The July issue of Qantas Magazine has an article on Akubra hats. The company has a problem: the price of a crucial input into its hats, rabbit skins, has risen by 125 percent in the past three years due to a virus that killed many Aussie rabbits. The rabbit population has been increasing again, but its previous decline caused a much longer-run decrease in the supply of rabbit shooters, who permanently left this occupation for other jobs in this low-unemployment economy.
These two factors—the short-run decrease in supply of rabbits and the long-run decrease in the supply of rabbit shooters—have caused a rise in Akubra’s costs and thus a decrease in supply in the related hat market. This is a nice example of a shock in one market causing a general equilibrium set of adjustments. Good for rabbits in the long run, not so good for bald guys who need hats to protect against the Australian sun!
A friend of mine received three prestigious academic awards in the same year. I asked him, “Wouldn’t you have been happier getting them in separate years? After all, the marginal utility of an award probably is decreasing within a particular period of time. So wouldn’t getting these awards in separate years have increased your lifetime utility?”
He said that my observation was probably correct. However, he was so surprised to receive even one of them, and the increase in his happiness was so great, that he just wasn’t able to think in this narrow economic way. I guess there are occasions (probably very few!) where even simple economics isn’t 100 percent relevant.
There’s a story in the July 3 edition of The Australian about the Fox Footy (Australian Rules Football) Channel. That the channel exists illustrates how changing technology increases well-being. With the plummeting cost of TV production and transmission has come a great growth in the number of specialized channels. When I was a kid, the U.S. had three networks and a few independent channels in big cities. Today, things like the Fox Footy Channel have increased the ability of the medium to cater to specialized tastes.
Since I’m not the only American who likes Australian football, or footy, I expect to see the channel on U.S. TVs soon — thus increasing variety, increasing my total utility. Any thoughts on likely future channels that will cater to even more specific tastes?
Every time I visit Australia, one of the first things I see in the news is a discussion of minimum wages. Pay rates in Australia are to some extent set by the government; these days by the Fair Work Commission. Today there is a news story that a labor union will seek to have teenagers paid the same wage as adults for the same job. This increase in youth wages will decrease the quantity of young workers demanded, especially as that demand is typically quite elastic. Worse still, this will prevent some kids from obtaining job experience, thus reducing their human capital and making them less employable in the future. As Peter Seeger sang, “When Will They Ever Learn?”
We have to have Wi-Fi available everywhere — I have withdrawal symptoms if I can’t do my email and check the web often. Recognizing this, many stores offer customers “free” Wi-Fi. I’m sure the cost of the Wi-Fi is passed onto the customers as higher product prices, in what are typically competitive retail industries. But how to avoid people spending hours in the shop surfing the web free of charge, and perhaps causing congestion for other users?
The Whole Foods store on Kensington High Street in London has solved this problem by allowing each computer or smart-phone a two-hour log on period, after which the device is booted off the Wi-Fi. Two hours are enough to satisfy almost any customer, but short enough to prevent non-customers from making the store their Wi-Fi venue of choice. I expect this kind of limit will become more widespread shortly — it is much more effective than warning people not to stay logged on for very long.
The Week (and, earlier, the N.Y. Post) reports a new way for high-wage people to economize on time: when visiting Disney World, hire a “tour concierge” — a disabled person who uses his/her disability privileges to ignore waiting lines (and take the high-wage person and family with him/her ahead of the crowd). At $130 per hour, the time saving is easily justified economically (just think of the lines at Space Mountain, or at my personal favorite, Small World). It would be nice too if people would rent me their toddlers to board Southwest Airlines flights ahead of the mob. Clearly, there is room for beneficial exchange like this in many areas.
These are not, however, Pareto improvements: while the “concierge” and his/her customers gain, everybody else in line loses. It doesn’t seem fair to me, and perhaps not efficient, since the externalities of extra waiting time for the whole line can be substantial.
We are belatedly watching The Wire, nearing the end of Season V. [N.B.: see Sudhir Venkatesh‘s series of blog posts called “What Do Real Thugs Think of The Wire?”] By Episode 6, Marlo Stanfield has killed off the competing retail drug lords and also the chief wholesaler, Proposition Joe. At the next meeting of Baltimore drug lords, Marlo allocates territories among his subordinates and announces to everyone a large rise in the wholesale price of drugs. Not surprising—he has turned an oligopoly into a monopoly, with him as the monopolist.
Marlo doesn’t realize it yet, but his monopoly status gives others a bigger incentive to attack him. Don’t spoil the suspense for me, but I wouldn’t be surprised, although I would be pleased, if Marlo is bumped off by his own subordinates—it’s hard to maintain monopoly power.
For many years, a common graffito in men’s rooms was: “Wash hands, place hands under blow dryer, dry hands on pants.” The old-fashioned low-powered dryers didn’t have enough power to dry hands well in any reasonable amount of time. No more: about 10 years ago the Dyson Airblade was marketed, and it was revolutionary: 10 or 15 seconds and one’s hands really were dry.
I assume that they were expensive, which is why I only saw them in a few places, even in the U.K., where they originated. Today they are much more widespread. They aren’t cheap (I see a discounted price of £615), but I bet they have come down in price. Why? The answer is competition: other companies are now making equally effective products, both in the U.S. and the U.K. An innovating entrepreneur may enjoy a monopoly for a while, but competitors with similar products will enter the market, forcing prices down (and increasing consumer surplus for now dry-handed users like me!).
Staying at the Sheraton Boston, the hotel room has an option: “Reward yourself with a $5 voucher at participating food … outlets for each night you decline housekeeping services.” My consumer surplus actually exceeds the $5: I would pay a little bit extra not to have the cleaning people in my room, since I wouldn’t have to worry about packing things up to hide them, nor about the cleaning people mistakenly throwing something away. So I take the deal. One friend here says this isn’t worth it to him—he likes having his room cleaned up each morning. This illustrates how crucial individual tastes are to determining the surplus we gain from transactions—and the choices we make, or don’t.
The Chronicle of Higher Education just published its survey of public university presidents’ compensation, which rose 4.7 percent, with four presidents receiving more than $1 million. During that year, public university faculty salaries rose less than 2 percent, a discrepancy that replicated the previous four years. Why the difference?
Market explanations would be that these wages reflect jobs increasingly well done relative to faculty performance (increasing relative productivity) and/or increasing difficulty in attracting talent. The first explanation is not credible: having taught at public universities for 40 years, I’ve seen the quality of public universities decline compared to private universities. (In 1969, one could argue that 3 of the top 10 economics departments were at public universities. Today, only 1 is.) Nor is there a dearth of high-quality potential university presidents.
Our local movie house in suburban London charges £11.90 for a regular ticket, and even seniors pay £8.90 (over $13). But there is a special for seniors (ages 60+): Every Tuesday they show a recent movie (e.g., Lincoln is showing on May 21) and charge only £3 ($4.60). Moreover, you get “free tea, coffee and biscuits!” Such a deal—so how can they make money off this, or is it just altruism by the theater owners toward us old folks?
The movie costs no extra rental, and the only variable costs are the wages of the one or two workers who sell the tickets and make the eats. The fixed costs—of the movie rental, the theater and heating/electricity, are irrelevant for the owner’s decision. I should think that, if they can sell even 20 tickets, they will increase their profits.
I write all my papers, letters, and exams using the typeface Times New Roman. As a lunch-table discussion here in England revealed, the University insists on certain typefaces that are dyslexia-friendly, particularly Arial, Trebuchet, and Verdana. It costs me or any other faculty member nothing to use one of these on exams; non-dyslexic students are not harmed by them, and dyslexic students are better off. Henceforth, no more Times New Roman on tests — mine will all be in Arial. A clear Pareto improvement. (HT: MS)
Benjamin Franklin apparently understood the notion that input prices affect product prices, which is a problem because product demand curves are not completely inelastic. Discussing a minimum wage, he noted, “A law might be made to raise their [workers’] wages; but if our manufactures are too dear, they might not vend abroad.” This is one of the best arguments against a minimum wage: in an open economy, which the U.S. increasingly will be at least partly passed on in the form of higher product prices, which will in turn reduce product demand—and eventually employment. (“On the Labouring Poor,” The Gentleman’s Magazine, April 1768.)
At the opera last night we pre-ordered a glass of wine for the first intermission. We paid before the opera and the glass was at the prearranged place after Act 1. We’ve done this many times in Germany and increasingly in the U.S. Why do the opera houses do this?
Competitive pressure is absent—they have a monopoly on drink/food at intermission. Despite this absence, providing this opportunity raises the house’s profits. Without the usual long wait at intermission, more customers will buy food/drink—so revenue increases. This policy puts less pressure on workers—they don’t have to rush during intermission to serve people; in the long run this reduces the wage the opera house has to pay for equal-skilled labor—costs are reduced. Everybody wins—and I’m surprised this policy isn’t more widespread.
One of the President’s budget proposals treats tax deductions as if a person’s marginal tax rate were 28 percent, rather than the actual possibly 39.6 percent. This would bring in substantial extra tax revenue, yet it wouldn’t violate the Republicans’ strong distaste for higher marginal tax rates on the grounds that they allegedly stifle incentives of the rich. Despite that, they are complaining loudly.
The President is finally proposing indexing Social Security benefits by the chained CPI, a more correct measure of price inflation than the current measure. Using it would reduce benefit growth and make indexation fairer to taxpayers and recipients. Yet I have already been deluged by liberal groups’ email petitions objecting to this change.
The only good thing about this sorry spectacle is that it is nice to know there is no shame on any side.
A Chinese fortune cookie typically offers homely advice or bland predictions with your dessert. But a recent one offered a good economics lesson: “The cost of something is what you give up to get it.” Nice to see the idea of opportunity cost enshrined between baked bits of dough. I wonder, though, what one does give up at a Chinese restaurant? (HT to TW)
A recent issue of the Handelsblatt (the German Wall Street Journal equivalent) had a neat graphic comparison of the U.S. to 5 other major countries: France, Germany, Italy, Spain and the U.K., along the criteria of the Gini coefficients on pre-tax/transfer incomes, post-tax/transfer incomes, and household wealth. Our pre-Gini on incomes is slightly below that in Italy, a bit higher than in the other four countries. The big difference is that our post-Gini is much higher than in all the other countries—0.38 compared to a range of 0.29 to 0.34. We do much less redistribution through transfers and have flatter taxes.
It is thus not surprising that we win the Champions League of Gini wealth inequality: Ours is 0.85, with a range of 0.65 to 0.78 in the other five countries. The tiny tax increase on the top 1 percent of households that took so much political energy last year will do almost nothing to strip us of our championship status.
Touring Bamberg, northern Bavaria, our tour leader mentions the local 1907 Beer War. The town’s three brewers announced that they were joining to raise suggested retail prices from 10 to 12 pfennigs and charge retailers commensurately more. The pub owners felt the public would be angry and refused to buy from the cartel. After one dry day they instead began “importing” beer from nearby towns. The public’s thirst was slaked — still at 10 pfennigs a glass. After a week of no beer sales, the local brewers caved in and cut their asking price to 10 pfennigs a glass. Moral of the story: even with just three players, it’s hard to maintain a cartel if there are ready substitutes for the product. (HT to MP)
A Texas legislator has proposed exempting handguns from the 6.25 percent state sales tax on March 2, Texas Independence Day. He claims this will create jobs.
It is likely that this brilliant idea will increase total gun sales, as reducing the net price of guns will increase the quantity demanded. But it would also shift gun sales away from most other days in the year. I would bet that employers of gun shops would in the long run cut employment and rely on overtime and temporary workers around March 2. It’s not clear that retail jobs would be created. Jobs in gun manufacturing would increase as production increases, but that wouldn’t help Texas very much, since most guns sold in Texas aren’t produced here. Of course, one also wonders whether more guns in Texas will add to our safety!
A 50-year-old law professor told me yesterday that between college and law school he worked as a carpenter. I said it was great to hear that, as it must make him more productive at home. He said no, he never does carpentry work around his house now for two reasons:
He didn’t mention a third reason, which I think is important, namely that the opportunity cost of his time is too high to make carpentry a good way to spend time. (HT: TB)
Friends have warned me about the new Medicare tax, 3.8% of one’s investment income. Since the tax only applies to people with higher incomes than mine, I am regrettably not liable for this tax. But what is the economic reason for putting an extra tax only on the investment income of the very well-off?
All Americans are eligible for Medicare at 65 (an age minimum that should be raised). Why should somebody with $100,000 in investment income but no earnings pay no Medicare tax, while someone who earns $100,000 from a job pays $1,450 herself, and $1,450 through her employer to finance Medicare? This seems inequitable. The tax on all investment income, regardless of one’s total income, should be the same as what one pays on self-employment income — 2.9%.
An English newspaper reports that an opera producer has had to cut back the number of naked male actors from 88 to 25 for fear that, given the size of the stage, some of the naked actors would fall into the orchestra pit. The stage is fixed capital; the marginal product of the 26th naked actor is negative — the production would be severely disrupted if an actor fell off the stage. Since the opera is about the “sex-crazed Duchess of Argyll,” presumably the marginal product of the first actor is positive — given the Duchess’s proclivities, having zero naked actors would make no sense; marginal products decrease but are still positive up through 25, then become negative thereafter. This is, of course, in the short run; perhaps if there were more time to produce the play, the capital stock could be increased — a larger stage could be built — and the marginal product of the 26th actor would be positive. (HT: CB)
A major story on the NBC Today Show was about the sharp rise in the price of gasoline. One “expert” claimed that, unless you have a very fuel-efficient vehicle, over a car’s lifetime gasoline will cost you more than the purchase price. Really? Say a new car costs $20,000, and is driven for 10 years, 12,000 miles/year. If gasoline is $4/gallon, and the car gets a paltry 24 miles/gallon, today’s average for new cars, gasoline costs $20,000. So, even without discounting. the “expert” is wrong.
Even if gas were $5/gallon, unless one discounts the future at a rate below 1 percent, the present value of the gasoline purchased is less than the price of the car. I doubt that there are many new vehicles for which the expert statement is true, even if gas prices rise permanently far above the current price. I do wish so-called “experts” knew the basics of Econ 1.
President Obama has proposed increasing the federal minimum wage from $7.25 to $9. Since the demand for low-skilled labor is quite elastic, this will kill off a few jobs that would otherwise have been created. Not very many, because relatively few people would otherwise be paid between $7.25 and $9 anyway (in an economy with an average wage of about $20/hour); but this is a job-killing idea.
The President’s proposal to index the minimum wage to the CPI is nearly excellent (except we should tie it to average wages, not the CPI). Doing this would end the repeated fighting over the minimum wage that distracts attention from other labor issues that are so very much more important. It would be a great saving of political energy not to have to debate the minimum wage year after year. I’d even be willing to see it increased to $9 next year if in addition it were indexed as I propose.
Eight years ago I blogged about a trip up to Haleakala National Park in Maui, noticing that at 9:45AM the National Park Service didn’t bother staffing the entry gate, thus not collecting the entry fee. Presumably the variable cost of the staff time wasn’t covered by the few entrants at that early hour.
This week we made the same trip at the same early arrival time — but now the gate was staffed and a Park Service attendant collected entry fees.
We did a kayak/hike/swim tour with Kayak Wailua in Kauai, Hawaii, mainly because our guidebook said it was as good as other tours and less expensive. I think the book was correct, so I asked the guide: “How do you guys charge a lower price and still survive?”
He answered that they are larger (because they have more permits for river trips), enabling the owner to do his own booking directly, thus saving expenses. Fine, but implicitly the opportunity cost of his time must be less than the cost of contracting out, or he is not profit-maximizing. If he is profit-maximizing, then implicitly he has taken advantage of economies of scale in this “industry,” while his competitors haven’t. If that is so, I would expect some consolidation among his competitors as they understand the shape of long-run average costs. (HT: KY)
The Texas Legislature is back in session, providing its usual cookie jar of absurd economic proposals. A real winner is House Bill 649, which would provide compensatory tax reductions to companies that become taxed under the Affordable Care Act because their employer-provided health insurance fails to cover employees’ emergency contraception. Such a bill means Texas would be giving firms incentives to thwart federal law. It also opens up the possibility of much broader tax offsets. I’m certain that our governor and legislature dislike the recent imposition of higher federal income tax rates on high-income families. Why not take the logic of this bill one step further and offer tax reductions (sales tax, since we have no income tax) to very high-income families? Indeed, the reductio ad absurdum would construct all state tax policy to offset to the extent possible any incentives provided by federal tax policy.
My son, who does downhill skiing, noticed that the resort he usually visits has changed its pricing policy. It used to offer free lift tickets to skiers ages 70+; now it only gives them a 20 percent discount off the regular rates. This change makes sense. My guess is that in times past, fewer older seniors even thought of skiing; and those few who did were somewhat marginal—had a fairly high demand elasticity. Today’s older seniors are healthier, have more skiing experience, and thus probably have a lower demand elasticity. It thus makes sense for the resort to reduce the extent of discrimination favoring old folks in its pricing scheme. (HT: MAH)
A student writes that she became a monopolist in her freshman dorm — hoarding Midol to sell to her dorm-mates at the time each month when dorm-mate had a quite inelastic demand for this product. She also realized that at that time, there is an increasingly inelastic demand for chocolate-chip cookies, so she hoarded and sold those, too. She correctly notes that the two goods are complementary over time — more of both consumed on some days than on others. But I bet that over a short interval, they are substitutes — the satisfaction from one reduces the demand for the other. This illustrates how we need to think about the time dimension of consumer choice. I would also bet that her monopoly doesn’t last long. Anybody can bring the two products to the dorm and sell them — there are few barriers to entry. A better description is that she’s an innovating entrepreneur in what inherently will be a competitive industry.
(HT: A.S.)
I was walking outside the American Economic Association meetings this past Sunday when a man stopped me and asked what all the university professors were doing in one place. I told him that it was the annual convention of economists, and got a hearty laugh by telling him the old joke that when the economists arrived in town, the prostitutes left. This joke is a good illustration: the arrival of economists represents a decrease in demand; the prostitutes’ leaving represents a decrease in the amount supplied. I don’t know the shape of the supply curve, however, so I can’t speculate about the size of the change, if any, in the equilibrium price. But the joke does suggest that the equilibrium quantity transacted decreased.
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