A major technical change in TV has been the introduction of HD broadcasting and receivers. For the same price you get higher quality, so this can be viewed as a rightward change in supply. This change has affected a surprisingly related market—that for make-up artists.
Now if you’re on television, as I discovered, every single “flyaway hair” is visible. Most of my hair flew away many years ago, but what’s left might still stick out and need careful laying down by a specialist. A make-up artist tells me that demand for her services has been helped tremendously by the introduction of digital broadcasting and HD receivers.
[HT to NN]
In Bonn, Germany, brothels and saunas pay taxes. Yet street prostitution is not taxed, so that the government has given streetwalkers a competitive advantage. To ensure fairness, the Bonn government has constructed meters along the main streets where the women solicit, with each woman required to purchase a “parking permit” of €6 each night.
As an economist, I would prefer to see hourly fees charged, but the costs of administering a fixed fee are much lower and probably yield greater net revenue. The only problem is that the fixed fee gives an incentive to shift work time toward fewer nights per week but more hours per night worked. A clear deadweight loss from this tax.
[HT to DJ]
Texas Gov. Rick Perry claims to have lured many doctors to Texas, some of the many jobs he claims to have created. (The media’s treatment of which we’ve touched on here.) At the same time, a friend on the board of a local community health center says they cannot find doctors to staff it—there is an insufficient supply at the wage they have always been paying. How can this be consistent with Perry’s claim?
One possibility is that the reduction in malpractice insurance costs raised the net wage in the private sector relative to the public sector. Even if Perry’s claim is correct, there may be more doctors than before, but relative supply may have shifted to the private sector, leading to a shortage in the public sector.
What is altruism? Warren Buffett recently proposed a surtax on the very wealthiest Americans, including himself to help reduce the federal deficit. (This is a mild version of Obama’s perfectly reasonable proposal to tax family incomes above $250,000, i.e., fewer than 2% of families.) Buffett is being altruistic—the tax will reduce his net income. I always thought altruism was desirable, yet I’ve seen Buffett lampooned in the press.
I suppose one can argue that he’s really doing this to preserve the value of Berkshire Hathaway stock. (The same argument might apply when I donate blood—perhaps I do it because it makes me feel good, not to help others.) But: it’s a pretty sorry state of the world when someone offers to reduce his circumstances in order to help his country and is mocked.
We inherited several art works, including a Rembrandt etching—a portrait of an old man. Is it worth anything?? An art appraiser/detective hunted down its story. The print itself is new—pulled on highest-quality paper in the 1990s from Rembrandt’s plates. Apparently no prints were made in most of the 20th century. In the 1990s the plate’s owner pulled a small number, but none since, and none planned.
The owner has a monopoly on the plate and understands revenue maximization (there are essentially no variable costs): Pull just enough prints to have sufficient quantity to drive the price elasticity of demand to unity, but no more than that. Not only does his strategy gain him the most revenue, but it keeps the price of our print up in case we decide to sell it. This is a rare case where I benefit from monopoly!
A number of months ago I wrote a blog entry on the requirement in the Dodd-Frank bill, put in by then-Senator (and now Kansas governor) Sam Brownback, prohibiting the purchase of “conflict minerals”—those that might be used to finance warfare in Africa, particularly the Congo. I noted the very simple economic point that this would create a surplus that would drive prices down, mostly harm local miners, but benefit buyers/countries without U.S.-level scruples about these purchases.
I shouldn’t brag—any Econ I student could have seen this point; but it is nice, albeit depressing to see this prediction come true. From David Aronson in the New York Times:
For locals, however, the law has been a catastrophe. In South Kivu Province, I heard from scores of artisanal miners and small-scale purchasers, who used to make a few dollars a day digging ore out of mountainsides with hand tools. Paltry as it may seem, this income was a lifeline for people in a region that was devastated by 32 years of misrule under the kleptocracy of Mobutu Sese Seko (when the country was known as Zaire) and that is now just beginning to emerge from over a decade of brutal war and internal strife.
In his discussion of the Siege of Paris 1870-71, David McCullough in The Greater Journey discusses the path of meat prices. One observer “considered cats ‘downright good eating,’ as apparently did many people. The price of a cat on the market was four times that of a dog.” Whether the price difference was really based on demand—differences in tastes for the two kinds of meat—or supply—is not mentioned in the book, but perhaps Parisians protected Fido less well than they protected Fluffy.
This illustrates a ubiquitous problem in discussing price differences: It’s easy to adduce a cause on one side of the market, but just as easy to bring up another cause on the other side of the market. I would bet on demand in this case, though, since it’s easier to protect Fido than a loose-running cat.
Beauty Pays is out!! (Princeton University Press, 2011, available from the Press, or either hardbound or Kindle version). Its central point is that beauty affects outcomes in markets because it is scarce. It details how these effects function, how large they are, and what they imply about a wide array of markets.
It includes relevant jokes, songs, etc., lots of pictures but no graphs. Despite a “chatty” tone the discussion of beauty illustrates ideas comprising almost half of an introductory micro course.
It raises a wide array of issues and questions. I’m happy to answer any questions that Freakonomics readers might have, so please ask away in the comments section below!
Here’s the table of contents:
Beekeepers transport their hives from field to field and make money helping farmers, orchardists and others pollinate their crops. (See the wonderful old paper by Steven N.S. Cheung, “The Fable of the Bees: An Economic Investigation,” Journal of Law and Economics, 1973.)
There are now indications that colony collapse, the current plague of the industry, may result from too-frequent moves of hives and the resulting greater exposure to more varieties of pathogens. The beekeeper thus faces a trade-off: increase revenue by moving hives around, but incur a potential cost of collapse; or move hives less and make less revenue, but reduce the potential risk. From what I’ve been told, different beekeepers make different choices, depending in part on their assessments of the risk of colony collapse and their degree of risk aversion.
[HT: SK-L]
A visit with two grandchildren this weekend, then the other four next weekend, then the eight and five-year old without their parents. What a delight! But no very little kids—the kids are now ages 15 to 5. I miss having tiny grandchildren, and I know that if another were to come along it would be as much or even more fun than the first. I guess I’m addicted to grandchildren. Sadly in some sense (although my sons’ and their wives’ lives are complicated enough without their having more kids), my addiction is being cured by an enforced “cold-turkey” regimen—no more grandchildren are likely to be forthcoming. That’s the best way to cure an addiction. With the average age at first marriage being 28 for men and 26 for women, odds are that it will be 15 years until great-grandchildren arrive. The life expectancy of a 68-year-old male is 15 years, so there’s a decent hope of rekindling my addiction—next time to great-grandchildren.
At a local cafe in western Massachusetts the printed bill contains something I’ve never seen before: At the bottom is a list of percentages—15, 18 and 20—with suggested gratuity amounts based specifically on the bill’s total. While tipping is a social norm in the U.S., it’s a hassle to figure out the right amount to tip. The tip amount is rarely suggested, and never in specific dollar terms (though sometimes a gratuity is included for larger groups of diners).
So why not do this everywhere? Perhaps it could be viewed as crass; but it saves time and makes the social norm explicit (as it already is in our minimum wage laws)—and it might shame those who refuse to tip. I hope this innovation spreads rapidly in this time of apparently decreasing social cohesion.
My younger son’s family visited the nearby Amish country and did a tour of several farms. The guide mentioned that the youngest son usually takes over the farm from his father. The older brothers typically learn trades. She thought this happens because the father isn’t ready to give up the farm when the older brothers reach adulthood.
My economic explanation is that this minimizes the frequency of paying estate taxes (no longer a very binding constraint, but it was until quite recently). Perhaps this “ultimogeniture” is an illustration of an unusual excess burden generated by estate taxes. Or perhaps there’s another explanation? (Related: check out Freakonomics Radio on “The Church of ‘Scionology.'”)
A friend mentioned an interesting way that the Internet can reduce cost, raise output, and that uses incentives cleverly. Her company created an educational ad campaign to encourage young women to engage in healthy activities. On several occasions various unrelated blogs mentioned that free vitamins were being given through the campaign’s website linked to the ads. Using Google Analytics she discovered that the website’s hits went up over tenfold after each mention on the blogs; but the data also showed that most of the new hits were by people who got onto the website just long enough to get the freebies.
In the next round the offers will be restructured so the freebies are available only after the person has watched an online educational video—and thus imbibed the health-promoting knowledge that was the purpose of the campaign.
[HT: CS]
The City of Austin offers airport parking in three tiers, from garage ($20/day), to close-in surface ($10/day), to distant surface ($7/day). Frequent parkers accumulate points entitling them to free parking days.
The incentives for redeeming the points are bizarre:
Garage 2500 points
Close In 2500 points
Long Term 2500 points
The “price” of a free parking day is the same for the very desirable garage, where I never park if I have to pay $$, and for the close-in parking (where I park for $$ if staying fewer than 5 days) as well as for the long-term (where I park only if staying more than 4 days). Seeing this, we will redeem our 10,000 points for four days in the garage—parking for “free” anywhere else makes no sense. Now if the airlines would only charge the same number of frequent-flyer miles for a trip to Australia as they do for a trip to New York, I would be even better off!
When I was a kid, tickets for grandstand seats at Comiskey Park (where my team, the White Sox, used to play) cost the same regardless of who the opponent was (only 7 possible in those days), the time of day or day of week. At a recent Minnesota Twins game I learned that MLB has gotten smart, pricing differentially depending on the identity of the opponent and the date/time of the game.
For games in the same one-week period a home plate view grandstand seat in Target Field ranges from $36 to $45, with a higher price for night games, weekend games and, most important, for more attractive opponents (sadly, higher, other things equal, for the Red Sox than the White Sox). Probably aided by web technology, teams can do a better job of equilibrating demand and the (fixed) supply of seats, although the current price range and the partly-empty stadium in the game I saw (against the last-place Kansas City Royals) still doesn’t seem great enough to accomplish this completely.
We came close to overturning comparative advantage last night with our new juice-squeezer. Using it requires peeling the oranges, which involves rolling them around, making two circumferential cuts, and then stripping the flesh out. Only then can the flesh be thrown in the squeezer. After doing this together, my wife announced that I was so incompetent that the elapsed time in the first three steps would be less if she did everything and I watched. What she really meant was, “Daniel, your marginal productivity is very low! (But it wasn’t negative: I was able to put the oranges in the squeezer, but she could have done that too, and the “assembly line” would have moved faster.)
How many household production activities are there where even the second cook “spoils the broth”?
The 13-year-old grandson and his 11-year-old sister are discussing the Texas tax holiday—for one weekend in August there will be no sales tax on school-related items. The grandson says stores will cut prices to compete for customers. The granddaughter, already an inveterate shopper, says no: With the tax holiday there will be so many customers that the stores will be able raise prices.
While prices won’t rise compared to the previous weekend, the granddaughter seems to understand that an inelastic demand means the incidence of (gain from) the tax cut will be on the sellers—the customers are unlikely to get much of a bargain. A subtle, Texas-style subsidy to business; but one that even an 11-year-old can see through!
With only 8 percent of private employees belonging to trade unions, job security outside government employment has become a sometime thing. One group of employees, however, does have nearly total job security: tenured university professors. Faculty tenure is under attack as never before in the past 50 years.
I like tenure, but why should my group of workers get special protections against the vicissitudes of demand for our “product?” Self-interested arguments about job protection are unsatisfactory. I recently “debated” a journalist on this issue, with the resulting short video from the Texas Tribune:
Driving through New Jersey we stop for gas and sit for a few minutes until the attendant comes to fill our tank. My son tells me that is because New Jersey has one of the most wasteful restrictions in the Union: There is no self-service gasoline; all gas must be pumped by an attendant. This wastes drivers’ time—it’s almost always quicker to pump gas oneself. The labor of the attendants is thus devoted to generating economic waste and could be spent productively elsewhere rather than in promoting economic inefficiency. Perhaps at one time the restriction was based, as they usually are, on health/safety, or perhaps on preventing pilferage. But today, with credit-card pumps and few (no?) cases of people burning themselves pumping their own gas, the restriction has no rationale—other than protecting the attendants’ jobs.
Our paper on discrimination in baseball has finally been published (June AER). While it received a lot of media and scholarly comment in draft, the final version contained a whole new section. The general idea is that those discriminated against will alter their behavior to mitigate the impacts of discrimination on themselves. But while reducing the impacts, these changes are not costless. For example, if you’re an Hispanic pitcher and think that the white umpire is against you, you’ll change your pitches. Where will you throw? How will you throw?
A colleague elsewhere, who wishes to remain nameless for fear of retribution, has illustrated how easy it is to destroy a university. His is abolishing its economics graduate programs; introductory economics will be taught in sections of 1,000 students; professors do their own purchasing of supplies; and upper-division courses are being sharply reduced in number.
All this is a response to calls for greater efficiency in higher education. Is this really greater efficiency? Or is it a move to a different point on the production possibility frontier, essentially choosing to convert a research institution into a mediocre equivalent of a two-year college? Calls for professors to teach more to save higher-education money have consequences—there ain’t no free lunch here. Of course, too, such policies drive away faculty members who might be interested in doing research. Fortunately, not all public universities are following this troglodyte approach.
The Wall Street Journal has a story about all the long-running soap operas that are going off the air. A cohort of die-hard fans is protesting the move, arguing that the shows are more popular than their ratings suggest, and even threatening to sue ABC’s parent company Disney for causing them “mental distress” by canceling the shows. But the fact remains that their viewership is down, and sponsors have been pulling out, making the shows unprofitable for the television stations even in non-prime-time slots. One might think it is because of rising female labor-force participation–but the increase has been quite slow for the past 20 years. The reason is competition for viewers with a new, cheaper product—“reality TV.”
Apparently soaps and reality shows attract similar viewers—they appear to be substitutes for the average consumer. As with any new product that is hot, its substitutes suffer when it enters the market. As the World Turns and Guiding Light have given way to such pathetic substitutes as The Apprentice and Let’s Make a Deal.
A social norm in Italy appears to be grandparents spending the day taking care of their pre-school grandchildren. Even grandfathers can be seen pushing infants around in carriages and entertaining them in public squares, something very rarely seen in the U.S. But social norms don’t just happen—they can be created and later altered by purely economic incentives. Italy has now increased its retirement age substantially, at the same time that the labor-force participation rate of women ages 25-54 has increased by over 20 percentage points. When today’s middle-aged Italian women have grandchildren it is unlikely that they will retire from their long-time careers, and thus unlikely that they will be available to care for grandchildren full time. The social norm of grandparent care is unlikely to exist in Italy in 25 years.
A week in a condominium in the Tuscan hills—all courtesy of the exchange of our own time share unit. Is this a good economic deal for us? In a narrow sense, no: the exchange fee, plus the annual fee in the “time share bank,” plus the taxes and upkeep on our own time-share unit almost equal what it would cost to rent the Tuscan unit for a week.
But: having an unused time-share week being wasted imposes psychic costs on us—and that forces us to take a one-week vacation. Also, the time-share bank provides information on a pre-selected set of vacation units, thus saving us search costs. We’re quite happy to pay for a self-control mechanism and pay to reduce the transaction costs of arranging a vacation.
My son now travels three days a week, and my daughter-in-law has knee problems. What to do about such tasks as gardening, lawn mowing, leaf raking, etc.? They could hire a gardener; but their kids, now teenagers, are confronting scarcity: Their allowances no longer cover the things they want to buy—they have become economic people.
To solve both parental and offspring problems, the kids have offered to engage in household production in return for extra pay. The garden now looks better, leaves are raked more quickly and the lawn is mowed on time—and the kids have more spending money. I have no doubt that paying the kids is cheaper than hiring a gardener—cheaper than the market solution. Of course, my son could order the kids to do the tasks, but paying them is a nice way to give them spending money. I wonder, though: Does their pay of, say $10, represent a $10 increase in income? Or does my son cut back on the things he used to pay for and now makes the kids pay for themselves? If so, do teenagers understand this kind of fiscal substitution?
I’m giving a speech at the 6th annual Festival Economia in Trento, Italy, this week — a huge street fair financed by the provincial government and large corporations. As with Austin’s South by Southwest Music Festival, visitors buy badges and can attend any event. The only difference is that this is economics for the masses instead of music (and film) for the masses.
Why should a government spend tax dollars on this? I would argue that it educates the citizenry; but also, and much more importantly, it creates social capital — it creates cohesion among the citizenry that might otherwise be missing. That it also brings in thousands of visitors who pay for lodging and meals probably makes it attractive to local businesses too.
I was chatting with a 70-year-old man who is an independent “software engineer”—a programmer. I asked him how he keeps up with all the young hot-shots who know the latest fancy programming languages. Simple, he said: There are many companies that are just converting very old systems, and the young programmers don’t know the older languages.
Being technically obsolete gives him an advantage. Economists believe that human capital and technology are complements (something I show by negative example when I can’t get my Powerpoint presentations to work on a projector!). But so long as companies don’t introduce new technologies, those workers with “obsolete” human capital will do OK. Indeed, this man charges higher than average fees, because there are so few other programmers left who can deal with the old technology!
The annual conference that I organize with the Institute for the Study of Labor in Bavaria begins Thursday. Each year we receive about 150 submissions, and pick 24 to fill the available time slots. Typically we’ve had one or two withdrawals, but this year we have five. If I had known this, we would have accepted more papers—the conference works best with 22 or 23 papers. Is there any way to solve this problem? I could accept more papers, but the program would be too long if nobody withdrew. I could require authors of accepted papers to post a bond, perhaps $250, forfeitable if they withdraw. While that sounds very economic, I bet we would get fewer submissions—posting bonds for conference participation is not part of our culture—and possibly even lower average quality submissions.
Of course, I punish those who withdraw by disqualifying them from the conference for the next few years. But other than that, I see no solution.
My publisher created a Facebook page for my soon-to-be-published book Beauty Pays. For the page to be effective, the Press told me that I had to add things; and in order to add things, I needed to sign up for Facebook. What to do?? My wife’s response, “Join the 21st century, Daniel.”
Being an obedient husband, I did so and just became the 500,000,000 and 1st Facebook enrollee. I’ve been on Linked-in for a while, but I doubt I’ll ever use it—so many more people are on Facebook. There are tremendous network externalities in social network sites—you want to be on the site with the most links to people with whom you want to be in touch. That is clearly Facebook. I’m not sure, though, that I like this aspect of the 21st century.
Joe Stiglitz writes an excellent jeremiad on growing income inequality in the U.S in a recent issue ofVanity Fair. Most of what he said is factually correct, although claims about the average American being worse off (his claims, but more noisily those of various leftie groups) are simply wrong because of upward biases in inflation measures.
But so what? Comparisons matter, and it’s not just an issue of envy. Even though the average American is better off in real dollar terms than 20 years ago (despite our American national pastime of “bitching”), the concentration of economic power is growing most among a very few fragments of society. And, with the Supreme Court having handed the rich carte blanche to subsidize political candidates, the institutional framework for the economy can be changed in ways that disproportionately help the rich. Even though a rising tide may lift all boats, if giant yachts are lifted higher, the political backwash can make us paddlers of rowboats worse off!
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