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Monday, August 18, 2008

The Economic Way of Looking at Behavior

I have mentioned earlier in my article’s that economics discipline demand thinking logically and are consistently based on models. Economists also generally assume that people respond to economic incentives and rational when they make any decisions. In economics we never really have only answers, but we are able to understand things better through research that initiates debate and makes good policy outcomes more likely.

Instead of using economic analysis in a study of compliance, we also can use Sociologists and Social Psychology analysts on study of compliance. For example, we can study impact of peer pressure on drug and smoking issues. A teenager's normally can facing choices of getting involved with drugs or smoking because of peer pressure. Teenager’s pleasure not only influenced by consuming the products, but also on what their peers are doing. If the teenager's doing something different from what their friends doing, that will reduce the teenager's satisfaction, partly because the teenager's will receive less respect from their friends, and feel less part of the group.

Therefore when the teenager's trying to get as much satisfaction as possible, they will take into account what their friends are doing. I mean that instead of us all behaving independently, we are all behaving interdependently. Economists normally have given social influences such as peer pressure far too little attention.

Combination of areas in economics and sociologists has been very successful in analyzing criminal behavior. For example, when we study economics of crime, our research question can be: What determines the amount of crime that we have and how effective are various actions that governments can take in reducing the amount of crime? This analysis explained that apprehending and penalizing criminals, giving better education to people who might commit crimes, using social pressure to criminals, reducing unemployment, and so on.

People make choices, and these choices are conditional on their expected benefits and the cost. You can affect the number of people who decide to enter criminal activities by affecting the benefits and costs. To the extent that people make these calculations, they are more likely to enter crime when benefits are high relative to the cost.

One way to affect costs is to make it more likely that if somebody commits a crime they’ll be captured, apprehended, convicted, and penalized. That raises the cost and reduces crime. Most people accept this conclusion for most crimes.

But the economic approach is not simply a law and order approach. It also says that if you can increase the attractiveness to people of working at legal activities rather than illegal or criminal activities, you will also have less crime. One way to increase the attractiveness is to make it easier for people to find jobs and to earn more by improving their skills, their education, and their training and also by improving the problem of labor markets. In Malaysia, to improve the problem of labor markets, the government should take care with the issues such as the problem of foreign labor and productivity of labor.

(Reference: Gary S. Becker (1993). The Economic Way of Looking at Behavior. Journal of Political Economy. Vol. 101 (3), p385-409)

Friday, August 15, 2008

Self-Regulation Theory of Compliance

Scholars identify self-regulation as alternate compliance plans conceived by regulated entities, with some degree of government review and involvement. It enables industry to propose alternative ways to comply with regulations by using different means to achieve environmental goals (Nik Mustapha et al. 1998). Self-regulation programs can also be industry codes of conduct that are sponsored by trade associations designed to improve members’ environment performance. An example would be the chemical industry’s Responsible Care Program (Hemphill 1996).
Regulatory agencies have a difficult time ensuring that the numerous regulated industries comply with all the volumes of federal and state regulations. As already established, the regulations produce no result if they are not being followed (Tietenberg 1992; Segerson & Tietenberg 1992).

In addition to using enforcement resources more effectively, Iannuzzi (2000) addresses the importance of an enforcement program to develop a complying majority. When the regulatory agency is comfortable that a majority of the companies it regulates are in compliance, it will be able to devote its resources to those that do not comply. One potential way to develop this majority is with an effective self-regulatory program.

Self-regulation is not a phenomenon restricted to the environmental field. It would be enlightening to briefly mention some programs in other fields. Many occupations require a license or certification in order for someone to practice that profession. A self-regulating licensing body that has been given its authority by law, issues the license. For example, a surgeon cannot practice unless the College of Physicians and Surgeons license him. Likewise, an attorney cannot practice law unless she/he is a member of the Law Society (Priest 1997). In Malaysia, most professionals such as accountants, engineers, doctors, and lawyers need a license from their respective professional body to practice.

These brief descriptions of programs outside of the environmental field indicate that self-regulation is a practice employed in some highly critical industries. There would be severe consequences if self-regulation were not effective in these areas. Therefore, it is reasonable to conclude that self-regulation can be considered as a potential policy tool for environmental enforcement.

Self-regulation can be used as environmental enforcement through changing attitudes of regulated individuals. Millar & Millar (1990), and Cialdini (1994) have identified key components of attitude change: the communicator, the communication, the medium, and the audience.

Changing people’s attitudes, and ultimately their behavior, can be difficult if they have well-established habits or are highly motivated in the direction opposite to the desired change. Research also shows that people who positively anticipate a new idea or who feel that others around them are inclined to change their views are likely to exhibit attitude changes (Boninger, Brock, Cook, Gruder & Romer 1990).

Self-regulation has numerous potential economic advantages for both the private and public sectors. It may result in faster assimilation of innovative improvements in environmental process and control technologies, streamlining reporting requirements, and paperwork reduction and slowing the growth of public regulatory bureaucracies (Hemphill 1996). It can also reduce the costs for regulators to prepare and review permit applications, renew and modify, review monitoring and reporting requirement, and perform inspections (Andrews 1998).

The Government sees self-regulation as an opportunity to bring industries into a “normative” behavior. Besides providing lower costs, it can also result in greater speed and flexibility, and since its requirements usually go beyond the letter of the law, it raises standards (Cunningham & Rees 1997).

Economic Theories of Firm Behavior: Using Normative Theories of Compliance

Although economists usually focus on economic analysis of environmental monitoring and enforcement, it is important to note that economists do not have a monopoly on theories of compliance. Sociologists and social psychology analysts also study regulatory compliance issues. In contrast to the positive perspectives, the normative perspectives generally assume that some compliance is due to social norms and the fact that individuals generally want to abide by laws they understand (Bardach 1982). People choose to obey the law because they believe the law is just and consistent with their personal morality, irrespective of assessments of harms or pleasure derived from breaking the law. Thus, government enforcement agencies might have two tools at their disposal - "deterrence" and "cooperation." Compliance takes on more of a moral tone in this literature, and is expected to be greater when individuals and firms believe the rules are legitimate and fairly applied.

Kuperan & Sutinen (1998) provide a good introduction to the importance of socializing processes in affecting behavior. Compliance with rules and regulations is hypothesized to be related to both the internal capacities of the individual and the external influences of the environment, where the socialization process is the linkage between the individual and society. Psychological theories such as social influence explain how the socialization process works with respect to compliance behavior.

1. Social Influence Theory
Social influence refers to the ways people alter the attitudes or behaviors of others, either directly or indirectly. Two important topics studied by researchers on social influence are conformity and obedience.

a)Conformity: When someone changes her or his attitudes or behaviors so that they are consistent with those of other people or with social norms, the person is exhibiting conformity, or trying to fit in. An individual may adopt positive, pro-social behaviors such as by wearing seatbelts, volunteering time and money to a charity, or buying only products that are safe for the environment. Sometimes, however, conformity leads to counterproductive, antisocial behaviors, such as drug abuse, or mob action (Lefton 2000).

Groups strongly influence conformity. Studies show that individuals conform to group norms even when they are not pressured to do so. Similarly, the desire to conform can induce people to do things they might not do otherwise. An infamous example is the My Lai massacre, in which American soldiers’ slaughtered Vietnamese civilians during the Vietnam War. Although several factors account for the soldiers’ behavior (including combat stress, and obedience to authority), the soldiers also yielded to extreme group pressure (Lefton 2000).

Arguments about the importance of reference groups in providing sources of learning and support for deviant behavior have a considerable history in the social sciences. Lening, Steven & Zhou (1999) suggest that people become criminals because of excessive exposure to the criminal behavior patterns exhibited by people with whom they have relatively intimate relations. Other investigators such as Young (1979), and Sutinen, Rieser & Gauvin (1990) have demonstrated that deviant behavior can be inhibited when individuals are embedded within a network of cohesive social groups that disapprove of those behaviors.

Motivational theory asserts that individuals learn to dislike specific individuals (competitors) and then generalize that dislike to whole classes of similar individuals (races, religions, or cultures). If people are raised to compete against others for scarce resources, the competition can foster negative feelings about those competitors. Research with children, adolescents, and adults shows that people who are initially seen as friends or as neutral are sometimes treated badly if they become competitors (Gaines & Reed 1995).

Lefton (2000) suggested that factors such as amount of information, relative competence, position within a group, and public nature of behavior of the group can influence individuals to conform. The most important factor in determining conformity variable is the amount of information provided or available when a decision is to be made. When people are uncertain of how to behave in ambiguous situations, they seek the opinions of others.

The role of community pressure and other forms of informal sanctions are also explored in Pargal & Wheeler (1996) and Konar & Cohen (1997). These two papers generally find support for informal community pressure and social norms as playing important roles in compliance.

b) Obedience. Obedience is compliance with the orders of another person or group of people. The studies on obedience by Stanley Milgram (1965) showed that ordinary people were willing to comply with the wishes of others, especially if they saw the others as legitimate authority figures. For example, children learn that authority figures, such as teachers and parents, know more than they do and that taking their advice generally proves beneficial. As adults, they maintain those beliefs and apply them to authority figures such as employers, judges, government leaders, and so on.

2. Cognitive Theory
In the study of motivation, cognitive theory is an explanation of behavior that asserts that people actively and regularly determine their own goals and the means of achieving them through thought (Lefton 2000). According to cognitive theory, the key variable determining compliance is the individual’s personal morality.
Cialdini (1994) argues that there are so many events, circumstances, and changing variables in their lives that people cannot easily analyze all the relevant data about one thing. People thus devise mental shortcuts to help them make decisions. One of those shortcuts is to stereotype individuals and the groups they belong to – for example, all homeless people, all men, and all lawyers. By devising such shortcuts in thinking, people develop ideas about who is a member of a group to which they belong or want to belong. The division of the world into groups labeled “in” versus “out” or “us” versus “them” is known as “social categorization.”

In a study of compliance with the law, Tyler (1990) reviews different perspectives from which individual behavior has been explained in the social sciences. From his discussion, two main categories of factors that could influence compliance with regulations are: (i) personal morality: the individual’s sense of what is right and wrong. This may or may not be in accord with the regulation considered and its objectives, and may thus act in favor of or against compliance; and (ii) the legitimacy of the regulation, the regulatory process and the regulatory authority. This relates to the recognition (or denial) by individuals of the right of an external authority to dictate their behavior, whatever the nature and consequences of the obligations imposed on them. It will therefore always act in favor of compliance.

3. Summarizing Important Features of the Normative Theory

The Normative theory of compliance is concerned with what people consider as just and moral, as opposed to what is in their self-interest. The analysis emphasizes on the relationship between normative commitment to legal authorities and compliance behavior. Normative commitment through ‘personal morality’ means obeying a law because one feels that the law is just, while normative commitment through ‘legitimacy’ means obeying the law because one feels that the authority enforcing the law has the right to dictate behavior. Normative theory also show that ‘social pressure’ can influence individuals’ compliance decisions.

Thursday, August 14, 2008

Economic Theories of Firm Behavior: Using Positive Theories of Compliance

Positive Theories of Compliance

Positive theories attempt to explain the behavior of the regulated parties (individuals or firms). These theories are related to the study of what is and how the system works. The discussions will be on economic theories of firm behavior that attempt to answer the question of why firms comply with environmental regulations. I will also discuss about Normative Theories of Compliance in my next article. Researchers and Policy Makers should look at both theories when they want to study or make a policy related to Environmental Policy.

Any study of compliance with environmental regulations should start first with a more basic understanding of firm behavior. After all, there would be no need to study enforcement if all firms complied with the law. Since not all firms do comply with the law, it is interesting to start with a more fundamental question - why do firms comply at all? An obvious economic reason for compliance is that firms respond to both positive and negative incentives. If expected penalties are sufficiently high, the threat of being punished for non-compliance should be an adequate reason for compliance.

An early work that is cited by many subsequent crime and punishment papers is that of Becker (1968). He examined the role of penalties and enforcement in dealing with illegal behavior. Becker claimed that an individual decision to act criminally could be analyzed by exactly the same kind of tools used for other individual decisions, i.e. by the use of the utility theory. This theory postulates that a person commits an offense if the expected utility of the offense activities exceeds the utility he could get by using his time and other resources at legal activities. However, some people become “criminals,” not because their benefits and costs differ from that of other persons, but because their benefits and costs differ (Becker 1968).

This approach implies that there is a function relating to the number of offenses by any person to his probability of conviction, to his punishment if convicted, and to other variables, such as the income available to him in legal and other illegal activities, the frequency of nuisance arrests, and his willingness to commit an illegal act.

People choose to obey or violate the law after a rational calculation of the risk pain versus the expected pleasure derived from an act. Legal punishments serve as deterrent because they communicate the pains likely to be suffered as a result of law violation by those who have been punished (specific deterrence) and by others who might be tempted to transgress (general deterrence). In other words, persons refrain from committing crimes in the first place, or refrain from committing crimes again, because they determine that the costs of doing so outweigh any potential gains (Hatcher, Jaffry, Thebaud & Bennet 2000). Enforcement agencies can give an offender ‘harsh punishment’ in order to set an example to other people. Fear of punishment is in turn typically conceptualized as a function of both the certainty of detection and severity of punishment if detected.

In a standard cost-benefit framework, Lear (1998) shows that an enforcement program will change the benefits of non-compliance by imposing severe penalty on their non-compliance activity. Consider a risk-neutral firm’s decision of whether or not to comply with a costly environmental regulation. Compliance is assumed to reduce firm profits below the level achieved under non-compliance, giving the firm an incentive to violate. In other words, when enforcement agency devotes some resources to monitor non-compliance activities, there are some possibilities that the violators can be detected. However, if enforcement agency does not devote any resources, there is no possibility at all that the violators can be detected. An increase in resources devoted to monitoring and enforcement raises the probability of detection for any given firm and there are diminishing returns to regulatory spending. Monitoring is assumed to be error free: the probability of mistakenly fining a compliant firm is zero.

The Firm will violate the regulation if the expected gain from non-compliance exceeds the expected penalty. For firm which thinks that their expected gain from non-compliance equal to their expected penalty, they will mixes between complying and violating. Lastly, the firm will comply if the expected gain from non-compliance less than the expected penalty.

Saturday, August 9, 2008

Economists with their Analytical Skill

When we study economics, we will realized that economics discipline demand thinking logically and are consistently based on models. Economists also generally assume that people respond to economic incentives. Even lecturers and researchers need incentives to motivate them to do a good research. In today’s world, where you need creativity, you cannot motivate people to do a good research by just commanding them. You need to motivate them by promising to give the right incentives if they produce something.

In economics we never really have only answers, but we are able to understand things better through research that initiates debate and makes good policy outcomes more likely. Many of the new ideas that are published in the academic journals and books have helped to guide policy makers. Researchers for example have to forecast economy and try to understand what going on in the economy, such as inflation, unemployment, balance of payment, economics growth, poverty alleviation and income distribution.

Economists normally suggest to policy makers to look for the future if they want to promote a stable economic environment in which the economy have a very low inflation. Sometime, during a business cycle expansion, there may be a tendency for the economy to overheat a little bit and a little bit of inflation to occur. Bank Negara Malaysia normally will starting implementing tighten monetary policy (higher interest rate, directive to commercial banks to control credit creation, etc.) to make sure inflation under control. Economics condition will then continued to grow at a sustainable pace.

What happens during a business cycle depreciate? When companies and banks had borrowed heavily abroad, the further depreciation of currencies value would have exacerbated financial problems by increasing the burden of servicing dollar-dominated debts. Financial and corporate sector inefficiency will make the problem become more challenging to be solved. Then, the government which trying to restore their popularity will try not to support unpopular strategy, such as increasing interest rate and depreciate the value of money. During that situation, government will also have a problem of getting a good support from the public, while not easy to restore market confidence. This will led to greater capital outflows and put additional upward pressure on interest rates and downward pressure on exchange rates, and forced a larger downward adjustment of domestic demand.

Actually Economists not only using economics knowledge to assist policy makers to do the right decisions, normally economists who works with educational sectors trying to educate students to become a better educated citizens. I think economics is a very powerful tool in achieving them. Students should realize that economists have a broad range of employment choices from working in business, government, research, and educational institutions. In developed countries, among social scientists, economists tend to be the more highly paid.

Monday, August 4, 2008

Konsep Penggunaan Lestari dan Pengurusan Sumber-sumber Ekonomi secara cekap

Penggunaan lestasi bermaksud penggunaan sumber pada masa kini untuk memenuhi kehendak semasa tidak akan menjejaskan keupayaan alam dan ekonomi untuk mengeluarkan barangan dan perkhidmatan bagi kegunaan generasi akan datang. Persoalannya bagaimanakah kita mengetahui kita telah melaksanakan penggunaan lestari? dan bagaimanakah penggunaan lestari dapat dicapai?

Apabila bercakap berkaitan dengan sumber ekonomi, dari segi ekonomi ianya meliputi tanah (termasuk sumber asli-minyak, galian,air), buruh, modal, modal manusia dan kemahiran keusahawanan.

Maksud cekap dari segi ekonomi pula boleh dibahagikan kepada: Kecekapan pengeluaran (productive efficiency) dan Kecekapan pengagihan (allocative efficiency). Kecekapan pengeluaran bererti barangan atau perkhidmatan dikeluarkan pada kos pengeluaran terendah yang mungkin, cepat dan mencapai piawaian kualiti tertentu. Kecekapan pengagihan pula terjadi apabila barangan dan perkhidmatan sampai kepada pengguna mengikut masa dan tempat yang telah ditentukan.

Pasaran pula dikatakan cekap apabila ia menggalakkan persaingan dan pertukaran barangan dan perkhidmatan secara sukarela. Pertukaran barangan dan perkhidmatan secara sukarela bererti pengguna dan pengeluar menjadi lebih baik dari pertukaran tersebut. Kita mengetahui pengguna dan pengeluar menjadi lebih baik, kerana jika tidak, tidak akan berlaku pertukaran barangan dan perkhidmatan.

Pengeluaran yang cekap pula berlaku apabila persaingan di antara firma dalam pasaran menyebabkan firma-firma mengeluarkan barangan dan perkhidmatan pada kos yang minima. Kos yang minima akan meningkatkan keuntungan firma. Persoalannya apakah gunanya keuntungan tersebut? Dari segi perniagaan, ianya bermaksud pulangan kepada peniaga dan pelabur bertambah banyak.

Walaupun pasaran menggalakkan kecekapan, tetapi ada kalanya kerajaan membuat peraturan tertentu untuk menghalang firma dari mengeluarkan terlalu banyak bahan sampingan yang boleh merosakkan alam sekitar ketika proses pengeluaran dibuat, atau memastikan firma memasang peralatan tertentu yang boleh mengurangkan pencemaran alam sekitar seperti alat mengurangkan pencemaran udara, atau pencemaran air. Pemasangan alat tersebut boleh menyebabkan firma mengalami kenaikan kos operasi dan mengurangkan keuntungan firma. Sebab itu firma kalau tak ada campurtangan kerajaan tidak akan membuat pembelian peralatan mengurangkan pencemaran tersebut.

Sebagai contoh, kawalan penebangan hutan untuk mendapatkan kayu balak bagi mendapatkan hasil perkayuan untuk industri perabut dan perumahan dapat memastikan sumber-sumber hutan kekal, binatang liar tidak terhapus, sumber herba dapat dijaga, dapat mengurangkan pemanasan global, faedah kepada ekosistem, dan pencegahan banjir secara semulajadi dapat dikekalkan.

(Diubahsuai dari bahan untuk Forum Hari Pengguna Malaysia peringkat Negeri Perlis yang dianjurkan oleh Kementerian Perdagangan Dalam Negeri dan Hal Ehwal Pengguna Negeri Perlis pada hari Isnin, 4 hb. Ogos 2008. Peserta Forum yang lain ialah Mufti Negeri Perlis, Dr. Mohd Asri Zainul Abidin)