More China Fantasy

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

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

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

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

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

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

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?

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.

1. Open a new web browser, go to www.emusic.com where they will offer you 50 free downloads to subscribe. Keep this open.
   
2. 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

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.