Tag Archives: regulation

Equilibrium response to reduced material use for plastic bags

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Probably to save material on the manufacture of the free plastic shopping bags in the US, these bags are small and thin compared to the ones in Estonia (which used to be free, but are now priced at significantly above production cost due to EU regulations on disposable plastic products). The equilibrium response of cashiers and customers to thin flimsy bags is to double-bag groceries, a practice unheard of in Estonia. After all, if one bag is sturdy enough, almost nobody will use two inside each other. I have successfully carried 10 kg in an Estonian plastic bag.

The equilibrium response to small bags is to distribute the groceries among many bags, especially the heavy or bulky items, for example to put each milk canister or large salad sack into a separate bag. Both double-bagging and the one-item-per-bag distribution lead to more bags being used in response to manufacturing each bag out of less material. It is an empirical question whether thinner, smaller bags result in less or more plastic waste overall. To incentivise reducing the one-time use of plastic bags and to encourage reuse, customers should have to pay for these, like in the EU.

One form of plastic bag reuse is as garbage bags (although it is only a one-time reuse, it is better than nothing). However, the flimsy free bags in the US come in bulk packs with the bottoms of the bags stuck together, so separating one from the stack often results in holes in its bottom an inch wide or more. The holes discourage many forms of reuse, including as trash bags, because small items (dust, crumbs, scraps) fall out. Partly the holes are due to the flimsiness of the material, partly to the way the bags are glued together to make a bulk pack.

Repeal regulation requiring ratings

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The credit rating agencies (Moody’s, Fitch etc) have been accused of inflating the ratings of companies after their ratings underestimated the default risk during the 2008 financial crisis. First, it is strange to accept ratings expressed as letters (AAA, AAB etc) when the market participants care about the default risk and the letter codes are based (or so the rating agencies say) on the default risk. Remove the coarse letter codes and require the rating to equal the estimated probability of default over the next n years. The probability should have enough significant digits and should report standard errors. It should not vaguely claim that the default probability is somewhere between x and y. The potential for rating inflation and later justification of wrong ratings is reduced by transparency.
A good punishment for the rating agencies that also increases transparency is to repeal any regulation requiring the use of their ratings. Currently, banks are only allowed to invest in “investment grade” bonds, where the grade is determined by the credit rating (agencies). The purpose of the regulation should be to prevent banks from taking too much risk, so the variable of interest is the default probability, not the rating. Replace the requirement of “investment grade” rating with a requirement that the predicted default probability over the next n years must be below x. The obvious question is who predicts this probability.
The restriction to investing only in bonds predicted to be unlikely to default is similar to the vague requirement of due diligence. The investing bank must be able to justify its decision later if the investment turns out badly. The bank must use all available sources of info (maybe even rating agencies) and state of the art methods to predict default probabilities for bonds it intends to invest in. To prevent the bank from manufacturing a justification ex post to excuse its bad decision, the methodology it uses to predict must be provably unchanged from the time of investing. This can be achieved by sharing the methodology with the regulator.
There is a concern that business secrets leak from the regulator to competitors. This can be eliminated by encrypting the info that the bank gives the regulator, with the bank keeping the key. The encrypted info can even be publicly posted on the web. If concerns arise, the bank can later be ordered to give the key to the regulator (or even to the public), who can then verify the info received in the past. If the bank claims to have lost the key, the punishment should be the same as for the lawbreaking that the key is intended to verify.