0:36 Intro. Trip to Chile, markets and incentives. Snowing in the mountains of Santiago. Traffic's pretty bad. What should we do through contracts and markets and what should we do through the public sector? Santiago is actually a little east of Washington, D.C., in the eastern time zone. Chile's been a laboratory for privatization. U. of Chicago trained some Chilean economists in the 1960s and 1970s, professors today. Center-left coalition today has accepted a lot of the pro-market reforms, but have they bought into them or are they just waiting? Chile used to have an almost private mass transit system. In 1975, built a subway, metro system, one of the biggest in Latin America. Santiago not quite as dense as NYC but close. On the surface, had a private bus system. No public subsidies, but system operated in the black. Consertacion [Consertacion Nacional Democratica, political party] looked at that and saw profits. Took a system that was $60 million per year in the black; now it loses 10 times more than it was making. How many passengers? Ridership has gone slightly down. Could argue that they were catering to mostly the rich, and by publicizing they would serve a larger audience. There had been different classes of service--now everybody has the same class of service. Commute times tripled, which is why people stopped using mass transit. Now people use cars. People didn't move out or stop working; they are driving cars on crowded streets. Key difference in the routes: used to be redudancy in the system. Always possible to get to work on time, and low variance. Now up to 2 hours but it may take 4 hours.

8:36 Incentives that the bus drivers themselves face. Natural experiment in the use of incentives. Before they were paid by the number of drivers they could pick up. Looked like the Chariot race in Ben Hur. Problem with the old system. Accidents, a few fatalities, usually only wounded people. Concertacion and President Bachelet saw both profits and drivers' greed as dual problems. Human transubstantiation. Pay is now not by passengers but by arriving on time. No incentive to pick up passengers if they are running after the bus; but also no incentive to stop if he's running late. Widely verified; Chilean listeners invited to write in. People respond to incentives not just in markets but in any setting they find themselves in. Mistake that the government of Chile made was they thought the problem is: in a market people are greedy, so let's take them out of the market. Paying drivers by schedule meant at a minimum they weren't going to go out of their way to pick passengers up. Also, changed style of buses. Buses used to be nimble; some old, belched black smoke. Government bought new buses, 4 or 5 times as long, articulated, bends in the middle, bendy bus. Four doors, only front door goes in to the driver to pay him. Driver doesn't get paid by how many pay him, but only by time. People scampered in the back doors; driver couldn't spend time going to the back to insist that they pay. Drivers routinely watch people get in the back doors. 100-foot long buses. St. Louis, light rail system, fad, too expensive to build a subway, packed for Cardinals games but empty during the middle of the day, between 9 and 4. The buses in Chile seem to be packed all the time; not nearly enough bus stops. 6 million people in urban Santiago, bus is losing $100/per person per year, for the privilege of not riding the bus. President has said "We owe the people of Santiago an apology, particularly the poor people." A lot of people actually lost their jobs. But less inequality, so happier.

18:29 Return to technical details. Map of the routes. Used to be the bus routes and the metro routes from where people live to where they work and were parallel. Cost per passenger for buses is still about ¼ of the cost per passenger for the metro. What the city did was eliminate almost all the bus routes that parallel the metro. Wait for bus; get off bus; wait for metro, which is crowded and might have to wait; then get off the metro and get on a bus with more waiting. Instead of looking at what people wanted, say as evidenced by what the map had evolved to look like, they drew it as what they thought it should look like from a planning perspective. Metro could not be more full but it still loses money. Could raise fares; could raise time. Also, new big bendy buses are six or eight inches wider than the lanes of Santiago. So accidents still happen often. Chile is not corrupt. It just seemed more rational--could put more people on them; wait longer and have fewer buses. How many private companies before? 3000. Probably some were small companies. Proportion of ridership from large companies? Probably mostly from a few largest companies. 4.8 million are from areas around Santiago areas. Express buses without stopping even with amenities like food and coffee; plus local buses that stopped at every corner.

24:49 Political economy. Private system that existed before had some visible negatives. Too many buses, inefficiencies. Political attractiveness to "publicize," "nationalize," "citicize" the system. Against the law now to own a private bus service. Maybe the system now actually does work--fed bad info. Why doesn't government return to the former system? Markets provide two things: information, and the incentive to do things in a particular way rather than some other way. Hard now for planners to go back, to know where to put routes now. Think what we need now is a reform. Unless you think of the market alternative you endlessly reform. Greed and profit. At least the current system solves that. Harper's Magazine ask readers to coin words. Everybody responds to incentives, including politicians. Puzzle: you've done something really dumb and people are mad about it. Go to unclog the sink drain. Take stopper out, etc., but forget to reattach the pipe. Floods vanity below the sink. Usually easy to put it back the way it was. What politics seems to do is to leave it disconnected. Different mental model: suppose you think water flows different ways because of different systems. Could think: This is public water and it will go where it should go. Even if you left it disconnected and lined it up just right it might mostly drain. Ethanol problem: corn prices have gone up. A lot of people say that's a mistake; but it's not repealed yet. The people who are making money from it don't want to repeal it. Bad policy might persist because people get emotionally attached or because the people who have benefited from the new regime are resistant in ways that wouldn't have existed in the old regime. Pareto superior policy: no one is better off from the new bus system in Chile. Volvo, the bus maker, is helped but not really a stake holder. Public choice approach, look at interest groups. The people in the government sincerely want to improve their society.

35:32 Are there any voices to go back to the old system? No. It would be political suicide. But why? Voters are tormented by the current system. Take the former Soviet Union, 1917 revolution, at the time greeted as a great success. "I've seen the future and it works." But it didn't work. Couldn't feed their people, bad weather for 70 years, poor incentives for their farmers. Suppose for the moment that some would have agreed that the system was horrible. System was corrupt, and they saw that and were aware of it. Causation wrong, thought corruption caused the difficulties rather than the system causing the corruption. But Chile is a democracy. Why can't a politician say "I have one issue: I'm going to go back to the bus system when it worked well"? Why wouldn't that strategy win? How many cities in the U.S. have private bus systems. But that's different--Chile's had the experience. They don't think of the old system as being private. They think of it as the old system. Ude, Chicago School based party in Chile, does promote return to the private system. Possible that the average citizen would just like the new system to improve. Bastiat: The State: each of us can ride at the expense of all of us. ["The state is the great fictitious entity by which everyone seeks to live at the expense of everyone else."--Bastiat] Curb Rights, Dan Klein, about taxis more than buses, distinction gets blurred when talking about multiple people. Bus systems have almost no riders. Why don't we allow private buses? Pat answer: People don't have the experience. Mental models. But people have the experience of private sector in other things that work great. No one says we should have government movies. Airports: private bus system only in certain places and they get a monopoly. The way you would introduce private buses would start with a private entrepreneur proposing it, and then there would be objected. Brown cloud over the mountains: inversion of clouds like in Mexico City, so more car driving is probably not ideal. Was also complaint about old buses. But that's a separate problem, environmental regulations.

46:00 More on mental models: comments invited. Organ sales. We have a system in the U.S. where we lament that there are not nearly enough organ donors. Somebody who needs something offers a certain amount and someone who has it asks himself if that amount is worth it. After a death, millions thrown away. Cannot write a contingent contract allowing sale of your organs after death. You are welcome and encouraged to give it away. Mental model: it creeps people out. Incentives. Wrapped up in this is that a lot of the time our objections to incentives are an objection to wealth. We go from "You shouldn't have to do that" to "You shouldn't be able to do that." Moral hazard problem. More people would put it on their driver's licenses if there were a flat fee of $1000. Might take more than $1000, might be $100,000. We'd find out with a price system. Right now a liver is more than a million.