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)