Do coaching institutes have scale economies?

I am doubtful of the scale economies of coaching firms. The success of a coaching firm depends on a few key instructors, and these advantages may decline if it is expanded with a large-scale recruitment of instructors or the use technology (or online modules). Yes, there is a possibility of scaling up to some extent but not beyond a limit. This is evident from the BYJU’s case also. By using a financial jargon, one can see that the growth of BYJU’s after getting a lot of capital was not organic. Hence it expanded by acquiring a set of relatively small-scale ventures. The reputation of such a venture may not go up (if not decline) when it becomes part of another company. 

Many technology firms have benefitted from what is called demand externality. We may use a park more frequently if our friends also use the same park. Social media platforms have this feature. A particular platform’s demand may go up when the number of people who use it goes up. There is a technical or objective reason that is behind the demand externality in such cases. Though any firm may have certain reputation benefits when its consumer base enlarges, such a technical or objective reason for demand externality may not exist in the case of a coaching firm. 

What may have happened in the case of BYJU’s? It was a successful coaching centre. There is an increasing demand for coaching in India. Many global investors have thought that this could be an opportunity to make money. Hence companies like BYJUs could attract a lot of capital. When venture investors put in a lot of money, the value of the firm has to increase continuously (even if it makes losses) so that those who want to withdraw can get away with their capital and handsome profits.

Hence there is an urgent need for the firm to grow (even if it is not making profits). Given the absence of substantial scale economies, one path of growth is inorganic – that is through the acquisition of other firms. I am not sure whether the real value of Akash Tutorial or such a company will go up just because it becomes a part of the BYJUs. The specific advantages of the former in the minds of consumers may disappear, if it also provides the same service as that of BYJU’s. There may not be a significant synergy. The real advantage is financial due to the increase in the value of the firm due to the increase in revenue (even if there is no profit). 

The other way to enhance the growth is to expand the consumer base. There were allegations of using unethical means to compel parents to subscribe to courses or to increase their payments. There were stories of excessive compulsions on employees to increase the number of paying consumers.

To go for higher levels of education or not? An economic view

This essay is aimed at those who complete successfully an undergraduate education of four years duration. Such an education is decent enough to get a good job in many parts of the world. Such a degree from reputed universities can help to go up to top positions in the government and private sector in the US. Civil servants in India need only an undergraduate education. 

However one can see many youngsters in India pursuing post-graduate education. This is a reflection of certain problems in Indian economy and society. There may be an under-supply of `desirable’ jobs in the economy. There can be an excess demand for (post) graduate education among sections of students in India. Those who write civil-service examination may pursue post-graduate education. This is also problematic since such an education is useful only to write the recruitment examination for a job which requires only an undergraduate education. 

There are benefits in taking up a job after completing an undergraduate education, even if one plans to go for postgraduate education in future. We may think that such jobs are not available in India. Though this may be true generally, many reputed colleges (including Azim Premji University) have campus placements which can offer a job to almost all those who are interested in one. 

Here are a few observations which may help students who complete undergraduate education and are thinking about whether to pursue post-graduation or take up work. Not only my experience as an academic but also my personal life and that of my daughter inform these observations. 

1. We need researchers and academics, and they need post-graduate and doctoral education. However the majority of them may benefit from an employment gap after undergraduate education. For those who complete undergraduate education in humanities and social sciences, taking up a job for 2-3 years will be very useful. This may give them an exposure to real world problems in economy and society, and that can add a lot more value to their graduate education/research if they want to pursue it. Otherwise they may become glorified research assistants to professors.
2. Such a gap is useful also to those who want to pursue post-graduate education in a discipline that is different from their major in undergraduate education. Many students may not develop a strong interest in a subject/discipline while pursuing undergraduate education. Or they may develop a genuine interest in a subject after this education. 
3. What about those who become passionate about an area of research in their discipline while doing/completing undergraduate education? If one student thinks that he/she is one such potential researcher, I have a suggestion. One should pursue research immediately after undergraduate education ONLY if that person is offered full-funding in a highly reputed university (say, within 500 in the global ranking). This is an indicator of what the world thinks about that student. There is little value in pursuing post-graduate education by paying money especially in arts and science subjects immediately after undergraduate education. 
4. If a student has relevant work experience and exposure to a real world issue (which can enrich the quality of the statement of purpose), then getting admission with full financial support to a post-graduate program in a reputed university may become relatively easier. 
5. If someone is interested in a career in private (or corporate) sector, the best option is to have an MBA. However, it is much better if this program is pursued after working for 3-5 years in private or social sector. This work experience may enhance the chances of getting admission in an internationally reputed university (sometimes with partial financial assistance), jobs and probably a higher salary. The last one is valid even for the students of IIMs where such work experience is not mandatory. (IIMs do not mandate work experience for certain problems in Indian society, and it is not a perfect situation). 
6. For those who are interested in social-sector jobs in NGOs and philanthropic sector, it is better to start working in the sector after undergraduate education. Fellowships for teaching in underserved areas or jobs in organisations like Azim Premji Foundation are ideal for this purpose. They can pursue a post-graduate education after acquiring a couple of years of experience. Though Azim Premji University is a good option within India, there are other national and international options too. The social sector or not-for-profit MBA from reputed institutes such as Said Business School (the University of Oxford) or such places are interesting opportunities. It is relatively easy to get financial assistantships for such programs and there is an increase in the recruitment of those who pass out of such programs by consulting companies including the Big Four.
7. I usually give the following advice to those students who don’t work but try to write civil service examination. They should write other examinations too (like those for lower-tier officers in the government) since the coaching for civil service exam may help them in this regard. If they are successful in any of these examinations, it can serve as a back up option; If they don’t, that is a signal of their lack of readiness for the civil service examination. It may be better if they take up some work along with preparations for the recruitment examination. Merely pursuing civil services can be very costly for the majority of students. They may not have a viable option after a few years. 
8. Many students in the developed world have opportunities to do one year fellowship or take up work after completing their undergraduate education. Such an opportunity may not be available to the majority of students in India. Hence students in universities such as ours which provide placement services should see work for 1-3 years as an important opportunity that is available to them. 

Economics of migration of Indian students for medical education

There are interesting aspects in the migration of Indian students for medical education. The majority of students who go from India for higher education in other countries (Canada, UK, USA, Australia, Europe, and so on) have the goal of getting jobs and living there. However such an aspiration is not strong among those who move to central Asia for medical education. Employment and migration opportunities in these countries are not that attractive to most Indians. (The salary of a medical doctor in Central Asia is not much higher than that of a school-teacher, and salaries in the region are in general not that higher than those in India). 

Hence the dominant goal of these students is to get medical eduction and come back to India. (Even if some may want to move to other countries, this trend may not be that different from those who get medical education in India). Hence the major concern is whether they can pass the foreign medical-graduate examination (or whether the government will do away with it and replace it by an examination for all students irrespective of whether the degree is from India or abroad). 

The attraction towards medical education in central Asia is based on two factors: First, there is a surplus demand in India. Even those who get a reasonable score in the NEET will not get admission in India; Secondly the cost of medical education in Central Asia is much less than that in private self-financing colleges in India. Both these together increase the number of medical students who study in Central Asia. There are emotional costs in staying far away from home and uncertainties regarding the outcome of education and these may be moderating the outflow of students despite the lesser cost of education there. 

Historical investments by governments in these countries when these were part of the Soviet Union led to the creation of public colleges for medical education. These colleges have basic facilities and a reasonable number of trained teachers. There is scope for enhancing the number of students, and this is a way to get additional revenues for these colleges which may not have enough resources currently. Hence these have an interest to attract students from India, and can afford to charge a fee which is a lot less than that in private self-financing colleges in India.

There is a public-private partnership here. These medical colleges get into agreements with private contractors to get students from other countries. These contractors have sub-agents who operate in different parts of India. They attract students who have qualified NEET and scored a minimum of 50 percent marks in higher secondary education and those who can afford to pay the fees. The main contractors also arrange/operate residence facilities for students in destinations. They are also trying to bring in additional medical teachers from India who can teach different courses in English. Many universities in the region see this as a way of resource mobilisation. The state university in Naryn – a small town up in the mountains that borders China and Kyrgyzstan – is making arrangements to get students from India. 

I am not taking a negative view of this exodus from India for medical education. The cost of medical education is prohibitively high in India. Entry barriers are unreasonable. My sense is that a lot more students have the proficiency to become medical doctors. India needs many more doctors especially those who are willing to serve in its rural areas. Medical education in Central Asia is not bad by considering the health-care achievements of these countries. If colleges there use the enrolment of Indian students to enhance their capacity utilisation and get an additional revenue, that is good for their functioning and sustainability. If this can help a set of Indian students to be doctors, that is broadly a win-win situation. 

There can be possible failures too. Some students may overestimate their ability to go through this education (and associated troubles). Some may not pass the qualifying examination to practice in India. There may be some private contractors or sub-agents who may not reveal all relevant information so as to attract more students. Then there could be emergency situations like what happened in China during COVID or in Ukraine due to the war. These may lead to severe losses for a set of students. 

The government of India does not (or cannot) have a major role. Its abilities to help students even during exigency situations are not that high. The only step that the government of India takes regarding the medical education abroad is to tighten the qualifying examination to practice within India. How tough such an examination should be is the moot question. Whether the motivation is to discourage the seeking of medical education abroad or the availability of enough qualified medical practitioners in India is the key concern. 

Positive Externality – Challenges in Forest Conservation

I was visiting Dayak villages in the Sintang regency of West Kalimantan (Borneo) last week. Despite the expansion of palm oil plantation in lands leased out by the government and also in private lands, there are communities which continue to use and protect forests there. These wet-tropical forests provide a variety of products which enable these communities not only to meet their subsistence needs but also to earn a decent income to meet their growing requirements of money. 

One common sight in Borneo is small tower like structures without windows. One can see these closer to houses and these are not built by destroying forests. While walking nearer these towers one can hear the rattling sounds of birds. These are coming from carefully designed CDs to attract birds. People collect bird nests when these are abandoned by birds. (Apparently birds will try to come back to the same place to make their nests). These nests are exported to China where these are highly valued. It is an important source of income for people in Borneo.

I was taken to these villages by an organisation called Forest Wise. It collects nuts from Ilippe tree (Calotropis gigantea), processes into a variety of cosmetic products and exports these to international markets. These nuts can be collected in a way which does not harm the undergrowth in forests. The collection of these nuts can generate notable incomes to those who could sell these to a company like Forest Wise. 

There are other products which include honey and a variety of wild fruits (including different species of Jack fruit family). Sustainable harvest of bamboo and rattan can also be a source of livelihood. Timber if it is harvested sustainably and carefully can meet their housing requirements and be a major source of income to local people. A few villages attract tourists and there is a potential for ecotourism. Hence there are different ways to meet the needs of cash income for these forest-dependent people. 

Forests also meet the subsistence needs of people. People can practice slash and burn cultivation with adequate fallow period in between. This is the way they cultivate paddy, which is the main staple food for these communities. They may cultivate cassava in small plots without destroying forests. There are different fruits (including durian, jack fruit, etc.) which can be important ingredients to food. Water is cleaner (if cared well), and some of these villages also produce hydropower locally.

It is not that getting more money is the sole incentive to protect forests by these communities. There is community cohesion and the life in these villages with their cultural attributes is meaningful to these communities. It is possible for one member of the community to take actions that may destroy forests but community pressure is adequate so far to prevent such actions. Hence the value attached to community life and culture is also enabling the protection of forests. 

There are possibilities and challenges in this regard. More and more companies like Forest Wise which are concerned about protecting forests and wildlife but at the same time interested in giving a sustainable income to these communities can play a positive possible. There may be a need for scaling up their actions focussing on not only one or two products but a variety of goods and services which can be provided by wet-tropical forests on a sustainable manner. In that sense, carbon finance can also be useful. However despite all the talk globally about carbon and biodiversity finance, this money has not reached communities.

There are challenges too. Youngsters in these communities are getting educated and migrating to cities. They may lose interest in activities (like the collection of ilippe nuts) which can generate income from forests. It is good if their migration leads to the non-use of forests, but a non-dependence on forests can also lead to their conversion for commercial purposes. 

Though there are companies like Forest Wise (and I have seen such private investments/firms in other countries like Brazil), these do not make much money. Hence they may not be in a position to scale up their operations. Their operations currently depend on the good-will of a few individuals who invest their money, time and probably life. Though there is a lot of talk about `businesses protecting forests and land’, the size of their operations is very small compared to the need. 

These indicate that we need to have a realistic understanding of the role of communities and private business in protecting forests. There are communities which protect forests but their incentives may change over time due to the process of economic and social change. All these changes are not undesirable for conservation but some of these can have negative impacts. Similarly, private business can help in certain cases, especially when these are also driven (partially by) environmental goals. However the whole needs of conservation cannot be met by private companies. The income that can be generated depends on the nature of forests. Though forests that I have seen in Borneo can give a higher revenue, that may not be the case of peatlands. Forests in Savannahs of Africa, though is not dense, enables wildlife viewing but that may not be the case of wet tropical forests. 

There are positive externalities in forest conservation. Yes private individuals or for-profit actors can provide these externalities to some extent. But the crucial insight from economics that individuals and private firms may undersupply those goods and services which have positive externalities continues to be relevant for forest conservation. This is where the state has to play an important role. Unfortunately, the governments of many poorer countries do not have enough resources and the policy-readiness to serve that role effectively. International interventions may have to enhance this capacity in a viable manner. 

Regulating Teenage Sex: A view with a lens of `law and economics’

There are many boys especially from tribal communities in India who face court trials for rape due to their sexual/marital relationships with girls who are lesser than 18 years old. Most of these are non-coercive sexual relationships between teenagers or that between a teenager and an adult of say 18-20 year old. Legally, these cases come under the Protection of Children from Sexual Offences (POCSO) Act. Hence the law sees these as `rapes’. 

This issue is part of regulation of or state intervention in sexual relationships. There are two questions in this regard. What may be reckoned as an undesirable sexual relationship which warrants state-regulation or intervention? If a specific relationship is recognised undesirable, what may be an appropriate form or instrument of regulation?

One’s sexual urge and consequent actions should not be harmful to oneself and others, though all these cannot be handled in the realm of law. An adult person’s unprotected sexual relationship with a  stranger could be harmful to the person but this needs education and it is harmful to be regulated by law. Such a law can be either ineffective (as sexual relationships are private transactions) or highly intrusive which may have other costs.

However those relationships which involve teenagers is a little complex. The consent of a teenager is not considered valid due to the assumption that this person may not be capable to take an informed view and make an appropriate decision. Teenagers may not be in a position to think about the possible consequences of these relationships. The sexual relationship leading to pregnancy can be harmful to a teenage girl in multiple ways. She may not be ready to have and take care of a child, and it may impose a longer term burden on her. It can also have a negative impact on her education. There is a need to discourage teenage pregnancy (and possibly teenage sexual relationships). This is the same reason that makes almost all countries to discourage child marriages or punish those who are involved in sexual relationships with children even with consent. Hence the social justification for discouraging sexual relationship with children is very clear. To some extent, this is valid for teenage sex too. 

However there are a couple of issues related to the sexual relationship in which one or both partners are teenagers. First the age at which one can give the legally valid consent can be arbitrary. It is 18 years, but what about 16 or 17 years? Both boys and girls may have biological and socio-psychological desires to have sexual relationships at this age. Grown up adults who enter into a relationship with a teenager can be careful but it is difficult to expect the same care on the part of teenagers or younger adults. Historically and culturally, marital relationships in most Indian communities may have started before 18 years and these are sanctioned or not discouraged in many communities even today. 

What is the best way to discourage teenage sexual relationships?  The blanket enforcement of a law that recognises sex with a minor girl (whose age is less than 18 years) as rape can have serious implications at the personal level for many families and for communities as a whole (like tribal populations). 

We need a nuanced mechanism to address this issue. First, we may realise that the conventional law enforcement may not be the appropriate instrument to address this issue. There have to be preventive actions before the event – like teenage pregnancies. Discouragement of teenage sexual relationship may be carried out first and primarily by families. Parental efforts, school education, psychological counselling, peer networks, etc. may be used to see that teenage sex is avoided or minimised or its negative impactions are mitigated. 

Family education for teenagers in schools is found to be effective as evident from the lesser prevalence of teenage pregnancies in Scandinavian countries compared to the United States of America. The availability and cost of family planing services can also play an important role. The cultural reluctance to discuss sex and sexuality may discourage teenagers from getting appropriate education and also accessing contraceptive measures. 

There could be such relationships even when parents are careful. There is a need to have mechanisms to deal with such a situation, especially if these result in pregnancies. Even otherwise teenagers may need counselling and other psychological support if such relationships affect their mental well-being, education and employment. There is a need for an appropriate mechanism for this purpose. 

There can be a system at the district level in India which may provide counselling and other services.  It may determine based on evidence whether it is a relationship with consent (an outcome of romance) or not; It may determine the possible steps if it has led to teenage pregnancy especially if there is a demand for abortion on the part of the girl; or advise and facilitate if the termination of pregnancy is the most desirable act in the given context. It may attempt: (a) counselling partners to deal with the situation by considering their longer-term welfare; (b) enabling teenagers to pursue education even if they have become a mother or father; and (c) facilitating access to child-care services; and so on. Regulatory institutions need to evolve and these can achieve a higher level of sophistication over time. 

If we take the tribal communities, the secretiveness attached to sexual relationships may not be that higher. However, they may be encountering two challenges currently. The sexual relationship which are sanctioned within these communities may lead to teenage sexual relationships and pregnancies. However the lack of sex education and limited access to contraceptive measures, which may be shaped partly by non-tribal sensibilities of India, may be affecting tribal communities in the form of teenage pregnancies and/or the need to confront criminal penalisation.

The legalisation of same-sex marriages: A `law and economics’ view

The opposition to (and support for the) legalisation of same-sex of marriage is, in my view, shaped more by an ideological or cultural attitude towards same-sex relationships. There is a problem here. All these people mix up the regulation of sexual relationships with that of marriage. 

What kind of sexual relationships can be permitted or legally discouraged is an issue and it is the goal of regulation of sex. The criminalisation of sex with children is an example. In that sense, the decriminalisation of same-sex relationships in India is an important positive step as far as the regulation of sex is concerned. 

The purpose of regulation of marriage is different. It may help in (a) ensuring the rights of partners in a marital relationship. Such protection of rights is more important for the less powerful partner, and there are other cases where the rights of both partners are important; (b) There may be a need to consider marital family as a distinct unit in the case of state policies. For example, there can be tax concessions with certain purposes; and (c) there may be a need to regulate or define rights of inheritance of assets which are accumulated through the (joint) effort of marital partners. Societies may prefer to facilitate reproduction of human beings. Usually this happens within the marriage or marriage as an institution has certain advantages in reproduction. Hence marital families may get policy support to facilitate the bearing and caring of children. 

Though the marriage can be viewed as an implied contract, its peculiarities (privacy, intangibility in services and certain outcomes, power structure, unequal consequences of the breaching of contract, difficulty to monitor by a third party, etc.) may require a legal intervention which is beyond the contract law. That is one justification for a law on marriage. 

However, the regulation of marriage as a whole may need changes and it may have to reflect the needs of socioeconomic contexts. When we say that the sexual relationship without consent within marriage is to be criminalised, it indicates the need for reforming marriage and here we consider the rights of individuals and that these rights cannot be suppressed in the name of marital family. Financial incentives which are offered by the state may also change depending on the changing importance of services provided within marital families (for example, taking care of children). The importance of regulating the inheritance of assets created within a marital family also depends on the gender division of labour and the inability of partners to arrive at a negotiated agreement on this count. 

A conventional justification for state intervention in marriage is to ensure the rights of less-powerful partner. These structural differences in `power’ may not be that relevant in the case of same-sex couples and hence the need for the state to address these may not be severe. There is a growing preference to live together (without marriage), which indicates a reluctance to enter into a formal legal agreement called marriage. There are a number of changes all over the world. People live together and have sexual relationships with or without having children. There can be non-sexual relationships between two people, and they can take care of adopted children. What if two women who are not in a lesbian relationship wanting and willing to adopt and bring up a child together? Children can be born without a sexual relationship between those parents who take care of them. These relationships need not be that of people belonging to opposite sex in the conventional sense. Separated couples can also share responsibilities in bringing up children. People adopt and take care of children, and this may be attempted by those who can or cannot have biological children. In that sense, there is nothing wrong for two people who don’t have a sexual relationship among themselves to adopt and bring up children. If children are not considered an important part of relationships, then all kinds of living together are possible. Universal marriage and child-bearing are disappearing in many developed societies.  

Moreover, when people are capable to choose different kinds of relationships, and couples (including same-sex couples) live together without formalising marriage, the role of marriage as an instrument to protect the rights one or both partners is less important. 

In these contexts, my argument is that if the additional protection through the regulation of marriage is needed, such protection is to be offered to all couples who are in a marriage-like relationship (whether they are married or not). They too need support and incentives if society thinks that taking care of children is an important task to be encouraged. Then these incentives need not be connected to the nature of sexual relationship between parents. 

Same-sex couples may have a symbolic or ideological interest in getting into a formal marriage. The kind of wedding ceremonies that even such couples go through shows the symbolic importance of marriage. There may be a yearning for the social recognition of their living together. This may be reflecting in the demand for the legalisation of same-sex marriages.  Tax incentives which are available to married couples may be an attraction. Or the demand for the legalisation of same-sex marriage could be a political project (which is genuine). To a great extent, the opposition to the legalisation of marriage is not against state-intervention but is also due to the perception that such a legal sanction may lead to a higher level of social recognition and acceptance of such relationships. 

If we take a rational approach to the role of the state in marriage, then it is to be extended to different kinds of marriage-like relationships and not only those of either couples of opposite or same sex.

Economics of Morality

It is possible to have an economic morality.

An action that enhances my happiness but which does not reduce the happiness of others is moral

Why? It enhances my happiness; it does not harm others.

The microeconomics behind the autonomy of academics

Generally academics enjoy a higher level of autonomy in their work – at least what happens in the classroom. To a great extent, they may decide what and how to teach. Though the feedback from students is sought, it is yet to become a major criterion to assess the performance of university teachers.

What contributes to this autonomy of academics? We may think that their specific knowledge matters. It is difficult for a third party to assess whether they perform appropriately or not. However there are other professions where the specific knowledge of the professional matters. These may include medical doctors or even judges.

However the diagnosis and performance of doctors are evaluated by the society. The decisions of judges – whether these conforms to the constitution and other rules of the country – are also closely watched by the society. How come then the academic work escapes from such a serious scrutiny?

This may have something to do with the actual (not the perceived) role of university academics. The conventional idea is that people seek education to enhance their knowledge and skills. Though this is true to some extent, the other role of education is also recognised. That is the screening and signalling role of education.

There is information asymmetry in labor markets. Employers find it difficult to assess whether a candidate for a specific job position would be doing hard-work or not. This cannot be assessed even if an interview or recruitment test is conducted. Hence, they may look for screening devices. By knowing this, the candidate may use signalling devices. Education is such a screening and signalling device.

Degrees or diplomas received from reputed universities would become highly valuable in labor market because of their signalling role. This may increase the demand for education from such universities and it is not necessarily due to the `better’ knowledge received from there. The universities may get higher positions in rankings based on a number of dimensions, including the salary received by their graduates, but it is rarely based on the usefulness of knowledge imparted there in the working and personal life of their graduates.   When employers look at the degree or the name of university for its signalling purpose, what is taught in the university becomes less important.

This can have a number of implications. In certain professions as in the case of business managers, there could be a greater connection between the content of curriculum and the practice of professionals who pass out the education program. This may be due to the way such programs have evolved and the constant touch that many professors have had with the field of practice.

However this connection is weak in the case of many other education programs. Employers who seek candidates with such a degree may look for certain general proficiencies (in addition to the degree as a signal). Teachers of universities also are aware of the lack of direct connection between what they teach and the specific proficiencies that are required in each and every job.

One impact of this disconnection is that academics have greater autonomy in deciding what is to be taught. Though there are merits in this autonomy, it has also created a situation where the content of education is determined more by the internal dynamics of the academic world and less by the imperatives of the socioeconomic context. These internal factors are the philosophical, methodological and sociological boundaries of (or tussles between different) disciplines.

Economics of the push towards `common prosperity’ in China

The market economy has been remarkably successful in China in generating wealth. It was successful in capturing a major share of global markets for its manufacturing products. It also enhanced the international clout of China. It is difficult for any country in the world currently to neglect China. It could reshape the domain of international development.

However there are disturbing developments within the country. Though the economic growth could take millions out of poverty, vulnerabilities of different kind persist. There are indications of a reduced access to education and healthcare or that families have to spend money to get quality services for this purpose. However the most striking development is the growth in inequality. There are visible aspects of this inequality. When the majority struggle to have a comfortable life in the cities even when they have employment, a minority has visibly cushy lives. The emergence of billionaires is not merely in the financial data but it is out in the open.

There are also concerns that political corruption is not uncommon and that leads to the affluence of some people. All these create disturbances in Chinese society which has not come out of socialism rhetorically. The legitimacy of the Communist Party of China rests partly on this rhetoric. It is possible that the current leadership see the political stability of China potentially unsettling due to the inequality and connected problems. The CCP cannot withstand the repercussions beyond a point. The corruption of party leaders may aggravate its degeneration. This could be a major reason for the current `repression’ that we see in China.

Perverse incentives: An Example of Public Project

We have talked about the case of medical treatment of a government official or politician in the previous example. Let us think about the construction of a new high-speed rail project. Before deciding on such a project, one should be looking at different options. This is so since the social goal is not the construction of such a project but the improvement in transportation. What are the different options to achieve such an improvement in mobility? There could be multiple alternatives. The strengthening of the existing system is one option. A new high-speed railway line could be an alternative.

Here the basic process of design-making is the same as that in the case of medical treatment (though there are some additional factors to be taken into consideration). What are the additional gains from strengthening the existing line? If the purpose is to enhance the average speed between points A and B which is currently say 50 KMPH, the strengthening may enhance it to say 90 or 100 KMPH. However a high-speed railway line may be able to increase the average speed to 150 or 180. However this is only an engineering assessment. It does not give us social benefits.

There is a need to assess the additional social benefits of (a) strengthening the existing line; and (b) the new high-speed railway line. Marginal social benefits can be calculated by aggregating the willingness to pay for each option by all potential users. That is called the total marginal willingness to pay (TMWTP). This TMWTP can be calculated for strengthening the existing line and also for the proposed high-speed line. If the new line has less connectivity (due to its distance from main junctions or the use of a gauge which is different from the existing line, these will reflect in the TMWTP).

There is one more complication here. In the case of medical treatment, only my cost is to be considered. However in the case of the public transport, society’s cost on all counts need to be taken into account. This may include not only the money that is required to construct the new line and trains but also the increased cost of transport to those who have to take a circuitous route when the new railway line is constructed, the possible environmental costs due to the changes in drainage channels and the use of materials and so on.

Hence the decision on whether to go ahead with the high-speed railway project should be based on a consideration of additional social benefits (in terms of the TMWTP) and additional social costs in comparison with the strengthening of the existing line. This cannot be done by preparing the Detailed Project Report (DPR) of the High Speed Line alone.

Then there are incentive problems. People who decide the public projects are not bearing their costs. There can be other private benefits. Even if these decision-makers are not corrupt, they may see a new visible project (such as a high-speed railway line) as a personal achievement (which may be remembered by people). Hence such small private benefits can drive decision-making in such cases. Then the preparation of the DPR may be assigned to agencies which are expected to prove that the project is beneficial. These are inimical to social interests.