Fresh-made gefilte fish is hard to find this Passover season, because the harsh winter restricted fishing on the Great Lakes, sharply decreasing the supply of an essential input—whitefish. While this delicacy is not required by ritual, it is traditional—and with fresh-ground horseradish it is a mouth- (and eye-) watering treat. One would think that a rising price would equilibrate the market, but it hasn’t—apparently merchants did not want to antagonize customers by raising prices. Indeed, the nature-induced shortage in the market for fresh gefilte fish has increased the demand in the related market for the pre-made Manischewitz product, so that is hard to find too. Pretty sad when you can’t find gefilte fish even in Manhattan!
The new exhibition on the Vikings at the British Museum illustrates behavior along supply curves. The local Anglo-Saxons decided that the best way to keep Viking raiders at bay was to buy them off—to pay tribute. Perhaps unsurprisingly, this extra payoff merely induced a movement up the supply curve of Viking raids, as more raiding parties realized that there was money to be made by raiding English villages. Perhaps this is a lesson for modernity: don’t negotiate with terrorists!
We are arranging a car to take us from our flat to Heathrow Airport early Saturday morning, then return us on Monday evening. The price going to the airport is ₤28, the price returning is ₤38. Why the difference?
One possibility is cost-based price discrimination: the driver may have to wait at Heathrow, since the plane and retrieving our baggage may be delayed. Another is that the prices are set to match the differential set by metered taxis to reflect waiting time for fares at Heathrow (although I would think that competition among car services would eliminate that differential). I don’t see how this differential could arise from demand-based price discrimination; and neither of the other explanations seems very satisfying.
(HT: DA)
On a visit to the London Science Museum, my oldest grandson explained to me how 3D printing works. I expressed doubt about its economic value, but he pointed out this sign. “Aha,” I said, “here is a clear-cut case of a technological change that should reduce long-run average cost (by saving on materials).”
And despite the last sentence of the picture, this saving will eventually be passed onto consumers in the form of lower ticket prices, but probably not fully in the oligopolistic aircraft manufacturing industry.
(HT: JCH)
At the British Library, the special exhibition about Georgian England has a concession (old folks) price of ₤7, but also a listed concession (gift) price of ₤8. With the latter, one gets a receipt and can deduct the ₤8 from one’s income at tax time. If one is in the 20 percent bracket (taxable income from almost nothing up to ₤32,000), the net admission price is ₤6.40. So the incidence of the subsidy is typically shared nicely by the library and the taxpayer. But for the highest-income visitors — tax rate of 40 percent — the overwhelming share of the benefit goes to the taxpayer. I’ve never seen this double-pricing scheme made so explicit — and the sharing of the gains made so clear — in the U.S.
The picture below is of a “beer” I drank at a friend’s house this past weekend. It actually tasted pretty good; but why 0.5 percent alcohol, which surely added to the cost of production, but couldn’t, I think, have added to the taste? Including the minuscule amount of alcohol would certainly exclude teetotalers from consumption; and to get any kind of buzz a real beer drinker would need to drink at least several gallons.
Watching the Olympics in a foreign country (the U.K.) brings out the super-patriot in me. I’m cheering for the U.S. athletes in each event, and I don’t even care about the games!
Is this patriotism unusual? Actually, we Americans are outliers in this regard. In a recent set of World Values Surveys, 71 percent of Americans responded positively when asked if they were very proud of their country. Among 16 other rich countries in the surveys, the average was only 45 percent. And only Australians and Irish were as proud as we seem to be. The jingoism of the networks in the U.S. during the Olympics caters to, and perhaps reinforces, our attitudes.
A recent New York Times article discussed a meeting being held to protest a “tiered wage” that averages $1,000 per week for performers in touring productions of Broadway musicals — compared to a “full wage” of $1,800 for the Broadway productions of the same show.
Why shouldn’t the pay be the same for the same effort? The article gets the answer correct: the pay must equal the marginal revenue product for the production to be profitable; and even compared to performances in cultural capitals like Austin, Tex., the revenue-per-seat-filled on Broadway is much higher. A touring company just cannot, as the article notes, make a profit or perhaps not break even paying the same wages as on Broadway. Perhaps not fair to the performers, but this is good economics. With this difference in pay, however, the quality of the touring companies is unlikely to be as good as the Broadway company.
I visited the Mütter Museum (a great collection of medical and related memorabilia and information in Philadelphia), which had the following sign on one exhibit about shrunken heads: “Westerners traveling to the territory in the late 19th century … were fascinated with the heads and offered the tribe money and guns in exchange. … This led to an increase in warfare … both to get more heads to sell and because of the prevalence of guns. It also led to the creation of counterfeit heads … made from real human heads but not prepared by the tribe, and others [that] were made from monkey, goat, or other animal skin.” Nice to see how, even for a bizarre object, a large increase in demand elicits a supply response of both genuine and fake products.
I welcome other equally weird examples of induced supply responses with both genuine and fake products.
What do you do if your product is obsolete and demand is shifting rapidly leftward? The paper industry has a problem: digitization and environmental concerns. To prevent further declines, the brand of paper our department uses has created a clever slogan (see the picture) — “Because it’s easier to learn on paper.” I wonder what other examples there are of businesses using the market to maintain the demand for a product that is being displaced by technological change (as opposed to obtaining government protection, the usual route in these instances)?
A student says his family owns some property in rural East Texas. The property on a hilltop next to it overlooks my student’s pond. His neighbor says he really enjoys sitting on his porch watching the sunset over the pond. The student’s family doesn’t benefit from the pond’s positive externality — they have no view at all.
His father, who was annoyed by the neighbor’s bragging, decided to stop trimming the bushes around the pond. Soon, the neighbor called up and offered to maintain the property — trim the bushes and keep the pond free of rubbish. A clever ploy by his father to force the neighbor to internalize the externality — although I wonder whether this induced behavior represented a stable equilibrium. (HT: SF)
There are three convenience stores in the student area west of the University of Texas campus. Store A sells the most beer, and barely looks at student IDs; but it also charges the highest price of the three. Store B is a bit stricter on fake IDs, refuses some underage students, and charges a lower price. Store C has the best prices, but its clerks inspect IDs thoroughly. My student reports that nobody makes it through with a fake ID. This near-campus oligopoly defines a new pricing strategy: lenience on IDs that is unsurprisingly related to the stores’ pricing policies. I wonder about differences in the characteristics of the patrons of the different stores.
(HT: JZ)
Chatting with a seatmate on a flight, I learned she was attending a conference, hosted by Shared Hope International, on domestic trafficking in minor children. Naively and optimistically, I asked if this problem has been diminishing. No, quite the contrary. Why? The reason appears to be economic, having to do with technological change and technology transfer. With the internet, it is much easier to engage in transactions — nothing needs to be done face-to-face, thus reducing the risk to traffickers. Also, organized crime is getting involved since the trade is so profitable, as at-risk children can be traded repeatedly (unlike an ounce of crack cocaine). With some modifications, an established drug network can be used as a child-sex network. Disgusting, horrible, and a negative side-effect of technological progress. (HT: JM)
We received a postcard from our plumber offering service on Fridays with no service charge, explaining that they can offer this because the plumber will be in our area of town, thus saving drive time and fuel costs. We are better off, saving the $59 on the service charge; and the plumbing company acknowledges that the savings make it better off too. It’s not often you see a company that understands Pareto improvements this well. I invite other examples of commercial offers where the advertiser makes the mutual gains as clear as this.
What’s in a name? Steve Levitt and economists following on his work have examined how racial differences in given names generate (or don’t) differences in economic outcomes. A new paper (PDF) by Costanza Biavaschi, Corrado Giulietti and Zahra Siddique shows that first names mattered for immigrants to the U.S. in the first half of the 20th century: people who Americanized their given names did better economically thereafter.
But how to get around the possibility that those with more energy/ambition were more likely to change names—going from Giovanni to John or Zbigniew to Charles? Answer: use the complexity of the pre-change name to predict whether a person changes names; and this is a good predictor.
During the Social Security lecture to my class of 500 freshman, most expressed disbelief that the program would exist when they retire. Like a young colleague of mine, they were sure they would never collect.
Wrong! I can’t see the program being abolished. It is very popular, and its potential bankruptcy is one of the most easily dealt with policy problems we face: just raise the age for regular benefits by one year in each of the next four quinquennia, raise the taxable base for FICA, and voilà — problem solved.
But perhaps my students’ pessimism is a good thing. If they believe this, and act on their beliefs, they will set aside more for their private pensions — saving more. Given the low American saving rates over the last few decades, maybe I should encourage their pessimism!
Friday’s labor-force data brought liberal outcries, and a comment from Ben Bernanke, that the drop in labor-force participation indicates unemployment is really much higher, and the economy in worse shape, than the 7.3 percent unemployment rate might indicate. It is true that participation for men is at a postwar low and has decreased by 3-1/2 percentage points since the 2007 cyclical peak; and women’s participation stopped rising in 1999 and has fallen by 2 percentage points since the peak.
Is this so bad? Yes, if labor-force leavers are desperate to work and just get discouraged. But perhaps no; perhaps it has taken the Great Recession to get Americans to realize that we shouldn’t be working harder than people in other rich countries and should be enjoying more leisure. If this is so, perhaps there’s a silver lining in what so many people view as the economic doldrums of the last three years.
Public higher education in the U.S. is not in good shape—and the main reason is lack of funds. States will not increase their funding, and often they severely limit tuition increases. My university appears to have hit upon a solution: product placement and direct advertising. The new computer building, the Gates Building, is part of the Dell Computer Science Center, and has a Dell logo and signs for eBay and PayPal in front of the building.
But why stop here? Five hundred students stare at me for 1-1/4 hours 28 times each fall semester. The university could ask me to advertise—wear a cap, or a t-shirt, just like a tennis star—showing the product of whichever companies bid the most for the rights to advertise on my apparel during class. While I would probably insist on some of the royalties, the bilateral monopoly between the university and me would surely raise funds for the university. With enough professors required to do this, public universities could alleviate some of their financial problems. No doubt readers have similar clever ideas for product placement that would help fund public universities, albeit at some cost in dignity.
An honors course of 150 students at the University of Texas requires short written assignments each week. The instructor had given prizes of $,1500, $1,000 and $500 to the top three papers at semester’s end. He abandoned this prize structure and now gives prizes of $100 to the three best papers each week.
The instructor, an English professor, is unfamiliar with tournament models and the idea that larger top prizes and a steeper prize gradient will elicit more effort than a flatter gradient, one with more prizes of smaller amounts (Lazear and Rosen, 1981). My guess is that he wants to be fair rather than confer such unequal prizes; but he would get better written work if he went back to the old system, just as Tiger Woods is better motivated by a big winning prize for a whole tournament than he would be by small prizes for having the best score in a particular round. Alternatively, combine equity and efficiency by offering two $100 prizes each week, then one $1,000 prize at the semester’s end.
(HT: L.C.)
For the first time, Austin City Limits, one of the two biggest music festivals in town, is running on two weekends instead of just one. Unfortunately, the price for a pass for the second weekend on Craigslist is now down to half the festival sponsor’s original asking price. Why?
1. The asking price for the second weekend was the same as for the first—not smart when you’re doubling the number of offerings; and the headliners are identical on the two weekends. The amount supplied is double in quantity, but no different in quality or even in variety; double supply, no change in demand.
2. Demand is almost certainly lower on the second weekend, since that is the weekend of the UT-Oklahoma game in Dallas.
It was probably a bad business decision to price the second weekend the same as the first.
(HT: KM)
There’s a midterm this week in my class of 550 students, and I have been deluged with emailed questions, many procedural, that are covered in the online daily class summary. (For example, is the test being given in class?) In the old days, when students came to office hours to ask questions, I wouldn’t have gotten most of these queries. Regrettably, a student’s opportunity cost of emailing is much less than the cost of an office visit.
Why don’t I raise the cost to students by refusing to answer these emails? If I thought that would deter all such questions and visits, I would refuse. But even if 20 percent of the emails translate into student visits, I’m better off answering the emails, since each takes me at most 1/5 as long as dealing with the question face-to-face in my office. This is annoying, but I believe I save time this way.
A student appears to have enclosed the commons: for the last two weeks, he has camped in a small public area in the vestibule of a suite of faculty offices, making it unusable for other students to meet in groups (its use in all previous years). Believing that this is a public area, and absent my colleagues saying anything, I asked the chap to vacate the place to allow others to use it. This is a classic case of the difficulty of maintaining property rights in a public setting with no way of enforcing public ownership other than moral suasion. This may be more of a problem in universities than in businesses, given what I find as the self-selection into faculty jobs of people who want to avoid confrontation.
One of the major complaints of right-wing politicians against the Affordable Care Act (Obamacare) is its imposed mandates that individuals obtain health insurance and that larger businesses offer health insurance to employees. The professed opposition is to the mandates, per se. It ignores the mandates that both employers and workers pay taxes for Social Security coverage—old-age, disability, Medicare, and unemployment compensation. Mandates are not new—nor is “government interference” in private choices about private insurance.
Opposition to the ACA mandates is really just a stalking horse for the eventual dismantling of the American social safety net. If the new mandates were to be dropped (unlikely, thank goodness), I would expect that their opponents would quickly move on to removing mandates for other programs that have been in effect for 70+ years.
Last spring, I blogged about the $5/day for in-house food purchases that many Sheraton hotels give guests who waive house-cleaning. In some hotels, they offer a choice between the $5 and 500 frequent-guest points. Which is better? For infrequent guests like me, the $5 is better. But in some of the best Sheraton hotels, it only takes 10,000 points to obtain a free night—i.e., 20 days of no house-cleaning. If you are a frequent guest, that seems like a much better deal—the opportunity cost of one free night is $100, typically far below the price of a night. The Sheraton’s offer creates a separation between infrequent and frequent guests, benefiting the latter (and giving people an incentive to become frequent guests). (HT: DJH)
Deuteronomy 28:68 states “ye shall sell yourselves unto your enemies for bondmen and for bondwomen, and no man shall buy you.” Oh dear, even at a price of zero, supply would exceed demand. (Josephus noted that there were so many slaves on the market when the Romans destroyed Jerusalem in 70 C.E. that many couldn’t be sold even at fire-sale prices.)
Why not buy a slave at no cost? The answer, presumably, is that potential buyers already owned so many low-priced slaves that they believed that another slave’s marginal product would fall short of his or her upkeep. The variable cost of maintaining the slave must have exceeded his/her output. Is there a contemporary analogy to teaching assistants?
I get invitations to guest lecture at English universities on Wednesdays, but almost never for Wednesdays in the U.S. I didn’t know why this difference exists, until one of the inviters mentioned that many English universities keep Wednesday afternoons free of regularly scheduled classes, historically so students can engage in inter-scholastic athletics. Universities thus have created a positive coordination externality.
We economics professors don’t engage in these athletic endeavors, but the athletic coordination creates a positive externality for economists: In scheduling seminars, we know that most faculty members at other universities are free to visit, and most of our colleagues should be available to attend the seminar. (HT: NT)
A very nice new paper (IZA Discussion Paper 7575) by Anne Gielen, Jessica Holmes and Caitlin Myers asks whether testosterone, which generates masculine traits, contribute to male-female differences in labor-market outcomes. The research innovation is to look at earnings differences between female twins, distinguishing those who had male twins (and thus were exposed to testosterone in utero) and those who had a twin sister (and thus were not exposed). There are no significant differences in earnings; if anything, the female twins exposed to testosterone earned slightly less than women with a female twin. Biology may matter; but this simple experiment should increase one’s belief that culture is more important.
At the Queen Victoria Market, an immense city-run collection of stalls and shops in Melbourne, Australia, a fishmonger at a prime corner is paying $5,500 per month to the City to operate there. Since other fishmongers pay less, much of this payment is economic rent — payment for the visibility/access at this corner. But is the City extracting all the rent, or is it giving the fishmonger a good deal?
This fishmonger has been in business at this location for a very long time. That fact suggests that at most the City is not overcharging him, and perhaps it isn’t even extracting all the rent. Whenever many public lessees in competitive businesses stay in business a long time, the public agency is probably granting them excess profits — at the public’s expense.
I called a taxi for a short trip in Melbourne, Australia. When I paid the price on the meter, the driver added a $2 booking fee. This is standard here, unlike in the U.S. where the price is the same whether you hail or call a taxi.
The Australian system may be a sensible way to set price to cover marginal cost. The booking service generates costs; and in many cases the booked driver “dead-heads” to pick up the passenger, using his valuable time without generating revenue. On the other hand, having a booked fare saves the driver time waiting in a queue or cruising, so perhaps the impact on marginal cost isn’t so clear. Is this monopoly pricing, or price reflecting cost?
We bought a box of Anzac biscuits — a very tasty cookie with no eggs or fat, thus not too many calories and easily preserved. The company, Unibic, states on the box that “4% of sales (revenue) go to the RSL (Returned and Services League).” This reminds me of Newman’s salad dressings, which advertise that all profit goes to charity.
It’s not clear which method would provide more money for charity generally, but I prefer the percent of revenue approach—it removes any incentive to raise costs (executive pay, for example). Either way, though, it’s nice that a few companies support charity so well and so openly. What other examples are there of products that support charity? And which method (percent of revenue or profit) is preferable?
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