Editorial
The Policy Impact of Technology As It Affects Costs
by Fred E. Foldvary, Senior EditorTechnology is the knowledge of methods of production, or know-how. The word derives from the Greek technikos, meaning "art," which also brought us the word "technique."
What does it mean to have "better" technology? There is an improvement in technology when it increases productivity. An increase in technical efficiency means we get more output from given inputs, or else for a given output, we need less costly inputs.
Why does advancing technology increase productivity? Because it more greatly harnesses the power in nature. We discover better ways to use the laws of nature.
Technology includes all knowledge of methods, including methods of organizing production. Better tech is not just physical, but includes better methods in economics, accounting, management, distribution, and exchange.
Where is the tech located? Technology is embedded in capital goods and in human capital. It is part of our tools, texts explaining the tool, the knowledge people have about tools, and in the skills people have in using tools.
My colleague, Daniel Klein, and I have co-edited a book, The Half-Life of Policy Rationales: How New Technology Affects Old Policy Issues, which examines the impact of better technoloy on the rationale for government policy.
One economic impact of better technology is to lower costs. These are of two types: direct costs and transaction costs. Transaction costs are those beyond what one directly pays to acquire an item. This includes all opportunity costs, what one has to give up to obtain an item. For example, when you buy things at a store, the transaction costs include the time and resources spent to get there and back, and the best thing you could have done if you had not done that.
There are several economic effects from lowering direct costs. First, industries that were natural monopolies become less so. Natural monopolies have a high fixed cost, which makes it too costly for others to enter and compete. So when better technology reduces the fixed cost, the industry becomes competitive. There is therefore less reason for government to regulate the industry.
Examples of lower costs include electricity and water. Small-scale generation of electricity by micro turbines now makes it possible to have decentralized production. We can reduce the natural monopoly of water supply by the on-site recycling of most of the water. Technology has also created more substitutes for mail delivery, so there is no longer any excuse for making postal services a government monopoly.
Better technology also makes some goods more excludable. Unmanageable common resources such as fish can now become protected property. Better technology provides clearer, more extensive property rights. It is less costly to mark property boundaries and to detect and prevent trespass. An example is marine life, both wild and cultivated. Technology enables electronic fencing and tagged animals. A conservation group could own tagged whales. There can be a rental charge for fishing in the ocean, reducing overfishing.
The reduction in transaction costs makes it more profitable to provide user-financed goods. This also eliminates negative externalities, such as congestion and pollution. Better technology also reduces information asymmetry; customers can get more information on products and firms. There is therefore a reduced rationale to require licensing and restrict products.
Examples of lower transaction costs include toll roads and parking meters, using electronic technology. Highways can now have electronic tolls that automatically register as one drives past, and electronic parking meters can be set to charge variable amounts, with no time limits. The tolls and meters would charge just high enough to eliminate congestion, so the traffic always flows, and you can always find a parking place within a block.
Better technology provides more efficient ways to handle pollution, such as car exhaust. Instead of smog tests, regulations dictating gasoline additives, and mandates on car engines, remote sensors can now detect the exhaust pollution coming from cars. Their license plates can be photographed, so the polluting owners can be sent a bill, without bothering the rest of us.
With lower costs thanks to better technology, there is a greater scope for private enterprise, and user charges and rental payments can replace regulatory restrictions. It's now up to government officials to have the law catch up to recent advancement in technology that could provide us with more freedom and a more efficient use of our time and resources.
Copyright 2003 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.
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