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The Jevons Effect

December 19th, 2012 by dimpledbrain

The latest craze in Malaysia is arguably the Big Bad Wolf sale from 7 – 23 December 2012. It is the biggest book sale in the world with more than 3 million books offered at steep discounts. I was told that the mastermind behind this is the same couple who run BookXcess. I would be very much delighted to meet this cool enterprising pair. Why? Because if you think about it, Malaysia is a super diverse multilingual nation who can easily speak English, Chinese (China), Indian (India) and Malay (distant cousin of Indonesia). It’s a record and rightly so, because the 3 million books sold are in English only.

Ah, you say what’s the base rate? (click here for the post). Good question. My totally unscientific and unmethodological research reveals the following: the world population who speak (a) English – 500 m (b) Mandarin Chinese – 1,000 m (c) Hindi – 500 m and (d) Indonesian/Malay – 215 m. Excluding funny dialects of all kinds, that comes to an access to 37% of 6 billion world population in 1999. (The Malaysia population is around 23 m in 1999, 0r 0.4% of the world population!) We could well add another 7% of Spanish if Philip 2 of Spain didn’t colonize and name the Philippines after him. Well, if that happened, Malaysians would also be a very good looking people.

The Jevons Effect is named after the English economist William Stanley Jevons. From Wikipedia, “in his 1865 book The Coal Question, Jevons observed that England’s consumption of coal soared after James Watt introduced his coal-fired steam engine, which greatly improved the efficiency of Thomas Newcomen’s earlier design.”

Simply put, all things constant, a decrease in price, say caused by an increase in efficiency, will lead to an increase, not decrease, in consumption. Does this seem counterintuitive? This observation is also known as the Rebound effect. Of course this depends on demand elasticity. If my capacity is 10 cans of Coke a day, I won’t buy more than 10 cans even if you offer me (daily) the 11th can @ 10% of the price. However, this may not quite be the case with say Skechers or Burberry products.

What’s the big fuss about the Rebound effect?

(1)  At the macro level, the rebound effect will mostly negate any subsidy impact, thus rendering the policy ineffective. If I have RM200 to spend on petrol, a subsidized price will only make me travel unnecessarily more. At the end of the day, I’ll still pay RM200 for petrol, subsidized or otherwise. Will I be bothered with carpooling or trip consolidation?

(2) This may also explain why we naturally couldn’t save much. Any savings will be ploughed back into other expenditure items. If I save Rm100 on petrol, I may just spend that money on Baskin Robbin’s Jamoca Almond Fudge Ice Cream or Las Vacas’ Grade 10 Wagyu beef.

(3) The Rebound effect happens in the mind, mostly. (click here for the post). Generally speaking there are 2 causes to this (a) substitution effect (direct) as described above when price drops or (b) income effect (indirect)- from an increase in real income. (refer to # 2 above and replace the bold word ‘save’ with ‘have additional’).

How can we make more informed decisions taking rebound effect into consideration?

Having said that, there are good rebound effects too. Take Big Bad Wolf for example. Or cheaper stock price on certain days when Mr Market feels depressed?


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