Tag Archives: Economics

(revised) Big-bet Strategy of Oil Companies

Gorgon is the name of the sister of Medusa – the monster with snake hair and eyes that can turn man into stone. Representing both powerful and dangerous, the name Gorgon was also used by Chevron for its all-time largest project in Australia.

By far, Chevron has invested $18 billion into this gargantuan project in terms of its 50% stake (Exxon and Shell took 25% stake for each). But this big-bet of Chevron hasn’t provided any profit for its owners yet, and it is only 75% finished up to now. Sounds like a crazy risky plan, but this project is just one among the $120 billion investment plans operated in 2013 by the team made up of Exxon, Shell and Chevron for the purpose of spurring oil production in the future.

So what are the incentives behind such risky mega scale investment actions conducted by those three big international oil companies? It isn’t news that they arrived late to the shale boom in America so they have to watch the new market divided up by small companies. United States hold more than half of the shale oil reserve in the world, so companies lost the biggest opportunity to earn the huge amount of profit.

But there is still chances left in Asia, they seek opportunities in Australia to keep control in advance of the undeveloped shale gas resource. Gorgon is one of the projects in Asia, which is the key to the promise made by Chevron to boost gas production by 20% before 2017.

The next reason is the increasing demand from Asia markets. Japan, China and South Korea are becoming hungrier for natural gas over the last decades, so big oil firms still believe that the energy market is not going to fail on the demand side.

What’s more, oil giants are facing tremendous challenges now that is they have to find the next big gusher to replace their depleted fields. The golden age for companies has passed, the truth now is that they must stake big to bet their future. And if they don’t, then they are going to shrink for sure. Chevron produce less in the past few years, Shell also declines its earning from the $27.2 billion in 2012 to the $16.8 billion in 2013. Investing in the “elephant projects” like Gorgon is their only choice.

But just like the name of Gorgon – powerful and dangerous, big investment are always risky in several aspects. First, exploration of new oil fields are difficult and expansive nowadays: labor cost soars high, competition becomes fiercer and new oil fields’ extraction is more costly. Just like it is indicated in the article Big Oil Companies Struggle to Justify Soaring Project Costs:

The easiest-to-reach oil ran dry long ago, and the most prolific fields often are controlled by state-owned companies in places like Saudi Arabia and Venezuela.

Second, the investment surge will definitely reduce the liquidity of the companies, big projects may be profitable in the long run, but it also worse the current financial statements. Third, the profitability of the investments is still doubtful, from the article Chevron Bets Big on Australian Shale Given Asian Demand, we can read this kind of uncertainty:

The deal poses some risks as the country’s shale resources are very underdeveloped, and it will take years for Chevron to finish with exploration. It is still uncertain whether the gas can be extracted at commercially viable prices.

However, I believe those oil giants are not going to quit despite of those risks above, they would definitely loss the war if they quit right now. Let’s check if they can win on their expensive bets in the future.

The American Dream is alive and well

Income inequality has been a divisive issue the past few years.  It has been a goal of the Obama administration to lessen this inequality due to its perceived effect on labor market outcomes, where the rich at a distinct advantage over the poor.  A post on Greg Mankiw’s blog about a piece of research seems to shed some light on this issue.  The research indicates that since the 1970’s, social mobility in the United States has remained at worst the same and could actually be easier.

Mankiw’s back of the envelope calculations show that the income one earns as an adult may be minimally effected by your parent’s income. He calculates that roughly 2% of the variation in income can be accounted for by parental wealth. The research is more comprehensive and seeks to address not the variation in wages, but whether parental wealth has an affect.  By tracking 3.7 million parents and children born between 1980 and 1993 for income and things like college attendance, Chetty et al determined that social mobility has increased.  While there is a perception of increased inequality, the paper points to this is due to the top 1% moving away from the center, skewing the distribution as it goes.  The authors note that how far away the top 1% is from the rest has nothing to do with social mobility, and compares the effect with the a ladder:

The rungs of the ladder have grown further apart (inequality has increased), but children’s chances of climbing from lower to higher rungs have not changed (rank-based mobility has remained stable).” 

This is strong evidence that the extra money spent by rich parents is not having an outcome altering effect.  While there is increased income inequality, the distance isn’t becoming harder to cover, only the disparity in outcomes between those that chose to put in the work and those that do not.

While there may be a correlation between having rich parents and going on to earn a similar (or larger) amount of money, money itself is probably not the cause.  Traits like talent, motivation, and genes are hard to include in a regression.  The question that society must answer is that if wealth isn’t affecting the outcomes of the next generation, is the redistribution of wealth really necessary?  A strong case could be made for redistribution if the current distribution was binding in some way, making it more difficult to improve ones standing standing.  However if it just making up for bad decisions, then the rationale is not nearly as strong.  What is clear is that the American dream is alive and well if you know how to go about getting it.  The tragedy is that so many don’t.

Irrationality

Based on Adam Smith’s rational choice theory, individuals will always make the best choice in terms of maximizing their interests. However, it is only an assumption, and I think that one-day it will become a “special case”.

Think about what choices will you made under situation below:

– Would you rather take $100 now, or take a 50/50 bet in which you will win nothing or win $200?

– Would you rather give us $100 from your pocket now, or take a 50/50 bet in which you will lose nothing or lose $200?

In this example given in the article Human? Then You Might Have These Issues With Trading, people are not indifferent between two choices that might bring them equally expectation of gain/loss. What we care more is to increase the possibility of getting something that’s better for us. In the first case, I will choose &100 because I have higher possibility for win something, in the second case, I prefer to take the bet because I know that I have higher chance to loss nothing. This suggests that people sometimes care more about possibility than quantity.

In one of my classes this semester, we played the OPEC game introduced by UC Berkeley. The rule of the game is simple: 7 countries of are members of OPEC, they will decide what amount of oil to produce and the aggregate production determines the world oil price. If every country produces its capacity amount, then the oil price will be too low to be profitable for all nations. All of us knew that collusion outcome is definitely better then cheating and it’s also better to cheat a lot than just cheat a little. But it comes out that no country followed the optimal plan and none cheated a lot, countries just increase their production by a little bit.

In my mind, there are some factors that stop people from making rational decisions. First is the imperfect information. People may not know others’ choice and it’s hard to predict your rivals’ behaviors, so some decisions are based on guess or imperfect information. And second is loss aversion, which refers to the preference of avoiding loss then obtaining gain. In the OPEC game, even though we want to believe in other countries, the possibility of being betrayed still exists, and human nature is against such possibility. Third is the opportunity cost. Doing the calculation and predict rivals’ production waste a lot of time, so people tend to risk the loss in score than the loss of time and energy.

Overall, the irrationality do exist widely in our world, actually it is more common than rationality. According to Harriet, the study of irrationality is becoming more and more popular among managers. Hedge fund managers turned to study behavioral finance to have a better understanding of how psychology affects decision and profits.

Apple’s Problems

It’s hard to find something blamable of the company that earn most aggregate profit per year in the worldwide, but investors of Apple are still not satisfied about it.

Falling from its top point of $700 per share in 2012, this technology giant is facing more and more challenges now. According to this article, Apple’s stock price is keeping slide down after the company’s announcement that the sales volume of iPhone in the last quarter of 2013 was not as good as predicted. Until now, iPhone is still the core product of this company and accounts for more than half of the total revenue. Actually, the success of iPhone has been accelerating the businesses of Apple in the field of tablet and personal computer.

I think Apple must solve several problems simultaneously to keep itself safe in the foreseeable future, what I mean “safe” here is to keep the first place among all the companies.

First and the most important, search for the next growth point in the market and get rid of the dependence of the company on iPhone. I feel that companies like Apple, and also Samsung are facing the saturation of the high-end smart phone market. Apple is experiencing demand decline of iPhone now and it is trying to expand market in Asia countries like China and Japan. According to Daisuke Wakabayashi of Wall Street Journal, “Apple introduced the new phones in China without a delay; it also inked a long-awaited deal with Japan’s largest carrier, NTT DoCoMo Inc.”

Second is find the balance between profit margin and product quality. In order to boost sales of iOS product, Apple has kept the prices of iPhone and iPad constant for 7 years, we can expect that they will also not be changed in the future. So the margin of those products can be calculated once we know their costs. Apple needs to upgrade its iPhone every year to attract consumers switch to its new generation phone, this will definitely increase the cost because many new techs need to be applied on the newest iPhone. So the result is, Apple must sacrifice its product margin in exchange of sales. So to keep the margin high, Apple changed phone’s components to drag down the cost. And this brings another problem: consumers may not want to upgrade their phone because they expect the lower quality of the new phone.

Then the last is the balance between innovation and the limitation of technology. I personally think that the upgrade speed for Apple’s product is too fast now. I used my two old Nokia phones for almost 10 years and now people around me changes iPhone every year. The problem Apple must face is they need to make a trade-off between their short-term profit and long-term sustainability. If Apple applies many new changes in their new product, it will boost sales now but for the next year, people may not buy the new iPhone unless you come up with more surprising features. The truth is our technology is limited so you can’t waste all your good ideas on one product in a single period. But if Apple don’t use new features on its current phone, then the performance this year is going to be terrible.

As long as it is taking the top spot, the company have to solve those problems or it will be replaced soon.

First price, next reserves

Do you know that you misunderstand the word “reserves”?

Let’s solve a math problem. If the world oil reserves are 639 billion barrels, and the world oil production is 59 million barrels per day, then when will we run out of all the oil? I did the calculation for you, the answer is 29 years. But actually those are the data in 1980, if my calculation was correct then there must be no oil left in 2009, so what’s wrong with it?

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If we check the graph from indexmundi.com above, we can see the world oil reserves are 1.451 trillion barrels and the daily production becomes 73 million barrels in 2011, after calculation you will find that it takes another 54 years for us to “run out” of those oil. According to BP, the world oil reserves increased to 1.67 trillion barrels in 2012. So you know now, we can never get the precise prediction due to the change of oil reserves.

Before I explain why the reserves changes so dramatically, I need to define the word “reserves” to answer the question at the beginning of this post. Reserves are the energy resources that can be produced in the future under current economic and technology condition. So, different from physical stock, “reserves” is a concept about economy and technology, not geology. For example, a new oil field is discovered, but extraction procedure will cost you $1,000 per barrel, than there is no possibility that somebody will produce those oil in the future under current oil price, because there is no revenue at all, so we can’t call the oil in this oil field as oil “reserves”. In another example, you know one place in the world may stores massive oil, but the discovery cost exceeds your minimum profit expectation, then this will never be your investment choice, the result is nobody knows if there exists oil reserves or not. The definition of reserves also suggests that the rise of price and the advance of technology will turn more unexploitable oil resources into oil reserves.

This case for oil is not the only example about energy reserves. In 1800s, people in UK worried that they would run out of coal one day. Now there are countless coal staying underground, but nobody worried about them now and no one is going to extract them, because they are not reserves anymore – oil and natural gas have out compete coal in the energy market in UK. It cost more and earn less revenue to extract those coal comparing exploit oil. That’s why I say “first price, next reserves” in the title. Relative price determined whether the energy resource can become reserves – after that, you can start worrying whether it will run out in the future. When the price is high enough, the revenue will also be sufficient for people to discover energy resources and extract that. And when you own advance enough technologies, you can turn cost relatively low, which is same as set a higher piece.

As I know, shale oil is not something that has been discovered recently in US. In late 1900s, Exxon started the colony shale oil project in US. And at the day of May 2, 1982, the so called “Black Sunday”, oil price dropped dramatically and Exxon quit that project.

The price is everything to the market, even you have resources and technology, if the price is low, then everything is done, no investment will be made.

(Revised) Shale Bubble? Or is it just too hurry?

In my last post, who worries about the oil? I discussed the bonanza of the US shale oil production, and how BP worried about the decline of demand for the crude oil. BP predicted that OPEC nations would lower their daily oil supply to stabilize the price. But I think that traditional oil production countries don’t have to be panicked about their destinies so far since it is still unlikely for oil being replaced by other energy resources in the near future and the global demand for crude will remain strong.

Yesterday, Wall Street Journal reported the rise of oil futures, and the slide of the natural gas futures. We all know that oil and natural gas are substitutes to each other, so in economic sense, the rise of the price of natural gas could lead to the enlargement of demand for oil. According to the articles, investors expected the increasing demand for fossil fuels due to the cold weather (people need more heating in their rooms). On the one hand, the price of natural gas raised (because the demand for it increased but the supply is limited), and oil seems relevantly cheap as a substitute good. On the other hand, US decreased its crude import so we don’t have so much crude available in the market now. What we did in response was to use our oil storage, which is the so called Strategic Petroleum Reserve (SPR for short). SPR is like an emergency oil storage regulated by the US department of energy, it was built in order to deal with the situations that oil demand exceeds oil supply. As the article noted:

U.S. crude inventories have fallen 11%, or 41.2 million barrels reaching their lowest level since March 2012. While some of the losses were due to year-end accounting measures, and lower imports, many market participants have focused on the possibility of more oil reaching the Gulf Coast in the near future.

The thing is cleared. Nonetheless, I believe it revealed a problem of the current US fuel market, that is, lack of flexibility. In other words, fail to adapt the volatility of energy demand. Why is that? It is known that US currently produce more oil than it import. And in order for US to achieve that, two jobs have to be done: first is to produce more oil, second is to gradually lower the oil imported from the outside. Then two potential problems follows: first is whether we can keep growing the production of shale oil, second is whether we decline the oil import too fast to satisfy the oil demand especially under some emergent situations. The rise of oil future indicated the existence of the second problem: when the oil demand soared unexpectedly due to the extreme weather, it took a long time for us to fix it.

So what about the first problem? Is there anything noticeable in the process of our production of shale oil? The answer is yes. According to this article, Shale: High depletion rates in Bakken written by Steve Austin, one undesirable feature of the extraction of the shale oil is its high depletion rate. To put it simple, imagine a towel soaked water, the first time wring it you will get a lot water from it. The second time, not so much. The third time, only a few drops. The method we are using now to extract shale oil is called fracking, which is just like the process you wring water from the towel. Oil wells using fracking will give you high return for the first year, but next year you will have 60% less production, and so on for the following years. The yield from shale oil well is diminishing fast. You can see the problem here: the high production can’t be sustained unless you keep exploiting more and more oil wells each year, which is costly and dangerous.

If you think that because US has more than half of the shale oil reserve in the world so we don’t need to worry about it then you are totally wrong. The key issue here is the technology, which determined whether we can get full use of those precious resource. Unluckily we can’t fully handle that right now. Fracking is the best technique we owned that have been assigned to the oil exploitation jobs, yet it is far from making the most use of the shale oil resource.

So it seems to me that US do the exploitation the way more hasty than it should. And the oil import was cut so fast to deal with the urgent situations. I don’t think that it could be a “Shale Bubble” just like many says, but US really needs to slow down instead of celebrating so early.

 

Who can solve the inequality?

President Obama is going to give a speech in next week’s State of Union address focusing on inequality, which is the current Democrat political proposition. This time, will the Democrats solve the problem at root and successfully win more voters?

Speaking of inequality, it’s takes a long time for people and economists to dig into the matter and reveal the reasons behind the surface. At the very beginning, we noticed the differences of salaries and the gap between rich and poor, and we owned this to the exploitation of men by others. So we made laws to set the minimum wage and gradually increase that. We changed the tax rate so that we can take more from the rich and redistributed the wealth to those who needed most. After that, we came to realize that the income inequality is largely caused by opportunity inequality. Then we established all kinds of social security programs, increased welfare for the poor and distributed more unemployment benefits. The past has shown us that most of those steps failed nonetheless. The evidence is that we are facing the elimination of the middle class­—the backbone of the country.

For me, all the federal programs are not to be blamed. People may say that they are ideas of wasting tons of money and in return, we get bunch of people who must rely on the benefit plans and provide nothing to the society. But for me, all those plans are just good enough in solving the inequality provided that people who are helped must think like a real mid-class. However, they can’t do that. I call this “thinking inequality”, which is some kinds of related to the theory of Sendhil Mullainathan and Eldar Shafir, they explained their theory in their book.

To put it simple, if you want to get rid of poor situation, you must think and act like someone who are rich. Sounds weird but imagine this: if you are born in a poor family with parents only finished their primary education, then you will think like a poor because that’s how you have been educated. Before you grow up and want to change your life, you are already left behind—in thinking. When people are trying their best to make use of all kinds of resources, you don’t even realized the importance of doing that because you are brought up in a totally different circumstance. And it will be less chance for you to think as a mid-class and try your best to be a rich person.

Just like David Brooks pointed in his article, It takes a generation before we can finally solve the problem, because in order to solve the thinking inequality we must focus our target on the parents who are going to give birth to their child. They are the people who impact their children most, and the people who can save their children from poor—as long as we get them prepared by some kinds of education programs. Once the children from poor families are thinking in the same way as children from rich families, then the mechanisms set up by our government can function well. The federal programs will ensure all those children to have equal opportunities and close income. Only in this way can they compete equally.

The education is important for solving the ineuqlity, but not only from schools’ side, but also from the side of parents. Actually, parents determined whether the problems can be solved.

I can foresee the successful outcome of the war on inequality: the middle class takes more proportion in the whole social class structure. It may takes a long time but it also worth waiting for.

Why is it so hard to change China? (2)

In my last post, why is it so hard to change China, I gave one reason from the behavior economy’s point of view to explain why it is difficult for China to reestablish its economy structure in a very short period. However there are still some reasons behind this dilemma, which are deserved to discuss about.

There are three questions to ask before we continue. First, people may confused about why the government of China expect to have a GDP growth rate of at least 8% per year. Why should the growth be such high? Second, we may say that China’s economy was not developed in a healthy way in the past several decades, there are problems happened such as heavy air pollution and forest destruction. Using the economic model, firms in China neglected of the externality, like social benefit. We know many other developing countries have their own environment problems during the growth, but none can match the problems in China in scale. So why is that happening? Third, why people in China can’t feel their salaries increasing even the GDP increased in a dramatic speed?

The key to those questions is the Chinese model, which to me means a special state-owned economy regulated by a strong centralized government. Usually in western countries, people own properties and get returns from the personal properties. But in China we have the so called state-owned properties like our four state-owned banks and CNPC, etc. which are owned by every Chinese-nominal, but actually we received not even a penny from those big firms (in fact, a large amount of money from tax payers of China were paid to those state-owned firms in case they get bankruptcy). Because China’s GDP is promoted mostly by the investment like those state-owned properties, for instance, when a regional government build some big expensive government buildings, this count a large amount of GDP growth even though ordinary people have no economic gain from big project like that. You can say that people like us get some kind of benefit from those project such as we feel more proud of our government buildings now. Just for kidding. In fact the consumption ability of people does not change at all, but China’s governments can add some big numbers on the data of national GDP. That answers my third question.

After we solve the third question, we now have a clue for the first question. Because most of the GDP growth must thanks to the investments that have little impact on people’s consumption ability, China needs a high speed GDP growth rate for us to feel the change in our living quality. Actually in China, those so called state-owned properties will never bring any benefit to local people. The initial purpose of having those state-owned properties is to cancel taxes from people. Because nominally those properties belongs to everyone, so the money made by the firms belongs to everyone and everyone needs to pay their tax in order to rise fund for the government. Now the situation is people in China still need to pay a large amount of money because those state-owned firms are actually losing money each year. And as a Chinese, you can’t quit from this “money-losing investment” as long as you are the “owner” of the country, what a sarcasm.

To answer the second question, we must figure out the structure of China’s economy, which is focus largely on heavy industries instead of light industries. The government of China has a bad habit, it always want to invest in the way of constructing a lot of new structures, because everyone can see how spectaculars those new buildings are. We all knew that Chinese government spend about 67 billion dollars in order to build the 2008 Olympic stadiums. Because of our government’s habit, heavy industries grew fast and bring in serious environment problems that hard to control.

In the article Is China’s Slower Growth Good or Bad News?, the author pointed out that policy makers used a mini-stimulus program that combined investment in subways and railways with tax breaks for businesses to keep growth from slowing further. Both the two new policies are just scratches based on our current problems, the government is still planning to stimulate the economy by increase investment, not increase consumption.

It is a good time for the policy makers to stop and rethink about their mistakes, but I still doubt if they will make the right moves.

Why is it so hard to change?

A recently updated article points out the slowing down of China’s GDP growth rate:  China’s Economic Growth Slows to 7.7%. This is not so surprising since the GDP growth rate of the year before was 7.8%. China lost its 2 digits GDP growth speed, which has been sustained over 30 years. As the world’s second biggest economy, China is expected to surpass America in decades for its long lasting high GDP growth rate, which appears to be over now.

As the growth pace slowing down, some problems of the China’s economic model has been exposed. China’s GDP relays mostly on investment and export instead of consumption. Investment contributes almost 50% of GDP growth, however, consumption becomes less and less important in China’s model. As the labor costs keep rising and RMB keeps appreciating, the government found it harder to increase GDP because of the reduction of external demand. For one thing, the 2008 financial crisis made a difficult time for countries like China since the aggregate import demand was decreased. For another thing, investors have less incentives to invest in China because it is costly and unprofitable doing so, comparing to 30 years before.

The economic model is hard to change not only because the economy is too huge to transform, but also because of the 30 years’ thinking model, which is a problem in the field of behavioral economy.

According to the new book Scarcity: Why Having Too Little Means So Much of Sendhil Mullainathan (Professor of Harhard) and Eldar Shafir (Professor of Princeton), when you are short of some kind of scarce resource, it will matters very much to you so as to change the way you thinking and making judgment. For example, when a poor family receives 10,000 dollars, they will not make the most use of it: they may use it to pay their debt or save the money directly, but they never use it in some investment activities like buy stocks, which may bring them more money and help them from the poverty situation forever. But if you give the money to someone who needs it but not so urgent, then he may use the money correctly and rationally to save his problem in an efficient way. The money means too much to those who living in poverty for a long time and they can’t change their thinking ability in such a short time to make good use of the money. The poor family can’t think rationally because money means too much to them not only just a tool for them to improve the living quality. That is: the poverty makes them lost the ability to help themselves get rid of poverty.

In 1970s, when China just started its reform and opening-up. Our government found that we are such a poor country, so in order to become rich we need money invested from outside. So we need to make use of our export advantage to bring in money. And because the living standard of people was too low so as the economy can’t rely on consumption. In that time, fundamental construction on one hand helped the development of the country, on the other hand, it helped increase the employment, so we depend heavily on investment in fixed asset.

30 years has passed by and the whole economic model does not changed. Our government have already aware of the importance of transformation. But when it comes to practice, they always do the old things because the thinking model is fixed. And that is because they put more attention on the resources that we used to be lack of! The economy can changes fast but the thinking ability is hard to be altered.

Nobel Economist Sees Market as Remedy to the Organ Donor Shortage

Life on the organ donation waiting list is a miserable experience for many Americans. A patient that entered renal failure today, a condition requiring a new kidney, would be placed on a organ donation waiting list with over 95,000 other patients with an average waiting time of about 4.5 years. Currently, only around 16,500 kidney transplant operations are performed each year in the U.S., so they’d have to be very patient.

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During the wait,  patients are placed on dialysis, a process that filters the blood several times a day using a sophisticated mechanical pump, meaning they spend the majority of their time in and out of a hospital. This treatment doesn’t come cheap either, dialysis currently costs somewhere around $80,000 a year, so patients spend about $360,000 in the 4.5 years just to stay alive while waiting for a miracle. Furthermore, dialysis isn’t a very good treatment either; it’s not as efficient as a human kidney, so the long wait shaves a few years off patients’ remaining years to live.

Finally, assuming patients can get a transplant, they would have to spend an additional $150,000 on the surgery itself. Overall, while these patients would be lucky to be alive, they would also be out over half a million dollars and would lose about 10-15 years of my potential life span.

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Some academics, feel that organ donation doesn’t have to be such a miserable process. In his latest Wall Street Journal article, Gary Becker, a Nobel-prize winning economist from the University of Chicago, explains that by making it legal for donors to be paid for their organs, it could improve the survival rates of patients on the donor lists and drastically reduce the cost of health care. He postulates that kidneys would be the most obvious choice for this market system, as people can live healthy lives even after donating one of their two kidneys. Studies suggest that donors could receive around $15,000 for each kidney, which would create a strong incentive people to donate and help boost the organ supply. On the patient’s end, the reduction to waiting time would substantially reduce the expensive costs of dialysis and dramatically improve the odds of surviving into old age. Becker also explains that in the case of a post-mortem organ donor, the proceeds could go to the grieving family and help support those who have recently lost a loved one. Overall, the goal of his strategy would be to create a more liquid market for organs to more efficiently treat those in need.

This proposed solution, though highly unconventional (and, in my opinion a bit disturbing), may have the potential to provide a strong public benefit. On the other hand, I could see a number of negatives to enacting this type of policy. First, in order for this idea to gain any traction, the exchange of organs for money would first need to be made legal, and in a country with a sizable conservative population this would be a difficult path. Second, the most obvious problem with this solution is that it could further increase the gap between the rich and the poor in the access to quality healthcare. The wealthy would have a smaller incentive to donate organs, and could more easily purchase a replacement. The system might also suffer from moral hazard, meaning the rich would have the incentive to take greater health risks because of the opportunity to “buy back” their health. The poor would have a large incentive to donate organs (and not without a considerable risk to their health) for the monetary reward, and would have lesser means to purchase an organ should their own health wane. Finally, I wouldn’t want to even think of the unlikely but extreme case in which individuals “steal” other’s organs for profit. Overall, I feel that the organ market makes for better science fiction (or potentially horror) than for successful solution to a public health issue.

Overall, my opinion is that this is an interesting, potentially promising (if policy makers could get around the moral aspects), but ultimately temporary solution. A better answer may soon come from new advances in bioengineering, as scientists have recently demonstrated the ability to grow replacement organs in the lab using a patient’s own cells. In 2012, doctors were able to successfully grow and transplant an artificial windpipe into a patient suffering from cancer in his trachea. In further experiments, scientists have been able to grow artificial rat hearts and lungs in the lab, providing evidence that patient’s might sooner find hope in a test-tube than in an “organ market.” (For those interested, Dr. Anthony Atala, in his TED lecture demonstrates the latest advances in the field of tissue and bioengineering.)

Overall, although Becker’s unusual solution to the organ shortage may have potential utility, in my opinion, science and medical research, which have a proven track record in improving healthcare, are probably more realistic and safer bets.