(This essay was published in Hong Kong Economic Journal on 3 June 2015.)

A recent commentary in the Apple Daily (28 May 2015) by Mr. Simon Lee (李兆富) piqued my curiosity about a set of reports by the Consumer Council comparing food prices across wet markets in Hong Kong. This was an initiative launched on 15 December 2009. It surveyed the same basket of 26 food items at 44 wet markets for monthly prices from November 2008 to November 2009.

 

Subsequent reports expanded the coverage to 52 markets in 18 districts throughout Hong Kong. The latest survey I was able to obtain online was for the month of October 2010. An analysis of the figures in these surveys answers a number of questions concerning differences between retail shopping markets that are privately or publicly owned. The government authority operating publicly owned wet markets is the Food and Environmental Hygiene Department (FEHD).

 

It is well known that rents charged by FEHD for comparable premises in their wet markets are usually lower than those at privately run markets, often by a considerable margin. There are many reasons for this, but the critical one is that a public authority seeks to accommodate the interests of a diverse set of stakeholders and is unable or unwilling to realize the full value of the assets under its management.

 

It is often alleged in defense of such a practice that some of the benefits of lower rents are eventually passed onto consumers through, for example, lower prices charged by the shopkeepers.

 

Economists doubt this actually happens. In any case if society truly wants to subsidize wet market customers the first-best solution is to give them subsidized food coupons directly rather than to selectively subsidize selected shopkeepers.

 

Most shopkeepers would relish the opportunity to rent premises in publicly owned wet markets because they are offered at below market rents. Those shopkeepers selected as tenants effectively receive a subsidy from the public purse. Shopkeepers renting in privately owned wet markets have no such luck. The subsidy received by the public wet market tenants becomes an additional part of their profit. There is no compelling reason why they have to pass it onto their customers. The FEHD selects tenants based on a set of criteria, and their propensity for charity, especially towards customers, does not appear to be one of them.

 

The October 2010 data published by the Consumer Council surveyed 52 wet markets and revealed some variation in food prices. Prices in the top 5 and top 10 high priced wet markets were, respectively, 9.7% and 6.8% above the average. Those in the bottom 5 and bottom 10 low priced wet markets were, respectively, 3.9% and 3.4% below the average. The difference in food prices of the most expensive and the least expensive wet markets was 17.5%. Some of the price variation may reflect unidentified differences in the quality of the food products available for sale.

 

The Consumer Council data was neatly divided into 26 wet markets with above average food prices and 26 with below average ones. The FEHD operated 20 of the 26 wet markets with above average prices (representing 77%) and 14 of the 26 wet markets priced below average (representing 54%). Interestingly, the data also showed that 4 of the top 5 and 8 of the top 10 wet markets setting the highest food prices were operated by the FEHD. By contrast, 4 of the bottom 5 and 6 of the bottom 10 wet markets offering the lowest food prices were privately owned.

 

So there is a higher concentration of higher priced wet markets in FEHD premises. On average, food prices set by the FEHD wet markets were 2% higher than the privately owned wet markets. These findings are prima facie evidence that shopkeepers renting from the FEHD are not charging lower prices and passing on their subsidies to customers.

 

These facts also suggest that shopkeepers in the FEHD wet markets are likely to be making higher profits than those in privately owned wet markets. As a general rule, rents charged by publicly owned retail spaces are lower than comparable privately owned premises. It is highly likely that shopkeepers operating in publicly owned premises are also making higher than average profits compared to those in privately owned premises. And if they are not, then most likely they are running a fairly inefficient business.

 

This also explains why tenants in publicly owned premises are strongly opposed to privatization. Government bureaucrats are seldom keen to privatize public assets unless they have no choice, for example, when they face a fiscal crisis. So even though the public case for privatization is a compelling one, it seldom happens.  I suppose that is because of the political headwinds government may have to brace for from disgruntled tenants and their political champions.

 

Similar economic factors may be at work in care homes for the elderly. On 26 May 2015, Ming Pao reported on a scandal involving an elderly care home in Tai Po that left its residents exposed on a podium before their showers. The public is outraged and wants government to revoke its operating license and to regulate private elderly homes more vigorously.

 

Whether the Social Welfare Department has been negligent is a matter for investigation. But monitoring by government authorities alone is seldom adequate on its own. If it were, then it would easily become prohibitively expensive and therefore unaffordable. The taxpayer would be screaming.

 

The press by contrast has huge, and often exaggerated incentives, to monitor the performance of all individuals and institutions for scandals, including of course elderly care homes. It makes news. A free press for this reason is a valuable asset to complement the inadequacies of public monitoring. But the press is only interested in violations or underperformance of a gross nature because only these are newsworthy, and not the day-to-day humdrum.

 

From an economic perspective, the problem with private elderly care homes is not very different from wet markets because private elderly care homes do not receive a rental subsidy from the government, while non-profit NGOs get cheaper premises. But will the provision of more subsidized space improve the quality of care? This is not so obvious. The example of wet markets discussed earlier indicates that the benefits of cheaper premises are not passed onto customers. Why would private elderly care home operators be any different?

 

Perhaps with more space, the elderly would not have to expose themselves for all to see on a podium. But they might still be made to stay naked indoors and out of public view. A Ming Pao reporter would then not be able to photograph the scandal and it would be out of sight, and therefore out of mind.

 

The problem we have in elderly care is not merely a case of weak monitoring, but of the lack of affordability. Elderly care requires space, but it requires labor services even more. The scandal reported looked more like a labor saving, assembly line operation to economize on staff resources.

 

A tight labor market and minimum wages have made the operating environment for private elderly care expensive for the elderly and their families. I think it is rather odd to believe that family members are completely unaware of what is taking place in these elderly care homes, unless they never visit the premises or speak to their relatives. Rather, the problem is what other choices they have given what they can afford. The answer is they have few options.

 

More innovative solutions have to be found to deal with the growing problem of elderly care as our society continues to age. I suspect the answer must come from a greater effort to mobilize public-spirited sympathy and charity within our society. Society will need to tap private benefactors for contributions and volunteers to offer care services (among the retired and especially men) if we do not wish to raise taxes.

 

Monitoring services could be outsourced in order to be better incentivized to do a proper job. The media is valuable, but it cannot do all the monitoring. Teams of stock analysts have long researched the performance of publicly listed companies. More recently, a growing industry of paid services has emerged to monitor the governance of publicly listed companies. Investors are willing to pay for such information. Government could learn from these private sector initiatives.

 

I suspect private charity would be more forthcoming if better monitoring services were available for social services. The market would then be less dominated by the well-known social service NGOs, which unfortunately are not always scandal free. I believe we have much to gain from the best practices in business, especially because the demand for elderly care will be a growing sector in Hong Kong and worldwide

 

Forty years ago at the University of Chicago, the late Professor Milton Friedman taught economic analysis by reading out passages from newspapers containing either statements made by well-known personalities or reports of interesting events. He would ask the class to apply the tools of price theory to identify the faulty reasoning in the statements or analyze the reported events. Students learned price theory from him by applying it. From him, I have learned to look for the common price theory logic behind different events.

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