31 October 2009

Why buy two if one will do?

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.


Onyinye Okwandu says:

Why do people purchase goods in bundles [i.e. - 2 for $3.00 instead of 1 for $1.79] if they initially only needed one?

I propose this question for a few reasons. Firstly, it was extremely difficult for me to figure out what to question on an economic standpoint so when I finally did think of something I didn’t bother to think of anything else. Secondly, [and lastly for that matter] I find myself doing this often. The idea of obtaining two seems to be an appealing idea for me and many consumers despite the obvious increase in price. So with that said, I am going to attempt to find a “bottom line” to my question using the concepts discussed in Zetland’s lectures along with my own personal opinion-since I am a representative of consumers.

For a consumer standpoint, when we purchase items in bundles we really don’t save a significant amount of money. For example, 2 packs of paper plates cost $3.00 and a single pack cost $1.79. Yes, there is a $0.58 difference but the producer receives an extra $1.50 [or so] more from your second purchase on top of the $1.79 you initially were prepared to pay. Nonetheless, this brings up a critical point. The consumer has no monetary constraint with the second purchase. Instead, the consumer has the financial resource to make a second purchase, so he/she will do so. We see an increase in utility with the second purchase rather than diminishing marginal returns. There is something about the price that makes us believe we are getting a deal. Because $1.79 is nearly $2.00, a dollar more does not seem to be that big of a deal. However, will the consumer purchase another bundle? No, probably not. At this point, diminishing marginal utility will start to take effect unless the consumer reaps a benefit from the third + purchase.

With the producer, he probably receives more of the benefit from the consumer’s second purchase. For one, from observation alone we can assume the production of paper plates is not very costly. There are many companies that produce paper plates, including ‘no name’ companies too. Hence, this plate market seems flexible in that a company can probably move in and out this market without tremendous consequence. Thus, the producer is making a significant profit from creating bundles and likely to drive its competition to do the same or out of the industry. Take note, the producer will not set the price significantly away from the original. For instance, the consumer is less likely to purchase the bundle if the price was $5.00 for two and still $1.79 for one. Therefore, with this in mind, the producer will only increase the price enough to make a little more.

Bottom line: We will purchase a good in pairs if the price is not significantly more than just purchasing one. Because 2 is greater than 1, consumers feel they are benefiting from this purchase even when at the end of the day it will cost us more.

Online Music Saves Oil

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.


Michelle Kim says:

We constantly weight how much you really want a product against how much it costs. From that point, we attempt to make the most sound decision about buying a product. People try to chose the best thing they can afford. In this particular case, let's take a look at consumer preferences between CDs (x1, x2) bundles and music downloads (y1, y2) bundles. For consistency, we can assume that consumers prefer music downloading over albums or (x1, x2) < (y1, y2). Technology has progressed so quickly over the past twenty years that in 2003, mp3s and sources like iTunes offer the same music for a fraction of the cost. For statistical purposes, I found that the total album sales fell from 666.7 million in 2004 to 618.9 million, according to Nielsen SoundScan, a drop of 7.2%. In contrast, digital track downloads, rising from 150% to 352.7 million. From such example captures the behavior of consumer's preference and the rising demand of certain goods.

Now let's examine the utility such digital download technology brings for a consumer. The digital-download sphere is a different business in that it allows to buy individual songs rather than albums, giving the consumer more options and flexibility. Also, the consumer benefits from lowered price of music, which is possible because of lowered fixed and variance cost (quite dramatically). With digitalization of music, you also reduce the environmental trade-offs. For example, CDs are processed from bauxite into alumina and then aluminum, which all require crude oil with natural gas and other chemicals for a manufacturing plant. Additionally, the firm needs to package the album with clear or colored plastic cases. Once they are packaged, they are sent to distribution centers, retail outlets, or other locations. Now, such transportation by plane, truck, or rail requires use of fossil fuels for energy, contributing to climate change. With digital-downloads, you can utilize central clearing house for more online use. Such method reduces the environmental cost and other costs, which make purchasing of music more cheap.

Bottom line: The idea of preference is based on the consumer's behavior, and the industry must devise new ways to maximize its capital from this shift in music purchasing practices.

Stupid comments reflect dubious perception

In the comments to this post, J [blogger profile] wrote the following:
BTW, something is wrong when a students always says that the teacher is right. Why are Oriental people so comformist? Destroy your critics!
Let's break down this comment into its component parts:*
  • "something is wrong when a students always says that the teacher is right."

    True. That student is not necessarily thinking of alternative explanations and may be over-respectful to power in an arena where power can be questioned and could be abused if not subjected to scrutiny.
  • "Why are Oriental people so comformist?"

    This is an oversimplified and racist comment. Of course, J is from Israel, and Isralis are famous for arguing with everyone and anyone ("Ask two Israelis for their opinions and you will get three"). But, J, being an oriental himself [a person from the east, even if it is the middle east or near east], will surely see how ignorant this comment is, in grouping 3+ billion people into a single category. Last week, I told my students about the scientific method, and how falsification works. This "theory" of J's is falsifiable -- and falsified -- on its face: I have met many "orientals" (a word that's meaningless in its generality), and many are NOT conformist. For example:


    Tank Man is not only one of my my heroes, but Chinese, and not a very good conformist. It is of course possible to find many heroic Israelis, but also many conformists. Of these, the worst abuse their power over Palestinians -- much like American racists abused Mexicans, Chinese, African-Americans [this is the right time to use that word], Italians, and many other "orientals." That behavior is despicable, and I will not tolerate it.

    Nevertheless, I am going to let J's comment stand, as a totem to how some people can be so ignorant and rude and illogical and -- really -- just a waste of my time and the time of others.**
  • "Destroy your critics!"

    This little tidbit is also interesting, as it reveals a childish desire to "win" instead of learn from a critic. No doubt, J would prefer all his critics to be destroyed, so he could live in a little world of "me right, always." But that's not the world that I want, and it's not the world we live in. It is necessary to respect and engage your critics if you want to learn ANYTHING -- including how to be wrong.

    Even better, a critic may become a good friend in addition to being a useful competitor.

Bottom Line: J's foolish remark reveals a profound ignorance of the world we live in, a childish desire to oversimplify and be right, and a worrying lack of interest in learning. Unfortunately, J is not the only one who has behaved this way, and this kind of behavior underlies 90+ percent of the problems that humans have with working together and getting along. Let's have less of this ignorance and more engaged, rational, respectful discussion. Thanks.

* The most bizarre thing about this comment is that Emmeline didn't even agree with me on anything in that post or the comments. (J made an earlier comment that was borderline rude, but it had some content; Emmeline responded to it politely.)

** Note that I am being very careful about denouncing what J says, not who he is. I am not interested in ad-hominem attacks, because they are not helpful and are usually wrong. I really don't know J.

Mismanage oil, mismanage water

(via DL) Venezuela gets about 40 inches (1 m) of rain per year, but President Chavez has outlawed low-efficiency appliances and asked people to take 3 minute showers to address their water shortages.

My take on this: His "Bolivarian revolution fascism" has lead to the same mismanagement of water that they are seeing with oil [$].

Who suffers? The poor that Chavez pretends* to care about.

Bottom Line: Governments that promise to "help the poor" by robbing the rich help neither.
* Even if he really does care, his ideology prohibits him from working with the people -- capitalists -- who can deliver. Too bad.

30 October 2009

What would you do with your $500,000?

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.


Hak Ryul Kim says:

Nowadays, ‘studying abroad’ became one of the most concerned educational issues in South Korea. The competition in the education of Korean high schools led students to seek for other opportunities abroad. The ultimate goal is to graduate from the high ranked universities mainly for its name value. This might sound quite extreme; yet, it is the reality that the Korean education values purely the names and the reputation of the universities. People judge one’s intelligence solely on which school or college he/she went to. Such perspectives on the educational system led parents to spend more and more money for their kids to study abroad. Recently, research has been done on Korean students who have completed their study abroad up to college. According to the research, Korean expenditure on education and language training abroad is $138 million per year; individually they spend approximately $500,000 on average to study at a private boarding high school and a private university (4 year bases) in U.S. It is 2~5 times more than receiving the best possible education in Korea. You might wonder why they don’t just go to public schools in the U.S. Since international students have to pay almost the same amount of tuition fees for public high schools/state universities as other private schools in the U.S, people tend to choose private schools. Then what happens after, when their half million dollar education is done? 60% of people get jobs in Korea, and their first salary is marked to be $36,000 on average, which is only 30% higher than those who studied in Korean high schools and universities. 24% were employed in U.S with average starting salary of $80,000. And the remaining 15% of students who studied in U.S suffer from unemployment.

Bottom Line: What is the opportunity cost in this case? Is it worthy for foreign students to have “better” education in the U.S, that costs half a million dollars or is it simply just a waste of money as the statistics show? In my case, studying abroad is more than the numbers that we see; it is more about experiencing and overcoming difficulties at a young age. It is an expensive cost to pay, but not so much for the experiences you can get.

Poor people need trees too!

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.


AL says:

In the average Californian urban landscape, most of the street trees are located in relatively affluent areas as opposed to low-income housing areas. Street trees are trees that are grown along the sidewalk to increase community aesthetics, air quality, and other benefits. Why aren’t there more trees in communities with lower income?

There are several possible reasons for the disparity between trees in high-income neighborhoods and low-income neighborhoods. The street planners for the low-income housing areas may not have included trees as part of the plan because they were trying to maximize space for housing infrastructures. They did not leave space for trees to grow because the people living in those communities need the land for living. On the other hand, a wealthy community that already has comfortable living space can afford to spend some of their sidewalk for growing trees.

Another theory lies in the fact that people who have their own property may be more likely to water their trees. California weather patterns usually have less natural rainfall and thus trees need irrigation or watering to survive. In areas like projects or apartments, few would want to take responsibility to water the tree on public property because they do not feel a connection to the tree. The lack of trees in lower-income areas may be due to the fact that city-planners have realized this and see dead trees as failed investments and have stopped growing them there.

Bottom line: The lack of street trees in low-income areas does not signify that the neighborhood collectively dislikes trees and city planners should reconsider street trees as a priority in planning.

Speed Blogging

  • Russ Roberts and Mike Munger discuss the importance of "price" in our decisions, e.g., they think that vaccines should NOT be given away.

  • A very good discussion paper [pdf] on consumer perceptions of water, how to price it and how to present (sell) expensive and annoying reforms to water management -- by Black and Veatch!

  • "The National Flood Insurance Program... has encouraged construction in flood-prone areas and hindered the creation of private flood insurance." Lose-lose: They get flooded, we pay.

  • "The Ohio River Basin... has the first multi-state water quality trading market in the US." Cool. Speaking of that, an update on Oregon's instream water trading program.

  • "US EPA had determined that 15% of water on a sample of 327 aircraft flunked the total coliform standards and inspections showed that all aircraft were out of compliance with the national drinking water standards." Why? Too many bureaucrats.

  • Yes, the air is cleaner, but now the water is dirtier. :(

  • The Aral Sea is recovering in Kazakhstan, but Uzbekistan is still destroying it.

  • Chicago may privatize its water system. Why? So that the politicians can blame the new operator for higher prices to cover all the deferred maintenance they prevented (to keep prices down). Typical.
Hattips to DL (many!), BM and AW.

29 October 2009

Saving Capitalism from the Capitalists...

In response to your preferences (and mine!), I sent this out tonight:
Dear Professors Reich, Johnson, Rajan and Besley,

I have met all of you at one time, if only as a listener and appreciative economist.

Each of you has spoken out against the abuses of capitalism:
  • Professor Rajan -- your book (which I have read) gives the subject to this email.
  • Professor Reich -- you spoke against corporate welfare at your 2006 ASE keynote (which I attended) at the ASSA.
  • Professor Simon -- you have come out against the power of the oligarchs on Bill Moyers (which I watched) and elsewhere.
  • Professor Besley -- you have written on the New Political Economy (a paper I enjoyed) about the problems of "government failure"
All of you understand the dangers of crony capitalism and how the current "financial crisis" has done little to restrain it and much to reinforce it.
I know that you all heard Mervyn King's call to break up the banks that are "too big to fail"
And all of you have heard the LACK of reply to this call for radical change, and the silence of those who continue with business as usual.
As you know, the oligarchs are among us; they are not just Russians in tracksuits; and they are destroying our economy, our markets and the welfare of the "other 99 %" They are making Michael Moore look good, but not much else.
I am hoping that you will work together to issue a letter supporting Mr. King. His idea is a good one, and only a first step that we need to take to restore competition and efficiency to our capitalist system.
As you all know, that system has done much more for the poor than any other system, anywhere, at any time, and that system is weak and fading under the onslaught of crony capitalism.
Please do something.
Do it for Mr. Schumpeter.
Best regards,
David Zetland
That's what I said. If you agree that action is a good idea, then please make similar efforts to contact your representatives AND friends (pass it on!)

Addendum: Russ Robert on the incentives driving this madness and more criticisms (via BH).

Economics for reality or theory?

Andrew sent this:
I found your lecture today about the theoretical/mathematical vs. the practical application of economics very interesting, and very much along the lines of my own observations. I have noticed that there are two schools of thought in the field, that there seems to be animosity between them, and that we may beyond the peak of usefulness of quantitative analysis (as in, negative utility) - at least until we have some awesome breakthrough in mathematics that allows us to model life more accurately.

Math is cool (even though I hate it most days), but it will always just be math...nothing more. Math to me is like the uniform a basketball (or whatever) team wears...part of the game, but my interest lies with the game and not team uniforms.

I am curious about this because the dynamics between these two schools of thought have implications for me as I move forward.

I enjoy economics so much that I went back to school after a 20 year absence to study it. Over the years I worked for a few large corporations, worked as a consultant, and owned my own retail business. At this point I only have interest in practical application of economic theory. That could be research in a Master's program or finding meaningful work after Berkeley. Whatever I choose it will be real, tangible and practical.

As an aside, I had to laugh at 'mathturbation'...Whenever I hear someone talk in a way that suggests they think math is more than just a tool I hear Sammy Hagar singing "..to me it's all just mental masturbation"....and I think Paul Krugman is awesome.

So my question is this:

Relating to the issue discussed today, do you think there is a meaningful (lasting, permanent) split among economists over the issue of practicality and real life vs theory? If so, is the split analogous to what happened to political science in the 50's and 60's? My understanding is that Polysci used to be the study of actions and consequences...positive statements and scientific research...but it grew to include normative ideas about our political system, which included an expression of values. That was the new, modern direction the field took, and that evolution came about during the political and social turmoil of the 1960's. Some people embraced the new direction and some did not. The ones that did not became part of a minority camp within the field. Do you see a similar crossroads for econ?

All of this has implications for my future so I'd like to hear your thoughts. The more I know about what I'm getting into before I get into it, the better.

Thanks...sorry for the length...I suck at writing short (any)things.
...and here's my answer:
That's a good question. The positive vs normative split is well-known and disparaged in econ. Many thought that we should stick with positive econ, but we all know that normative econ is where the action is at (policy) AND where anyone with an opinion will go. That's why "unstated" biases are so dangerous and prevalent in economics...

That said, I would hope that reality would check thoughtless, inaccurate and misleading math econ, but the self-sustaining nature of mathurbaters (get a phd from a math-econ place; get hired by an m-e place, publish in m-e journals, train more students in m-e) means that it may persist (and perhaps HAS persisted) far beyond its useful (as in real-world relevance) life.

That's just sad, but it's mostly true.

Luckily, we have things like the nobel prize and reality to push back on such silliness...
What are your thoughts?

Why do rich people live in the hills?

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.


Emmeline Sun says:

It’s common to drive through an average suburban or metropolitan city and find yourself driving toward the “rich neighborhoods” the higher up you go. Take an urban setting like Berkeley, California for example. The houses and tenements located in South Side (note: closer to sea level) tend to be old and shabby. Yet as you go up toward North Side, the houses begin to straighten out, and you see a shiny imported mosaic window here, a well-kept garden there. They appear in better condition, and are clearly more expensive than their South Side counterparts, though North Side and South Side are less than a few miles apart. So why is this?

The higher price-value operates in a two-fold way. Firstly, developers and contractors would much rather build and place commercial sites somewhere flat- this is due to the greater cost/difficulty of building in the hills. If a firm or individual can reduce variable costs, net profit will be greater. Now, because of the lack of commercial development, the hills become a desirable area to live. Housing prices shoot up because prospective home-owners (with greater income) see the tranquility and safety (and view) of the hills as a fair trade-off for the cost. For anyone purchasing a home here, their personal benefit from living in the hills will exceed costs. And the costs will naturally be (at a base level) slightly higher than they would be on level ground, as housing development is more expensive in the hills.

Furthermore, hilly areas are often removed from the community, which makes it harder to live there. Travel time increases and people often have to commute. Public transportation rarely runs in these areas and many hillside home-owners have cars. To own a car or otherwise meet these inconveniences, one must have dispensable resources, i.e., a greater income. This equates to a higher budget constraint… which might also be applied toward sprucing up their houses with the aforementioned mosaic windows and pretty gardens. The picturesque quality of the neighborhood then leads again to an increase in housing prices, and the cycle
continues...

Bottom Line: Hill development is more expensive than development on level ground. Thus, there is little commercial activity. This leads to an increase in demand for hill houses, which translates as an increase in housing prices. The people who purchase hill houses typically have higher incomes and accordingly, higher budget constraints, to offset the higher costs of living in the hills.

Do we still need diamonds as the symbol of love?

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.

Soo Park says:

What drives men to splurge on the perfect diamond when proposing to an attractive girl? For what purpose?

Diamond is so expensive than other jewels because diamond’s has scarcity value, distribution structure and diamond’s special symbol – all driven by a dominant monopolistic practices not seen in any other industry.

De Beers, with its monopoly like control over mining, production, and distribution of the world’s diamonds, it has a control in the scarcity value of diamonds. In the 1890’s, Cecil Rhodes (founder of De Beers) monopolized the world's diamond supply through a strategic partnership with the London-based Diamond Syndicate, with whom he agreed to control world supply in order to maintain high prices. At one point De Beers controlled 90% of the world’s production of diamonds and even today the figure is significant at 40%. Monopolies, characterized by a lack of economic competition for the

Monopolies are characterized as having a lack of economic competition for the good or service that they provide and a lack of viable substitute goods. The verb "monopolize" refers to the process by which a firm gains persistently greater market share than what is expected under perfect competition. De Beers fit that definition perfectly with its business practices and dominant market share.

Second, the limited number of distribution channels compounds the problem. The great majority of the world’s diamond mines can be found in Southern Africa, Russia, and Australia. Africa has cheap and plentiful labor. Many mineworkers dig tirelessly for a mine-owner’s profit. The government and mine- owners abuse their powers and pay cheap wages in return for the hard labor. With De Beers not owning much of the mining (production) and distribution from a very limited number of sources, it has the power to artificially raise price while through marketing efforts do as much as possible to keep demands for diamonds inelastic to price sensitivities.

Diamond companies possess a brilliant marketing strategy. Diamonds appeal to majority of women’s desire for love, commitment, and luxury. At the same time diamonds are used as a yardstick for men’s success. The bigger and better a diamond is, the men is viewed as being more successful. De Beers perhaps did this best with their marketing campaigns featuring the slogan “A diamond is forever” during the early 2000s. The marketing strategy worked as diamonds purchased for engagements are standard practice for much of the western and eastern world. The diamond is a symbolic representation of eternity, commitment, and love – everything that a marriage is supposed to be. And couples gobble it up. Is it really ok? Someone are dying for diamond mine however we pay for them because our love’s symbol.

Bottom Line: Diamonds by themselves are a plentiful, inexpensive raw material. It is a person’s business marketing and distribution structure that creates the allure and makes diamonds one of the most expensive precious stones.

Prophet of Innovation -- The Review

Thomas McCraw's biography of Joseph Schumpeter is fluid, interesting, well paced, and evenly weighted between his private and professional lives.

Schumpter is known for the phrase "creative destruction," and he lived a life with lots of both. His mother "married up" to give him access to a better education (and higher social status) in Vienna, and the boy genius made his mark there -- before failing as finance minister (politics!) in the post WWI chaos.

His life took many turns and he worked in many places. In one terrible fortnight, his life turned upside down: just as he rushed to his mother's deathbed, his [second] wife died in childbirth -- as did the child. At that moment, Schumpter's goals (to be the world's greatest horseman, lover and economist) seemed trivial.

He plunged into his work, producing a massive book on Business Cycles (1939) that was too dense for most readers and overshadowed by the massive popularity of Keynes's General Theory (1936).

Convinced (rightly!) that Keynes had missed the importance of dynamics and innovation, Schumpeter wrote Capitalism, Socialism and Democracy (1942) -- a book that brought him great fame and recognition as the father of entrepreneurial studies, business strategy and innovation [I've read this one :)].* Schumpter, like Hayek (another Austrian), understood that our world is not only in a constant state of DIS-equilibrium, but also that our prosperity is best advanced within a capitalistic system that rewards success and quickly disposes of failure.

It is in this sense that the theories and practices of Keynes (and other fans of managed economies) have been and will continue to be the greatest barriers to human achievement and the greatest friends to the status quo and those who would corrupt (and be corrupted) in the game of robbing Peter to pay Paul.

Luckily for Schumpeter, he remarried, and Elizabeth (an economist whose career was blocked by her gender and study area -- Japan) was able to help him stay sane (he never recovered from the death of his mother and second wife) while he wrote CS&D as well as the masterful -- in the eyes of economists -- History of Economic Analysis (1954).

Schumpeter was perhaps lucky to die, in his sleep, at the height of his popularity, leaving behind a massive legacy: numerous grateful students, appreciative colleagues (many of whom he rescued from Nazi Germany), and several new fields in business and economic studies.

As an intellectual and economist, he was rare in his overarching desire to understand and give credit to views that did not agree with his. Somewhat ironically, one of his star students (Paul Samuelson) became famous for pursuing the type of mathematical economics that has become a lodestone on the profession. Schumpter would not have accepted the math-centric economics that leaves out the innovation, creativity, and conflict essential to capitalism but unwieldy within mathematical models incapable of including such "badly behaved" activities.**

He understood that economists' the most common model -- an economy with perfectly competitive markets -- is most uncommon in reality. And that's why economists often have very much textbook knowledge and very little useful knowledge. I should hope that Schumpeter's rising popularity is a sign that such autistic economics is falling out of fashion -- in less than a generation, I hope!

Bottom Line: This book gets five stars for its balance, insight and accessibility. It's one thing to be the man Schumpeter was; it's entirely another thing (a wonderful thing!) to have such a brilliant study of that man. We are twice lucky!

* The Economist ridicules management gurus whose "numeric" solutions improve nothing but their consulting income.
** Econ geeks will recognize the problem of using math to understand out of equilibrium (strategic) behavior among actors with varying degrees of market power in an environment of risk and uncertainty. No closed form solutions!

28 October 2009

Schwarzenegger flips off the legislature

Here's the backstory to this signing statement:


Bottom Line: He may be overfond of dams, but he's pretty damn funny sometimes. (Oh, and California's legislature really does FAIL when it comes to "fixing" the policy problems that they've made...)

Midterm update on my class

My EEP100 students just took their midterm, and their median score was 10.5/15 (70 percent).

If you think you can do better, go here for the test and answer key (no peeking!)

That link also goes to the audio and video recordings of my first 16 lectures, but you can skip straight to the YouTube videos by clicking here.

As part of my plan to be the world's greatest teacher of economics, I asked the students for their feedback on my teaching (good things, bad things), what they were still confused about and what they learned.

They liked my accessible lecturing style (funny, understandable, etc.) but they disliked my disorganization (go off on tangents, no lecture notes, no textbook). Unfortunately, their likes and dislikes are related, so -- for the moment -- they are going to have to deal with broken eggs as they enjoy their omelets :)

(They were still confused about many things -- one thing for one person, a different thing for another -- and enjoyed learning how economics applies to the "real world.")

Bottom Line: Teaching is fun, but learning can be hard. For the second half of the semester, we are going to get into the good stuff, the fun stuff -- case studies of the interactions of economics and politics as related to the environment and natural resources. Stay tuned!

Why does produce cost less than packaged food?

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.


Shelley Woo says:

The crazy thing is that fresh healthy and delicious produce costs so much less than processed unhealthy packaged food. Now, how does that make sense? Don’t we usually pay more for a healthier option like purchasing organic or natural foods? I find this so interesting because I would expect to pay a high price for fresh fruits and vegetables that were on a farm a couple days ago. Now what we don’t think about is the packaging cost and marketing for the packaged product to be sold. With packaged products, there must be some appeal or special aspect that the product can offer. So the extra variable cost can get expensive, so the consumer ends up paying more for their product. Whereas fresh produce that comes from directly from the fields and into the supermarket, it takes less cost to sell it because most fruits and vegetables are more or less the same. There isn’t as much as a difference in the way it looks unlike packaged products. If a person wants to buy a banana, they would just buy the cheapest one and as every banana company competes with the other, the price is driven down because there is not much a difference between the
two goods.

Bottom Line: The extra cost in packaging products makes packaged food more expensive than produce which comes directly from the fields and ready to sell, so buying produce is a real bargain and contributes to a healthier diet.

Crossroads: Adverse Selection Eliminator

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.

Korina Cassidy says:

For those of you that don't know, Crossroads Trading Company is a store down on Shattuck that buys used brand name clothes in good condition and resells them at discounted rates from their original prices. Sellers receive 35% of the price that Crossroads will sell the item for. At first glance, this doesn't seem like a good business deal. Why not just find someone on your own to purchase your unwanted clothes and receive all or at least more than 35% of what Crossroads would have made? For one, that would take a lot of your own time to arrange. You must find some way of advertising your clothes, either in a newspaper article or online on websites such as eBay. Once you find a prospective buyer, you must arrange to either meet with them or send them your clothes in exchange for what you hope is a reliable source of payment. This private transaction is risky for both sellers and buyers because they face adverse selection: a situation in which asymmetric information results in high-quality goods or high-quality consumers being squeezed out of transactions because they cannot demonstrate their quality[1]. Basically, sellers with high-quality items will not want to sell them because they are unable to convey their true worth through a description or photo, and will not be able to get the amount of money they deserve. With the creation of paypal and user ratings and feedback, which provide more secure ways of receiving payment, high-quality buyers can be kept in the market and only sellers that make transactions by cash or check in the mail may still face an adverse selection of buyers. Essentially, Crossroads serves as a third party to reduce or eliminate adverse selection. They provide you with the service of finding high-quality clothes, displaying them, and allowing you to browse and buy them at your own convenience. For sellers, they are able to give you reliable payment without the hassle of advertising and finding buyers on your own. Part of the reason sellers only receive a portion of the profit from their items is because of this service. Also, Crossroads must pay for fixed costs such as rent, electricity bills, and clothes racks as well as variable costs such as employees’ wages (considered variable depending on the amount of clothes they have to sell, they may need more or less employees running the store). So while sellers may be able to get more money for their clothes by selling privately and buyers able to bid down prices by buying privately, each can choose to pay a transaction cost to Crossroads to reduce adverse selection and save time.

Even though cheaper brand name clothes may sound great to some, others may argue that it does not help boost the economy, especially in a recession. But Crossroads is an exception in two ways. First, by setting up a store to resell used clothes, it creates employment that wouldn’t have existed otherwise. People would’ve either privately sold their clothes or just held onto them, neither of which creates employment. But by hiring cashiers, people to evaluate and buyback clothes, as well as other higher management positions, Crossroads creates new employment and salaries for those employees to spend on other goods and services. Second, assuming that people buying from Crossroads would've bought new brand name clothes at much higher prices, they now have more money leftover to spend elsewhere. If they can buy a top that would’ve cost $30 for $10.50, they can now spend the leftover $19.50 on something they wouldn’t have bought before. So just because they bought a second-hand item, it does NOT mean that they don’t boost the economy and add to the GDP.

Bottom Line: If you’re short on cash and need a new wardrobe or looking to sell some of your nicer clothes, check out Crossroads. Not all second-hand transactions are bad for the economy, as long as you’re employing a third party in the process or spending your leftover money in other industries.
[1]Case, Karl E., Ray C. Fair, and Sharon M. Oster. Principles of Economics. Upper Saddle River, NJ: Prentice Hall, 2009.

The Law Speaks. Will Mulroy Listen?

via RW, we have this bad news sensible decision from a Nevada judge:
Judge Norman Robison ruled that State Engineer Tracy Taylor "abused his discretion" and "acted arbitrarily, capriciously and oppressively" when he cleared the [Southern Nevada Water] Authority to pump more than 6 billion gallons of groundwater a year from Cave, Delamar and Dry Lake valleys.

The senior judge from Gardnerville wrote that the state's chief water regulator traditionally requires "specific empirical data" before allowing groundwater to be transferred out of a basin. This time, though, the state engineer is "simply hoping for the best while committing to undo his decision if the worst occurs," Robison wrote.
Did you get that last bit? Hoping for the best? As in, Mulroy is really going to keep her promise to stop if things get outa control? Yeah, right. Reminds me of Lucy's promises to Charlie Brown!


Addendum: More (much more) from Emily Green

Bottom Line: The only solution to abuse of power is countervailing power -- as our founders so wisely foresaw -- and this ruling will require Pat Mulroy and the "endless growth" brigade to work harder (or give up!) before they can exploit economically and politically weak neighbors.

Meters matter and smart automation matters more

Shahram Javey is a Silicon Valley entrepreneur whose company, Aquacue, makes it easy for water consumers to conserve and manage their water consumption on-line through a hardware and software solution that re-defines the concept of automated water monitoring.

I have met him and think that his product has great promise:
  • He used his technology background to create a new water consumption monitoring solution that is much easier to deploy and use than traditional water meter automation systems (AMR and AMI)
  • More important, this monitoring device (called the "Barnacle") can be installed on meters, one house at a time by the homeowner or the utility. The industry standard requires entire neighborhoods to get wired at once, by the local water agency. The Barnacle is installed on your existing water meter and immediately after you can track your water consumption in real-time on-line.
In addition to these interesting strategic advantages is the fact that Aquacue has data showing that people (in Carlsbad,* near San Diego) use less when they have real-time information on their water consumption and the ability to compare their consumption with others in the community. According to this story:
...those who got the feedback used 20 percent less water compared with the same period the year before. The control group reduced its water use by only 11 percent compared with the previous year. The results also suggest that people who were already interested in reducing their water use before the study began conserved the most once they got the devices and software.
Read more (and get more data) in this report [pdf].**

If you wish to learn more about Aquacue and their solution contact Shahram.

Bottom Line: Smart meters work, and they will pay for themselves if they are cheap. Aquacue's are.

* Ironically, Carlsbad is building a 50mgd desalination plant. I can see why they need want the supply, but they wouldn't need that plant if they were using higher prices and smart meters!

** And yes, one homeowner really did cut use from 109 units to 47 units -- from 2,700 gallons/day to 1,200 gallons/day -- holy cow, in multiple ways!

27 October 2009

Poll Results -- Relevant Academics

Hey! There's a new poll (lawn morals) on the sidebar --->
Academics (economists, political scientists, et al.) should be MORE involved in public policy debates

Yes
 89%
63
No
 11%
8
71 votes total

Ok, fine, I will keep blogging, but can we get some more folks involved?

Here's how:
  • Professors can start talking to reporters, politicians and the public. Either you will have something to teach them or you will have to change what you do.
  • Students can ask professors to relate class learning to the "real world."
  • Non-academics can ask academics to summarize their "favorite" journal articles as short (250 word) essays. (And no, abstracts don't count!)
Bottom Line: We (academics) may claim to be relevant to "society," but we are only relevant when we are engaged with the members of society.

Feinstein's Kool-Aide

She wants dams, a peripheral canal, water trades and infrastructure... and the environment.

I don't think she's being honest about that last bit, and I said so.

US healthcare and unrestrained demand

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.


Siu Lai Chow says:

Healthcare cost tops 2.5 Trillion dollars this year in the USA. With a population of 305 million people, that is $8,200 per person. In SF Bay Area, one of the wealthiest areas in the country has a maiden Per Capital Income of $36,800. If the healthcare cost is outrages to us, it is just more so when apply to the rest of the country.

Can you can image spend $8,000 dollars at your visit to a doctor? Is it worth the cost? Of course we have insurance, but somewhere someone including us is paying for the $8,000. Insurance is a system for everyone pays a little more, so the few needed more don’t have to pay entirely by themselves. It is no different from going to restaurant with a group of people and just simple split the check. Someone order an expensive item has a benefit at the cost of their friends each pay a little bit more. When it is with friend we are Okay with this. But most of the other members in the insurance system are not. With an average Insurance cost at $3,000 per year, plus the matching cost of employers to the insurance plan. With price so high already it is not too hard to see people have a tendency to make the visit to a healthcare facility worth cost they already paid, by order the best medicine money can buy and the most costly check up and treatment insurance can pay. Healthcare carrier has no problem with this as long as the insurance company pays; drug and medical equipment company enjoy the additional revenue by higher demand, and Insurance company just increase the premium to everyone. The worst part is no real alternative to the general public. In all we end up with a 2.5 Trillion bill and every one of us is the loser to the system. On the top of it we have 40 million American live without insurance.

The under-regulated Insurance system is the reason leads us to this mess. Current system has no incentive to anyone to save cost. It is like there is no constrain in the resource we spend on Healthcare, the demand is of course goes to the roof and so as the cost.

Protecting the country wasteful expenses from health insurance is out-weighting the benefit of the free market policy to protect the insurance companies.

Bottom Line: The solution to our healthcare problem relies on government intervention not the free market competition.

References:
Bay Area Census
US healthcare costs
The Economic Naturalist (by Robert H. Frank) Chapters 5 and 6

America’s favorite pastime: a booming business

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.


Jessica Oliva says:

Sports were a large part of my childhood, it set the agenda for family bonding, but never did I stop and realize the profit the sports industry was making from our smiles and family time. Professional sports teams have become very successful and profitable products. It's market that prospers on selling a product that combines entertainment, athletics, and business. Sports cost money and time; money you could be using for tuition, and time you could be spending writing papers. Why then are people willing to undergo such great opportunity costs for a Sunday afternoon baseball game? The sports industry is a market that profits from what economists term as utility. It’s the concept of spending money and time on a product or service that makes us happy, simple as that. Even though writing a paper and paying tuition might be more useful ways of investing your time and money, watching a Monday night football game clearly makes you happier. Professional sports have caught on to this idea, which is why despite economic times, you still find stadiums filled with people. It’s an market that sells a high utility product; people pay their money and time for sports, sports make people happy, people keep coming back for more. Of course this isn't exempt from the law of diminishing marginal utility, but lucky for the industry, there are always those really devoted fans, and a plethora of events over the entire year that keeps the business running.

Bottom Line: All industries thrive on a consumer’s utility: the more a product makes people happy, the more it will be consumed of, and the more profits the business makes.

Data Bleg

JY asks:
Do you know of any sources for a nice clean bar graph, showing costs of water conservation vs. efficiency and new sources (e.g., WaterSense applicances, desalination, etc.)?
I've seen what JY is talking about, a side-by-side comparison of different methods of creating/saving water on the horizontal axis and the cost on the vertical axis, but I can't recall where.

If you have a source, post a link in the comments or email me.

Sustainable desalination is NOT an oxymoron

Addendum: Israel is NOT the president of New Water LLC. [update post coming]

New Water LLC has a patented a "biodesal" technology (process, really) that puts salt-tolerant trees in floating greenhouses. As the trees suck in seawater from their roots, they transpire water vapor from their leaves. This water can be gathered and used.

According to Noah Israel (New Water's president), their demo 40x90 foot [330m^2] platform will produce 5,000 gallons [18,900 ltrs] of water/day, based on land-based greenhouse experiments that produce up to 3,000 gallons a day. New Water LLC has plans to scale up to 5, 10 and even 20 million gallon/day installations. The 20mgd installation would cover 4 acres of sea. More importantly, this water would have an all-in cost that's less than one-tenth of the current $1,000+/af for desal that uses oil (instead of trees and light) to run the reverse osmosis.

Noah Israel is looking for angel investors. If you are interested, contact him.

Bottom Line: Necessity is the mother of invention, and water shortages are surely driving that process. (Of course, we could just raise prices, but that would be too easy!)

26 October 2009

Peter Gleick on Peak Water

Here's NOT* the mp3 recording I made of Peter Gleick's presentation last week at Berkeley (prior post).

His talk was about "peak water" -- a concept that makes sense with oil (when use outpaces new discoveries), but not as much with water (previous post). Nevertheless, Gleick made these useful points:
  •  The demand for water has been expanding at an exponential rate, on the extensive margin (greater population) and intensive margin (more use per person). In these cases, there is less water for everyone as time passes.
  • There is a point where "renewable" water becomes non-renewable, either because groundwater is over-drafted ("mined") or water is polluted (a big problem in China). In these cases, there is less water for the future.
  • Some water basins (e.g., the Colorado River) are fully allocated, i.e., consumption equals total flows. In these cases, there is no additional supply.
To illustrate each of these points, Gleick drew exponential, "peak" and logarithmic curves, respectively. 

While I agree with his analysis, I do not agree with the application of the "peak" analogy, since all of these phenomena are the result of poor water management -- not the physical/economic relationship between oil consumption and exploration. Put differently, we can manage water as a renewable resource (sustainably), but we will never be able to make oil into a renewable resource.

This was also the first time I met Peter. Like many of you who have suggested that I work with Peter and the Pacific Institute, I was eager to explore some options for collaboration -- especially since the Pacific Institute has no economists on staff.

I sent an email suggesting that we collaborate, and I will keep you posted on Peter's reply.

Bottom Line: Although we may not have "peak water," we certainly do have problems with water management, and I am glad that Peter Gleick is working on those problems.
* Addendum: Peter asked me to remove the mp3 of the lecture, and I have complied. (I am not sure if he would have given me permission had I asked, which I didn't, but I have asked now. I will repost the mp3 if he does extend permission. Until then, you will have to do with my summary and/or and ask one of the 80+ attendees what they remember.)

Credit Cards and Cracker Jacks

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.


Steven Otto says:

While enjoying Barry Zito’s surprisingly dominate start against the Rockies at AT&T Park, I couldn’t resist the urge to purchase the classic baseball treat, cracker jacks. As the salesman walked up the aisle, I signaled him only to realize that I had no cash! As I weighed the rumble in my stomach vs. the excitement of the game, I couldn’t help but wonder how long it would take for one to be able to purchase food, beverages or souvenirs from one’s seat using one’s credit card.

When thinking about this question, a couple things come to mind. First, what are the costs associated with providing this new service to the audience, and second, how much will this increase either the sales of the vendors, or the utility of the fans. In this case, the marginal cost for supplying each vendor with a machine that is capable of both accepting and remembering credit card purchases as well as printing a receipt to the customer is quite high. In regards to the marginal revenue, the returns would be relatively small. For instance, take the average baseball fan. He/she probably goes to the game having some experience or knowledge of the culture behind the game, or at least the environment in which the fans watch the game from. As a result, they generally bring cash to make purchases with from the comfort of their seat, negating the need for a credit card service. One can even take the unusual instance of a person who does not have cash, i.e. me. After sitting with a hungry stomach for an inning or so, I eventually ran to a concessions stand and purchased my cracker jacks at the same price I would have got for them from my seat. Despite a slight inconvenience to me, AT&T Park made the same amount of revenue without the credit card option as they would have if it was offered.

Weeks later, my friend went to another Giants game, but had significantly nicer seats than I did. In fact, his seats were so nice (behind the dugout) that an in-game concessions service was offered where a vendor came to take his order. Much to my surprise, he was given the option of paying by credit card with the same device I had pondered about only a few weeks earlier. However, this new piece of information fits well with my initial thoughts. First of all, the MC is offset by a $2.50 credit card fee, which should more than cover the cost of the device. Second, wealthier people sit in seats where the service is offered, and they are more likely to make larger purchases which is difficult to do with cash. By accepting credit cards, the ball park makes it easier for fans to purchase large amounts of food and souvenirs, a massive source of revenue for the company. Finally, the utility of the wealthier audience members is worth more than the utility of a lowly nose bleeder fan such as myself. Thus the convenience offered to them by accepting credit cards is worth more.

Bottom Line: The marginal cost of vendors accepting credit cards in the stands outweighs marginal revenue for all fans except the wealthiest.

Why buy books at the store instead of saving money online?

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.


Ellena Nguyen says:

It's a widely known fact among students that textbooks cost a lot.  They can range anywhere from $20 to $100 something.  To make things worse, the school bookstores jack up the already high prices.  Sure, they offer used versions of the textbooks but those are usually only $10 to $20 cheaper than the new ones.  To really save money, students should buy their textbooks online.  They can easily save over $30 by buying online.  If it's so cheap though, why do textbooks still get sold out at the school bookstores?  Are college students just crazy and want to spend a lot of money?  Do they have some sort of sick aversion to saving  money?

You can find the answer by simply comparing the costs and benefits of each option.  Buying from the school bookstore might cost more but at the same time you get the book immediately, it's close by and you know you have the right edition.  Also, if you decide to drop a class, you can return the textbook for a full refund if it's within the full refund period.  On the other hand, buying books online might be cheaper but there are a lot more costs to it than just the price you pay for the book.  One of those other costs is the shipping fee.  That would be the transaction cost.  Not only do you have to pay for shipping but you also have to wait usually a minimum of 1 week before you actually receive the book in the mail.  This is fine if you order your textbooks early but most students don't buy their books until classes start.  While everybody that bought their books from the school's store can do their homework, you'll be waiting for a package that might or might not come. Along with the waiting time, there is also the possibility of buying the wrong edition or the book not matching the description.  Then you're stuck with a book you don't need and can't return.

Bottom Line: The prices at the school bookstore are more expensive than online but it's less risky.  Trying to save some extra bucks with online shopping might actually end up costing you more in time and money.

Monday Morning Smile


Plus, the world's first IT professional:

Say Everything -- The Review

JWT sent me this book by Scott Rosenberg on blogging's first 15 years. In part one, the author (former editor of Salon.com) goes back to the early days of online diaries and link pages. In part two, Rosenberg tells how technological advances (e.g., the simple interface of Blogger, which hosts this blog) led to an explosion of blogging. In part three, Rosenberg gets to the interesting stuff, the impact and future of blogging.

This readable and interesting book left me with these ideas:
  • Warnock's Dilemma, i.e., you may get no response to your blog post because:
    1. The post is correct, well-written information that needs no follow-up commentary. There's nothing more to say except "Yeah, what he said."
    2. The post is complete and utter nonsense, and no one wants to waste the energy or bandwidth to even point this out.
    3. No one read the post, for whatever reason.
    4. No one understood the post, but won't ask for clarification, for whatever reason.
    5. No one cares about the post, for whatever reason.
    I've considered all these reasons when wondering about the lack of comments on posts on this blog.
  • The internet has been hard on newspapers (classified ads have moved to Craigslist; weather, sports and business statistics are best viewed online), but magazines are also threatened. I agree with this thinking, and see how daily papers will be replaced by the continuous flow of news from the internet.
  • Is blogging journalism? Yes, indeed if it uses the same techniques of journalists (fact-checking, original material, analysis). In fact, I would draw a parallel with the academic world and ask this: "Is blogging academic?" Yes, and academic blogging (on "edublogs"? "Profblogs"? Some better name?) can not only be academic, but better than academic. Consider:
    • Blogs are faster to distribute and free to anyone on the internet.
    • Blogs allow commenting, conversation and corrections.
    • Blogs allow "infinite" exposition, linking to sources and debate.
    The only advantage of academic publication in journals is that such publications are peer reviewed by referees and editors, but that advantage is not exclusive to academic work -- it can work with blogs, and would -- given the speed and breadth of access and conversation -- work even better with blogs. In the words of Marc Andreessen: "It is crystal clear to me now that at least in industries where lots of people are online, blogging is the single best way to communicate and interact." We (academics) should keep this in mind as we debate the future of academic discourse. (Of course, Tyler Cowen is already on board.)
Bottom Line: Blogging is important to our culture and our intellectual growth. I give this book four stars for its thorough, clear and contextual explanation of the history and importance of blogging.

25 October 2009

Weekend Discussion: Carbon Offsets

NOTE: This post will stay here until Sunday night. Posts for Saturday and Sunday morning go below this post.

Dear Aguanauts,

Discussion posts allow you to discuss a topic among yourselves -- exchanging views, learning and teaching. (I only read the comments.)

If you are interested, take a moment to check out (and add to!) the last week's discussion on Sin Taxes. After that, please give us your thoughts on...

Carbon offsets. Should I offset my "carbon footprint" if I fly in an airplane that's 1/2 full (and would have flown without me anyway)?

No Salary Cap Not So Bad?

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.


Ken Shimizu says:

As a die hard San Francisco 49ers fan, I thought I would give some insight on the upcoming expiration of the Collective Bargaining Agreement between the owners and the players of the NFL. The CBA expires in 2010, and if a new deal is not in place by the start of the 2010 season, there is a provision in the contract that nullifies the current salary cap structure. To most fans of the NFL, this seems like blasphemy, and would ruin the integrity and competitive balance of the NFL. However, in viewing the uncapped season from an economic perspective, we may see a shift toward a free market solution.

The current salary cap based system relies on revenue sharing and yearly increase in both the salary cap, and the minimum teams must spend. This acts almost like a price ceiling, limiting the amount that players can receive because of the total balance of the NFL teams. Certain positions are deemed as more important than others and players within that position are given relative wages instead of being paid their real value. With the switch to the uncapped structure, players will be given wages closer to their real value. This will theoretically eliminate deadweight loss for both the producer (the player) and the consumer (the owner).

Real life examples show the problem in this system. With the loss of the salary cap and revenue sharing, the balance of power shifts heavily in favor of teams with more money. In looking at Major League Baseball, of the 5 teams with the highest salaries, only the 1 team hasn’t been to the World Series since 2000. Of the bottom 5 teams, only the Florida Marlins have actually been to the World Series in recent memory, and 3 of the 5 teams are at the bottom of the league perennially.

Bottom Line: With the competitive balance of the NFL being one of its most appealing aspects, the owners and the players MUST find a way to agree on a salary-capped structure. Though players may lose out on their market value, they’re still making millions and millions of dollars in the end. Further, creating a large competitive imbalance may create more deadweight loss via players on horrible teams, eliminating the benefit of improved salaries.

Why Christians should support drug legalization

A friend asked for suggestions on ways to discuss drug policy at his church. I said this:
Ask them if they would worship God if their church was banned. After they (presumably) say, "yes, we'd go underground, like the early Christians," you can tell them that some people feel the same about drugs. Prohibition is against human nature.
Bottom Line: Judge not (a man's private life), lest ye be judged.

For sale: slightly worn balls

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.


Brandon Price says:

Major League Baseball is one of the most lucrative businesses of all time. Many of the world’s highest paid athletes are among those competing in the MLB. Several teams such as the New York Yankees have payrolls well over $100 million. My main focus however is not any one team, but rather the Rawlings Company. With the help of Major League Baseball Rawlings now holds an oligopoly in the field of sports equipment. Some say that Rawlings can be considered to be a monopolistic corporation.

The main piece of equipment that gives Rawlings a monopoly is the actual “Official Major League” baseballs. There are 162 games in the regular MLB season, and the number of baseballs used is quite staggering. In one season, the average number of baseballs used is 160,000. This equates to more or less 65 balls per game. The average life-span of a major league baseball is 7 pitches. After that it is no longer used in a game. 160,000 is an absurd amount of baseballs used, especially when one game could be played with a maximum of 5 baseballs.

Because of their massive contract with the MLB and with the number of baseballs used every season, Rawlings must continue to mass produce baseballs every year. This is no problem for Rawlings because their plant is located in Costa Rica and wages are extremely low. The marginal cost of producing a baseball is very small, but this does not stop Rawlings for selling the balls at an increased price. The average cost of an official major league baseball here in the United States is $14.00. The cost to produce that one same ball is well below $1.00. As a baseball player myself I believe it is outrageous to pay $14.00 for a 5 ounce ball. The Rawlings baseball has become the staple of America’s pastime and this has been made possible by the MLB.

A baseball is just a baseball, but as soon as it says “official major league baseball” the value of it increases ten-fold. As can be seen though, the price of official major league baseballs is inelastic for the majority of people. It is unnecessary to produce that many baseballs. The average life of a baseball should be considerably greater than 7 pitches. Rawlings has the ability to continue to extract cork and leather resources to continue producing baseballs, but when is enough enough? No other baseball manufacturer will ever be able to crack into the market because
  1. They cannot produce a baseball for cheaper and
  2. Rawlings continues to have an ongoing contract with not only MLB but also the even larger minor league baseball system and this contract increases demand for the same type of
    baseballs that the professionals play with.
Bottom Line: Major League Baseball has allowed the Rawlings Company to become a monopoly in the market for baseballs giving them the power to inflate the price of an extremely inexpensive good.

Speed Blogging

  • The EPA vows to enforce the Clean Water Act.

  • Subliminal advertising doesn't work and never did.

  • G. Tracy Mehan says [pdf] "a subsidized water or wastewater system is not a sustainable one." Bravo!

  • "The Dismal Politics of Legislative Transparency: ...legislators have a conflict of interest and act on it in making roll call votes inaccessible. Moreover, this particular conflict of interest is merely the tip of the iceberg of a greater incentive problem elected officials have in designing legislative information systems to make themselves more democratically accountable."

  • Aid and Oil: "...donors provide a higher share of aid, but not higher absolute aid levels, to countries from which they import more oil."

  • "Hydrodam Protests and Policy Adjustments in China: ... is a refreshing and informative investigative foray into the critically important water dimension of the still mostly opaque mechanisms of political and social adjustments underway in the course of China’s technological, economic, and geographic modernization."

  • An excellent profile of the Nobel winners -- I owe them more than I thought! Also listen to Tom Keene interview [mp3] Avinash Dixit on the prizes.

  • Coral reefs provide "ecosystem services" worth at least $130,000/ha, with about $40k in value to the environment and about $90k in value from direct tourism values. Speaking of that, Singapore's demand for sand makes it an increasingly valuable natural resource!

  • Uh oh: "Can liberalised energy markets cut carbon emissions? Britain is starting to doubt it" This problem is relevant after 20 years of liberalization; liberalization in the US has been more timid.
hattip to DW

24 October 2009

"Cash for Clunkers" -- Clunk or Slam Dunk?

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.


Sungmin Song says:

I am writing a blog post about the government funded “Cash For Clunkers” Program. For a little bit of background information: The government created this program to encourage US consumers to trade in their old “clunkers” (defined as vehicles that receive less than 18mpg in total) and in return they receive a subsidy of $3,500 - $4,500 towards the purchase of a newer, cleaner and more fuel efficient vehicle that receives at least 24 mpg or more. Another caveat to add to this is that the stated 18mpg total fuel rating is the vehicle’s off the lot fuel rating (Even if that was 10-15 years ago).

I believe there were three intrinsic motivations behind this program, one being to remove gas guzzling ozone destroying machines off the road and the second being to encourage the American people to spend money, and lastly for consumers to bail out our failing auto industry (i.e. GM, Chrysler and Ford). The program is nearing an end considering that the $3 billion or so the government set aside for the program has nearly been depleted. The final numbers reported include: approximately 690,114 requests submitted by dealers, $2.87 billion in subsidy money (pending) there as you can see, the supply has been met with plenty of demand.

To do some analysis, allow me to refute some of the assumed original intrinsic motivations of the government as well as some other issues included.
  1. Assuming that half of the consumers used the $4,500 subsidy as a down payment towards the purchase of say a cheaper $15,000 car (hopefully), this means that they will essentially be $10,000 in debt. Say a fourth of the consumers spent the $4,500 subsidy towards a nicer $25,000 car which means about $20,500 in debt. And say the final fourth used the $4,500 subsidy towards the purchase of a much nicer $35,000 car. If we multiply the amount of debt accumulated (assuming everyone used the $4,500 as a down payment, because we’re in a time where we do not have any cash lying around) this is what we’ll come out with:

    345,057 (690,114 consumers/2) x $10,000 (debt) = -$3,450,570,000
    172,528 (690,114 consumers/4) x $20,500 (debt) = -$3,536,834,250
    172,528 (690,114 consumers/4) x $30,500 (debt) = -5,262,119,250

    Approximate Total: -$12.248 Billion in debt

    I don’t want to look at the negative side of things because it is supposed to be an excellent program but think about what got us here in the first place, sub-prime debt to people who can’t pay them off. Can this be a microcosm of what brought us into this mess in the first place?

  2. The other intrinsic motivation was to have consumers to help out our ailing auto-industry (particularly GM and Chrysler). However, according to the final report that came out the top 5 vehicles that were purchased are the following:
    1. Toyota Corolla
    2. Honda Civic
    3. Toyota Camry
    4. Ford Focus FWD
    5. Hyundai Elantra
    And for space sake, 4 of the final 5 cars on the original top 10 list are not US-auto industry cars but cars that perhaps were manufactured in the United States but foreign cars where the revenue goes straight back to its own country origin.
Bottom Line: The “Cash for Clunkers” plan sounded great in words but in practice it may not prove to be as promising and potentially damaging to a good portion of the 690,114 Americans who participated in the program. (Hopefully these people aren’t the same ones that defaulted on their sub-prime mortgages!) I do really wish that this program does encourage people to take out their wallets and spend more (if they can afford it), because we do need a whole lot more spending from our fellow Americans.

Flashback: 18-24 Oct 2008

These posts are still relevant. Please comment!

Let Them Drink Bottled Water! CEI's propaganda for bottled water is over-the-top, but so are the folks who want to ban it. Speaking of that, the religious have their own bottled water guy: Water, Faith and War describes blessed bottled water. Really.

Public Trust Toss-up -- a discussion of a complicated idea (it's complicated b/c EVERYONE claims to speak for "the public")

BEST: The Political Economy of Cap and Trade -- politicians LIKE IT when the system is inefficient (=lobbying $ for them!) Speaking of politics, Dry Commands describes the Chinese government's theft of water from the poor (rurals) to the rich (urbans). Pity.

BEST: WHO is Westlands? I want to know (still!) how many people control Westlands. 20? 350? Help!

What's Fair? A discussion of water budgets with one of the guys who implemented them at Irvine Ranch...

My Advice to the President (like Peter Gleick's) has been ignored :(

Who Suffers More During a Recession?

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.

Christopher Rodriguez says:

Census data reveals that the income gap in the United States is getting bigger. The toll that the recession had on income in the US was more evident in low and middle income individuals. The data shows that the median income in the US is at its lowest level since 1997. This data is interesting because it shows that poor and middle class Americans are hurting the most in this economic downturn, while those with the top 10% of income in the US are not harmed as much.

The individuals who we hear about in the news receiving loads of money for running a bad company are the ones benefitting from this recession.

The data also reveals that the use of food stamps increased 13% from last year and that there are 9.8 million households using food stamps. I'm not too sure how the supply and demand for food stamps works, but its kind of crazy to think that more money is being used on food stamps, as income levels decrease.

Where will or where does the extra funding come from? If there are less jobs and income out there, that means there is a decrease in taxes collected by the government. I also read somewhere online (not sure where) that someone was saying that since income decreases more for poor families that they will now be able to qualify for food stamps and therefore that compensates for the loss in income. I feel that this is just dumb. I'm sure people would much rather be off of the food stamp program and would rather work for their wages. I feel that the utility that one receives from working is greater than the amount they receive in food stamps.

Bottom line: The recession has hit middle and low income individuals at a larger scale than it has the upper class. Programs such as food stamps are not a perfect substitute for work and income.

23 October 2009

Our Immortal Demise

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.

Ryan Lam says:

The rapid growth in the field of technology has led to the barrier breaking belief that immortality could be achievable by human beings. Advances in nanotechnology and an increased understanding of the human body may someday allow us to replicate our vital organs and cells with artificial “nano-bots.” These bots would theoretically be able to replicate the functions of our normal cells allowing us to technologically regulate our bodies and fix problems, just like fixing a computer.

The increasing potential and capacity to do this would have a profound effect on human institutions and regulatory practices. The ability to technologically improve, fix, and enhance humans would lead to new restrictions and barriers. An example: sporting events would need different types of tests and regulatory practices as nanotechnology would join steroids as possible performance enhancers.

At the onset of these emerging technological advancements, the resources for these procedures would only be available to those with enough money to afford them. There would be positive externalities to the widespread availability of such procedures (limiting the spread of diseases) that would incentivize governments and people to make these procedures affordable to all. However, in the long run, allowing humans to live longer would lead to increasing and quicker overpopulation. Overpopulation would drive up the competition for the other resources necessary for human survival (food, water etc.) and in the long run, overcrowding may be an undesirable result of messing with human beings natural lifelines.

Bottom Line: While we would all love to live longer, be free of disease, and have spare organs on hand whenever we need them, in the long run immortal humans will become too much for our earth, with its finite resources, to handle. We should leave playing God, to God, if it means the longevity of the human species as a whole.

Elementary, My Deer Watson

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.

Emily Riggs says:

Post labor day weekend, the season tends to swing swiftly into Autumn. The changing colors of the forest, from brilliant green to dusky reds and yellows, signify the arrival of a new inhabitant to the woodlands. Man. Yes, the fall season signals the start of 37 consecutive days of deer hunting season. During this time many hunting enthusiasts flock to the woods to bag themselves a buck.

In the United States however, successful policies exists that protect the deer that roam our wilderness. In California, a strict limit of two deer is imposed on the hunter. This however is only one of many hurdles that the hunter has to go through to participate in the sport. The hunter must first buy a hunting license costing $41.20 ($143.35 if you don’t happen to be a California resident). Then the hunter must purchase two additional tags for each of the deer costing $27.55 (first deer), and $34.40 (second deer). The non-resident pays $242.80 for both.

Hunting also has less explicit costs. There is the time that it takes to go out into the woods, track, kill and clean a deer. For people who enjoy these activities the costs of this time will be less then those who are not enthusiasts.

There has always been tension in modern American society about the necessity of hunting. Many people are outspoken in their beliefs that hunting is morally wrong. And many hunters feel that hunting should be enshrined in the constitution right next to freedom of speech. It would be hard for either side to ever change the others views on hunting. The various hurdles that the hunter has to face ensures that only those who get the most marginal benefit from hunting will participate. These people will be the most unlikely to change their behavior despite protests from people who feel hunting is wrong. The anti-hunting people are those whose marginal benefit of hunting is lowest and therefore these people will rarely be enticed to change their opinions of hunting.

Bottom Line: People who participate in hunting do it because they gain a large marginal benefit from it despite the costs. These people have a high marginal utility of hunting and thus will normally not be inclined to change their behavior.