Walker Economics Blog

Hiatus

2007-05-08T09:33:00.000-04:00

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

Why Are There So Many Reality Shows?

2007-04-27T15:30:00.000-04:00

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)

Fascinating Predictions

2007-04-26T09:35:00.000-04:00

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?

2007-04-26T09:27:00.000-04:00

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

2007-04-26T09:18:00.000-04:00

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)

The Height Tax

2007-04-18T16:25:00.000-04:00

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...

Irrational Taxi Drivers?

2007-04-17T09:38:00.000-04:00

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)

Out-of-Town Speeders

2007-04-13T14:27:00.000-04:00

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)

Timbaland can teach you Economics

2007-04-12T12:43:00.000-04:00

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

2007-04-12T11:15:00.000-04:00

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

2007-04-12T09:22:00.000-04:00

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

2007-04-12T08:25:00.000-04:00

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.

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

2007-03-28T11:59:00.000-04:00

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)

Resale Price Maintenance

2007-03-27T15:15:00.000-04:00

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)

Why Recording Artists Don't Make All The Money

2007-03-26T14:45:00.000-04:00

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

2007-03-26T14:28:00.000-04:00

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.)

2 Stories on Inflation

2007-03-22T08:35:00.000-04:00

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

2007-03-22T00:22:00.000-04:00

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)

What Makes a Good Company Name?

2007-02-28T10:50:00.000-05:00

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)

Efficiency Wages at Costco

2007-02-27T14:44:00.000-05:00

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

2007-02-27T14:29:00.000-05:00

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

2007-02-27T14:11:00.000-05:00

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)

Shortcomings of GDP

2007-02-20T09:52:00.000-05:00

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.)

Live Classes & Guest Speakers

2007-02-19T10:29:00.000-05:00

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?

Super Bowl Losers' Gear

2007-02-15T08:36:00.000-05:00

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

2007-02-15T08:21:00.000-05:00

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)

More on the Economics of Crime

2007-02-14T13:03:00.000-05:00

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.

Congestion Pricing

2007-02-13T12:56:00.000-05:00

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)

Violence in Sports

2007-02-09T11:21:00.000-05:00

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)

Sunday Alcohol Sales

2007-02-08T13:07:00.000-05:00

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.)

Setting Your Watch Fast

2007-02-07T13:19:00.000-05:00

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

2007-02-07T13:09:00.000-05:00

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.

More on the Minimum Wage

2007-02-01T09:25:00.000-05:00

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

2007-02-01T09:02:00.000-05:00

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.

Breaking Down GDP Growth

2007-01-26T14:39:00.000-05:00

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.

"Meatlifting"

2007-01-26T14:26:00.000-05:00

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)

Hire a Protester

2007-01-24T08:22:00.000-05:00

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)

Your Personality & Lifestyle as a Tradable Asset

2007-01-18T12:40:00.000-05:00

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:
-Name
- 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)

Economics of Trying New Things

2007-01-16T18:23:00.000-05:00

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)

A Controversial Idea

2007-01-10T11:17:00.000-05:00

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

2007-01-10T11:05:00.000-05:00

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)

Christmas Break

2006-12-18T09:08:00.000-05:00

The Walker Economics Blog is currently taking a Christmas break of its own, and will return the second week of January. In the meantime, here is some reading material:

1. A paper by two prominent development economists at MIT that describes how the poor in developing nations live (by poor, they mostly document people that live on $1/day). Here is a summary of their conclusions on Marginal Revolution.

2. Richard Posner discussing the ban placed by NYC on using trans fats in food sold in restaurants. His blogging partner, economist Gary Becker, will add his two cents next week.

3. The blog for the magazine The Economist, called Free exchange.

Have a happy holidays!

Why Is College Tuition So High?

2006-12-13T14:28:00.000-05:00

Economist Greg Mankiw has a great post on his blog about why college tuition has risen so much in the pst few decades. He gives 3 possible explanations:

1. Increasing costs due to Baumol's cost disease (which I explained in this earlier post).
2. Higher demand for a college degree since the wage gap between college-educated and non-college educated workers has been increasing.
3. Price discrimination means that the published tuition is not really the price that most students are paying. So the average price that a student is paying is much lower. And the increase is due to increasing skill at price discriminating

This topic is very relevant to you guys since you and your family will start paying these tuition fees in about a year. Any other possible reasons you can think of? Which one of these reasons do you think explains most of the increase?

Another Example of the Peltzman Effect

2006-12-13T11:23:00.000-05:00

At the beginning of the year, we read an article about how when seat belts became mandatory in cars, people started to drive more dangerously, countering the effect of seat belts. Here is another example of that so-called Peltzman Effect: the NY Times magazine reporting on research that motorists drive closer to people on bicycles when they are wearing a helmet.

(Source: Newmark's Door)

The Economics of Hidden Fees

2006-12-13T10:01:00.000-05:00

The NY Times has an article on hidden fees, where the stated price of the good does not reflect the full cost. Examples are ATM surcharges that you may not know about when you open your bank account, expensive minibars in hotels where you don't know that you are paying $4 for a Coke until you get the hotel bill, or expensive printer cartridges you have to buy every month for a printer that you got on sale.

The main question the article asks is: why don't firms compete to offer low ATM surcharges or low printer cartridge prices? A firm could offer their printer cartridges or minibars at lower prices and advertise those lower prices to increase their business.

The article references a paper by two economists that argue that it is a form of price discrimination (even though they don't use that term in the article):

Their argument assumes the existence of two kinds of consumers — sophisticates and “myopes.” Sophisticates play the hidden-fee game well. They seek out low advertised rates and whenever possible avoid or find substitutes for the hidden fees, using cellphones at hotels, steering clear of the minibar and setting their printers to draft mode. Myopes, by contrast, obliviously sip $5 Cokes.
Now ask yourself: what would happen if some business tried to blow the whistle on hidden fees in its sector? Consider a hotel chain that wants to expose the use of hidden fees by, say, the Hilton chain. Because Hilton makes so much on the extras, it can charge a low, even a loss-leader, price (say, $80) for its rooms. The other chain might charge more (say, $100) as it hits the airwaves with ads saying: “Watch out for our competitor’s hidden fees. We charge fairly for breakfast and local phone calls.”
But now ask yourself: whose behavior would such an ad change? Sophisticates already know about the hidden fees. All that the ads will do, Laibson and Gabaix contend, is turn some myopic consumers into sophisticates. And in turn these newly wised-up consumers will spend less on extras at both hotels — indeed, at any hotel they use from then on. Unshrouding hidden fees is “good for the consumer and bad for both firms,” Laibson and Gabaix conclude. “Neither firm has an incentive to do it.” Multiply the hotel example by a thousand, across all sorts of industries, they say, and you see how we got the countless deceptive price structures we have today.

Any other examples of hidden fees? What do you think of the author's argument? Are you a "myope" or a "sophisticate"?

(Source: Marginal Revolution)

Marginal Tax Rates in the US

2006-12-13T09:41:00.000-05:00

Here is a graph of the top marginal tax rate in the US tax system over the past century or so.

A couple of things to notice:

- the decrease of the highest marginal tax rate during the 1920s and the subsequent increase of that rate during the Great Depression

- the decline in the highest marginal tax rate over the past few decades

Richard Posner argues that this decrease in the highest marginal tax rate helps explain the increasing income inequality in the United States:

What are the causes, and what are the effects, of this trend in the income (and of course wealth) of the highest-earning segment of the distribution? Part of it is reduced marginal tax rates, because high marginal tax rates discourage risk-taking. Consider two individuals: one is a salaried worker with an annual income of $100,000 and good job security, and the other is an entrepreneur with a 10 percent chance of earning $1 million in a given year and a 90 percent chance of earning nothing that year. Their average annual incomes are the same, but a highly progressive tax will make the entrepreneur's expected after-tax income much lower than the salaried worker's. Many of the people at the top of the income distribution are risk takers who turned out to be lucky; the unlucky risk takers fell into a lower part of the distribution.

Economist Greg Mankiw adds:

Has the fall in top marginal tax rates over the past several decades in fact encouraged people to pursue higher-risk career paths, thereby exacerbating inequality in ex post incomes? As far as I know, this hypothesis has not received much attention in the empirical literature on income inequality.

(Source: Greg Mankiw's Blog)

Is Student Debt Too High?

2006-12-06T23:14:00.000-05:00

Economist Gary Becker asks that question on his blog. He concludes that student is not too high, especially considering:

On the other side of the ledger, higher tuition over time was related to sharply higher financial benefits from a college education. The typical college graduate earned per hour about 50 per cent more than the typical high school graduate in 1980, and the gap is now about 95 per cent. Earnings of graduates with a professional degree or other post-graduate education grew even faster over time than did earnings of college graduates.

His main conclusion is that interest rates on student loans should be determined by the amount of income you make after graduating from college:

Within any category of graduates, earnings vary considerably by type of job-- teachers and clergymen earn a lot less than investment bankers--and by degree of success within jobs. Fixed interest loans are not the best way to borrow when loans are used for risky activities. Returns on higher education are rather risky, even after adjusting for how they co-vary with returns on assets. Businesses often borrow with the equivalent of equity to finance start-ups and other risky activities, where the equity pays off well if the venture is successful, and pays little if the venture fails.
This suggests that student loans should not have fixed interest rates that require a fixed amount to be repaid per $1.000 borrowed, but rather should have the equivalent of an "equity" repayment system. That would mean that persons who earn very little repay little, while those who earn a lot repay a lot (per $1,000 borrowed). Requiring individuals who are repaying student loans to submit their income tax statements each year, so that lenders could document what the borrowers earned, could enforce such an income-contingent repayment system.

(Source: Becker-Posner Blog)

Economics of Procrastination

2006-12-06T22:51:00.000-05:00

Marginal Revolution links to an article that looks for reasons why procrastination may be rational from an economic perspective:

But is it possible that there is also a rational component to our procrastination habits? There are at least three reasons why this might be the case. The first is that there are fixed costs to doing homework. Suppose that in order to do homework you have to run to Kohlberg for a mocha latté...and check your favorite five media outlets as a preemptive distraction. In that case, it makes sense to have longer homework sessions in order to reduce the total number of sessions (and number of fixed costs to pay). Thus, putting things off in order to concentrate the work for a paper in one epic block means that you don’t have to waste time setting up to write again and again.
The second reason is that there may be decreasing marginal costs to doing homework. Suppose that the second hour of doing homework is much easier than the first, and the third easier yet and so on. You get in the homework zone. Then it makes sense to make your homework sessions as long as possible in order to take advantage of these returns to scale in doing homework...
The third reason is that there might be “thick-market externalities” in doing homework. The idea is that if everyone else is doing the same thing that you are, it gets easier and more enjoyable. If all of your friends are procrastinating at the same time, then the opportunity cost of doing work is that you miss an excruciatingly funny episode of “Curb Your Enthusiasm”... Similarly, when everyone is doing work, the opportunity cost of work is very low. After all, “Curb” is far less excruciatingly funny when watched alone. So it makes sense to do work when your friends do work, and avoid work when your friends avoid work.

It is fitting to make this post now because I am cramming several posts into one post-wrestling match evening, after neglecting this blog for the past several days...

Any other possible reasons why procrastination could be rational?

(Source: Marginal Revolution)

Interesting eBay Price

2006-12-06T22:45:00.000-05:00

Here is a gift card selling on eBay for more than face value. Why?

(Source: Marginal Revolution)

Why a Free Gift Bag?

2006-12-06T22:40:00.000-05:00

A question from Austin:

Why do you always get free gifts with perfume, cologne, and makeup?

The answer cannot just be: "because it encourages people to buy more." Why is giving free gifts with a purchase very common with those products, but not others? What is it about those goods or the consumers that they are targeting that makes the companies provide free gifts?

(Source: Austin L.)

Repugnant markets: it's not just kidneys

2006-11-27T19:34:00.000-05:00

Keeping with the recent Milton Friedman theme: Friedman beleived that markets can solve basically any problem. Here's an excerpt from a blog entry at The Economist:

"Thy money perish with thee, because thou hast thought that the gift of God may be purchased with money." That's what Peter the Apostle said to Simon Magus when he tried to buy the power to work miracles. Mr Magus gave us the word "simony", which means the buying and selling of ecclesiastical offices, but can also refer to any human venture or transaction too lofty for the market.

Alvin Roth of Harvard University has published a new working paper on the many potential market transactions--from the selling of cadavers in the 19th century, to serving horsemeat in Californian restaurants--that are hobbled by the kind of repugnance Peter felt for Simon. Some of his examples are poignant as well as repugnant,

"the French Ministry of the Interior, in 1991, issued a statement saying that 'dwarf tossing should be banned'... a French dwarf, who had been employed by a company called Société Fun-Productions, successfully sued in French courts to have the bans overturned. However the bans were upheld on appeal... on the grounds that 'dwarf tossing… affronted human dignity…”' The dwarf then brought his complaint to the UN... he stated 'that there is no work for dwarves in France and that his job does not constitute an affront to human dignity since dignity consists in having a job.' However the UN committee found in favor of France..."

What do you think of this ruling? should there be a market for tossing dwarfs? Why or why not? And if not, are there other things that should not be left to the market? Do you have examples? Try to make your argument on the basis of what goes wrong if you let the market try to allcoate goods and services (seeing that we usually assume that goods and services will be assigned efficiently by the market).

Why Blockbuster Advertises Movies in Theaters

2006-11-26T20:51:00.000-05:00

A question from Nicole:

I happened to be at Blockbuster the other day renting a movie for the weekend and I noticed that all over the walls and windows of the store were posters advertising the new movie Happy Feet, which came out last weekend. "Only in theaters!" the posters and huge dancing penguin display proclaimed, and I was left wondering why a store which specializes in renting movies to consumers would want to encourage them to visit the movie theaters instead.

So the question is:

Does the revenue that Blockbuster gains from selling advertising space so much greater that it negates the possible loss of business from people who decide to go to the movies instead (because, at least from my personal experience, people tend to do one or the other in a given period of time, and not both)? Or do Blockbuster executives figure that they don't stand to lose much business because it takes too much extra effort to leave Blockbuster and go to the theater instead, and since people are already in the store, they will just rent a movie anyway?

Another possibility that I would throw out there before you guys offer possibilities is that Blockbuster may have deals with movie studios that require them to have advertising for movies in theaters in exchange for deals on DVD releases, etc.

(Source: Nicole O.)

Playstation 3

2006-11-26T20:09:00.000-05:00

With the recent chaos over the release of Playstation 3, a question arises: why are there long lines and sell-outs of the new game system? Instead of people selling the new game consoles on eBay for thousands, why wouldn't Sony either produce enough to meet the initial demand or raise the price? How is their current strategy of selling out profitable? They knew this was likely to happen because the exact same thing happened last year with the XBox 360.

Some of the examples of the extremes of the launch:

Long lines waiting to get the PS3.
People were robbed and a man was shot while standing in line to buy the game system in Connecticut.
People are selling consoles for thousands on eBay (and in this case, the people who bought the system initially are getting profit that Sony could have gotten by charging a higher price).
One person even sold merely the information of someone who was willing to sell a PS3, not the actual game system, for $1,100.

When you offer a possible answer, it should be from the perspective of Sony: why would they go against the basic principles of economics by not meeting the demand for the game consoles?

(Source: James C.)

Luxury Car Dealerships

2006-11-26T20:02:00.000-05:00

An article in USA Today describes the luxury car market and the lengths that dealerships go to get people into the dealerships:

At Fletcher Jones Motorcars, customers stroll through a gallery of Mercedes-Benzes, linger at the cappuccino bar, tap balls on the putting green or go for a pedicure. A couple of blocks away, Newport Lexus boasts marble fireplaces, Oakley and Tommy Bahama beachwear boutiques — and a flat-screen television, tuned to ESPN, of course, mounted above the urinal in the men's room. . .
Built at a cost of $75 million, Newport Lexus didn't hold back when it opened in July. It has lounges with big-screen TVs, a sandwich counter, video game room and boutiques all aimed at making customers want to stick around. "When people have their car in for servicing, I don't want them to leave," says sales general manager Scott Brewer.

Why would these dealerships go to such lengths? What is interesting is how much the dealerships are spending on all of these amenities that aren't directly related to their main product, which is cars. Also, what do all of these attempts at differentiation tell you about the market structure in the car dealership market?

(Source: Sarah O.)

Applying Economics to Artistic Masterpieces

2006-11-17T11:09:00.000-05:00

In Wednesday's NY Times, there is an article discussing whether there is a pattern to how works of art are priced. The article discusses the work of economist David Galenson who has found that great artists usually fall into one of two categories:

1. "Young Geniuses:" like Picasso, Van Gogh, or Gauguin, who create their most valuable works early in their career and are innovators who spend little time on their artwork.

2. "Old Masters:" like Jackson Pollock or Paul Cezanne, who create their most valuable works of art late in their career and spend a lot of time perfecting and experimenting with their artwork.

Galenson then uses these two categories to explain patterns in the creation of artwork and to predict the prices that the works of art will sell for.

One of the main topics of the article is how there is a lot of resistance to applying these economic and statistical techniques to the field of art. So my question would be, what do you think of Galenson's ideas? Is it an example of trying to bring everything under the economics/statistics umbrella without regard to whether it fits? Why do you think there is so much resistance to Galenson's work?

Another Couple Thoughts on Friedman

2006-11-17T10:56:00.000-05:00

To add to Kroger's well-put post, Milton Friedman is the father of the author of Hidden Order, which we are currently using in class, and I will add one link: a tribute written about 10 years ago by economist Greg Mankiw. The reason I am linking to that article is that is has a quote from Milton and his wife summarizing their views on policy:

The Friedmans are best known for their articulate and unwavering defense of the free market. Their policy objective is, simply, "the promotion of human freedom." This goal, they tell us, "underlies our opposition to rent control and general wage and price controls, our support for educational choice, privatizing radio and television channels, an all-volunteer army, limitation of government spending, legalization of drugs, privatizing Social Security, free trade, and the deregulation of industry and private life to the fullest extent possible." Milton and Rose were libertarians--aggressively vocal libertarians--before libertarians were cool.

Milton Friedman Dies at Age 94

2006-11-17T07:03:00.000-05:00

Milton Friedman, one of the most important economists of our times, died yesterday. Although few of the people I know* agree on many things with Friedman, I'm not sure if there are many other economists who have had such an impact on the debates about economics, welfare, public policy, and ethics that I occasionally have with friends and colleagues as he has. For example, he is the person who popularized the phrase "There's no such thing as a free lunch." See the following two links for more background on Friedman's life.

http://www.nytimes.com/2006/11/17/business/17friedman.html?hp&ex=1163826000&en=505fe80dff8061d4&ei=5094&partner=homepage

http://www.nytimes.com/2006/11/17/business/17milton.html?_r=1&oref=slogin

* one of the few people I know who agree with much of what Friedman said is Mr. Arjona's neighbor his senior year in college, "Poofy."

IKEA Doesn't Follow the Textbook Example

2006-11-16T20:15:00.000-05:00

Here is an article that discusses IKEA's unique policy on selling umbrellas:

The umbrellas are huge (3 people can fit underneath), colorful (in IKEA's signature blue and yellow with a big company logo), and made of good quality materials (strong cloth, steel shaft, large wooden handle). Exactly the kind of umbrella you want to carry when it's raining.
A small sign hangs nearby:
IKEA UMBRELLAS
Sunny Day .............. $ 10.
Rainy Day .............. $ 3.

This strategy is contrary to one of the most basic examples in supply and demand analysis: when it is raining and the demand for umbrellas is high, firms can charge a higher price to make higher profits.

The author of the article thinks that IKEA's strategy is a good one (though he does not give any empirical evidence). What do you think? Is IKEA's policy leaving money on the table? Or can you think of reasons why it would be a good idea for them to go against the textbook example?

(Source: Newmark's Door)

Finding Underpriced Goods on eBay

2006-11-16T11:48:00.000-05:00

There is a business called eBooBoos whose sole business model is to find auction items on eBay that are misspelled (eBay does not have a spell checker). The idea is that when items are misspelled, people will not be able to find them, and therefore, they will be priced too low.

Another example of the ridiculous range of businesses that exist.

(Source: Marginal Revolution)

No Such Thing as a Free Drug

2006-11-15T13:50:00.000-05:00

Marginal Revolution links to an NBER paper that compares the pharmaceutical industry in Europe to the pharmaceutical industry in the US. In Europe, phramaceutical prices are regulated by the government and are therefore lower. An unsurprising consequence:

Results show that EU consumers enjoyed much lower pharmaceutical price inflation, however, at a cost of 46 fewer new medicines introduced by EU firms and 1680 fewer EU research jobs.

The abstract of the article also discusses how US firms spend 15% more on research and development than European pharmaceutical companies.

The main point is not that the regulations are bad necessarily (you then get into an equity vs. efficiency argument), but that you can't lower prices on drugs without knowing that this action will have negative consequences somewhere else.

Burrito = Sandwich?

2006-11-14T08:29:00.000-05:00

In this unit, we have talked about how companies try to set up barriers to entry in their markets. Apparently, a Panera Bread bakery in a Massachusetts mall wrote into their contract that no other sandwich shop could open in that mall. They then used that clause to try and stop a Mexican burrito place from opening in the mall.

This leads into a court having to rule whether a burrito is a sandwich. The court ruled in favor of the burrito place saying that a burrito is not a sandwich.

(Source: Greg Mankiw's Blog)

Herd Mentality of Shoppers

2006-11-14T08:06:00.000-05:00

An article in The Economist this week discusses how companies are trying to increase sales by taking advantage of consumers' herd mentality: that they are more likely to buy what other consumers buy.

The idea is that, if a certain product is seen to be popular, shoppers are likely to choose it too. The challenge is to keep customers informed about what others are buying. Enter smart-cart technology. In Mr Usmani's supermarket every product has a radio frequency identification tag, a sort of barcode that uses radio waves to transmit information, and every trolley has a scanner that reads this information and relays it to a central computer. As a customer walks past a shelf of goods, a screen on the shelf tells him how many people currently in the shop have chosen that particular product. If the number is high, he is more likely to select it too.

As evidence that this will work, the author references a market where people download previously unknown songs based on how they are ranked by previous downloaders and the recommendation system that Amazon uses.

Do you think this strategy will have a significant impact on sales in grocery stores? Personally, I am not sure that people buy what is "popular" when buying groceries as much as when buying music or books, but I may be underestimating the herd mentality that buyers have in general.

Strategy for Dealing with Telemarketers

2006-11-12T09:03:00.000-05:00

Economist Andrew Samwick has a novel strategy that he uses to deal with unsolicited phone calls. It is definitely an economic approach to the problem, factoring in the cost and benefit decision of the telemarketer:

Second, hanging up immediately is the non-cooperative response to this problem. When the Samwick household receives unsolicited phone calls (and I'm talking about you, Car Store), we employ either of two strategies that have a common element. If the VoxSon is feeling punchy, we let him answer the phone and have a little fun. Otherwise, we answer the phone, possibly responding that we will "go get" the person in question, and then just put the phone down.The common element here is that we keep the offender on the line as long as possible. This prevents the offender from bothering the next household on the call list until the offender terminates the call. This is the way to tax the resources (i.e. time) of the offender, making the enterprise less profitable and thus less likely in the future. If we all cooperated to employ this strategy, we would all be better off for it.

The key is increasing the cost of making unsolicited phone calls, thereby affecting the cost-benefit decision of the telemarketing company. Now, the main problem that I see with his strategy is that it also imposes a small cost on himself because he cannot receive or make any calls while he has the phone off the hook (but if you are having your dinner interrupted by the call, then that is probably not a problem).

Any other strategies that you think would work to prevent the phone calls?

(Source: Vox Baby)

The Economist Blog on Overfishing

2006-11-10T14:26:00.000-05:00

The Economist magazine has a new blog (which I am a little too excited about) called Free exchange and one of their first posts is about overfishing: why it is a problem and one possible solution.

Here is one excerpt I liked:

I have met many people who, in their quest for health and oneness with nature, eschew all meat but happily eat fish twice a day. This I find ironic, since, whatever the environmental effects of industrial farms, they are as nothing compared to the probleme of overfishing.

And another:

The counterincentives in the fishing industry, unfortunately, are particularly poor: everyone likes to eat inexpensive fish, and the fish aren't cute, or running through our back yards where we can see them.

They propose a solution where the government caps the amount of a certain fish that can be sold by restaurants and grocery stores.

Old Posts on Thomas Schelling

2006-11-10T14:21:00.000-05:00

Since I brought him up in class, I thought i would link to two posts that I created last year about Thomas Schelling and his work on applications of game theory.

First, a summary of two his main accomplishments that I posted when he won the Nobel prize last year.

Also, a post on a concept of his called "focal points."

Feel free to add to the discussion we started last year on Schelling.

How Education Levels Affect Marriage

2006-11-09T11:12:00.000-05:00

Economist Greg Mankiw links to a Wall Street Journal article that examines the relationship between education levels and marriage:

increased education leads to better marriages and stronger families. College graduates are less likely to divorce -- and more specifically, families with highly educated mothers are half as likely to split. So says an upcoming article in Demographic Research by Steven P. Martin, a professor of sociology at the University of Maryland. Looking at marriages that began between 1990 and 1994, Mr. Martin found that, of marriages in which the wife had a college education (or more), only 16.5% dissolved in the first 10 years, compared with 38% in which the wife had only a high-school diploma.

Any ideas on why this connection exists?

(Source: Greg Mankiw's Blog)

Economics of Voting

2006-11-09T08:34:00.000-05:00

In honor of the elections a few days ago, I think the question of why people vote is an interesting one. Statistically, the probability that your vote will decide the election is basically 0%. Additionally, it is costly in terms of time and effort to vote. Therefore, why do people vote? (I am not by any means saying that people should not vote, I am just interested in why people are compelled to do something that on the face of it seems to have no concrete benefit).

Here are some additional resources for the question and discussion:

Here is a post from last year where I pose the same question.
An article from economist Greg Mankiw on why he thinks some people should not vote.

Economics of the Weather

2006-11-05T16:01:00.000-05:00

The authors of Freakonomics have an article in the New York Times Magazine describing recent research in how the weather affects economics. Two main ideas:

Rainfall seems to have a significant effect on violent crime, both because increased drought tends to lead to more civil war and because riots in cities are dampened by rainfall
Research by two economists estimates the global warming will cause an increase in agricultural profits and mortality rates by the end of the century

Any thoughts on this research? Any other ways you can think of applying weather in economics?

(Source: Freakonomics Blog)

What is a "ClickTip"?

2006-11-02T13:25:00.000-05:00

Journalist Stephen Dubner discusses the practice of clicking the ads on a page that is provided for free as a tip to the author of the webpage. Since many webpages make money based on how many people click the ads that are placed on the page, by clicking the ad, you are giving them a small tip.

Stephen references a commenter on his blog:

I think The N.Y. Times and Washington Post websites are great (although I don’t pay for “Times Select” but I do think that their site has the best presentation, appearance-wise). I always try and remember to click on the ad banners once in a while to try and keep the sites free or at least much of the content free. Opening the ads in another tab on Firefox is not so disruptive. Or click and minimize.

What do you think of this practice? Do you think it is (or would be) effective? Try to put in economic terms why people do this.

(Source: Freakonomics Blog)

Why Do New Yorkers Smoke So Much?

2006-10-31T20:15:00.000-05:00

Economist Tyler Cowen posts an interesting question on his blog: why do New Yorkers seem to smoke so much more than people from other places/cities? Here are the possible reasons he offers:

1. Social networkers head to Manhattan, and social networkers smoke.
2. In Manhattan it is more important to signal you are cool.
3. Air pollution is higher, so the marginal health cost of smoking is less.
4. New York is colder, and that makes cigarettes more enjoyable.
5. The "artsy" variable is doing most of the work; of course this is related to #1 and #2.
6. NYC life is more stressful, and smoking calms some of these people down.
7. Many of them are poseurs, and these smokers don't have such valuable human capital.
I'd bet first on #2, and also on #7, but I don't have a good theory that will explain the rest of the cross-sectional evidence.

Which hypothesis do you find convincing? Any additional ones to add?

(Source: Marginal Revolution)

A Boom in Halloween Industries

2006-10-31T08:49:00.000-05:00

In honor of Halloween, today's post is about the horror genre of movies is doing really well in recent years. And actually, the "Halloween industry" in general has been doing well, from costumes to decoration. Here is an article from USA Today discussing the boom in revenues from horror movies and a new venture planned by Comcast and Sony called FearNet.

Here are some questions from Sarah:

What has casued the rise in horror genre popularity over the past few years, especially given that most movies this year are sequels or part of a series?
Do you think this new horror web site will stay in business? Is there enough of a fan base?

(From: Sarah O.)

A Fat Tax

2006-10-30T09:11:00.000-05:00

Economist Gary Becker considers a tax on foods with saturated fat as a solution to the problem of obesity in the United States.

One proposal receiving some attention is to impose a tax on foods that contain high quantities of saturated fat in the hope of cutting down consumption of these foods. The basic law of demand states that a tax on saturated fat would raise the price of fatty foods, and thereby would reduce their consumption. A good analogy is with other "sin"taxes, such as the very heavy tax in most countries on cigarettes, or the large tax in many countries on alcoholic beverages. These taxes have greatly raised the price of these goods and reduced their consumption. For example, it is estimated that every 10% increase in the retail price of cigarettes due to higher taxes cuts smoking by about 4% after the first year, and by a considerable 7% after a few years.

He ends up arguing against the use of a tax on foods with high levels of saturated fat due to the fact that there are other major causes of obesity, the likelihood of future medical advances, and a doubt of whether it would be an effective tax.

(Source: Becker-Posner Blog)

Reminiscing About Legos

2006-10-30T09:00:00.000-05:00

The Economist has an article this week about Lego, the Danish toy firm, and how it has turned around its business in the last year or two. Apparently, they worried too much about diversifying their business into video games and clothing instead of sticking to what they know best, which I think is making people with cylindrical heads.

Either way, it is an interesting case study of how new management comes in and reworks a firm. Also, you get this interesting tidbit of information about Lego blocks:

everyone on earth has, on average, 52 of them.

Another Interesting Graphic on Gasoline Taxes

2006-10-30T08:33:00.000-05:00

Economist Greg Mankiw has another interesting graphic up this week on gasoline taxes. It shows basically, the law of demand, showing that where gasoline taxes are higher (which results in higher prices), those nations consume considerably less gasoline.

(Source: Greg Mankiw's Blog)

Lucky Lottery Clerks

2006-10-30T07:59:00.000-05:00

A statistician in Canada discovered that the clearks who sold lottery tickets were winning a whole lot of prizes in the Ontario lottery. That means that they were either really lucky or they were stealing lottery prizes from elderly customers. Not the most shocking crime, but it is an interesting application of statistics.

(Source: Freakonomics Blog)

A Prize for Good African Leaders

2006-10-26T11:01:00.000-04:00

Part of the reason why Africa continues to be in a cycle of poverty is due to corrupt leadership in many African nations. In these cases, foreign aid is not effective because that aid typically falls into the hands of corrupt leaders and helps them stay in power at the expense of their people.

As a solution to this problem of bad/corrupt governance, an African billionaire has offered a lucrative monetary prize to any African leaders that meet certain standards of governance.

The contest, launched in London, will award winning leaders $5m (£2.7m) over 10 years when they leave office, plus $200,000 (£107,000) a year for life. The award will go to African heads of state who deliver security, health, education and economic development to their constituents.
In an interview with the Financial Times newspaper, Mr Ibrahim, 60, said leaders had no life after office. "Suddenly all the mansions, cars, food, wine is withdrawn.
Some find it difficult to rent a house in the capital. That incites corruption; it incites people to cling to power. The prize will offer essentially good
people, who may be wavering, the chance to opt for the good life after office,"

What do you think of this prize? It is actually similar to the Netflix innovation prize we discussed recently. Do you think it will be effective in combatting the corruption in many African governments?

Economist Tyler Cowen thinks the prize is too small. Here is another post about it where the author is skeptical, thinking that is gives a reward for something that should be expected.

(Source: Marginal Revolution)

Possible Solutions for the US Health Care System

2006-10-26T10:54:00.000-04:00

Here is a discussion from Stanford Medicine Magazine with different experts weighing in on how they would fix the US health care system. Here is a question from Carrie:

How should the US healthcare system be reformed?
Which of these solutions seems that it would work the best?

(Source: Carrie S.)

Will Small Countries Be Bought and Sold in the Near Future?

2006-10-25T11:48:00.000-04:00

Economist Tyler Cowen discusses the future of colonialism. Specifically, how future technologies or wealth might change the ability of more powerful countries to control weaker ones.

One idea he brings up is whether small countries may be simply bought by industrialized nations in the near future. In his words:

If the world's very poor countries stay in Malthusian traps, how long will it be before wealthy philanthropists can try to "adopt a country"? Measured Haitian gdp, for instance, is only a few billion dollars a year. Yes many countries have laws against foreign investment and land ownership, but at some point a correct strategy can put the money to good use. Can an entire corrupt government simply be bought out? Just how much money, and what kind of plan, would a private philanthropist need each year to turn Haiti around, or at least bring it to the standards of Martinique?

What do you guys think? Do you think this will happen in the forseeable future? Could it be a way to improve some countries or merely a power that will inevitably be abused?

(Source: Marginal Revolution)

Optimal Buffet Eating Strategy

2006-10-23T20:54:00.000-04:00

Economist Tim Harford, who was mentioned in the last blog post, also has a column for the Financial Times called Dear Economist, where he gives advice from the perspective of an economist on questions that are not your typical economics questions. A recent question:

Dear Economist,
From time to time I find myself eating a meal with an unlimited supply of food: sometimes an all-you-can-eat buffet, sometimes a more sophisticated meal laid on by a friend or someone trying to impress: weddings, banquets, that kind of thing. I like food but there are limits to how much I can eat. So how should I pace myself for optimal enjoyment of the meal?
Mr M. Newman, Shrewsbury

Harford offers two strategies depending on how the food is presented:

try a little of everything to decide what you like before going back for the main eating fest
consider the incentives of the food supplier if the dishes are brought out sequentially to save room for the best food

Any thoughts on the best buffet strategy?

Are Kids Fat Because of Working Parents?

2006-10-23T20:25:00.000-04:00

In this Slate article, Tim Harford argues that one of the reasons why more children are overweight these days is because there are more two-income families with moms working instead of staying home. In an earlier blog post, we discussed some of the other factors at work that Harford references, but this adds another idea into the mix. Here are questions to go along with the article:

In some ways, says Tim Hartford, author of the article, this makes sense: having two working parents leaves young children unsupervised, at daycare or with a nanny, who probably puts them in front of the TV and feeds them high-calorie processed foods that take less effort to prepare. And at the end of a long working day, exhausted, they may provide fast food for the children rather than cooking a traditional, nutritious meal. (Just look at it based on opportunity cost: if parents are too exhausted, the cost of cooking a meal would be much higher than the "small" weight gain associated with just one fast food meal...and then that just snowballs.) But on the other hand, for example, many kids at Walker have two working parents, and few of them are overweight. Is Hartford's proposal a plausible cause of the childhood obesity epidemic? Could it be a major player, or only one of many factors? If it is one of many, what other possible causes (within the family) could there be (i.e., parents' income levels, living in the suburbs vs. the city, even firstborn vs. second, third, etc child)?

(Source: Nicole O.)

Argument for a Higher Gasoline Tax

2006-10-20T17:12:00.000-04:00

Economist Greg Mankiw has an article in the Wall Street Journal arguing for a $1.00 increase in the per gallon gasoline tax. He argues for the tax to be phased in by $0.10 a year for the next 10 years and offers a very clear list of reasons why he favors it.

One of his reasons harkens back to our discussion of tax incidence in Unit C:

Tax incidence. A basic principle of tax analysis -- taught in most freshman economics courses -- is that the burden of a tax is shared by consumer and producer. In this case, as a higher gas tax discouraged oil consumption, the price of oil would fall in world markets. As a result, the price of gas to consumers would rise by less than the increase in the tax. Some of the tax would in effect be paid by Saudi Arabia and Venezuela.

What do you think of his argument? If you agree, what is the most convincing aspect? If you disagree, is there a better alternative?

Celebrity Baby Names

2006-10-20T16:11:00.000-04:00

Why do celebrities name their kids more unusual names than the general population? This may not seem like an economics question, but it involves a decision, which can always be examined from an economic perspective.

This article talks about some of the examples. There are the ones we have all heard of lately like Suri, Apple, and Shiloh. My favorites from the article are Penn Jillette's daughter named Moxie CrimeFighter and Jason Lee's son named Pilot Inspektor.

Why are celebrities choosing these names? I am not sure if the whole answer is publicity because I don't think that Tom Cruise or Brad Pitt and Angelina Jolie need more publicity than they have now.

An Economist also Won the Nobel Peace Prize

2006-10-18T09:08:00.000-04:00

Last week the Nobel Peace Prize was awarded to Muhammad Yunus, who is actually known for his advances in applying economics to helping developing nations. Yunus is known for starting a microfinance organization called Grameen Bank, which gives loans to individuals in developing nations (Grameen operates in Bangladesh).

Here is a basic explanation:
One of the obstacles faced by individuals and families in developing nations is that they have a difficult time obtaining loans (for consumption or starting and running a small business, etc.). Two of the reasons why it is difficult is that poor families do not have anything to offer a collateral, and it is not cost-effective for larger banks to offer such small loans. Since they have no collateral to offer, banks have no way of ensuring repayment.

Yunus started a bank based on the fact that individuals in developing nations have strong social bonds that could be used as a type of collateral. He took advantage of these strong social bonds by having the lenders apply together in groups. If one person in the group defaults on their loan, then everyone in the group is responsible for the loan. Therefore, the bank uses social pressures (the borrower not wanting to let down or burden their peers) as a way to enforce repayment.

The bank has been incrdeibly successful and has a very high repayment rate. Overall, Yunus and Grameen Bank are an example of helping developing nations by helping them build their own economies and their own markets instead of forcing western models upon them or just throwing foreign aid money at the problem.

Edmund Phelps Wins the Nobel Prize in Economics

2006-10-18T08:47:00.000-04:00

The announcement was really about a week ago, but I have not gotten around to posting about this until now. Edmund Phelps is a macroeconomist, so his accomplishments will not mean as much until next semester.

His main contribution is the idea of a natural rate of unemployment, which is a certain level of unemployment that will exist even when the economy is functioning at its potential. He also wrote about the importance of inflationary expectations -- the fact that it matters what people think inflation is going to be in the future.

Phelps is honestly not an economist whose work I know very well, but here is the press release announcing what he got the award for, and here is a summary of his accomplishments by economist Tyler Cowen.

Optimal Charitable Giving Strategies

2006-10-17T22:22:00.000-04:00

Tim Harford has an article in Slate that talks about the economics of charitable giving. The part that I think is most interesting is when he argues that we should give only to one cause to maximize the effectiveness of our charitable giving. Here is his explanation:

Even the way we choose to dole out cash betrays our true motives. Someone with $100 to give away and a world full of worthy causes should choose the worthiest and write the check. We don't. Instead, we give $5 for a LiveStrong bracelet, pledge $25 to Save the Children, another $25 to AIDS research, and so on. But $25 is not going to find a cure for AIDS. Either it's the best cause and deserves the entire $100, or it's not and some other cause does. The scattershot approach simply proves that we're more interested in feeling good than doing good.
Many people are unconvinced by this argument—which I owe to Steven Landsburg—because they are used to diversifying their financial investments (a bit of Google stock and a bit of Exxon, too) and varying their choices (vanilla ice cream AND bananas). But those instincts are selfish: They are not intended to benefit both Google and Exxon, nor both the ice-cream company and the banana growers. With charity, the logic is different, and a truly selfless donor would bite the bullet and put his entire donation behind one cause. That we find that so hard to imagine is just one more indication of how hard it is for us to think ourselves into a truly selfless view of the world.
None of this is to say that these contributions are worthless or economically insignificant. Just don't get too starry-eyed about the motives behind them.

Economist Tyler Cowen discusses this article and gives another argument for giving to only one charity:

I agree with Harford's point in a different regard. The fixed costs of processing a donation are relatively high, if only because the charity will send further letters asking for more money. For that reason it may be better to focus our giving on a single charity.

What do you think? If you had $1,000 to give, what strategy would yield the biggest impact?

(Source: Marginal Revolution)

Doggie Ice Cream

2006-10-17T21:44:00.000-04:00

Good Humour is going to start making ice cream sandwiches for dogs.

Companies appear to be on a never-ending quest for ways to pamper your pooch, and here's the latest evidence: Ice cream maker Good Humor and pet food producer Pedigree have announced plans to produce ice cream sandwiches for dogs.
Apparently this is not a stupid pet snack. The companies said they needed a special formula for the dairy treats, as many dogs are lactose intolerant and cannot easily digest regular ice cream. Pedigree Ice Cream Sandwich Treats for Dogs will be dairy-based and have the same texture as ice cream, but contain only 1 percent lactose. The treats also will have added protein and no sugar, and are "pawsitively delicious," the firms' press release exclaims. A package containing 6 frozen yummies will
sell for $3.99.

Why do you think there would be a market for this? You could also argue why there will not be a market for this (or why no one will buy it as long as they have that horrendous slogan).

(Source: Marginal Revolution)

Rising Prices of Cancer Drugs

2006-10-12T17:11:00.000-04:00

The NY Times this week has an article about the skyrocketing prices of cancer treatment drugs. They profile a new drug called Abraxane that costs $4,200 per dose, and is considered to be only a marginal improvement (if at all) over the older, much cheaper drug. The article also highlights the reasons why the prices of cancer drugs are increasing so much:

The rise in cancer-drug prices is a microcosm of broader trends pushing up health care costs nationally. Despite decades of efforts by governments and insurers to restrain costs, patients continue to want the newest — and most expensive — drugs and medical devices. And doctors and the health care industry have little reason to keep costs in check, because insurers rarely deny coverage for new treatments on the basis of price.

Drug industry experts say Abraxane’s price reflects the fact that makers of cancer drugs can charge high prices for new medicines even if they are only marginally better than their older counterparts. That pricing dynamic is enabled by insurance, which shields patients from the full price of drugs. Without pressure from their insurers, patients have little reason to choose older treatments over expensive new therapies.

And the insurance companies are not the only ones that face the higher price:

Even if they have insurance, many patients face co-payments of 20 percent for their cancer drugs, an expense that can become ruinous for patients receiving combination therapy with several new drugs. For example, Abraxane is being tested along with Avastin, a treatment from Genentech that costs $8,000 a month for some patients.
Drug costs are rising so fast that some patients cannot afford the newest treatments, and access to some therapies “is beginning to be eroded,” Ms. Hinestrosa said.

Here are some questions that go along with the article from Sarah:

What are the problems of this current system and what can be done to limit the prices of these not even miracle drugs? What are the long term effects of this trend and is it caused only by increased demand by consumers?

(Question posed by Sarah O.)

World Gasoline Taxes

2006-10-12T15:04:00.000-04:00

Below is a graph showing the taxes on gasoline in industrialized countries from the NY Times this week:
(Source: Greg Mankiw's Blog)

Netflix $1 Million Contest

2006-10-12T14:50:00.000-04:00

Netflix is offering $1 million to anyone who can beat their movie recommendation system, which recommends movies based on whether people liked or disliked other movies. They have a dataset of anonymous movie ratings, and your system would have to predict what movies people will like at least 10% better than the system that Netflix currently uses.

Here is an overview of the basic rules. You can look at how the teams competing for the prize are doing here.

Here is the take of Economist Steven Levitt:

I love the Netflix approach to the problem. They could easily spend $1 million internally hiring some programmers or Ph.D’s to try to improve their algorithm, with uncertain results. Instead, by making it a contest and offering up data to outsiders, they will probably succeed in having 100 times as many person-hours devoted to the problem for the same price—or cheaper because they only pay out the million if someone really improves on what they are doing now. In addition they gets lots of free publicity. Truly a brilliant strategy.

Do you agree that it is a brilliant strategy? Is there any downside to this strategy?

If you do agree that it is a brilliant strategy, why don't more companies use this method of innovating?

(Source: Freakonomics Blog)

Another Downside to Quantity Restrictions on Organs

2006-10-12T10:24:00.000-04:00

Economist Alex Tabarrok discusses a further danger of the ban on organ sales: lack of experience in transplants. He argues that due to the shortage of organs, many hospitals only do a few transaplants a year and therefore are more likely to make mistakes due to the inexperience and lack of practice.

Medicare requires that transplant centers perform 12 transplants a year to be certified but many programs are in violation of that standard with little consequence. Medicare is even thinking of reducing the standard from 12 per year to 9 in 30 months. As one specialist says "I wouldn't take my car to be serviced by someone who repaired nine cars over the past three years. Would anyone do that?"

He references an article and graph in the Washington Post that discusses the fact that many hospitals are currently falling short of this mark.

This post is timely since you guys did a paper on the possibility of the organ market just a few weeks ago and adds an argument that I had not heard before.

(Source: Marginal Revolution)

7-11 and the White Sox

2006-10-12T10:16:00.000-04:00

The Chicago White Sox and the convenience store chain of 7-11 struck a marketing deal where the start time of all White Sox home games for the next 3 years will be 7:11pm. The deal will pay $500,000 a year to the team.

This is a creative advertising strategy and a way to create value and exchange from a starting time where there was not value being traded before. Do you think it will be worth it for both groups? Is this a good business decision for both sides?

How to Allocate Flu Vaccines?

2006-10-06T15:03:00.000-04:00

In the Wall Street Journal today, there is an article that discusses the important, but tricky question of how limited vaccines should be allocated in the event of a national emergency. The question is relevant due to concerns that have arisen over the past few years over the avian flu.

The author of the article, Sharon Begley, reports on a paper that questions the conventional wisdom on the issue:

In May, scientists at the National Institutes of Health stirred things up with a paper calling into question the policy that aims to save the most lives by first vaccinating the old, the very young and the sick, putting last those who are two to 64 years of age.
The value of a life, they argued, depends on age. A 60-year-old has invested a lot (measured by education and experience) in his life, but has also reaped most of the returns. A child has minimal investment. A 20-year-old has great investment but has reaped almost none of the returns. Conclusion: To maximize investment in a life plus years of life left, 13- to 40-year-olds should have first claim on rationed vaccine, explains NIH's Ezekiel Emanuel.

What do you guys think? If you only have a certain number of vaccines, who should get first priority?

This is a pretty controversial question, so I urge you to read the whole article before commenting and to keep the comments civil and well thought-out.

(Source: Greg Mankiw's Blog)

What type of economist should get the Nobel Prize?

2006-10-06T14:52:00.000-04:00

I know that I have been posting about nothing but the Nobel Prize this past week, so you guys might be tired of it, but has been a convenient way to introduce you to the work of current economists.

Economist Greg Mankiw has an interesting question posted on his blog about what type of economist tends to get the Nobel Prize. He states that

There was an apparent consensus that the Nobel committee prefers rewarding people for a few path-breaking works, rather than judging an entire career of contributions. Is this optimal?
If the goal is to provide researchers with the right incentives, it may not be. It is as if a baseball team paid players based only on the number of home runs. We would have too many players swinging for the bleachers and too few base hits. In economics, maybe we get too many of the best people trying to create new paradigms and too few engaged in more routine, applied research.

What do you guys think? Should they be giving Nobel Prizes to the economists that come up with a few pathbreaking ideas (the home run hitters)? Or to economists that have larger quantities of consistent, solid research (the batting average leaders)? Which would be better for the field of economics? Which would be better for society as a whole in terms of advancing knowledge and having better economic policies?

Ig Nobel Prizes

2006-10-06T14:40:00.000-04:00

Since we have been discussing the impending Nobel Prizes, the "Ig Nobel" Prizes are also given out each year, and they are a lot less prestigious, but also a lot more entertaining. They are given out for research that is unusual and/or humorous, and as I quoted last year on this blog, for research that "cannot or should not be reproduced."

A list of this year's winners are listed here.

A couple of the more unusual ones:

ORNITHOLOGY: Ivan R. Schwab, of the University of California Davis, and the late Philip R.A. May of the University of California Los Angeles, for exploring and explaining why woodpeckers don't get headaches.
CHEMISTRY: Antonio Mulet, José Javier Benedito and José Bon of the University of Valencia, Spain, and Carmen Rosselló of the University of Illes Balears, in Palma de Mallorca, Spain, for their study "Ultrasonic Velocity in Cheddar Cheese as Affected by Temperature."

Nobel Series: William Baumol

2006-10-04T12:07:00.000-04:00

William Baumol is an economist at NYU and was the co-author of the intro textbook that I used in college. The main theory of his that I am familiar with and would like to highlight is called "Baumol's cost disease," which sounds more gruesome than it is.

Basically, Baumol's cost disease explains why productivity grows so fast in some sectors while it lags behind in others. In particular, the term refers to the fact that it is difficult to increase productivity in labor-intensive industries, like the arts or education. To use an example from Baumol himself, it takes the same amount of musicians to play a string quartet as it did 300 years ago. Or to use an example from education, the number of students that can be taught by one teacher is the same as it was 50 years ago. In fact, it may even be less now since there is more of a focus on low student-teacher ratios.

Therefore, while other industries like manufacturing clothing and printing books become more productive due to technological innovation, service industries do not due to the fact that they are labor-intensive goods. Therefore, the costs to produce those service goods remains higher than other goods. This could be an explanation for why the prices of medical care and tuition have been increasing so much while the prices of computers and most other manufactures have been decreasing or increasing at a slower rate.

Here is an article from The New Yorker that discusses the application of Baumol's cost disease further and references a newer study that confirms these ideas.

Can you think of any other examples of industries or goods and services that suffer from Baumol's cost disease?

Nobel Series: Gordon Tullock

2006-10-03T13:23:00.000-04:00

Another economist who has been discussed as a possible Nobel winner is Gordon Tullock. Dr. Tullock is known for his work in public choice economics (which basically applies economic logic to how government makes decisions). He is mostly known for introducing the idea of "rent-seeking behavior."

Rent-seeking behavior is where an individual or business seeks to gain by changing the economic environment instead of through a productive activity. To make the idea more clear, here are some examples:

A group of businesses join together to form a cartel and agree to raise prices.
An industry pays lobbyists to get Congress to pass a bill giving subsidies to the industry.
One country invades another to take natural resources, like oil.
A union tries to negotiate higher wages without increases in productivity.
Any type of theft of property.

The basic idea in all of the examples is that the action is not adding to the total welfare to society, merely providing more profit or resources to the rent seekers (many times just transferring resources from one group to another).

As a sidenote, one of his colleagues at George Mason University posted this about how Tullock always comes up with great insults. Here is my favorite:

The other day Gordon asked me to read one of his papers and Ipointed out a few typos. "Excellent," he said, "this will surely be your greatest contribution to economics."

Can you think of any other examples of rent-seeking behavior? Any ways in which you try to gain without providing any productivity?

Nobel Series: Oliver Williamson, part 2

2006-10-02T09:42:00.000-04:00

Williamson's work in transaction cost economics sheds light on the question of what determines the length of a contract. For instance, why is my contract with The Walker School a 1-year contract? Why do some companies give contracts of 3 to 5 years (informally through a trial period)? Why do temp agencies have people whose job is to work for contracts of as little as a day or a few hours?

Part of the reason comes down to the type of investments involved in the transactions. The basic conclusion is that the more "relationship-specific" the investments, the longer the length of the contract. As an example, job-training can be looked at as an investment from both the employer and the employee side. In situations where the employer has to spend a lot of time training employees in skills that are very specific to their company (like a technical job where the software is company-specific), we would expect to see longer contracts. Whereas, in a temp agency where the only training involved is in office skills that can be used in any job (therefore, not very relationship-specific), the contracts can be very short.

An interesting article in Financial Times by economist Tim Harford talks about this very issue. He discusses marriage as a unique long-term contract and how it relates to corporate examples of contract length and relationship-specific investments.

Any other examples of "long-term contracts" that you know of that might have to do with how specific the investments involved are? Reactions to the Harford article?

Nobel Series: Oliver Williamson, part 1

2006-10-02T09:21:00.000-04:00

The first possible Nobel economist that I will profile is Oliver Williamson, the one whose work I am most familiar with from graduate school.

He is the economist most responsible for the field of transaction cost economics. Transaction costs are the costs of an economic exchange. As an example, if you decide to buy a car, the price of the car is one of many costs you have to incur. You also have to research to find what kind of car you want, spend time driving to dealerships or looking through classifieds to find the car you want, and finally spend time negotiating on the price or terms of the deal. All of these are transaction costs. These type of costs are many times ignored in the theoretical realm of economic models, but Williamson brought attention to their effect.

Here is a review of one of Williamson's better known works by a UCLA law professor. He adds this assertion on Williamson and transaction costs:

Williamson's core idea is the theory of transaction cost economics. We can analogize transaction costs to friction: they are dead weight losses that reduce efficiency. They make transactions more costly and less likely to occur. Among the most important sources of transaction costs is the limited cognitive power of human decisionmakers.

Can you think of any other examples where transaction costs are important other than when buying cars? Are there cases where transaction costs can cause you to not make a purchase that you would make if they did not exist?

Economics of Tipping

2006-10-01T22:48:00.000-04:00

Stephen Dubner, co-author of the bestseller Freakonomics, asks why people do not tip flight attendants. He basically argues that flight attendants do the same type of service that you find in a lot of other jobs where the workers do receive tips (waiting tables, hotel bellmen, etc.). Any ideas on why people do not tip flight attendants? What makes it different from those other service jobs?

I think the rules about tipping are generally interesting/confusing. For instance, why is the tip in restaurants based on the value of the meal instead of the number of people at the table? I would think that the number of people at the table has a bigger impact on the amount of work a waiter (or waitress) has to do.

Also, if a tip is supposed to be a reward for a good job of service, why not have a convention where half of the tip is given at the beginning of the meal and half at the end? This strategy might encourage better service since I doubt giving a big tip encourages better service unless you go to a restaurant often enough for the server to recognize you and that you tip well.

Also, here is a link to a post I had last year on economic research on small ways that a server can increase the size of their tips.

(Source: Freakonomics)

Nobel Prize Possibilities

2006-09-28T08:24:00.000-04:00

The Nobel Prize for Economics is given out every year, and this year it will be announced on October 9th. Here is a link to my post on the winners from last year, Thomas Schelling and Robert Aumann. Follow the links to Schelling's work, which is particularly interesting.

The weeks leading up to the announcement always result in guesses as to who the winners will be. The publisher Thomson Scientific has some predictions for this year's Nobel Prize. On their online poll, the current leaders are Paul Krugman, Avinash Dixit, and Jagdish Bhagwati for contributions to internation trade theory.

Economist Tyler Cowen has some predictions posted on his blog as well; he is predicting that the prize will go to Eugene Fama and Richard Thaler for contributions to empirical finance.

I am personally hoping that the committee recognizes my contributions to the field of interactive whiteboard graphing and audioblogging...

I will try to profile a few of the main contenders over the next week (at least the ones that I am familiar with), but anyone who wants to post comments identifying what exactly these guys are known for would be a good post to earn extra credit.