Tuesday, May 08, 2007


With the AP Exam and Graduation approaching, I will not be posting on the blog for awhile (maybe until August).

Here are links to a few very good economics blogs to read in the meantime:

Marginal Revolution

Greg Mankiw's Blog

Free Exchange

Freakonomics Blog

Friday, April 27, 2007

Why Are There So Many Reality Shows?

Economist Austan Goolsbee has an article in the NY Times that looks at the economics of reality shows. He starts with a question of why there are so many reality shows (in particular, shows like American Idol), and comes up with the following initial answer:

Some say it’s just that people now lack the attention span for old-style television or that our tastes have changed.

Most insiders point out that reality shows cost much less to make than scripted shows, and, they argue, this is just a profit play by the broadcast networks.

However, he astutely points out that if reality shows are popular because they are cheap to make, why weren't they popular 20 years ago. As Goolsbee says, "Surely the broadcast networks wanted to save money back then, too."

Goolsbee then cites Harvard economist Richard Caves, who comes up with the explanation that reality shows are popular because there are so many TV choices with the proliferation of cable and satellite:

He points out that such incentives depend on the size of the potential market. The programming is a fixed cost — networks pay for the programs even if nobody watches. If paying an extra $1 million to get a star onto a show, for example, raises every customer’s love of the show by the equivalent of $1, the investment more than pays off if there are 10 million potential viewers. But the $1 million investment would be a terrible flop if there were 10,000 potential viewers.

So the increase in reality programming is not just a matter of broadcasters wanting to save money. It’s that a shrinking potential market gives the networks less incentive to spend money. They can’t recoup it with enough viewers.

Any opinions on this question of reality show popularity?

(Source: Marginal Revolution)

Thursday, April 26, 2007

Fascinating Predictions

Here is a list of predictions of what the world will be like in the year 2000, made for a magazine in the year 1900. It is a really interesting list. Here are a few of the most interesting to me:

Mosquitoes, house-flies and roaches will have been practically exterminated.

Strawberries as Large as Apples will be eaten by our great-great-grandchildren for their Christmas dinners a hundred years hence.

There will be No C, X or Q in our every-day alphabet. They will be abandoned because unnecessary.

There will be no wild animals except in menageries.

Those are some of the ones that sound ridiculous, but there are actually plenty of others that sound familiar. For instance:
Ready-cooked meals will be bought from establishments similar to our bakeries of today.
Any that you find particularly interesting? Be sure to explain why.

(Source: Marginal Revolution)

Which Countries Supply the Most to Wal-Mart?

Benjamin Edwards spent a day driving to as many Wal-Marts as he could (he went to 8) and writing down where each product he picked up came from (he picked up 727 items).

Here is a map showing where the most goods came from (the relative size of the country on the map indicates how many goods came from that country).

(Source: Marginal Revolution)

Explaining Income Inequality Through Harry Potter

Economist Alex Tabarrok argues that the way to explain why incomes are becoming less equal in the world and in the United States is to look at why some writers, like JK Rowling are making tons of money. Basically, it comes down to the fact that everyone is staying about the same, while a few top-earners are making a lot more than they used to because they have larger global markets than they used to. So Tabarrok's explanation is not that the poor are getting poorer, but rather, the richest few are pulling away from the pack.
I do not disparage Rowling when I say talent is not the explanation for her monetary success. Homer, Shakespeare and Tolkien all earned much less. Why? Consider Homer, he told great stories but could earn no more in a night than say 50 people might pay for an evening's entertainment. Shakespeare did a little better. The Globe theater could hold 3000 and unlike Homer, Shakespeare didn't have to be at the theater to earn. Shakespeare's words were leveraged.
(Source: Marginal Revolution)

Wednesday, April 18, 2007

The Height Tax

Here is the abstract of a new paper by Greg Mankiw:
Should the income tax system include a tax credit for short taxpayers and a tax surcharge for tall ones? This paper shows that the standard utilitarian framework for tax policy analysis answers this question in the affirmative. This result has two possible interpretations. One interpretation is that individual attributes correlated with wages, such as height, should be considered more widely for determining tax liabilities. Alternatively, if policies such as a tax on height are rejected, then the standard utilitarian framework must in some way fail to capture our intuitive notions of distributive justice.
The paper's interesting tax suggestion is due to the well-documented finding that tall people tend to have higher wages. Any ideas on why that correlation may exist? Here is a link to the full paper.

What do you think? Should tall people be taxed more to even out the playing field? I may be biased, but I would be a strong supporter of tax credits for the short...

Tuesday, April 17, 2007

Irrational Taxi Drivers?

There is high demand for taxi cabs in NYC when it is raining, of obvious reasons. However, taxi drivers tend to work fewer hours on rainy days.

The first perspective on this phenomenon is that the taxi drivers are behaving irratioanlly. According to a paper by behavioral economists:
They speculated that cab drivers have a particular income level they target each day. When they hit that target, the cabbies go off duty. The increased cab demand in bad weather increases the number of fares per hour, so cab drivers reach their target sooner, and go off duty. Economists consider such a strategy irrational. After all, if each hour of work is more lucrative, shouldn't cabbies work more hours?
However, on the Free Exchange blog, the author proposes another idea that brings the taxi drivers behavior back into the realm of the rational:
They claimed the reason they stop work early on rainy days is the dangers associated with driving in such conditions. Rain makes the roads slick and encourages irrational behaviour from pedestrians. As one cab driver put it, “The people become crazy; they walk right in front of oncoming traffic to get out of the rain.” Assuming high costs associated with getting into an accident or hitting a pedestrian, it may be very rational to work fewer hours at the higher wage. When you subtract the cost of getting into extra accidents, the wage may not be as high as it seems.
Any thoughts on which side is more likely?

(Source: Free Exchange)

Friday, April 13, 2007

Out-of-Town Speeders

At the beginning of the year, there was a test question that asked you to discuss the economics behind the decision to speed on the highway. Well, a study cited in The Atlantic Monthly reveals another aspect that should be added to the marginal analysis. They confirm what many suspect, which is that people from out-of-town get speeding tickets more often than locals.
An out-of-town driver stopped by a police officer in any given area has a 51 percent chance of getting slapped with a fine, versus 30 percent for a local, and the average fine for an out-of-towner is $5 higher.
In fact,
The poorer the town (in terms of property-tax receipts), the more likely its cops are to target drivers passing through; fines also increase the farther away drivers live, since distance makes them less likely to contest the ticket.
Any guesses at the reasons for this?
(Source: Cafe Hayek)

Thursday, April 12, 2007

Timbaland can teach you Economics

There is a new blog that discusses teaching economics through music. They take music from popular song lyrics and then ask questions on the economics behind the song lyrics.

Here are links to a few interesting ones:
Luxurious by Gwen Stefani
The Way It Is / Changes by Tupac Shakur (sampling Bruce Hornsby)
Taxman by The Beatles (relevant to the Laffer curve discussion to continue with our theme in the last few posts)
And because it's Weezer -- Beverly Hills by Weezer

Are there any songs you're currently listening to on your iPod that include some economics in the lyrics? Bonus points for good song suggestions with the relevant lyrics listed.

(Source: Tim Schilling)

The Current State of Supple-Side Economics

In a recent NY Times article, Bruce Bartlett discusses how the ideas of supply-side economics have become more and more popular. However, he also argues that the ideas are being taken too far:
Today, supply-side economics has become associated with an obsession for cutting taxes under any and all circumstances. No longer do its advocates in Congress and elsewhere confine themselves to cutting marginal tax rates — the tax on each additional dollar earned — as the original supply-siders did. Rather, they support even the most gimmicky, economically dubious tax cuts with the same intensity.
A particularly interesting part of the article shows how high the marginal rates were in the 1950s - 1970s:
Kemp-Roth was intended to bring down the top statutory federal income tax rate to 50 percent from 70 percent and the bottom rate to 10 percent from 14 percent. We modeled this proposal on the Kennedy-Johnson tax cut of 1964, which lowered the top rate to 70 percent from 91 percent and the bottom rate to 14 percent from 20 percent.
Another interesting note is that supply-side economists of the 1970s and 1980s did not believe that tax revenue would actually increase when taxes were cut, they just believed that the loss of tax revenue would be smaller because of the greater incentive to work:

Thus, contrary to common belief, neither Jack Kemp nor William Roth nor Ronald Reagan ever said that there would be no revenue loss associated with an across-the-board cut in tax rates. We just thought it wouldn’t lose as much revenue as predicted by the standard revenue forecasting models, which were based on Keynesian principles.

Furthermore, our belief that we might get back a third of the revenue loss was always a long-run proposition. Even the most rabid supply-sider knew we would lose $1 of revenue for $1 of tax cut in the short term, because it took time for incentives to work and for people to change their behavior.

(Source: Greg Mankiw's Blog)

Another perspective on CEO pay

There are two posts on Free Exchange that give another perspective on why CEOs are paid so much.

The first discusses how CEOs may not have been paid as much in the 1960s and 1970s, but that was because they gained the benefit of huge expense accounts. So when you account for the lack of the extravagant expense accounts now, the compensation has not gone up, it has just changed forms. As a bonus, the post includes discussion of the Laffer curve, which we just finished talking about.

The second discusses some reasons for the increased CEO pay:
Better explanations have to do with changes in the tax code, the rise of stock-based compensation, foreign competition (which makes the choice of CEO seem much more important), and the massive increase in the market capitalisation of the biggest firms, which roughly tracks the increase in CEO pay.

Make sure you include these considerations in your answer to the previous post.
(Source: Free Exchange)

High CEO Pay

In recent years, there has been a lot of criticism concerning the salaries of Fortune 500 CEOs. The graph below from The Economist shows how much CEO compensation how grown relative to the average wage in the United States:

As you can see, the compensation for executives in major US corporations was around 30-40 times the wages of the average worker up until the late 1980s. Now, executives make over 100 times the average wage. You could also look at the largest compensation packages for US CEOs on this Forbes site, noting that the highest paid CEOs make a couple hundred million dollars for the year (this of course includes bonuses and stock compensation).

Some are particularly aghast at what CEOs make when their performance is poor. For example,
The Corporate Library, an American corporate-governance consultancy, last year identified 11 large and well known but poorly governed companies, including AT&T, Merck and Time Warner, where the chief executive had been paid at least $15m a year for two successive years even as the company's shares had underperformed. Robert Nardelli received a $210m pay-off when he lost his job earlier this month even though the shares of his company, Home Depot, fell slightly during his six years in charge. Carly Fiorina, ejected from Hewlett-Packard almost $180m better off—including a severance payment of $21.6m—after a lacklustre tenure as chief executive
What do you think about the increase in executive pay? Is it an outrage or is it fair? Should there be restrictions on how much a CEO can be paid? You may want to remember our discussion of labor markets and how marginal revenue product was the basis for how much someone should be paid.

Wednesday, March 28, 2007

How Much Would You Pay to Drive in the HOV Lane?

Here is an example of the unintended consequences that arise when the government imposes quotas and price controls.

Californians appear willing to pay $4,000 more for used gasoline-electric hybrid vehicles that have state-issued carpool stickers than for hybrids that don't, according to a sampling of prices by Kelley Blue Book for USA TODAY.

The stickers allow low-polluting hybrids to use less-crowded, faster-moving carpool lanes, even if the driver is alone in the car. The state quit issuing stickers to hybrids last month after hitting a self-imposed cap of 85,000. Those already issued are valid through 2011 and stay with the car when it's sold, benefiting subsequent owners.

(Source: Marginal Revolution)

Tuesday, March 27, 2007

Resale Price Maintenance

The Supreme Court is examining a longstanding law in the United States banning resale price maintenance. Resale price maintenance is when a manufacturer requires a retailer to sell their products above a minimum price. An example would be if Apple required stores to sell iPods for at least $400. The practice was banned to increase competition, but there are doubts as to whether it serves its purpose.

Greg Mankiw discusses the court case and his take on the practice on his blog. Here is a NY Times article on the concept.

Do you think resale price maintenance should be allowed? Make sure you read the articles before responding to keep the discussion informed.

(Source: Greg Mankiw's Blog)

Monday, March 26, 2007

Why Recording Artists Don't Make All The Money

Stories about musicians always seem to end with them being broke at some point. Then there are also statistics about how little money the artist makes from each $15 CD. Many people point to the recording industry as the reason why recording artists don't makemuch money: that musicians are being taken advantage of. There is a post on Free Exchange that discusses the reasons that this is probably not true:

But more generally, the problem that artists have is not the recording industry. The main problem musicians face is other musicians. There are too many of them.

Pardon me while I make a simplistic, Economics 101 argument here, but it seems to me that the reason almost no musician ever makes much money is that there is a huge excess supply of people who want other people to listen to them sing or play an instrument. When all the primates are vying to get up on stage to impress the other primates, there's little reason to pay the primates much. Get rid of the recording industry and there will still be a huge oversupply of people trying to occupy a limited space on stage, the radio, or your iPod. The market power currently enjoyed by the recording industry will instead pass to the owners of those scarce resources.

This is also why I don't tend to feel bad for the winners of American Idol that sign their career away to Simon Cowell. There are 100,000 people lined up to take their place, but there are only a few people who have the influence/experience/skill to successfully market a recording artist; therefore, why shouldn't the person marketing them get more of the profit.

As we learned from David Ricardo: bargaining strength comes from scarcity.

(Source: Free Exchange)

Economic Effect of the Final Four in Atlanta

Here is a question from Carrie:
Normally, hosting a national event benefits a city's economy: out-of-towners patronize local hotels, restaurants, and stores. But when Atlanta hosted the NBA All-Star game four years ago, the overcrowding was terrible and traffic was awful for days; Las Vegas had some similar problems with the game this year. How will Atlanta's hosting of the Final Four next week be different? Should the city take any precautions to prepare for such a big crowd?
There is a lot of debate on how much hosting big sporting events benefits cities. These supposed benefits are used to justify public funding of stadiums and arenas. What do you think about the effect of having the Final Four in Atlanta this weekend? Give specific ideas on the economic effects.

(Source: Carrie S.)

Thursday, March 22, 2007

2 Stories on Inflation

First, Venezuela is trying to combat inflation by revaluing the bolivar (the Venezuelan currency). The new currency, the boliver fuerte, will be worth 1,000 of the old bolivars. The inflation rate in Venezuela recently reached 20%. The problem with this policy is that it will not have much effect unless the underlying causes of the inflation (like increases in public spending) are taken care of. In fact,
Gastón Parra, the president of the central bank, went on television this week to emphasize that the effect of these measures on the value of Venezuela’s currency would be neutral, neither increasing or decreasing salaries, debts nor the price of consumer goods. Private economists, however, say the changes, combined with inflation, could heighten confusion over prices.
An extreme case of inflation problems is Zimbabwe. The World Bank estimates that inflation in that country will reach 4,000% by the end of the year. That means that a t-shirt that cost $10 in January will cost $410 by December. It has reached the point where "Business deals can only be negotiated a few hours ahead because prices are rising so rapidly." The article also mentions that the printing of money by the Zimbabwean government was temporarily stopped because the government "ran out of foreign currency to pay for the paper and ink it needed for the bank notes."

(Source: Free Exchange)

Get Rich or Die Tryin' as an Economist

If you are wondering whether economics majors can make a lot of money without working on Wall Street, here is the example of David Teece, who runs an economic consulting firm called LECG.

Economic consulting firms provide economic expert witnesses for court cases and are becoming increasingly valuable. Teece earns just under $3 million a year as head of LECG and as an expert witness, and he has this to say about the prospects of working in an economics consulting firm:
"I won't get many thank-you notes for this, but we've given economists the chance to earn investment bankers' incomes," Prof. Teece says. "If you're successful with us, it isn't hard to make half a million dollars a year." He estimates that 60 LECG experts topped the $500,000 mark last year.
So if I don't show up on Monday, you'll know why...

(Source: Freakonomics Blog)

Wednesday, February 28, 2007

What Makes a Good Company Name?

Companies, of course, put a lot of thought into what to name their company. It may seem like a simple task, but it can be harder than you think to come up with an original, concise name that people will remember.

This post discusses the 10 types of company names and the pros and cons of each. It gives some insight into what you need to think of when naming a company.

When I was a senior in college, I started an educational technology company with a couple of friends of mine from Walker. Our product was a website that would help all parts of a school community to communicate with each other efficiently (students, parents, teachers, etc.). The name we chose for the company was "learnection." It fits under the "Blends" category from the blog post I link to above -- like Microsoft and Netscape, it is a blend of two words: "learning" and "connection."

At the time, it seemed like a good, simple name that was halfway creative. However, there were several problems with the name after we looked back on it. First, it does not really roll off your tongue, and people were not always sure how to pronounce it when they read it the first time. When you think of the successful internet companies, it is abundantly clear how to pronounce Microsoft, eBay, Google, Apple and Amazon. Also, when writing "learnection" in certain fonts, the lower-case "L" at the beginning of the name would look like an upper-case "I" and that would really confuse people. Now, those considerations are not why the business did not last more than a couple of years, but it probably would have helped our marketing to have a simpler, catchier name.

What do you guys think makes a good company name? Can you think of any companies that succeed despite having an awkward or confusing name?

(Source: Guy Kawasaki's Blog)

Tuesday, February 27, 2007

Efficiency Wages at Costco

In AP Micro, we discussed efficiency wages, where a company pays wages that are above the market wage as a way of reducing turnover and because happy, appreciated workers are more productive. Here is an article that suggests that Costco pays efficiency wages relative to other warehouse stores:

And Sinegal says he's also built a loyal work force. In fact, Costco has the lowest employee turnover rate in retailing. Its turnover is five times lower than its chief rival, Wal-Mart. And Costco pays higher than average wages — $17 an hour — 40 percent more than Sam's Club, the warehouse chain owned by Wal-Mart. And it offers better-than-average benefits, including health care coverage to more than 90 percent of its work force.

Costco doesn't have a P.R. department and it doesn't spend a dime on advertising. There's a real business advantage to treating employees well, Sinegal said. "Imagine that you have 120,000 loyal ambassadors out there who are constantly saying good things about Costco. It has to be a significant advantage for you," he explained.

(Source: Greg Mankiw's Blog)

Beauty in the Eye of the Computer

Beauty is thought to be subjective and ideas of beauty can change over time, but there is some general consensus on what makes someone beautiful. Researchers in Tel Aviv have written a computer program (called the Beauty Function) that scans an image of your face and makes small adjustments to the picture to make you look more beautiful.
Some 250 measurement points were taken into account and once formulated, researchers developed an algorithm that could let them apply some of the desired elements of attractiveness - as mathematical equations - to a fresh image.
The article mentions that one practical application of the software could be for plastic surgeons. Any other commercial applications you can think of?

(Source: Marginal Revolution)

Confirmatory Bias

Last semester, we discussed biases and irrationalities that violate the rationality assumption in economics. Another common bias is confirmatory bias. This describes the tendency of people to look for information that confirms their preconceived notions or a decision they made.

An example used by Tyler Cowen on his blog is how people eagerly read advertisements for a car after they have already bought the car: they do it as a way of confirming that they made the right decision. Another example that is a little different is when people notice or comment on a piece of jewelry or an expensive piece of clothing on a Walker student because they believe that all students from private schools are all rich. In that case, they are looking for information to confirm their preconceived notion.

Any other examples you can think of?

(Source: Marginal Revolution)

Tuesday, February 20, 2007

Shortcomings of GDP

We recently talked about the shortcomings of GDP as a measure of economic well-being. One of our points was how GDP does not account for environmental effects. Chip suggested this article that discusses that very issue with China. The overall point is that China is growing very fast, but you should decrease that growth rate to account for the effects of its high levels of pollution.

The article discusses the example of the Shanxi province:

These are boom times for Shanxi province in northern China. The province produced 25% of the country's coal in 2005 at a time when coal prices were soaring. Shanxi's economy grew by 12.5% in 2005, well ahead of even the astonishing 10% growth for China's economy as a whole. Or maybe not.

The province is home to Linfen, Yangquan and Datong, the three most polluted cities in China. Life expectancy in Linfen is 10 years below the Chinese national average. Unchecked coal mining -- the province closed 4,800 illegal mines in 2005 -- and the drilling of illegal wells for water have created a chronic water shortage and a steady loss of farmland as it subsides into underground mine shafts and drained aquifers.

If you subtract the costs of air and water pollution from Shanxi's growth rate, local officials have told Deutsche Bank, the province's real economic growth rate is close to zero.

The article also references research that applies that method to the country as a whole and argues that Chinese economic growth should be revised to be closer to 7% or maybe even as low as 0%, as opposed to the current figure of 10%. The author is a little too Malthusian in some of his predictions for my taste, but he still discusses the point that just looking at GDP figures does not give you the whole picture of how well a country is doing.

(Source: Chip B.)

Monday, February 19, 2007

Live Classes & Guest Speakers

Two related questions from Marginal Revolution and Greg Mankiw:

1. Why do people pay exorbitant amounts of money to see a guest speaker at a conference when they could see them on TV or read their book for significantly less?

Similarly, people are willing to pay a lot more to see someone speak live than a videotape of a speech. Tyler Cowen suggests that it is a signalling problem: "The quality of the speaker signals the quality of the event, and most of all the quality of the other attendees. Wealthy people and successful people don't want to go to an event full of losers, why should they? So the organizers seek quality speakers, so as to attract quality participants."

2. You can buy mp3's or CDs of economics lectures by talented economics professors here for a few dollars per lecture. On the other hand, tuition at highly-ranked private universities is about $30,000 a year, which works out to a lot more than a few dollars per lecture. Why is there such a discrepancy? Why not just pay for the lectures and save thousands? (Note: this is not a suggestion, just a question for thought)

What are your thoughts on either of these questions? Why are live performances worth so much more?

Thursday, February 15, 2007

Super Bowl Losers' Gear

Have you ever wondered what happens to all of the t-shirts and hats that say "Chicago Bears: 2007 Super Bowl Champs" after they lose the game? They have the hats and t-shirts available right after the game so they have to produce them for both teams without knowing who the eventual winner will be. Here is the answer:

By order of the National Football League, those items are never to appear on television or on eBay. They are never even to be seen on American soil.They will be shipped Monday morning to a warehouse in Sewickley, Pa., near Pittsburgh, where they will become property of World Vision, a relief organization that will package the clothing in wooden boxes and send it to a developing nation, usually in Africa.

This way, the N.F.L. can help one of its charities and avoid traumatizing one of its teams."Where these items go, the people don’t have electricity or running water," said Jeff Fields, a corporate relations officer for World Vision. "They wouldn’t know who won the Super Bowl. They wouldn’t even know about football."

(Source: The Sports Economist)

Non-Scientific Evidence on Minimum Wage Effects

Here is some anecdotal evidence to support what we have discussed as the main effect of a minimum wage increase: New wage boost puts squeeze on teenage workers across Arizona

That's certainly not the case under the state's new minimum-wage law that went into effect last month. Some Valley employers, especially those in the food industry, say payroll budgets have risen so much that they're cutting hours, instituting hiring freezes and laying off employees.

Mark Messner, owner of Pepi's Pizza in south Phoenix, estimates he has employed more than 2,000 high school students since 1990. But he plans to lay off three teenage workers and decrease hours worked by others. Of his 25-person workforce, roughly 75 percent are in high school. "I've had to go to some of my kids and say, 'Look, my payroll just increased 13 percent,' " he said. " 'Sorry, I don't have any hours for you.' "

Tom Kelly, owner of Mary Coyle Ol' Fashion Ice Cream Parlor in Phoenix, voted for the minimum-wage increase. But he said, "The new law has impacted us quite a bit." It added about $2,000 per month in expenses. The store, which employs mostly teen workers, has cut back on hours and has not replaced a couple of workers who quit.

(Source: Division of Labour)

Wednesday, February 14, 2007

More on the Economics of Crime

At the beginning of this semester, we read a chapter out of David Friedman's Hidden Order that discussed how to keep people from burglarizing your house by posting fake signs, etc. Stephen Dubner has a post on the Freakonomics Blog that continues on that same theme. Here are some of the tips he cites:
1. If you do keep cash in the house, leave a little of it where the burglar can find it, in the hope that he’ll think that’s all there is.
2. Leave visible a list showing that all your valuables are tucked away in a safe-deposit box.
3. If you have kids, consider hiding cash in their rooms: they’re too messy for a burglar to bother with and burglars assume that parents wouldn’t take a chance of hiding money where their kids might find it.

Tuesday, February 13, 2007

Congestion Pricing

The NY Times has an article up about congestion pricing on roads and highways. Congestion pricing involves charging a toll to motorists to reduce congestion on roads -- in particular, varying the toll based on how much congestion & traffic there is.

The reasoning behind congestion pricing:
congestion pricing holds out the possibility of harnessing people’s innate economic rationality and self-interest in order to promote a series of public goods. Every time a driver turns onto the Henry Hudson Parkway, she slows down the travel speed of all the other drivers, imposing a cost — or, as economists say, a negative externality — on countless fellow citizens. “Everybody wants fewer people to drive, and everybody wants people to use less gas,” said Gregory L. Rosston, deputy director of the Stanford Institute for Economic Policy Research in Palo Alto, Calif.

But so far, high gas prices and concerns about emissions haven’t led Americans to alter their driving patterns significantly. By making people take into account the true cost of driving — beyond gasoline, insurance and lease payments — congestion pricing in theory encourages people to car-pool, or to drive at different times of the day, or to take the train or bus.
The most famous implementation of congestion pricing is in London, where you have to pay a toll to drive in the center of the city. In the United States, most cases of congestion pricing have been implementing a toll to drive in an "express lane."

What do you think of charging tolls in this way? What are the pros and cons?

I particularly like this quote from the article:
“Everyone accepts that if your car is stationary, it’s fine to pay for parking,” said Alexander Tabarrok, professor of economics at George Mason University. “But if you tell people they have to pay to move their car between two points, they think it’s crazy.”
This subject is one that we may also discuss in class because I did some graduate research in this area.

(Source: Greg Mankiw's Blog)

Friday, February 09, 2007

Violence in Sports

Italian soccer has been in the news lately because there were riots at a soccer match in Sicily where a police officer was killed. They cancelled the professional matches in Italy last weekend, and this weekend, they are playing the games, but not letting any fans watch them in the stadiums. European soccer has a reputation for hooliganism and has struggled to limit the violence around matches for decades.

Stephen Dubner, co-author of Freakonomics, asks why there is so much less violence in American sports than in European soccer, especially since the US has a higher overall rate of violent crime.

He offers the following possible theories:
1. Many soccer matches are more local affairs than U.S. sporting events, thereby attracting a lot of fans for both teams, who are more likely to mix it up than if 95% of the fans are rooting for the same team.
2. We have better security.
3. We drink less; many U.S. stadiums and arenas now cut off the sale of beer, e.g., before the end of the game.
4. Perhaps the audiences at U.S. sporting events don’t include the criminal element — the result, perhaps, of high ticket prices.
5. For years, there has been talk of how American sports, particularly football, are a proxy for war and true violence; maybe this is actually true.
What do you think? Any of these convincing or is there something else? Don't give an answer like "Europeans are just more fanatical about soccer" unless you have an explanation for where that fanaticism comes from.

(Source: Freakonomics Blog)

Thursday, February 08, 2007

Sunday Alcohol Sales

There is a current proposal in the Georgia House to repeal the law that bans the sale of alcoholic beverages on Sundays (laws like this are also called "blue laws"). [Technically, it is a law to allow local jurisidictions to decide the issue.] The ban currently covers liquor stores and sales of beer in grocery stores, but does not cover drinks purchased in restaurants. Do you think this will have any economic impact?

(Source: Drew W.)

Wednesday, February 07, 2007

Setting Your Watch Fast

Tim Harford also has a column in the Financial Times called "Dear Economist," where he answers "Dear Abby"-type questions with an economist's perspective. Here is one recent question:
Dear Economist,
I have the habit of setting my watch five minutes fast. This fools me into avoiding being three minutes late for meetings, or the train – well, more often than not – and instead being two minutes early. But if I am a rational economic agent, how do I succeed in fooling myself so systematically?
Yours (in haste),
Mark, Oxford
I am familiar with this because in past years in my classroom I would set the clock 3-4 minutes slow, which typically prevented students from packing up their books when there was still 5 minutes left in class.

Your first instinct would be that people learn the pattern pretty quickly and adjust their mental clocks to account for the difference. But it still works. Why do you think people succeed in fooling themselves and rational others with this?

Here is Harford's answer.

Here is a clock that assists people in fooling themselves by randomizing how fast the clock actually is (within a range).

Giving Money to a Bum

Many people would like to give money to homeless people on the street, but are hesitant because they are not sure where the money is going or whether the person really needs it. If you could be assured that a panhandler was truly in need and not going to spend the money on drugs or alcohol, many more people would give a few dollars or cents.

Tim Harford (who wrote the article you are reading this week in class) uses this idea to formulate a question: if you could ask 10 bums one common question, and give money to only one of them based on their answer, what would the question be?

One thing to keep in mind is that the bums know what you are doing, and therefore, are tempted to lie.

What would you ask and how would you decide who to give the money to?

Here are some possibilities from the economists who write for Marginal Revolution.

Thursday, February 01, 2007

More on the Minimum Wage

On Free Exchange, the blog for The Economist, there is a post that does a good job of summarizing the main issues with the minimum wage. A couple of excerpts:

It is probable that the minimum wage increase will not cost enough jobs to make its effects readily distinguishable from random economic variation...
On the other hand, it also seems probable that much of any benefit that goes to poor families will come out of the pockets of other poor people—very probably even poorer people, such as convicts, who are currently barely hanging onto the fringes of the labour force...
CEO's who support higher minimum wages are not, as the media often casts them, renegade heros speaking truth to power because their inner moral voice bids them be silent no more. They are by and large, like Mr Sinegal, the heads of companies that pay well above the minimum wage. Forcing up the labour costs of their competitors, while simultaneously collecting good PR for "daring" to support a higher minimum, is a terrific business move...

Pennies Are Evil

Right now, there are two US currency problems: (1) The increasing uselessness of the penny, (2) the government currently loses money of producing nickels (the combined losses from making nickels and pennies is estimated to be $40 million). NY Times columnist Austan Goolsbee discusses a solution offered by an economists at the Chicago Fed: eliminate the nickel and make the penny worth 5 cents.

Mr. Velde, in a Chicago Fed Letter issued in February, has come up with a solution that would abolish the penny, solve the excess costs of making nickels, help the poor, keep the Lincoln buffs happy and save hundreds of millions of dollars for taxpayers.

Pennies would then cost a little over 1 cent to make and would be worth a nickel, so the government would again be making a profit on money. We would have plenty of new Lincoln nickels so we could stop minting our current nickels at a heavy loss. The Jefferson nickels would stay in circulation, just as the old wheat pennies do now. Because metal in nickels is valuable, though, they would probably be melted down.

What do you think of this option? The most important benefit of the policy to me is that K-Fed would be happy.

Friday, January 26, 2007

Breaking Down GDP Growth

This article in The Economist this week discusses the high GDP growth rates of India and China. They argue that China's growth is more impressive because it is due to greater increases in productivity, while India's GDP growth is due more to increased employment levels without those workers becoming more productive. Therefore, since China's growth is more associated with productivity increases, it is more likley to sustain itself.

The article also discusses how the growth in each country has been in different sectors:
According to conventional wisdom, Chinese workers have shifted largely from farming to factories, whereas India's growth has been driven largely by services, from call centres to writing software. In fact, jobs in services have expanded more strongly in China than in India. Since 1993 the rate of increase of China's service-sector jobs has been four times that in industrial jobs and has exceeded that in India. China's real output of services has not only grown almost as fast as its industrial output, but also faster than India's services. Indeed, a larger proportion of workers is employed in services in China than in India. However, the share of services in GDP is much smaller in China (33%, against India's 50%), because Chinese industry is so much more productive.
This article provides a deeper look at increases in GDP and a little background on the rapid growth of India and China.


According to this article, the item that is most often shoplifted from grocery stores is meat.
Meatlifting is a grave problem for food retailers: According to the Food Marketing Institute, meat was the most shoplifted item in America's grocery stores in 2005. (It barely edged out analgesics and was a few percentage points ahead of razor blades and baby formula.) Meat's dubious triumph is due in part to a law enforcement crackdown on methamphetamine use. Meat used to be the shoplifting runner-up to health-and-beauty-care items, a category that includes cough medicines containing pseudoephedrine, a key ingredient in home-cooked meth.
Why do you think this is? Especially given that meat seems like a messy item to steal. The most straightforward answer is that meat is one of the more expensive items in many grocery stores. Are there any other reasons?

(Source: Free Exchange)

Wednesday, January 24, 2007

Hire a Protester

A German company offers young Germans that you can hire to protest for your cause:
Young, good-looking, and available for around 150 euros (£100), more than 300 would-be protesters are marketing themselves on a German rental website. They feature next to cars, DVDs, office furniture and holiday homes.

Next time you want me to postpone a test, just hire some Germans to protest outside my apartment...

(Source: Marginal Revolution)

Thursday, January 18, 2007

Your Personality & Lifestyle as a Tradable Asset

An Australian guy is selling his current life on eBay:
This auction is for a New Life in the coastal town of Wollongong, Australia of a 24 year old male. It includes the following:

Winning bidder will take ownership of my:
- Phone number
- All my possessions
- I will teach you my skills
- Will introduce to all my friends & potential lovers (around 8 which I have been flirting with)
- I have around 15 close friends and around 170 other friends
- I have 2 nemeses.
- Lifestyle is very social. It includes a lot of going out.

NB: Friends will treat you exactly as they have treated me. This includes friends who take me surfing, running, climbing and cook for me. All of these features will be transferred over to the winning applicant.

Life also includes the following features
- Will have access to a cruisy job in march delivering fruit.
- You will write a satirical horiscope in the University of Wollongong Magazine.
- You will have new parents to have Christmas with & birthday presents from friends.
- A birthday party will also be organised for you.

This auction also includes the following
- A 4 week training course by the former me which includes the following:
- Many anecdotes and stories from a very interesting and intriguing past 24 years of my life
- 6 Jokes
- Training in becoming me (fashion, food, lifestyle, style of seduction, interests)
- Haircut like mine
- Piercings to the value of $180.
- Lessons in my personal history (The good stuff and the bad stuff)

NB: After the 4 week training winning bidder will also receive 2 months of on-call support.
There are a few more interesting details at the site. He seems to be doing this to film a documentary about it. The current bid is over $60,000 Australian dollars (about $47,000).

Another example of a creative way of finding something of value that you can sell as an asset.

(Source: Marginal Revolution)

Tuesday, January 16, 2007

Economics of Trying New Things

A post at Free Exchange discusses a small purchase he made that brought him a lot of joy. The key part of his post is this:
While I was at AEA, I had lunch with Dick Thaler, the famous behavioural economist from the University of Chicago. He lauded my (much derided) penchant for experimental purchases of small items at supermarkets and drugstores, pointing out that at my age, the net present value of future utility from a "find" is huge, while the costs (pecuniary and utilitarian) are negligible.
The idea is that young people should try a lot of new things because if they find something you like, you have much of your life left to enjoy it. Even if you try 10 new foods and only like 1 of them, you have given up relatively little and gained a lot of future enjoyment.

What do you think about this idea? Is it a good reason to try new things? Or is there a better reason to stay with what you like? What else could this apply to other than trying new foods?

An personal addendum to this rule that I used when travelling in Japan is that I am willing to try any food, provided I am not told what it is or what is in it until after I have tried it. It helps me keep an open mind.

(Source: Free Exchange)

Wednesday, January 10, 2007

A Controversial Idea

UGA Economist Dwight Lee has an idea that he claims would help the immigration controversy in the United States, and the homeless/panhandling problem: allow US citizens to sell their citizenship to non-Americans. The American selling their citizenship would have to leave the country, and the buyer would be a US citizen.

Here is part of his explanation:

First consider the fact that America's homeless and panhandlers (who are often different people—some homeless don't panhandle and some panhandlers aren't homeless) are actually quite wealthy. Almost all own an asset—their United States citizenship—that is worth several hundred thousand dollars. The problem is that they are denied the right to sell that asset.

Citizenship in the United States is a highly valuable asset because it gives its owner enormous productive potential. American citizens are able to take advantage of the
opportunities to combine their ambition, ingenuity and labor with an unparalleled capital base and other hard-working and talented people to create wealth. The homeless and panhandlers in America have clearly failed to use their citizenships as productively as many non-U.S citizens could, and would, if they became citizens.

What do you think of this idea? Do you think it would work at its stated purpose (with restrictions on selling citizenship to terrorists, etc.)?

Minimum Wage Issues

An interesting political issue is whether to apply any minimum wage increases to the islands that belong to the United States, like American Samoa and the Northern Mariana Islands.

Under the new proposal before Congress to increase the minimum wage, the Northern Mariana Islands would now be subject to the minimum wage. The reason why that is so important is because the average wage in the islands is half of the proposed minimum wage. There is a lot of debate amongst economists as to how much an increase in the minimum wage affects employment, but I think most would say that doubling the average wage would have a significant impact.

To add to the interesting situation, right now, American Samoa would still be exempt from the minimum wage, offering a possible comparison of the effect of the minimum wage if instituted.

(Source: Marginal Revolution)