Christmas Break

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?

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

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

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

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?

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

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

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

(Source: Marginal Revolution)

Why a Free Gift Bag?

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.)

Why Blockbuster Advertises Movies in Theaters

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

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:

1. Long lines waiting to get the PS3.
2. People were robbed and a man was shot while standing in line to buy the game system in Connecticut.
3. 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).
4. 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

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

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

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.

IKEA Doesn't Follow the Textbook Example

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

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

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?

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

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

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

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

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

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

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

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"?

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?

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

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

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

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

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

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

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

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?

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

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?

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

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

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

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

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

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

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

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

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

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

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

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?

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?

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

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

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

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

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

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

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

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.

Wal-Mart Cuts Generic Drug Prices

You may have seen this on the news last week, but Wal-Mart has just cut prices on some generic drugs to $4 for a 30-day supply. Here are some good questions posed by Sarah:

How will this new policy from Wal-Mart affect the demand for brand name drugs and will this policy affect total revenue? Consider the elasticity of demand for generic drugs. Wal-Mart claims up to a 70% savings for consumers on some drugs, so where does Wal-Mart benefit? What are some possible negative repercussions for such a policy?

Yale to Offer Videos of Courses

This article on CNN.com reports that Yale is planning to offer digital videos of its courses online for free:

Yale University said on Wednesday it will offer digital videos of some courses on the Internet for free, along with transcripts in several languages, in an effort to make the elite private school more accessible.

While Princeton University, Massachusetts Institute of Technology and others already offer course material online without charge, Yale is the first to focus on free video lectures, the New Haven, Connecticut-based school said.

The 18-month pilot project will provide videos, syllabi and transcripts for seven courses beginning in the 2007 academic year. They include "Introduction to the Old Testament," "Fundamentals of Physics" and "Introduction to Political Philosophy."

The courses cannot be counted toward a Yale degree, and educators say they are no substitute for actual teaching.

What do you think about this plan? Is it smart on Yale's part or are they giving people a free ride without having to pay the high tuition?

(Source: Greg Mankiw's Blog)

More on School Choice

Here are a few more resources to fuel the discussion on school choice from a website of resources for the PBS show Frontline when they did a special on the subject.

In particular, here is a set of interviews with proponents of school choice, and then here is a page with interviews with opponents of school choice.

In your posts be sure to reference the article or provide links to what you are commenting on so people know how to go to the source to respond.

School Choice

We have been talking about the efficiency of markets in class, and an area where many people think markets could play more of a role is education. Eminent economist Milton Friedman was one of the first to form this modern notion of "school choice," where individuals can use government money (like vouchers) to choose which school they go to instead of just go to the school where they live. The main benefit would come from the competition between schools, which would act as a constant incentive to improve the educational experience at the school.

Here is a post on Marginal Revolution that discusses a talk by Harvard economist Caroline Hoxby. The policy paper linked from that post discusses the 3 elements that Dr. Hoxby thinks must exist for school choice to work:

- Supply flexibility, which means that schools should have the ability to open where there is demand for them, expand with increased demand and contract with reduced demand

- Money should follow students, which means that funding policies must be designed so that schools that are in demand have the funds to expand and those that are not in demand lose funds and must contract; and

- Independent management of schools, which means that schools must be free to innovate in a range of areas, including pedagogy, teacher pay, budget allocation, and the way the school is organised.

Now being at a private school, you guys have at least some idea of the benefit of competition between schools. What do you think of the overall idea as a replacement for the current public school system? Let's get a discussion going of some of the key issues involved.

(Source: Marginal Revolution)

Becker on Price Gouging

Given what we have been discussing about supply and demand the past couple of weeks, here is an article in defense of price gouging by economist Gary Becker. One key part on the refineries last year damaged by Katrina:

On the other hand, profits have increased to operators of refineries that were not damaged by Katrina because the damage to Gulf oil refineries raised the wholesale price of gasoline, the main product of refineries. However, the higher prices and greater profits induced undamaged refineries to squeeze greater production out of their limited capacity, and companies hastened to repair the refineries that were damaged to cash in on the high prices. In fact, many were repaired in a remarkably short time. If price were not allowed to rise, profits of undamaged refineries would have been reduced, but the supply of gasoline would have increased at a slower, probably much slower, rate.

He also discusses later in the article that he thinks that price controls are also not necessary in developing nations when they face a catastrophe, which is a more controversial stance. Any thoughts on that after reading his argument? Any cases that we did not discuss in class where you think price controls are valid?

(Source: Greg Mankiw's Blog)

The Future of Grocery Stores

Nick poses a question on why the delivery of groceries never worked out:

One thing that I never could understand was why Webvan (the company "back in the day") who was in all the major cities delivering groceries from their online page went out of business. It just made sense to me that people would have an easier time buying their groceries online and having them sent directly to their house (no driving, long lines, etc).

Here is an article that discusses the issue.

Economist Tyler Cowen actually discusses this very question in his post today:

We should expect supermarkets to overinvest in encouraging impulse purchases. (Wegman's should put a given item in only one place and yes I will learn where that is.) Maybe that is the economic problem with home delivery. Smells, squeezes, and full-size items -- not Internet links -- sell profitable foodstuffs. The boring bulk stuff which is easy to order over the Internet also brings the lowest profit margins, I believe.

Overall, can you think of any other reasons why the home delivery of groceries did not work? Or maybe answer the question posed by Dr. Cowen in his post: what features would you like to see in the near future in grocery stores (especially given that it will probably be a few years until you have to shop for groceries on a regular basis anyway)?

(Source: Marginal Revolution & Nick Wellmon)

Chevron vs. Shell

Minimum Wage Articles

Here are a couple of minimum wage articles, now that we have covered the basic theory behind price controls:

1. A short article in Time (recommended by Natalie) that discusses the proposal to raise the minimum wage in Chicago. The issue of a minimum wage in a particular city raises the possibility of businesses leaving the city or locating just outside the city to avoid the regulation (a phenomenon called "voting with your feet"). Since the article is about a month old, the update is that Mayor Daley vetoed the minimum wage bill.

2. A post by Economist Alex Tabarrok that discusses some further issues on the minimum wage, taking as a given that the employment effect is small.

How do these issues complement our discussion of minimum wage in class? Any new ideas on this current debate about the minimum wage?

Economic History Graph

Here is an interesting graphic from the Wall Street Journal, courtesy of Economist Greg Mankiw that shows how large the GDP of the US, China, and India has been relative to the GDP of the entire world.

(Source: Greg Mankiw's Blog)

99 Cent Pricing

This is an age-old question: why do prices in stores end in .99 (like $1.99 instead of $2 or $19.99 instead of $20)?

The traditional explanation is that there is some psychological aspect that makes more people buy the product because it appears much cheaper even though it is only $0.01 cheaper. I buy that to a certain extent, but I feel there is also something to be gained by pricing at even numbers because people appreciate not feeling like they are being tricked. Or why not price items so that they work out to be even numbers when tax is added so that you save people from having to deal with change?

Another explanation I have heard is that it was designed to keep cashiers from pocketing money given to them by customers. Since they are given $1.99 instead of $2, the cashier has to open the register to give change.

Neither of these explanations are really satisfying, so I wanted to see what you guys thought. Another interesting idea is to think about the circumstances where pricing is a little different. Like why are gasoline companies are the only ones to give tenths of a cent on their prices? Or why do some places price in whole numbers (some fancy restaurants, used book stores, concert tickets, etc.) while most do not?

(Schulz gets credit for suggesting the question should be on the blog)

No, Really, This Is Our Farewell Tour...

Big-time artists that have been around for awhile will many times announce a farewell tour when they plan to retire from the music business. However, you then see some bands come out of retirement after their so-called farewell, or at least extend the farewell long enough to play cities multiple times (some recent examples are Eric Clapton, Cher, and the Who). In fact, Phil Collins named his tour this summer the "First Final Farewell Tour" as reference to this phenomenon.

Clearly, bands name their tours this because it raises the revenue for the tour because people think they will never have the chance to see this band again. But on the other hand, if bands keep going back on saying it is a farewell tour, then they lose credibility and people won't be as likely to buy a ticket when it is their last tour. What are your thoughts on this whole idea? What would be the revenue-maximizing strategy for a band in this situation? What type of band could use the strategy of announcing a farewell tour? Red Hot Chili Peppers? Death Cab for Cutie? Hilary Duff? U2?

(Question from Austin)

Reading a Book vs. Watching a DVD

Economist Tyler Cowen offers what I think is a very interesting question:

I almost always read novels in bits. That is, I put the book down for a few times before finishing it.

I rarely watch movies in bits. That just seems wrong. But, assuming we are watching on DVD, why? Why do pauses ruin a movie but not a book?

He offers several hypotheses, but the one I find most convincing initially is:

2. Most books are longer than most movies, but there is otherwise no good reason for the difference in our consumption pattern.

I find this one convincing simply because if there is a book that takes less than two hours to read, I usually read it in one sitting. I tend to think that any movie over 1 hour and 45 minutes is too long, anyway, so I have no problem pausing DVDs and watching the rest later if they are over 2 hours.

Another reason I would add:

• with books, it is easier to look back at an earlier section for a piece of information if your forget, even with the scene selection on DVDs

A further wrinkle he offers is comparing action books and action movies:

The ever-wise Natasha notes that we are mostly likely to read action novels -- such as The da Vinci Code -- straight through without pause. But action movies are the easiest to watch in bits. Ever try just a half hour of Jackie Chan? Wonderful. But breaking up a good drama is criminal.

What are your thoughts on this?

(Source: Marginal Revolution)

Banning Chocolate from Schools

Economist Tim Harford discusses how free markets are suppressed in some cases. The main issue he discusses is how some schools are banning candy in vending machines. The questions to go along with the article are below:

In a few very publicized cases, the government is trying to get directly involved in maintaining (or improving) the health of America's children by putting weight on report cards, removing vending machines from schools, etc. Is it important to do such things, or is it a lost cause? If so, why, and what causes the problem in the first place (like marketing of junk food directly to children)? And is there something, ultimately, that could reduce the incentive for children (and people in general) to eat junk food, or is the approach that these schools are taking (by removing the temptation entirely) the best (or is it an impossible problem to fix at all)?

(Proposed by Nicole)

Divergence Between Test Scores & Economic Performance

Nobel Prize winning Economist Gary Becker has an article posted on the following paradox:

One of the challenging paradoxes during the past several decades is that American teenagers have consistently performed below average on international tests in math and sciences, and not especially well on reading tests, yet the American economy is more productive than any other.

One reason he gives is that the education system in the United States builds up and gets harder as you move up each level, culminating with university, while in some other countries, elementary and secondary school is harder and college is seen as a "break" or a reward for doing all of the work in the first place. I can attest to this phenomenon from observing schools and talking to students in Japan. Another interesting reason he gives that I can relate to as a teacher is that:

American schools are less oriented toward rote teaching than are schools in many other countries, and they are more oriented toward giving students practice in thinking through issues and expressing themselves in discussions.

Economist Arnold Kling boils the argument down to two propositions:

(1) International tests fail to measure the superior aspects of the U.S. education system.

(2) Education is not such an important factor in comparative economic performance.

I lean toward (2). It's better to have strong entrepreneurialism and mediocre education than the other way around.

Which explanation do you find most convincing? Any other explanations that may be useful?

(Source: EconLog)

Consumer Surplus from Pets

Economist Tyler Cowen has a post on how much consumer surplus people get from pets -- very timely considering what we are studying right now.

He argues that people get a lot of consumer surplus from pets because they value the pets they have very highly, but many families do not want another. Therefore, the willingness to pay for the pet they already have is relative to the price they would have to pay for the next pet (which is determined by their willingness to pay for that next pet).

He goes on in the post to discuss endowment effects and the corresponding rise in living standards, but for this post, let's stick to his idea that people get a lot of consumer surplus out of their pets. Any thoughts in agreement or disagreement?

(Source: Marginal Revolution)

People Sleep Better on a Pile of Money

An interesting study from the Journal of American Epidemiology suggests that the rich sleep more efficiently. People with higher incomes don't sleep for more hours necessarily, but they spend less time trying to get to sleep each night (called sleep latency).

Here is a link to a graphic from the study and where I originally found out about it.

Any ideas on what your income could have to do with your sleep latency?

(Source: Marginal Revolution)

Copyrights for Fashions?

Economist Greg Mankiw points to an article in the Wall Street Journal that explains a way that designers want to stop cheap imitations of their designs:

prominent fashion designers in the U.S. are pushing for federal legislation that would offer three years of copyright-like protection for designs ranging from dresses and shoes to belts and eyeglass frames.

What do you think of this idea? Copyrights protect intellectual property and give people more incentive to create new ideas. However, they also create temporary monopolies and drive up the price of the goods in question. Copyrights already cover written material, songs, etc. Do you think copyrights should be extended to fashions?

(Source: Greg Mankiw's Blog)

Using Economics to Put People in Jail

The Economics Focus in this week's issue of The Economist discusses how the "efficient markets hypothesis" is used in legal cases. Again, we are getting a little ahead of ourselves in the curriculum, but the "efficient markets hypothesis," as applied to the stock market, basically says that the price of a stock includes all of the public information relevant to its value. Therefore, the only reason a stock changes price is because of new information.

You can turn the hypothesis around and measure how much impact an event has on the stock price by determining how much the stock went up or down when the news came out about the event. This hypothesis was used in the legal case of a tax accountant named James Olis

His 24-year sentence stemmed from a calculation of the financial loss caused to investors in Dynegy by Project Alpha, an accounting fraud in which he took part. That financial loss was estimated using the fall in Dynegy's share price on the news that Project Alpha was fraudulent. According to Judge Lake, it was so big that, under sentencing guidelines then in place, Mr Olis had to go to jail for a long time.

Any thoughts on the use of this theory to determine damages? The article discusses some of the controversy of using it.

(Source: Freakonomics Blog)

How to Best Target Foreign Aid

Foreign aid to developing nations has typically been used to fund long-term projects like infrastructure (roads, education systems, etc.). An article in Business Week from Edward Miguel says that it should be used instead to repair the short-term effects of natural catastrophes:

Our research find that a 5% drop in per capita income due to drought increases the likelihod of a civil conflict [in African countries] in the following year by nearly one half. That's a very large effect.

...Currently, most foreign aid focuses on long-term investments in infrastructure of education but does little to deal with such short-term triggers of violence as drought or falling export commodity prices. But our research suggests a larger share of aid should aim to dampen the sharp falls in income that actually generate recruits for rebel movements.

There is no link to the article, but here is a link to the Marginal Revolution post that cited it and also an opinion from economist Tyler Cowen that his issue is that he does not think the foreign aid would end up in the hands of the poor in these cases.

(Source: Marginal Revolution)

How does YouTube make money?

The Economist has an article about the business model of YouTube. The key question is how the site makes money out of people posting amateur videos (which costs a lot in terms of bandwidth and data storage). The main answer is that they don't really have a way of making money yet. Here are their two ideas right now:

Aware that inserting advertisements at the beginning of video clips, as some sites do, is annoying and risks driving away YouTube's users, Mr Hurley and Mr Chen have announced two experiments with advertising, with the promise of more to come. One idea is for “brand channels” in which corporate customers create pages for their own promotional clips. Warner Brothers Records, a music label, led the way, setting up a page to promote a new album by Paris Hilton. The second experiment is “participatory video ads”, whereby advertisements can be uploaded and then rated, shared and tagged just like amateur clips. This “encourages engagement and participation,” the company declares.

Do you think YouTube is a sustainable business? Any thoughts about their ideas on how to make money? I know that many of you are the prime consumers of YouTube, so would you look at ads in this way?

(Source: Newmark's Door)

Mommy, is Grandma a trucker?

An article in the Wall Street Journal (no link because you need a subscription to read it) by Stephanie Chen describes how trucking companies are trying to hire older couples to drive their big rigs together:

Faced with a worsening shortage of long-haul truck drivers, freight carriers are turning to the RV generation, aggressively recruiting older couples like the Fords to climb behind the wheel. Schneider National Inc., the Green Bay, Wis., company that hired the Fords and put them through driving school, fishes for applicants through AARP, the advocacy group for people 50 and older, and has a Web page for "mature workers." This fall, the American Trucking Association plans a billboard and television ad blitz to lure older drivers."We just thought if Ma and Pa can drive the Winnebago, maybe they can drive the 18-wheeler," says Tim Lynch, a senior vice president at the trade group...

The hiring binge has dramatically increased the number of husband-and-wife driving teams, and truck makers are trying to make their big rigs feel more like rolling homes away from home. Paccar Inc.'s Kenworth Truck Co. unit introduced a new model in March with leather beds and heated seats. Volvo Trucks North America, part of AB Volvo, has begun production of trucks with a full-size bed in the cab comfortable for couples.

Why do you think trucking companies are facing a shortage of workers? Other than their penchant for driving RVs, why target older couples?

Where is it easiest to do business?

The World Bank publishes a report every year called Doing Business that compares different countries and how easy it is to have a business in each country. They look at regulations on the following factors within a country:

starting a business, dealing with licenses, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business.

They then rank countries in on how easy it is to have a business in the country based on the regulations of the government. For 2007, the top five are as follows:

1. Singapore
2. New Zealand
3. United States
4. Canada
5. Hong Kong

And the bottom five are as follows:

171. Republic of Congo
172. Chad
173. Guinea-Bissau
174. Timor-Leste
175. Democratic Republic of Congo

Here are some interesting facts from the 2006 report (courtesy of economist Greg Mankiw):

If you were opening a new business in Lao PDR, the start-up procedures would take 198 days. If you were opening one in Syria, you would have to put up $61,000 in minimum capital—51 times average annual income. If you were building a warehouse in Bosnia and Herzegovina, the fees for utility hook-up and compliance with building regulations would amount to 87 times average income. And if you ran a business in Guatemala, it would take you 1,459 days to resolve a simple dispute in the courts. If you were paying all business taxes in Sierra Leone, they would take 164% of your company’s gross profit...

Overall, a clear reason why many countries have difficulty sustaining economic growth is that it is so hard to merely conduct business in the country. Reactions to this? Why do you think so many countries burden their industry with regulations like this?

Ethnic restaurants: in the city or suburbs?

In the Washington Post, economist Tyler Cowen, who also publishes a dining guide for the DC area, discusses why some ethnic restaurants are in the suburbs and why others are clustered around ethnic communities. The article references a lot of suburbs of DC, so if you are not familiar with the area, the article loses some impact. However, there are a few interesting points:

First, Cowen argues that ethnic restaurants are moving into the suburbs as rents increase in the city, ethnic populations move into the suburbs, and American tastes welcome the new flavors:

This new mobility is weakening the whole notion of the ethnic neighborhood. Forget the old Chinatown paradigm: Diffusion is the new model. As a result, ethnic restaurants are more like scattered outposts, drawing from a wide radius. As Serrano points out, "Our competition is not right next door. We compete with . . . restaurants five or 10 miles away."

Cowen also discusses, however, the types of restaurants that are still clustered in ethnic neighborhoods. They tend to be ethnic foods, like Korean and Filipino, that do not appeal as much to American tastes.

Filipinos, for example, are the second most numerous Asian group in the United States (some 2 million, compared with 2.7 million Chinese). But outside of Little Manila in Los Angeles and parts of San Francisco, Filipino restaurants are unusual. The Washington area -- where there are some 34,000 people of Filipino heritage -- has Little Quiapo in Arlington and Manila Cafe in Springfield. But few non-Filipino Americans have a love for fish sauce, vinegar marinade and oxtail. And, as my Filipino friend John Nye has told me, many Filipinos prefer a home-cooked meal.