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:

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?

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.

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 Moral Hazard Of Yuppie 911

Suppose an individual enjoys something that reduces the downside costs of his risky decisions.  For example, I have a 70 year old friend who, with a good health insurance program and very low copayments, plays basketball and injures himself a couple times a month.  The health insurance serves as a kind of reduced-cost safety net.  Problem is, he has an incentive to expose himself to greater risks (basketball injuries that require treatment) than he would without the insurance.  He does so all the time.

Economists call this moral hazard. Personal locator beacons provide another example:

"The question is, would they have decided to go on the trip knowing the weather was going bad if they had not been able to take the beacons," asks Rocky Henderson of Portland Mountain Rescue. "We are now entering the Twilight Zone of someone else's intentions."

More here.

HT:  Tyler Cowen

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? 

Consumer Choices And Corporate Conspiracies

My son and I attended a packed NMU vs. Hillsdale football game this past weekend.  (Suffice it to say not only is their economics department stronger than ours, so, too, is their football team.)  When many people started to leave a few minutes before the game's end, my son asked why.  I explained that they are trying to beat the traffic.  "That will cause traffic," he replied.

Now, we all know that this is rational.  Some are willing to bear a higher cost now to avoid even higher costs later.  The unintended consequence is clear, and desirable: the flow of traffic slowly builds up in an orderly way in advance.  People act on their expectations.  Nobody in their right mind would argue that somehow the suppliers of parking services engage in a conspiracy to increase the costs of the drivers before and after the end of the game.  The drivers chose to do so themselves. 

Even an eleven year old boy knows this. But, when a similar process occurs in a market -- a rise in price expectations that lead people to buy more now -- and voluntarily pay more now -- suddenly the story becomes one of greed and conspiracy among the suppliers.  My boy is now beginning to see the fallacy in this.  When will millions of able-minded adults?

Markets Work

The Atlanta Braves are playing with their backs against the wall for a spot in the playoffs; my "real" team, the Chicago Cubs, are playing for next year.  If the Braves can go 13-2 or better in their final 15, I think they can still get in as the NL Wild Card team.

Despite having a slim chance of making the playoffs, Braves tix on Stubhub for Sunday's home game could be purchased for as cheap as $1.75 per ticket as of Saturday morning!  The face value price of these tickets normally ranges from $6-$16.

Tickets to Wrigley Field for games against the Pirates are also cheap.  Some are going for $4.99 per seat now that we can put a fork in the Cubs for this year. 

For all of my friends who say things like "tickets to Wrigley are impossible to get these days because of how trendy going to Wrigley has become," I say wait for the annual collapse and head to Stubhub.  It looks to me like you can get as much of Wrigley as you want on the cheap right now! 

Demand And Quantity Demanded, Again

It's about that time of the semester for me to remind beginning economics students about the difference between demand and quantity demanded.

You know the law:  if P rises, Qd falls; if P falls, Qd rises... all other things constant.

The confusion occurs by using the word "demand" both by itself and tied to "quantity demanded." 

Two suggestions.

First, when you see the word "demand" on its own, always think of it as a shorthand for "demand curve" -- the set of P's and Q's.

When you see the phrase "quantity demanded," think of it this way:  Qd is the amount of a good that consumers plan to purchase at a given price.  We spell this out in our EWOT textbook, but the bulk of professors never state it this way.

It's all about plans, and how plans change.  So think of the Law, finally, as this:  if P rises, consumers will plan to purchase less of the good; if P falls, consumers will plan to purchase more, all other things constant.

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.

EC 101 Question Of The Moment

A few days ago I went to my bookshelf to get my copy of Friedman's Free to Choose.  I had Milton and Rose autograph it twenty five years ago.  Lo and behold it is not there.  It's been on my NMU office shelf for twelve years.  I have no clue where it is. 

Here's a simple question:  Suppose I value the book at $200 and value my time at $50 per hour.  How many hours should I search for it?

Cuba Continues To Go Down The Toilet... Without All The Amenities

I've argued in my EC 101 class that government would not be able to supply enough toilet paper to meet consumer demands.  Now I've found my argument holds true in the case of Cuba.

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?