The Economic Way of Thinking

EWOT Question Of The Moment

My student, Ray, asked me the following question in an e-mail the other day:

Excluding interstate exchanges, why do you suppose gas prices are generally higher in the more depressed sections of the city than in the, let's say, less depressed areas?  It seems like the more depressed, the higher the prices.  I've seen a $.20 range in some locations in the Savannah area.

Can you help him answer this one?

The Godfather?

Steve Horwitz just finished up the beginning of his Liberty Tour of the South 2009.  He's now on his way to Berry College for the next stop on his tour.  While visiting Mercer, Steve was great in his lectures and with our students.  He's a McCloskeyite when on campus (i.e., he wants to be kept busy), and he went way beyond the call of duty in his three presentations and many hours of informal conversations with students and faculty. 

A few highlights and random tid-bits about Steve's visit can be found below the fold:

The Peak Oil Fallacy

Take a good look at this graph:

Projections like this have been around for decades.  Take a look at the "peak oil" discussions at World Without Oil and Scenario Thinking, for example. To expose the fallacy, we provide a similar one in the appendix to chapter 6 of our EWOT textbook.  Notice that the graph predicts a shortage of oil over the next twenty five years.  It uses supply and demand curves -- the language of the economist -- but those cannot possibly make sense.  Supply and demand represent the plans of sellers and buyers at differing prices a scarce good on the market.

But where are oil prices in this graph?  There aren't any.  Price, and its role in adjusting quantities supplied and demanded, is nowhere to be found.  Should demand grow and/or supply fall over time, the price would rise to capture the greater scarcity of oil, and oil would therefore be conserved or economized in response.  All that is absent in this type of model.  In short, the model is economic nonsense.

It seems like this type of model undergirds the new "biophysical economics:"

The new field shares features with ecological economics, a much more established discipline with conferences boasting hundreds of attendees, but the relatively smaller number of practitioners of biophysical economics believe theirs is a much more fundamental and truer form of economic reasoning.

These physicists, ecologists and a few weak economists focus only on the projected quantities of oil, and energy, that are expected to exist in the world, and have no understanding or appreciation of the use of market prices to coordinate the plans of its producers and users.  I call their approach the Peak Oil Fallacy, and I've discussed it for years in my EC 101 course.  While "biophysical economics" seems to examine quantities alone in its so-called supply-demand model, economics is about choices and decisions in a world of ever-present scarcity.  When will they learn?  Have the economists among this group ever learned the coordinating role of markets and prices?

The Campus Parking Problem

It's been one of those weeks where, after nearly being T-boned in our campus parking lot and watching people wait in their cars like vultures for a parking spot to open up, I've had to digress in each of my classes to discuss the campus parking "problem." 

As many of our readers probably know, the problem is due entirely to the marginal cost of parking being equal to zero on most campuses.  Raising costs of parking per parking experience through metered parking programs or some other mechanism that imposes user fees would greatly reduce the parking problems most of us encounter on a daily basis. 

As I presented the example, my students were with me...so with me...more than they're ever with me.  For a moment, it even felt like they were ready to lead a free market revolt for metered lots on our campus right away. 

Their enthusiasm got me wondering: Do we have any examples of non-urban colleges or universities (i.e., let's rule out NYU or George Washington University) actually using market prices to allocate parking spaces on campuses? 

Rational Stereotyping?

My eyes, they are a bleeding because I recently finished grading a new record mountain of exams and quizzes.  While grading I noticed something: Students with good penmanship and clean graphs tended to outperform others.  (In what follows, let's assume I grade fairly and don't just reward legible essays with higher marks).   

That got me thinking about two things.  First, if what I'm observing is not the result of randomness, why are neat writers getting stronger grades on my exams?  Have they always been conscientious students who think neatness matters at the margin?  Is penmanship something easy for talented students to pick up at a young age, which means I'm actually picking up talent?  Or, is there some kind of special link between penmanship and performance on my econ exams?

Second, if there is a penmanship and strong exam performance correlation in econ more generally, what does that say about me, Mr. Illegible?!  Exhibits of sloppy whiteboards to support this latter point are coming soon...

Commitment Devices

Jim Otteson's presentation to approximately 175 students and faculty last night was splendid; a brief summary of his talk will be coming in a future post.  This morning I'm on the road, and I'm thinking about commitment devices. 

Commitment devices are tools that lock yourself into a behavior and help you hold to your promises.  One of the classic examples of a commitment device is the policy of burning bridges behind military battalions during war. 

Here are a few examples of commitment devices that work moderately well for me:

(1) I'm currently trying to kick my coffee addiction.  For the first couple of days, putting the coffee pot and holder in the dishwasher raised the costs of making a pot.  To further raise the costs, I have thought about moving the entire pot to the attic (but that sounds like a lot of work if I ever want to cave in and have a cup!)...

(2) To avoid typing phone numbers while driving, throwing the cell phone into the back seat far enough that it cannot be reached helps one focus on their driving (or encourages shuffling through one's CD collection!);

(3) Agreeing to meet another runner at some God-awful hour of the morning to pound out a run makes oversleeping more costly.

What kinds of commitment devices do you all find effective in your own lives? 

Imagine

No, not this song, which is also utopian.  Instead, imagine stripping all emotion out of behavior and decision-making. 

When I present this thought experiment to students, it's immediately followed up with the statement that we'd be left with Spock or a group of Spocks.  Thankfully, there is more to man than strict and cold calculation, but let's zoom in and look at homo economicus for a while.  That, to some extent, is intermediate micro.   

Though we know people have emotion, let's suppose for a second social planners (or blobs from another planet!) were able to strip emotion out of decisions.  What would society look like? 

My Friday night movie choice for last night, Invasion of the Body Snatchers, tells us something about what this utopia would look like, as well as what the transition period from emotional man to rational man would be like.  Check it out (the 1978 version in particular) if you're struggling to find a good movie! 

The movie is thought to be commenting on communism and/or McCarthyism.  It's one of the best '70s movies I've ever watched, and you'll even see that Spock plays a significant part in the movie!

The Public Option And Monopsony: Greg Mankiw's View

Recall a basic lesson of economics: A market participant with a dominant position can influence prices in a way that a small, competitive player cannot. A monopoly — a seller without competitors — can profitably raise the price of its product above the competitive level by reducing the quantity it supplies to the market. Similarly, a monopsony — a buyer without competitors — can reduce the price it pays below the competitive level by reducing the quantity it demands.

This lesson applies directly to the market for health care. If the government has a dominant role in buying the services of doctors and other health care providers, it can force prices down. Once the government is virtually the only game in town, health care providers will have little choice but to take whatever they can get. It is no wonder that the American Medical Association opposes the public option.

To be sure, squeezing suppliers would have unpleasant side effects. Over time, society would end up with fewer doctors and other health care workers. The reduced quantity of services would somehow need to be rationed among competing demands. Such rationing is unlikely to work well.

Here's more of Mankiw's New York Times article.

Future Micro Question

I don't teach Intermediate Micro this semester.  When I do teach it again I'll have to find a way to work in the following question, which is the direct result of spending too much time in Atlanta Hartsfield-Jackson lately:

True, False, or Uncertain.  It is irrational for people to walk up to a moving walkway in the airport and then, once on the walkway, stop walking.  Does your answer change at all if people stop on an escalator going up?  How about if it's one going down and they stop? 

Safe at Any Cost?

I'm not a big NASCAR fan, but I was awake enough this morning on the drive in to work to get the gist of this story about an ugly finish at Daytona International Speedway this weekend involving Tony Stewart and Kyle Busch.

The commentary on the dust-up, particularly Tony Stewarts's criticisms of restrictor-plates, reminded me of this Sobel and Nesbit article, which is one of the best tests of the Tullock Theorem available.  

In addition to providing evidence consistent with the Tullock Theorem, the ongoing controversy about the role of safety regulation in NASCAR raises all kinds of bigger questions in political economy.  For example, who knows best--the regulators or the drivers?  What is it we are trying to maximize--close finishes or long careers for our drivers? 

Family And Friends Want To Know

I started out as a double major in chemistry and water science, and after my first EC 101 course, switched without hesitation to economics.  My family didn't quite understand.  I tried to explain it to them, which leads to the question for our own readers:  why do you study economics?

More Kohl On The Fire

Why in the world should the U.S. Senate examine text messaging rates?  Not only is this another violation of liberty and the rule of law; there is no economic basis to alter the pricing structure.  Excerpt:

6/16/09

WASHINGTON - U.S. Senator Herb Kohl examined today the state of competition in the cell phone industry and the causes of rising text message prices during a Congressional hearing in the Senate Judiciary Antitrust, Competition Policy and Consumer Rights subcommittee.  This hearing follows a sharp increase in the price of text messaging and will examine whether this is evidence of lack of competition in a market which has become more concentrated.  Four national carriers control over 90% of the cell phone market.  AT&T and Verizon combine to have a market share of  60%, and consumers’ choices have become more limited following multiple mergers. American consumers now pay more for wireless phone service than most other developed nations, an average of $506 per year in 2007.

The LRATC

If we assume complete information and zero transaction costs, why in the world would a perfectly competitive firm's long run average total cost curve slope upward?

The Economics of Grading

Alright readers, use economic analysis to explain the following...

When looking at a stack of 42 semester papers, the two most difficult points for me as a grader are the point where I must get started grading and the point where I'm down to 5-10 papers.  In my years as a teacher, this is a pattern I've found again and again when it comes to grading papers.  I suspect it's something other teachers deal with, too.   

Using the tools of economic analysis, how would you explain (1) my procrastinating on getting going with grading for as long as I possibly can; and (2) my difficulty with just pushing through and finishing those last few papers on the ground?  All kinds of benefits and peace of mind await me when I'm done, but I still plod along and drag the whole experience out for as long as possible.

(For my Public Choice students reading this post: your papers are done and will be returned tonight, so this post is me reflecting back on the last couple of days and not me apologizing!). 

The Hopelessness of HOPE

Grade inflation is, once again, in the news in Georgia.   

You see, here in Georgia, private universities like Mercer University must compete with heavily subsidized public universities.  In fact, for many talented in-state students, the relative price for a Mercer education approaches infinity.  This is all due to Georgia’s lottery funded HOPE (Helping Outstanding Pupils Educationally) scholarship program, which guarantees “free” tuition to any Georgia student earning higher than a 3.0 GPA in high school.   

As any EC 101 (ECN 177 here at Mercer) student can imagine, the policy has had a number of unintended consequences.  My friend, fellow marathoner, and one of Georgia’s best economists, David Mustard (along with co-authors), has written a series of papers that point out some of these effects.  Several weeks ago, I promised to profile his work, and here are the HOPE related findings I find most interesting:

(1)    Since many HOPE eligible students would have been going to college anyway because they were near a 3.0 GPA, the extra scholarship money from HOPE is acting as a wealth transfer.  Their parents have already saved for college, and the additional income from HOPE is going into durable goods, such as new cars.

 

(2)   The distributional effects of HOPE are uneven, and counties with large fractions of African-American, low income, and low educated individuals are bearing the largest share of HOPE’s costs. 

 

(3)   Even though SAT scores for in-coming freshman have remained constant, GPAs for resident freshmen have risen since HOPE.  The obvious explanation is that high school teachers do not want to be obstructing a student near the 3.0 threshold from a free ride in college.  Would you want to be the “hard” teacher sticking to your guns when tens of thousands of dollars are on the line?  (PLEASE look at Figure 1 on p. 901).

Policymakers have also established “checkpoints” for students receiving HOPE.  At certain credit levels, college students are supposed to be at minimum GPAs to maintain their hope funding.  Around these “checkpoints”, Mustard has observed two predictable effects: dropping classes to put off HOPE evaluation for another semester and substitution into summer courses where grades are generally higher.