Thursday, September 1, 2022

Not doing things is a nonrival good (and while we're on the subject, can you have a nonrival good with a monopsony?)

As mentioned before, Matt Levine has become on of the essential writers on the business and finance beat and I strongly recommend that everybody sign up for Levine's free Money Stuff newsletter mentioned at the bottom of the post.

Here's a choice bit from the August 30th newsletter. 

The most interesting field of economics might be the economics of not doing things. The main way that people make money, in the world, is by doing things that other people want: drilling oil, brewing coffee, maintaining social media sites, writing newsletters. But there are a few lines of business where you can get paid for not doing things that you’d otherwise do. Blackmail, for instance, is a classic: “I will go around distributing these compromising photos of you, unless you pay me money, in which case I will do nothing.” Coasean bargaining: “I will build a smelly polluting factory on my land next to yours, unless you pay me money not to, in which case I will leave it undeveloped.” Demand response in electric grids: “I will turn my lights on and use electricity, unless you pay me not to, in which case I will use less electricity.” And, in the modern world, all sorts of environmental credit schemes: “I will chop down these trees, drill this oil, etc., unless you pay me not to, in which case I won’t do anything at all.”

There are so many ways in which the economics here are unintuitive. Consider the oil market. There is some demand schedule for oil; people will use more of it at lower prices and less at higher prices. There is also a supply schedule: Some oil is cheaper to drill than other oil, so when oil prices are low only the cheapest-to-extract oil will get drilled, but when prices get high people will drill in more difficult environments because it becomes worth it. But then consider the market for not drilling oil. If you own a bunch of oil fields, and someone will pay you $5 per barrel not to drill oil, you should start your not-drilling in the most-expensive-to-drill places. “Good news,” you say, “I have decided not to drill in this field that costs $150 per barrel to drill, now pay me my $5.” You could expand on this theory. If you don’t own any oil fields, you could walk into the offices of some environmental-credits company and say “if you pay me $5 per barrel not to drill oil, I won’t go around buying oil fields and drilling them.”

Also consider the demand schedule there. If you promise me not to drill for oil, I might pay you $5 per barrel for the oil you don’t drill. But you could go to someone else and promise not to drill the oil, and they might pay you $3 per barrel. For the same barrels. “Not drilling oil” is a non-rival good; you can not drill the same barrel of oil as many times as you like, and sell it to a different person each time.

Or consider blackmail. If you get some compromising photos of me, and I pay you not to publish them, then you won’t publish them (let’s assume). But what are your long-term incentives? The way to succeed in the business of not publishing compromising photos is by taking lots of compromising photos and repeatedly threatening to publish them. If I paid you $100 not to publish the photos, and you were like “right, good, I get paid not to publish photos, I will stop taking the photos,” you would be deeply misunderstanding your business. You are not being paid to not publish photos — anyone can not publish photos! You are being paid to credibly threaten to publish photos, and then not publish them.

This has important implications for the environmental credit schemes. You don’t get paid for not drilling oil or not cutting down trees; you get paid when there is a credible threat (from you or someone else) to drill the oil or cut the trees, and you prevent it. You are in the credible-threats business.

You can probably guess where this is going.

One of the counterintuitive aspects of this having a well functioning market with multiple buyers and sellers actually leads to worse outcomes in this case. You're better off having few sellers and only one buyer. Take one of the more successful examples, programs where the federal government pay framers to leave land fallow.



  1. > . You're better off having few sellers and only one seller.

    ... few sellers and only line buyer?