safe for me) and non-excludable (having kept the streets safe, you cannot exclude me from enjoying the safe streets). And it being a public good, it is the responsibility of the state to provide it. It also means that it is the responsibility of the state to provide public safety everywhere – be it private or public places. Arguing that the ATM, since it belongs to the bank, is not a public space and hence the state is not responsibility for security there is thus wrong. So the state has no right to demand that banks employ private security guards to guard the ATMs.

So if it is the state’s responsibility to keep ATMs safe does it mean that police be appointed to guard the ATMs? Of course not, for the police’s job is not to guard private property that is the ATM – their job is to ensure public safety. Effective policing would mean that the thug who attacked the woman at the ATM wouldn’t be in business at all, and that he wouldn’t have thought of committing this crime.

So if we don’t have private security guards or cops guarding the ATMs how are we going to keep them safe? I argue that it is a matter of design. If you were to watch the video above, you will notice that the first thing the thug does on entering the ATM behind the victim is to pull down the shutters – thus the happenings of the ATM is shielded from the public eye. If ATMs are by definition perennially open what is the purpose of the shutter? You might also notice in the video that the thug pulled down the shutter once again while exiting. Consequently the victim was found only three hours later and that might have had serious consequences in terms of her health. Would the ATM not be better off without that shutter?

Then, there is the question of whether we need a room at all to house the ATM. Here in India, everywhere except in malls, ATMs have their own rooms, and it was in one such room that the mugging happened on Tuesday. On my few visits abroad, however, I’ve noticed that ATMs there never have their own rooms – they are simply holes in walls on the street from which you can get cash. That automatically puts the ATM in a public space and makes them safer (especially if they are on busy streets). The ATM rooms only provide a false sense of security and can prove counterproductive like in the case we just saw.

As we saw in the first part of this piece, ATMs perform a socially valuable function and it is in the interest of banks to encourage customers to use them. That, however, doesn’t mean that banks appoint guards to all ATMs – there might be an alternate solution that might be cheaper and easier to implement, and it is for the banks to find it. It is NOT the state’s business to mandate how the banks get customers to use their ATMs – the state has to concentrate on maintaining public safety.

In June last year the Reserve Bank of India allowed non-bank entities to run “white label ATMs” – cash dispensing machines that are not affiliated to any banks. The first such ATM came up earlier this year. I’m hopeful that some of these ATM companies will gain enough scale that they can solve the ATM design issue and make them safer and more customer friendly.