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.