Diminishing Marginal Benefit

tESTING

2009-06-26T17:13:00.001-07:00

HERE IS THE TEXT YOU CAN SEE.
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Correct the Journalist

2008-09-11T10:41:00.001-07:00

I found this article from March 2008, in which business writer John Wilen writes:

Q: If people are driving less, why do gas prices keep rising?
A: People are indeed driving less. Gas consumption has fallen about 1 percent since late January.
Yet, gas prices are on the rise. Gas has averaged more than $3 a gallon for four straight months and, more recently, has surged into record territory. Estimates of how high gas prices will go this year vary from $3.50 a gallon to $4. But virtually everyone agrees prices have higher to go before they fall.
This disconnect between demand and price may seem to violate fundamental rules of economics, but gas prices are actually responding to demand of a different kind: From investors.
...
Unfortunately, consumers pay for this investment frenzy in the form of higher pump prices. And despite mounting evidence that Americans are cutting back on their gasoline habit — and may cut back even more drastically as gas gets more expensive — it may be some time before prices start responding to lower demand.

His explanation regarding speculation is correct as far as one possibility goes, but there is an error in the last paragraph, and 3 other possible supply and demand explanations for why the relationship (price going up and quantity going down) is being observed.

Identify the error and the 3 possibilities. The answer is in the comments.

Unintended Consequences of CAFE

2008-09-11T09:52:00.000-07:00

From the Wall Street Journal on the "corporate average fuel economy" rules of the 1970s:

Look at gallons consumed, miles driven, barrels imported or emissions emitted: CAFE has had no significant impact on energy consumption. Its sole practical effect has been to inflict on Detroit the need to produce, with high-cost U.S. labor, millions of small cars designed to lose money.

CAFE has to be the most perverse exercise in product regulation in industrial history. It confronted the Big Three with the choice only of whether to lose a lot of money, by matching Toyota and Honda on quality and features; or somewhat less money, by scrimping on quality and features and discounting, discounting, discounting. Rationally, they scrimped -- and still live under a reputational cloud in the eyes of sedan buyers. Yet notice that their profitable product lines, in which they invest to be truly competitive -- such as SUVs, pickups and minivans -- hold their own against the Japanese and command real loyalty among U.S. consumers.
Had CAFE not existed, there is no reason the Big Three today could not be competitive. As businesses do, they would have allocated capital to products capable of recovering their costs. Investments in fuel efficiency would still have taken place -- to the extent consumers valued those investments. That is, if they were profitable.

If Washington found this unsatisfactory, it could have done as the Europeans do and raised fuel taxes to coax the public to make different choices. Politically inexpedient? Well, yes, but that doesn't mean CAFE is an effective substitute. It isn't and never was.

Do read the whole thing, it is interesting throughout.

v517 Fall 2008: Homework 1

2008-09-10T10:09:00.000-07:00

Homework 1 covers "How Markets Use Knowledge" by Russ Roberts. Answer the 6 questions at the end of the article and turn it in by the beginning of class on Monday, September 15.

If and when questions are brought to my attention, you can find the question and my response in the comments of this post.

Spot the Error in Supply and Demand Logic

2008-09-10T10:02:00.000-07:00

Pick out the error presented in this CNN article covering a study given to Congress, the answer is in the comments.

According to the study, investors poured $60 billion into oil futures markets during the first six months of the year as oil prices soared from $95 to $145 a barrel. Since then, investors have withdrawn $39 billion from those same markets as prices have retreated.

Michael Masters of Masters Capital Management, which did the study, said the flow of money - not major changes in supply and demand - caused the volatile movement of oil prices. The report was released Wednesday by Senate and House sponsors of bills to put additional curbs on oil market speculation.

Camels and Gas

2008-05-04T19:52:00.000-07:00

As oil (and gas) prices rise, those in India are switching to camels instead of driving their cars:

“It’s excellent for the camel population if the price of oil continues to go up because demand for camels will also go up,” says Ilse Köhler-Rollefson of the League for Pastoral Peoples and Endogenous Livestock Development. “Two years ago, a camel cost little more than a goat, which is nothing. The price has since trebled.”

The economics of it then...how does a increase in the price of oil lead to an increase in the price of camels?

The price of oil increases.
Oil is a complement good for cars.
Demand for cars falls, putting downward pressure on car prices.
The falling car prices do not offset the rising cost of driving the car.
There is an increase in demand for substitute means of transportation, including camels.
The price of camels increases.

Hat Tip: Kids Prefer Cheese.

EC 201: Homework 4

2008-04-26T10:46:00.000-07:00

Due Sunday at 11:45 p.m. on Alia. View the comments for Q&A.

Economic Myths

2008-04-16T18:33:00.000-07:00

Nice description here of why the following statements are MYTHS:

The cost of living has steadily risen throughout the 20^th century, especially the last few decades
The 1980s were a decade of greed.
The rich are getting richer and the poor are getting poorer.
Wages have fallen in the last 20 years and the market is only creating bad jobs.
We are running out of various resources.

There are many more myths, of course, but the internet is only so big.

Lessons on Minimum Wage Causality

2008-04-06T04:37:00.000-07:00

Hilary Clinton was on Jay Leno, and she tells this story about a 11 years old boy in Indianapolis (See 3:23 here):

... he said, "You know, my mom makes minimum wage and even though it went up, her hours were cut. So we're not making any more money. Can you help her?" You know, when somebody says something like that to you, it really does kind of energize me. I think, yeah, I can, I'm going to really try to help you, because this is wrong.

Watching her response, the causality appears to be lost on Clinton. The minimum wage caused the reduction in hours. Just as importantly, there is nothing that can be done about it. If I hold my iPod out over the floor and open my hand it will fall to the ground, and there is nothing Clinton can do about that either. Congress cannot pass a law changing the Laws of Demand any more than they can the Laws of Gravity. On a smaller note, I am concerned that a child so young is looking to politicians to solve their problems, especially when these particular politicians have no power over the situation, regardless of what they tell people.

HT: Cafe Hayek

Gas is Still Cheap

2008-03-25T13:39:00.000-07:00

For those of you upset about the news of retail gas hitting the highest real (meaning adjusted for inflation) price in history, be comforted by the fact that it is still historically cheap. Daily prices have large fluctuations, so it is best to just look at annual averages, in which case 2007 gas was still cheaper than it was when the government started collecting this data...in 1919! Consider the graph on the left here based on data from the EIA. The blue line adjusts the prices to the price if you were buying it with 2007 money, while the red line is what you would see posted on the signs at that time.

Of course, this is just the price and it does not account for the improved quality of gas, greater access to stations, improvements in fuel efficiency, etc all of which make gas functionally cheaper to us. More importantly though, it does not show us how much of our budget gasoline takes up. Let us frame the question this way: For an average person living in the U.S., what percentage of their budget would purchasing 1,000 gallons of gas take? Check it out:

The measure of income is per capita personal income available from the BEA. Is it any wonder why most people are not changing their behavior in any significant way to accommodate higher gas prices? Bitching is free, so of course they are doing lots of that.

ECON 201: Exam 2/HW 3

2008-03-16T15:26:00.000-07:00

Homework 3 is due Tuesday night at 11:45 p.m. on Aplia. Exam 2 is on Thursday, bring the big blue scantron (#30423) and #2 pencil. A review sheet and the lecture notes are available on the course webpage. Exam 2 covers Price Controls, starting in Lecture 5, and includes all Lectures through 9 (competitive price takers).

Questions on the Homework and Exam, with my response, can be seen by clicking on the comments for this blog post.

Organ Market Ethics

2008-03-08T15:57:00.001-08:00

It is hard to find an economist who agrees with U.S. law on organ markets. Currently it is illegal to sell your organs to another. This law means we watch tens of thousands of people needlessly die every year in the U.S. and we deny yet another avenue for the poor to find an escape. The current system blatantly favors the rich who have the networking ability to get their name to the top of the list, generating an enormous amount of inequality. Curiously, those who raise "ethical" objections to organ markets seem to get this backwards. Regardless, biochemist Stephanie Murphy at U Mass-Amherst has written a nice short essay titled "Eight Ethical Objections to an Organ Market...And Why They're Wrong."
Hat Tip to the Perfect Substitute.

Proud to Serve the Dismal Science

2008-03-05T20:14:00.000-08:00

Courtesy Robert Dixon:

Carlyle puts the view that 'work' is morally good and that if a "Black man" will not voluntarily work for the wages then prevailing he should be compelled to work. He writes of those who argued that the forces of supply and demand rather than physical coercion should regulate the labour market that: "the Social Science ... which finds the secret of this Universe in supply and demand and reduces the duty of human governors to that of letting men alone ... is a dreary, desolate, and indeed quite abject and distressing one; what we might call ... the dismal science"

In short, economics became the dismal science because everyone is treated as equally important and defends the right to pursue happiness regardless of the manner in which society views them. Slaves, CEO's, and Mexican immigrants all receive equal treatment for their role in society from the economist.

NAFTA + Ohio = Good Economy

2008-03-03T20:08:00.000-08:00

Though you wouldn't know it if you listened to the politicians stumping in Ohio for the primaries, Ohio has benefited enormously from free trade, especially from the NAFTA agreement. If we stopped all international trade, it would not bring back those manufacturing jobs (jobs which were created by trade in the first place). Consider the unemployment rate in Ohio and Cleveland since January 1993 (Month 0), the start of NAFTA (other Ohio cities do not go back that far):
Since the start of NAFTA, Ohio and Cleveland have never experienced more unemployment than the month it began, which was not a historically high level anyway. Even during the recession, unemployment only got as high as 6.5 percent, which is still low by historical standards. Unemployment rate is by no means the only important statistic on labor force activity, but it is reflective and probably a surprise to those who listen to wanna-be presidents.

More China Fantasy

2008-02-25T19:34:00.000-08:00

This is from Economist Greg Mankiw's Blog:

From a recent Gallop Poll:

"Which one of the following do you think is the leading economic power in the world today?"
China: 40 percent
The United States: 33 percent
Japan: 13 percent
The European Union: 7 percent
India: 2 percent
Russia: 2 percent

Here is the reality, as I have said before, we are economic giants:

Economics of Universal Health Care

2008-02-25T18:35:00.000-08:00

A student stopped by my office today and asked for materials on the economics of universal coverage. Apparently his instructor in Social Work class showed the movie "Sicko" and used the opportunity to rail for government provided health care. He asked for a few quick links to gather material for a 5-minute defense of markets. Below is a copy of the e-mail I sent him, you may find it informative as well:

A podcast on the topic:
http://www.econtalk.org/archives/2007/11/arnold_kling_on.html

A good case study:
http://www.marginalrevolution.com/marginalrevolution/2008/02/cherrypicking-1.html#comments

Video of Economics of Health Care:
http://www.youtube.com/watch?v=84CDvTfz_y4

This article is written for a general audience and is very good:
http://i.abcnews.com/2020/Stossel/story?id=3580676&page=1

Academic Study:
http://www.nber.org/papers/w13429
It's main points:
1. You cannot compare U.S. and Canada's life expectancy or infant mortality because of innate population differences
2. Once you have been diagnosed with a condition, you are much more likely to die in Canada than in the U.S.
3. Point 2 is partly due to the fact that it is much more difficult to be screened for problems, and thus you are diagnosed much later in the prognosis.
4. Income is at least as important in Canada, and probably more important than in the U.S. This is known to be true for Britain, especially for Children's Health (see http://www.nber.org/papers/w13495)

Finally, make the point that a profit driven system induces innovation in the advancement of medical technology. We invent cures for profit much more quickly than we do for the feeling of "doing good". The U.S. is the leading innovator in developing new drugs and technologies, the rest of the world just copies what we accomplish. This makes it less expensive for them (and more expensive for us) to achieve the same level of technology and drugs. If we stopped doing this, they would be in a much worse situation. For an analogy, suppose you put nice siding on your house, and your neighbor comes over and rips it off and puts it on his house. Then people come by and say, "Wow, your neighbor's house looks so much better, and he did it at a much lower cost!" That is what world health care is like.

Market Equilibrium: Future Supply Cuts Increase Today's Oil Price

2008-02-18T06:10:00.000-08:00

From CNN.COM:

Oil prices rose slightly Monday, gaining after further hints that OPEC may cut production if global supplies continue to rise.

So consumers expect that in the future there will be a supply shift to the left. Why then did prices rise today? Work it out yourself, then compare your answer to the one I provide in the comments.

Market Equilibrium: Disappearing Bees and Ice Cream

2008-02-17T11:10:00.000-08:00

From CNN.com:

Premium maker Haagen-Dazs says vanishing bee colonies in the U.S. could mean fewer flavors and high prices.

So the product market is ice cream. The ingredients used as inputs in the resource market have suffered a supply shock to the left. Trace the effect of the adverse supply shock on the resource market to the final outcome in the product market. You should arrive at the same conclusion as Haagen-Dazs, who correctly states that this will lower quantity and raise prices in the market for ice cream.

Try it yourself, then check the comments for the answer to verify your work.

Venezuela Declares Economic War on the US

2008-02-12T18:36:00.000-08:00

Venezuela has cut-off Exxon Mobil from access to its oil as a result of a legal stand-off. Unfortunate for Exxon Mobil, sometimes business deals go badly, but Chavez flies off the handle accordingly by making it some kind of larger issue. Incredibly, he threatens an "economic war" on the U.S. by cutting off supplies of his oil. Apparently he does not realize 2 important points.
1. Who "we" (U.S. firms) buy oil from is not particularly important. Unless they are selling it to us below market price, we would pay largely the same price regardless of who actually delivers the oil. Even as large suppliers, it will be a tiny supply shock at most, as there will be a rearranging of contracts among the different firms.
2. The U.S. economy is massive, the rest of the world is just a bunch of ants compared to us. We are a market economy, we practice relatively free trade internationally and very free trade among our own states. Both the size of our pie and the size each person receives in our country makes us giants in a land of ants, and Venezuela is a small ant. The last country to enter into an economic war on the U.S. was the largest and most powerful socialist regime the world had ever seen and it barely reached our knee-caps before crashing into non-existence. That was almost 20 years ago. We're even bigger and stronger than before with more economic freedom. Meanwhile Chavez is no Stalin, and Venezuela is no USSR.

Market Incentives Trump Regulations

2008-02-06T16:46:00.000-08:00

It is not very likely that safety regulations have done much to really improve the quality of life for American workers. In fact, there is a good chance that it has done the opposite. As long as all parties understand the risks involved, which contract law sorts out in the courts, workers will be compensated for higher risk with higher wages through the forces of supply and demand (known as compensating differentials). Regulations that force safety standards wind up forcing wages down as well, and it is perfectly reasonable for some workers to choose to accept higher risk in exchange for higher wages. Interestingly, it is unlikely that the regulations are actually anything more than paper work used to keep out smaller firms or lower skilled workers. Consider the following graph:
If the vertical line illustrating where OSHA was formed was not there, you would not be able to guess when it was instituted based on the graph. Workplace fatalities were already well under decline by the time safety regulations came along via OSHA. Why is this? Because one way to cut costs is to improve workplace safety, causing the supply of labor to shift to the right, and lowering the wages you have to pay. For some numbers from Bryan Caplan:

Annual OSHA penalties for safety violations (2002): $149,000,000

Annual Workers Compensation Premiums (2001): $26,000,000,000

Estimated Annual Wage Premiums for Risky Activities (2004 dollars): $245,000,000,000

The market punishment for riskier conditions is about nine times larger than the government regulation punishment of workers compensation and OSHA penalties. That is why we have the steadily falling time trend pictured in the graph.
Hat Tip: Marginal Revolution, Division of Labour, and EconLog

ECON 201: Homework 2 and Midterm 1

2008-02-06T12:33:00.000-08:00

Homework 2 is due at 11:45 p.m. on Sunday, February 10th.
For the exam on Tuesday, bring the big blue scantron (#30423), a #2 Pencil, and a calculator.
The exam covers lectures 1 -4 and the "Link between resource and product markets" in Lecture 5. This roughly matches chapters 1-4 in the textbook.
Review Sheets, and the practice problems I did in class can be found on my website.

If you have questions about the homework or exam, e-mail me. I will respond and copy the question with answer to the comments under this posting.

How are Netflix Customers Different?

2008-02-05T21:24:00.000-08:00

Third Degree Price Discrimination occurs when consumers are separated into different groups and charged different prices. I have discovered a clever ruse by emusic.com that applies this concept by targeting Netflix customers (which I am). Now this will only work on your computer ONCE, so follow these instructions carefully.

Open a new web browser, go to www.emusic.com where they will offer you 50 free downloads to subscribe. Keep this open.
Open another new web browser, go to www.emusic.com/netflix11. This is the web address that I received on a flier with my Netflix DVD arrival. What is different?

With the /netflix11 extension, you will be offered 35 free downloads instead of 50 (i.e. a higher price). Emusic has apparently discovered (or they believe) that customers of netflix are willing to pay a higher price than the general internet music consuming public. We have been segmented, and are believed to have a higher willingness to pay. I should note that if emusic would not have been able to price discriminate and instead offer one single price, then they probably would have charged some middle price between 35 and 50. Remember that price discrimination will increase social surplus.

Sterling Example of Why You Should Not Trust Antitrust Suits

2008-02-05T19:46:00.001-08:00

Google is attacking the proposed merger of Microsoft and Yahoo on the grounds that it will reduce competition. You should be able to clearly see that Google's real concern is that it will increase competition. Google has been distancing itself from the other two with superior product innovation. In order to catch-up and compete, these two hope to combine their resources. Antitrust law is special interest law, not consumer interest law.

This is not the first time Microsoft has dealt with this nonsense. Here is an excellent short petition from 240 economists when Microsoft was sued by the government the first time. A nugget:

The current spate of heightened antitrust activism seems to suggest that anti-competitive business practices abound. Headline-grabbing cases against Microsoft, Intel, Cisco Systems, Visa and MasterCard, along with a flurry of merger investigations now under way, would appear to demonstrate the need for a vigorously enforced antitrust policy that will create checks and balances to eliminate consumer harm.

However, consumers did not ask for these antitrust actions — rival business firms did. Consumers of high technology have enjoyed falling prices, expanding outputs, and a breathtaking array of new products and innovations. High technology markets are among the most dynamic and competitive in the world, and it is a tribute to open markets and entrepreneurial genius that American firms lead in so many of these industries. But, these same developments place heavy pressures on rival businesses, which must keep pace or lose their competitive races. Rivals can legitimately respond by improving their own products or by lowering prices. Increasingly, however, some firms have sought to handicap their rivals’ races by turning to government for protection.

Pushin' Primaries in Iowa and NH

2008-01-02T21:08:00.000-08:00

The Associated Press review voter frustrations over the influence of New Hampshire and Iowa in the presidential primaries. The background on the issue is that these two states hold their primaries before all the other states, and candidates who perform badly often drop out before even appearing on another ballot.

Both states have been criticized as unrepresentative of the country given their size and lack of racial diversity. Iowa — population 3 million — is 95 percent white; New Hampshire — population 1.3 million — is 96 percent white. Democrats tried to inject more diversity into the process by adding early contests in Nevada and South Carolina, but Iowa and New Hampshire moved even earlier.

The system became so scrambled last year that New Hampshire Secretary of State Bill Gardner was prepared to move the primary into December to keep ahead of other states that scheduled their own early primaries and caucuses. If anything, the front-loaded calendar made Iowa and New Hampshire more important.

Put your game theory to work now: 1) Use the prisoners' dilemma to explain why a simultaneous game would lead to all states converging to a single point in time further from the general presidential election; 2) Using a sequential game, explain why the New Hampshire SOS Bill Gardner's (credible) threat to continue to move earlier may prevent this convergence outcome. For extra credit, think about the economic benefits of hosting the initial primaries that Iowa and New Hampshire have capitalized into their tax revenues and their constituents' economic profit make their threat to move earlier so credible.

Note that the latter part of the article discusses the argument that New Hampshire and Iowa more closely examine the candidates, weeding out the candidates without enough "substance." How does the median voter model undermine this service?

Irrationality and the Minimum Wage

2007-12-30T15:46:00.000-08:00

I have found that the hardest point to get across to students is the many adverse consequences of price controls, primarily because of their attachment to the idea of the minimum wage. Bryan Caplan has the best rejoinder I have ever read for this criticism from students:

What happens when my outraged students reach the "Salary Requirements" line on job applications? They could ask for a million dollars a year, but they don't. When their future rides on it, students honor the economic truism that labor demand slopes down.

The rest of the book is excellent, but would have been worth the read for that statement alone. Raising the wage, ceteris paribus, lowers employment.

McMillionaires

2007-12-30T15:33:00.000-08:00

In an excellent article on the fastfood industry, George Will makes a statement about the McDonalds franchise system that shocked me for a second before I realized that it should have been obvious that this would be true:

McDonald's exemplifies the role of small businesses in Americans' upward mobility. The company is largely a confederation of small businesses: 85 percent of its U.S. restaurants -- average annual sales, $2.2 million -- are owned by franchisees. McDonald's has made more millionaires, and especially black and Hispanic millionaires, than any other economic entity ever, anywhere.

I would bet that many of the McMillionaires started out with McJobs.

The Negative Externalities of Blondes

2007-12-09T10:06:00.000-08:00

Blondes apparently make men dumber. What are the policy implications?

Place a tax on blond hairs, encouraging women to dye their hair another color.
Pay subsidies to men who are frequently surrounded by blond women. (Economists will probably point to endogeneity problems outside the laboratory.)
Regulation: Ban blond hair. Inevitably deal with the problem of defining the color.
Assign property rights over women's hair color to either women or men.

Feel free to post your own suggested policies to the comments below. This is all tounge-in-cheek of course. I would also argue the existence of an adverse effect on male intelligence suggests there is a positive externality occurring on men, one which might swamp the adverse effect on intelligence. (Hat Tip: Division of Labour)

Capitalization and Naked Twister

2007-12-09T08:17:00.001-08:00

An article on CNN.com details the dispute in Duncanville, Texas, a suburb of Dallas that illustrates several important points about local government that we have discussed over the last two days of class. The issue is one of the homes frequently hosts "swinger" events that draws a significant number of patrons and drawn the ire of the other locals.

Retiree Jack Martin, who lives a block behind Trulock's home, said he's concerned that the parties will reduce the value of his property.

As discussed in class, homeowners concern for the value of their property drives local government behavior, and that can be clearly seen from the points in the article. The local government officials are carefully trying to toe the line on this issue by repeatedly saying they are not interested in intervening in the private life (a signal that would hurt property values), but rather trying to prevent the nuisance of noise, traffic, and parking problems occurring in the area on the nights of these events (which also hurt property values).

Final Exam & Final Homework

2007-12-05T08:31:00.000-08:00

The Final Exam is Thursday, December 12th, from 3:00-5:00. The review sheet explains the details of the exam.

The Last Homework was due Friday, December 7th in class. I e-mailed those who have turned it in already the solutions. If you do not plan on turning the assignment in late, e-mail me and I will send it to you.

Public Choice Features in Region Focus

2007-10-27T12:36:00.000-07:00

The current issue of Region Focus, a publication of the Richmond Bank of the Federal Reserve, has a pair of interesting articles regarding Public Choice Economics. The first is a discussion of the theory itself, which is very readable for undergraduate economists. It discusses Bryan Caplan's new book The Myth of The Rational Voter: Why Democracies Choose Bad Policies. I'm not yet on-board with his arguments, but I have not yet finished the book and I do think it is an interesting alternative way of thinking about democracy beyond the traditional median voter framework that I teach in Micro.
The second article is of interest to WVU students, as it is an interview with our own Russell Sobel about a variety of his best research: Why FEMA fails (he wrote pre-Katrina), testing for the magnitude of the incentive to drive more dangerously when safety regulations are increased, Why West Virginia is poor, and does Wal-Mart destroy small businesses.

301 Exam II

2007-09-19T12:00:00.001-07:00

Wedneday, 10/31/2007. We will have a review day on Monday. A review sheet will be posted on the course webpage. Bring a calculator if you need one. You do not need to bring scantrons.

If I receive any good questions concerning the material in the test, I will post them as a comment under this post.

China to Regulate Reincarnation

2007-08-25T15:09:00.001-07:00

Seriously.

Painfully Predictable

2007-08-23T11:55:00.000-07:00

Communist China and Socialist Venezuela have just passed the U.S. in income inequality. That is, the two have greater income inequality than us.

Not unrelated, Venezuela's brilliant leader figures he'll close out a career of shutting down government checks and balances with a lifetime position has head hancho.

There was no need for Vegas to try and give odds for either of those outcomes, they're pretty much gurantees.

"The society that puts equality before freedom will end up with neither. The society that puts freedom before equality will end up with a great measure of both". ~Economist Milton Friedman

What's Wrong with this Argument?

2007-08-23T11:35:00.000-07:00

Are Americans Lazy? Fortune magazine at CNN Money thinks we are. Like many of their articles it seems as of late, it is surprisingly ideological rather than factual. The argument is essentially this: U.S. workers are lazy given by increased amount of leisure time (such as sleeping, days off, hours of work per week, etc). His argument is based on a very good paper out of the Boston Fed and is not one that those authors are making. So the question is, why does increased leisure time NOT equal laziness? Hint: Leisure is a normal good. I’ll leave comments open for a few days if anyone has a suggestion, then I’ll leave the answer in a comment before closing them.

Also, you may also notice a rather misleading sentence that is carefully ambiguous in its wording:
Economists see it happening already, attributing some of the surprising flatness in Americans' real total compensation of the past few years to the presence of millions of global workers competing for jobs.

Which economists? Why real total compensation and not earnings? Interestingly, part of the reason this is misleading is part of the reason the leisure = laziness argument is wrong.

Zimbabwe, Price Controls, and Socialism

2007-08-15T09:56:00.000-07:00

Zimbabwe has arrested 7,500 since the enactment of price ceilings on many necessities on the convoluted logic that this is will curb inflation. While there are many lessons in this story, there are three big demonstrations of economic principles at play here in the story.

The story demonstrates the shortages created by price ceilings (Qd>Qs).
The price ceilings fail because black markets replace the legal markets, so you never actually get a reduction in price anyway:

The price cuts have left shelves bare of corn meal, meat, bread, eggs, milk and other basics that sell for at least five times the government price on a thriving black market. Local beer became the latest item to disappear Monday. Acute shortages of gasoline have crippled commuter transportation and prevented manufacturers delivering diminishing stocks to retailers.
This is a demonstration of how ultimately socialism must resort to totalitarianism, that the idea we can have social freedom without economic feedom is flawed (See here for Nobel Prize Economist Milton Friedman explanation of this).

"Some are ... saying they will not supply goods and services but we say you will," Mugabe said, according to state television.

FDA claims more lives...to its own benefit

2007-07-20T09:31:00.000-07:00

It's hard to argue that the FDA does anything but kill sick people for the sake of politics. Here is a sad update on a legal case against them, provided by Alex Tabarrok at Marginal Revolution. Below is the cut and paste from the link:

Last year the Abigail Alliance won a stunning decision from the DC Circuit Court of Appeals that dying patients have a due process right to access drugs once they have been through FDA approved safety trials. Here's a sad update from Kerry Howley writing in the Aug/Sept. issue of Reason Magazine (not yet online):

After last year's ruling in the alliance's favor, the FDA argued that the group no longer had legal standing to sue it, since none of the patients who had signed the original affidavits were still members. They were all dead.

Benjamin Franklin and Self-Interest

2007-06-24T19:21:00.000-07:00

B. Franklin has been my favorite historical persona since my 5th grade history report, and in light of an upcoming trip to Philadelphia I have returned to a biography on him written by Walter Isaacson. In it he describes what economists mean when we talk of self-interest and how it benefits society better than I think I ever could have. Here is the excerpt:

A fundamental aspect of Franklin's life, and of the American society he helped to create, was that individualism and communitarianism, so seemingly contradictory, were interwoven. The frontier attracted barn-raising pioneers who were ruggedly individualistic as well as fiercely supportive of their community Franklin was the epitome of this e of self-reliance and civic involvement, and what he exemplified became part of the American character.

A great description of self-interest and its results for society!

The Charity of the Uncharitable

2007-06-18T14:11:00.000-07:00

There is a famous paper by economist Gordon Tullock on why people vote for taxes that carry out actions one could do on their own, known as "The Charity of the Uncharitable." To restate this, Tullock asked why people would vote for a $100 tax to support some transfer to the poor instead of giving the $100 of your own free will to the poor (or some other charity). After all, either way it costs you $100, but the taxes force everyone (not just yourself) to give $100 to the poor. Why force others to be charitable when they may need that $100 for their own survival or charity of their own choice?

Tullock believed that since people innately realize, even if they don't acknowledge it, that their democratic vote doesn't matter. It is extremely rare for any election to be decided by one vote, thus usually your vote doesn't change the outcome. Given this, you are less likely to vote your true preferences and satisfy what he called internal dissonance, which is internal conflict between wanting to be charitable and simultaneously wanting to be greedy. Since your vote doesn't matter, you may as well vote for the tax to satisfy your charitable side but then privately behave greedily, allowing you to satisfy two conflicting desires.

The reason I bring this up? Scientific American reports that research has found that the brain responds the same way to paying taxes that directly fund charity as it does when money is being given to charity. Perhaps this is the biological proof of Tullock's theory. If you read the article, you will also see that people give less to charity individually than they do when paying taxes. It is however, not a definitive study, as it has several limitations many of which are mentioned in the article.

Quantity Supplied and the Deathly Hollows

2007-06-12T11:21:00.000-07:00

CNN reports on the retail competition side of producing the final Harry Potter book in a way that closely describes the supply curve discussed in principles. Also, this demonstrates the move to zero economic profits of a perfect competition. As the price falls (they use the term "discounting" but this is not quite correct) notice that some bookstores choose not to sell the book. This is a movement along the supply curve.

Why Tastey Animals Live Forever

2007-06-05T16:40:00.000-07:00

What is the difference between Lions, Elephants, and Tigers from Chickens, Pigs, and Dogs? The former 3 cases you aren't allowed to own and they are going extinct, the latter 3 cases you are allowed to own and have a thriving population. In class, I gave several examples of how private property rights can save endangered animals (recall Lobster Fishieries in New England vs. Port Lincoln, Australia; the Black Rhino in Africa which can also be found on page 39 in your textbook). The Wall Street Journal reports a new case with Bison, where decades of conservation regulations barely kept the species from going extinct, recently assigned private property rights to ranchers has caused the Bison population to grow dramatically over just the last few years.

My thanks to Mark Gillis for the link.

Wal-Mart Investors: Economic Profit is What Matters

2007-05-31T19:48:00.001-07:00

In a CNN article on 5 ways to improve Wal-Mart, it begins by stating that investors are unhappy with the largest U.S. company's performance. It states that Wal-Mart's profits have increased 1%, meaning that they took their investors money, and earned it back plus an extra 1%. So why are investors unhappy about this?

Remember the difference between accounting and economic profit. Wal-Mart has earned a 1% increase in accounting profit. However, most other companies have earned better returns well above 1%. In fact, you could open a e-savings account with Citigroup and earn 4.5%. What the investors here are implicitly complaining about is that Wal-Mart has had a negative economic profit, even though it earned a positive accounting profit. Higher returns, like the savings account, offer a better return than Wal-Mart as of late. As a result, investors have punished them as indicated by a 5.1% fall in their stock price over the last year.

Game Theory and the War Funding Bill

2007-05-02T06:43:00.000-07:00

For those of you who have been watching the news, you are aware of the Democrats' War Funding Bill stipulating an end date for the pull-out of troops from Iraq. This whole topic is loaded with Game Theory applications. First, the pull-out date that the Bush administration opposes is based on game theory. There is a big difference in strategic games outcomes when the game has an ending point versus ones that the players perceive to have no end-date. If you take game theory here later in your schooling you will learn about that. Secondly, Bush promised to issue a veto if the Democrats passed the bill through congress. You can easily imagine a sequential game where this changed the strategy the Democrats pursued. Suppose you are a congressman who wants the political benefit of being in favor of a troop pull-out, but you also don't want to be remembered as the politician who prevented any form of success in Iraq. Now because of the veto you can have both, by supporting the bill in Congress knowing that the policy won't reach that outcome. I think the bill would have been much more likely to fail, or would hve received fewer votes anyway if Bush had not promised a veto. No way to know for sure though.

Racial Bias in the NBA

2007-05-01T19:49:00.000-07:00

There is an interesting piece in the NYT covering a new economics article that reveals that referees (both white and black) are more likely to call a foul against players of the opposite race. Take a read when you get a chance, it is essentially contributing to the literature on peoples preferences for homogeneity (desires for similar people) and takes the standpoint that this is on the subconscious level.

The Winner's Curse

2007-04-13T20:36:00.000-07:00

This post is inspired by Google's aquisition of DoubleClick, in which they outbid Microsoft and others to obtain. There is a well known result of auctions known to economists as "The Winner's Curse," that you would see in an advanced game theory course. This is the idea that we would expect whoever wins the auction probably got a bad deal. Assume that the bidders have similar budget constraints. Prior to going into the auction, each bidder will make estimations about the value of the aquisition (assuming that it's the same for both groups), from which this value would represent the maximum bid. Statistically as a group, we know that on average the bidders would come up with the correct estimate. That is, the bidders will have an equal amount of over- and under- estimation of the true value so that the errors will cancel each other out. However, the winner of the auction will be the bidder who overestimated the true value by the largest amount. It's an interesting idea you should keep in mind with auctions that might fit the assumptions like the Google example above. Another that might work is the Boston Red Sox's bid for the rights to negotiate with Daisuke Matsuzaka.

Update (April 14, 2007): It appears that others believe Google drastically overpaid, supporting my earlier post regarding the Winner's Curse.

Why Did Gas Prices Rise Over the Weekend?

2007-04-10T09:01:00.000-07:00

Predictably, gas prices rose over the weekend. While prices have been rising for a few weeks now for reasons related to wholesale oil, we always expect gas prices to rise on this past particular weekend every year. Why?

Are textbooks too expensive?

2007-03-11T12:42:00.000-07:00

An article on CNN reports the new political debate regarding the "high" prices of textbooks. There are a number of problems with the discussion in the article. I just decided to enumerate a few of them:
1. The student estimates he spend $4,500 for a career in college on textbooks. My guess is that he choose to ignore the fact that he probably was able to sell them back for a figure less than that which would probably lower that figure by 60%. The article later states that the average student pays $900 per year on textbooks and supplies, which is no where near what this guy spent. That figure also excludes the resale value.
2. Ambiguous regulations for professors to be cost-conscious. I do not know a professor who does not take this approach already. While there is technically an incentive for professors to choose high prices, there is much more incentive to choose the best book at the lowest price. If I choose the most expensive book, it probably would only earn me an extra few dollars on the resale market. However I would lose much more valuable time in answering questions for students who do not buy the book because it is too expensive or do not understand the book because it does not match my lecture very well. Chances are this regulation would do much more harm than good.
3. Textbooks are the "hidden" costs of education. This was claimed by Rep. Frank Moe. Frank apparently believes people are systematically stupid. Everyone knows that they will spend money on books and they include that estimate in their own cost-benefit analysis of enrollment. While they may over or underestimate the cost, on average they will be right. To say that no-one realizes the costs of textbooks is equivalent to saying everyone who plays darts will miss the bulls-eye to the left.
4. Much of the article is accurate in explaining why textbooks are expensive relative to other books, but they miss a big one. Comparatively low sales volume and a used book market that cannibalizes future sales are good reasons to expect prices to be high relative to the books at Barnes & Noble, but local monopoly power is a big reason too. See fellow Econ professor John Whitehead's blog post against high book costs for his students for a nice explanation.
5. "The textbook industry pulls in more than $6.5 billion dollars a year...." I don't know what this means, or what it is supposed to imply. It sounds like from the sentence that this is the industry revenue, which means nothing as profits might be really low due to costs. I don't know if this is the case or not, but I also think that there are many textbook companies, so this would be distributed among many suppliers and the economic profit would be low. I also suspect that this is a risky industry, so we should expect there to be some economic profit.
6. What is the alternative? Regulations will increase costs, causing prices to rise. You can pretty much guarantee that if the university or the government takes over the industry, both its quality will decline and prices will rise. Just look at the post office, DMV.
7. Rick Howden complains of buying books he never opens. Whose fault is that? If you weren't going to use it, why did you buy it in the first place?

What is a lifetime of sex worth?

2007-03-05T19:57:00.000-08:00

How much would you have to be paid in order to give up a lifetime of sex? What is the dollar value of your life? What is your reputation worth? These are the kinds of questions economists are called in to answer in the courtroom and is known as foresic economics. It is an aspect of our field that some people would probably find "morbid" because it is like putting a price tag on something that many would consider priceless. An economist would probably suggest in a wrongful death suit that a 65-year-old woman's life would require lower compensation than a 20-year-old man's, ceteris paribus. If a doctor botched a surgery that left a woman unable to copulate with her husband for the remainder of her life, an economist would likely be called in to put a price on that.

If you are interested, here is a blog by forensic economist Ralph Frasca (I've met him once, he's a nice guy) and here is a list of example cases in Ohio.

Negative Externalities in the NK deal on Iran

2007-03-01T08:23:00.000-08:00

It appears that the agreement with North Korea to disarm their nuclear facilities has been interpreted as an increased probability of U.S./Israel air strikes against Iran, as evidenced by the Intrade Trading Exchange on Current Events. On this website, people buy shares of stock based on the probability that a certain event will occur by a particular date, and if it does then those who hold stock will be paid a dollar per share they hold. Based on the link I provided, it appears that over the last few days as these talks with North Korea have advanced, people have increased the price they are willing to pay for these shares, i.e. they think it is more likely that the U.S. will attack and the shareholders will get paid that dollar. So even though Iran was not involved with the treaty, they appear to bear some cost of that transaction.

Gas Price Gouging Bill

2007-03-01T06:31:00.000-08:00

Lawmakers in the House have introduced a bill creating a Federal Law against "price gouging" at the pump. According to the article, Rep Bart Stupak (D-MI) says he is concerned gas prices will again reach $3/gallon. This is essentially creates a price-ceiling for the retail gas market. What will happen with this?

Suppose there is some big shock: Iran gets enthralled in War, another bad hurricane in the Gulf Coast, another massive earthquake in Alaska, or whatever. Oil is traded on a global market, and one of these shocks would trigger a fast spike in oil prices. If this spike in prices is large enough, gas would need to be sold above $3/gallon for there to be any profit. Now, U.S. refineries and other U.S. gas retailers would be unwilling to purchase oil from world suppliers because it would be too expensive relative to what they could sell it for. Clearly, the result would be empty gas stations in the U.S.

Additionally, what would happen to the little bit of gas that did make it here? Even if it was sold at a retail price of $3/gallon, the individual who managed to get it would have a big incentive to turn around and sell it "black market" to somebody willing to pay a whole lot more. We'd be left with a gas shortage and paying very high prices for gas on a black market.

Remember, "high" prices does not equal price gouging.

Moral Hazard and the Catholic Church

2007-02-28T09:27:00.000-08:00

There is an article on yahoo about the San Diego diocese filing bankruptcy because it cannot afford to pay the damages to its sexual assault accusers. Bankruptcy creates a well-known moral hazard problem because it reduces the cost of making a risky decision. In essence, if you are weighing the benefits and costs of a risky decision, the ability to file for bankruptcy means you do not have to pay back all of your creditors and others you owe money to. This reduction in cost means some people may end up making choices they otherwise wouldn't make and we have more bankruptcies as a result. It also is a problem for creditors, because they know that if someone is on the verge of bankruptcy, they are less likely to be repaid and are less likely to lend to those who are in the most need.

What is interesting about the article above regarding the SD diocese is that according to the plaintiffs' lawyers, the Catholic Church is able to hide more embarrassing information about their behavior, which means there is a second source of moral hazard in bankruptcy. Remember, they are in trouble because they were helping to cover-up for priests who sexually abused parishioners. Apparently, the ability to declare bankruptcy reduced their cost of getting caught doing this. While bankruptcy may not have made the difference in their decision, it certainly reduced the cost of the cover-up, giving them more of an incentive to engage in this behavior.

First Post for Blog

2007-02-27T19:52:00.000-08:00

I have no idea how well this will work....but here it goes. My hope is that this blog will help you (students) pass and obtain information regarding class quickly. Especially for those who are unable to read the syllabus. Since I am not someone who checks my e-mail every hour of the day, many of the routine questions may get answered faster if they are posted for anyone to answer. For example: "When is the homework due? When is the test?" are questions anyone can easily answer.

You can also ask for general help on homework or other study material here. I have no rules for this in that respect.

Also, I hope to post interesting articles in the news relevant to understanding classroom material. We'll see how well this works.