The Economic Way of Thinking

Whining About Wine Etiquette

Happy New Year! 

Our gracious New Year's Eve hosts know how to put on a party.  At their house, the food is always plentiful and diverse.  The bar is open all night, and it's a su casa es mi casa/smoke 'em if you got 'em attitude towards beverages.  Sports are on the television up until it's time for the always entertaining and awkward Anderson Cooper and Kathy Griffin countdown to the new year.  (By the way, here's video of Kathy sneaking in a bad, bad word during the broadcast; no word yet on whether or not there will be regulatory consequences or if her check will have to be forfeited.) 

Of course, many people aren't like our New Year's Eve hosts, and many parties involve bringing good wine to a house only to have the host not offer to open it.  Since simply asking your host if the wine can be opened is sometimes a violation of social norms, strategies must be pursued to make sure your bottle gets opened.  Some thoughts about overcoming this extremely serious coordination problem are below the fold:

EWOT Question of the Moment

Final exams ended for me last night at 10 pm.  Fast and furious grading has begun in earnest this morning.  Here's a final exam question from my Applied Micro class that may one day show up again on an exam:

Assume criminals are rational.  Which is more likely to deter crime: increasing the length of imprisonment or increasing the likelihood of arrest and conviction?  Use economic theory to support your answer.

Got Milk?

Though I'm still doing my best to boycott Walmart for their stance on health care, I have found myself in Walmart two or three times in the past month.  (And, let me say, the "People of Walmart" are out in force this time of year!)

While in the dairy section last night, I leaned on the cart and went off to my happy place where I curse repeatedly, "Damn you, Walmart.  Why do you have to be the store on our way home from Chinese?  Why do you have to have everything a person needs in one place?  And, why are your prices so low?"

Somewhere during my zone out, I noticed my wife over by the milk refrigerators.  As I watched her, she first picked up a half-gallon carton of milk, then put that back to grab a full gallon. 

When she got back to the cart, I said, "What was that all about?"  She said, "Don't ask me why, but a gallon of milk is $1.99 and the half-gallon is $2.98.  Same expiration date." 

We got inspired by Angelina and got milk last night.  Do you, readers, got an explanation for why we paid lower prices for twice as much milk?

How The Market Works

Israel Kirzner's pamphlet, How the Market Works, offers a nice and readable discussion of the Austrian theory of a competitive market process against the standard theory of perfect competition.  Highly recommended.

It's available here.

Signals, Countersignals, and Crime

As I mentioned this weekend, I'm currently listening to the excellent book, The Monsters of Florence on CD.  (If I can just find the "opportunity" to drive another 400 miles or so, I'll have the book finished).  While listening to disk 3 (of 8), something like the following was said (I'm paraphrasing):

After the killing of two French tourists in 1985, an anonymous note was sent to the police.  In the note, the police got an important clue: the author spelled the word "republic" with one b instead of two b's.  [The appropriate and higher class way to spell republic in Italian is "Repubblica"].  Clearly, this indicated that the perpetrator was either not from Italy or poorly educated.

Boy, did my head begin to spin with mixed strategy game matrices after listening to the above passage!  If the simple misspelling of the word "republic" led most Italian criminologists to focus on foreigners and dolts, a rational criminal would misspell more often. 

But, if police learn that it's in one's interest to send a false signal by misspelling words, they'll stay on track and assume the criminal is trying to outwit them.  If the criminal knows that the police know that he's playing games, then...

And, away I went into the world of infinite regress and probabilistic equilibria.  About 10 minutes later I was done thinking about randomizing criminals; I was happy to still have my car on the road; and I realized I had missed an entire section of the book!  I guess that's a small price to pay for a novel taking you on a mind-walk like the above...

User Fees and Peak-Load Pricing

Over the last couple of months, the topic of user fees has come up on our EWOT blog a few different times (see here and here, for example).  In putting together my MBA Micro exams, I got wondering why user fees and peak-load pricing aren't used a lot more often.  Here are three cases in point: 

(1) Food consumption probably peaks with dinner.  Putting the drunks and others with munchies aside, it must be lowest between midnight and 5 am.  Why don't restaurants use more "smart" pricing during these off-peak hours?  If it can be done in the heavily regulated electricity market, why not in the food market?

(2) An extremely ugly side of people comes out when it comes to overhead bins on full flights.  Those with briefcases are asked to cram their feet for the sake of those who want to take large carry-on bags on board.  This problem has gotten much worse since the introduction of fees for checked bags.  Why aren't airlines being entrepreneurial and also charging for bin space?

(3) Why don't rental car companies pro-rate the first and last days of rentals?  If you go over by even an hour on your final day, you're usually charged for a full day.  Wouldn't a profit-maximizing company have a strong incentive to cut prices substantially on the final day, attract more customers, and still the car around right away?

A good economist should be able to explain the lack of markets for all of the above.  I think I have good answers for each.  Do you?

A Recap of Benson's Visit

As readers know, we had the great pleasure of hosting Florida State University's Bruce Benson earlier this week here at Mercer.  Bruce gave an excellent presentation, which was filled with data and good anecdotes, regarding the tremendous costs of America's "War on Drugs."  The following morning, his discussion of anarcho-capitalism impressed several Mercer faculty members and our "Free Marketeers" student group.  A few highlights of his visit can be found below the fold.

A Future Intermediate Micro Question

I'm less than two months away from beginning another semester of Intermediate Micro, which is one of the courses I most enjoy teaching.  Here's a future exam question that came to me while driving the other day:

In Macon, some of my friends describe the intersection of I-16 and I-75 as "the V of death."  Traveling in either direction on this stretch is dangerous.  That's because people wanting to exit onto Spring Street after getting onto I-16 have just 0.5 miles to get across three buzzing lanes of traffic.  People going west on I-16 must also quickly change lanes to get on 75 North or South.  Many horrible accidents have occurred in this area, and the Georgia DOT intends to seriously reorganize the interchange. 

Use price theory to explain why "fixing" this messy stretch of highway could, in theory, actually lead to more traffic fatalities in the future. 

For students looking to get a jump on their micro, here are 111 other questions from Walter Williams. 

Portugal: Our New Amsterdam?

Amsterdam and America's Prohibition are the two "controlled experiments" I frequently invoke when talking about issues related to legalization and prohibition.  Perhaps it's time to add a third, as it was recently brought to my attention that Portugal's experiment with decriminilization of all drugs, which began in 2001, seems to be working. 

Here's what Johann Hari had to say about the Portugal experiment a couple days ago:

On July 1^st 2001, Portugal decriminalized the possession of all drugs,including heroin and cocaine. You can have and use as much as you like for your own needs, and if you are caught, the police might refer you to a rehab programme, but you will never get a criminal record. (Supplying and selling remains illegal.) The prohibitionists predicted a catastrophic rise in addiction, and even I – an instinctive legalizer – was nervous.

Now we know: overall drug use actually fell a little. As a major study by Glenn Greenwald for the Cato Institute found, among teenagers the fall was fastest: 13-year-olds are 4 percent less likely to use drugs, and 16-year-olds are 6 percent less likely. As the iron law of prohibition predicts, the use of hard drugs has fallen fastest: heroin use has crashed by nearly 50 percent among the young, who were not yet addicted.

HT: Matt

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?