Thursday, May 13, 2010

Can News Be Saved?

Hal Varian, Chief Economist at Google, has a fascinating new blog post on the economics of newspapers.

He writes:
[N]ewspapers have never made much money from news. They’ve made money from the special interest sections on topics such as Automotive, Travel, Home & Garden, Food & Drink, and so on. These sections attract contextually targeted advertising, which is much more effective than non-targeted advertising

In the past, advertising from the profitable sections cross-subsidized the news operations, since everything was delivered as a bundle. But online, users interested in the special interest sections bypass the news pages and go to focused websites.

So how will news be supported in the future? Unfortunately, Hal doesn't have a clear answer and neither do I, but I'll endorse his recommendation of experiment, experiment, experiment. In time, a business model will emerge, though it will almost surely look very different from what we have now.

Sunday, May 2, 2010

Would a “Drain America First” strategy significantly lower gas prices?

In the New York Times today, Jad Mouawad argues that the United States “needs” more offshore drilling in the Gulf of Mexico.

I don’t think the numbers support his claim. Instead, any additional oil would mainly a) lead to increased consumption in other nations, and b) lead to decreased production in other nations, with little net effect on American consumers. This is because oil is a fungible global commodity.

According to his article, Mouawad reports that Gulf of Mexico oil production amounts to 1.7 Million bbl/day. This is just 2% of the 85 million bbl/day produced globally. James Hamilton has estimated that the long run demand elasticity of oil is about -0.2 to -0.3 (although there’s evidence of less elasticity recently). If crude oil accounts for half of the cost of gasoline, then even a 50% increase in Gulf production would lead to only about a 1.5% to 2.5% decrease in U.S. gas prices.

In addition, we must also consider supply elasticity, which further limits the effect of increased drilling on gasoline prices. Bringing more Gulf oil to market would reduce incentives for other nations to bring as much oil to market. Furthermore, it would decrease incentives for investments in alternative energy like wind, solar and nuclear. Thus every additional barrel we drain from our Gulf oil reserves would net less than an additional barrel of oil or its equivalent coming on to the market.

Factoring in both demand and supply effects, it appears that a major increase in Gulf production would have barely a 1% effect on gasoline prices for American consumers. That's less than the average monthly change in prices.

On the other side of the ledger are the risks of more catastrophic oil spills like the BP rig, and the inevitability of negative externalities from increased oil consumption, such as pollution and congestion.

America does not “need” more offshore drilling. On the contrary, an energy strategy focusing on demand and speeding the development of alternatives is likely to be much more effective.

The Official U.S. Energy Information Administration appears to agree:
"Because oil prices are determined on the international market, however, any impact on average wellhead prices [from additional drilling on the Outer Continental Shelf] is expected to be insignificant."

Saturday, May 1, 2010

Solving Email Congestion

Email costs zero to send but it consumes the attention of the recipient. The cost of attention is not charged to the sender, which can lead to too many messages being sent and inbox congestion. This is a kind of information pollution that is especially visible in the billions of spam messages sent each year.

In his blog today, Greg Mankiw argues that charging senders a small price to correct this externality is an appealing "Pigovian" solution. For instance, a reader of his blog writes:
[A] penny tax (say) on email would probably generate large amounts of revenue, mitigate an important negative externality, and have minimal inefficient disincentives. Since email servers are necessarily centralized and networked and all email senders are ipso facto connected to an ISP who is charging them for access the transactions costs and evasion problems seem low.

I agree that charging senders is the ideal way to solve the email congestion problem, especially spam. It is superior to technical solutions like filters because it helps align the sender and recipients' incentives and thereby harnesses the knowledge that the sender has about the content.

Unfortunately, the issues are a bit more complicated than he describes in his brief posting and thus this solution requires some new standards and infrastructure. Along with Marshall van Alstyne and Jon Koomey, I wrote an Op-Ed in the WSJ explaining some of these issues and proposing a way forward.

See "You've Got Spam" (WSJ, Sept 6, 2007).

Update: [Here's an un-gated version]