Published on 26 Jun 2015
In this video, we take a look at common goods. Common resources are nonexcludable but rival. For instance, no one can be excluded from fishing for tuna, but they are rival — for every tuna caught, there is one less for everyone else. Nonexcludable but rival resources often lead to what we call a “tragedy of the commons.” In the case of tuna, this means the collapse of the fishing stock. Under a tragedy of the commons, a resource is often overused and under-maintained. Why does this happen? And how can we solve this problem? Like we’ve done so many times throughout this course, let’s take a look at the incentives at play. We also discuss Nobel Prize Winner Elinor Ostrom’s contributions to this topic.
August 24, 2016
August 21, 2016
Of the numerous and occasionally contradictory techniques used to ration demand and supply [when monetary prices are not used], perhaps the most common is past behavior: persons already in apartments are given preference under rent control, or past acreage determines current allotments under agricultural price support programs. Another common technique is queuing or first come – first served: taxicabs, theater tickets, medical services, and many other goods and services are rationed in this way when their prices are controlled. Of course, discrimination and nepotism are also widely used; the best way to get a rent-controlled apartment is to have a (friendly) relative own a controlled building. Other criteria are productivity – the least productive workers are made unemployed by minimum wage laws;…. collateral – borrowers with little collateral cannot receive legal loans when effective ceilings are placed on interest rates.
Each rationing technique benefits certain groups at the expense of other groups relative to their situation in a free market. Price controls are almost always rationalized, at least in part, as a desire to help the poor, yet it is remarkable how frequently they harm the poor.
Gary Becker, Economic Theory, 1971.
August 20, 2016
Published on 26 Jun 2015
In this video we discuss club goods. Club goods are nonrival and excludable. For instance, HBO is a club good, as you need to pay a monthly fee to access HBO (excludable) but more viewers does not add to costs (nonrival). Entrepreneurs are always looking for ways to turn public goods into club goods — cable TV and satellite radio being two examples. Some entrepreneurs have even figured out how to profit from providing public goods — for instance, radio and broadcast television are public goods, but, thanks to advertising, they are profitable.
August 18, 2016
Ever since the beginning of the ethanol mandate it was obvious to anybody with eyes to see that the whole thing was a boondoggle and a huge waste for everybody except ADM. What the Greens failed to understand is that if you prop up corn prices by buying, distilling and burning massive amounts of corn whisky in cars, two things are going to happen. One the price is going to go up, making things like cow feed and other uses of corn more expensive and 2. farmers are going to, without restraint, plant ever larger amounts of corn, which will 1. push out other crops like wheat and 2. require more land use to plant even more corn. Which is why you can now go from Eastern Colorado to Western NY and essentially see nothing but corn. Millions of acres of corn, across the country, grown to burn. Somehow this was supposed to be environmentally friendly?
J.C. Carlton, “The Law Of Unintended Consequences Hits Biofuels”, The Arts Mechanical, 2016-08-07.
August 12, 2016
The bad news? It’s more expensive to consume than ever before, thanks to the way the Ontario government has manipulated the market:
You may be surprised to learn that electricity is now cheaper to generate in Ontario than it has been for decades. The wholesale price, called the Hourly Ontario Electricity Price or HOEP, used to bounce around between five and eight cents per kilowatt hour (kWh), but over the last decade, thanks in large part to the shale gas revolution, it has trended down to below three cents, and on a typical day is now as low as two cents per kWh. Good news, right?
It would be, except that this is Ontario. A hidden tax on Ontario’s electricity has pushed the actual purchase price in the opposite direction, to the highest it’s ever been. The tax, called the Global Adjustment (GA), is levied on electricity purchases to cover a massive provincial slush fund for green energy, conservation programs, nuclear plant repairs and other central planning boondoggles. As these spending commitments soar, so does the GA.
In the latter part of the last decade when the HOEP was around five cents per kWh and the government had not yet begun tinkering, the GA was negligible, so it hardly affected the price. In 2009, when the Green Energy Act kicked in with massive revenue guarantees for wind and solar generators, the GA jumped to about 3.5 cents per kWh, and has been trending up since — now it is regularly above 9.5 cents. In April it even topped 11 cents, triple the average HOEP.
The only people doing well out of this are the lucky cronies of the government who signed up for provincial subsidies on alternative energy (primarily wind and solar), who reap rents of well over 100% thanks to guaranteed minimum prices for electricity from non-traditional sources.
August 10, 2016
In popular discourse, America is said to be more “pro-business” than is France. When people use this term “pro-business” they typically have in mind some vague notion of a government policy made up of low-ish taxes and not a great deal of government regulation. That is, “pro-business” is commonly used to mean a free, or free-ish, market.
But such language is mistaken.
A true free market is at its core pro-consumer. In a genuinely free-market economy, businesses are valued only insofar as they serve consumers. The performance of a genuinely free-market economy is assessed by how well it satisfies, over time, the demands of consumers spending their own money and not by how well it satisfies the demands of business owners and managers.
Obviously, because businesses are a useful – indeed, practically indispensable – means of abundantly satisfying consumers’ demands, government policies that obstruct the smooth operation of these means are undesirable. But such policies that obstruct or discourage business operations are economically undesirable not because they harm businesses but, rather, because they harm consumers.
Anyway, for all of its faults, American culture and policy are actually much less pro-business than are the culture and policy of France. If you’re really looking for a government that is deeply pro-business – one that regards the protection of existing businesses as a worthy end in and of itself – one that forcibly transfers resources from taxpayers, consumers, and other non-businesses in order to promote the material interests of existing businesses – look at France. You’ll find there what you seek. In France you’ll find one of the most business-friendly policy regimes on the face of the earth. (HT Chris Meisenzahl)
Pity the French.
Don Boudreaux, “Pity the French Consumer and Worker”, Café Hayek, 2016-06-27.
August 6, 2016
“Seriously?” you’re asking. “Love is like … automobile manufacturing?” Well, no. But companies are composed of people. And people tend to make the same sort of mistakes over and over. This particular mistake is so common that economists have a name for it: the sunk cost fallacy.
A sunk cost is, well, like a sunken ship: It’s gone, and you cannot retrieve it, or you can only retrieve it at immense expense. The correct and rational way to deal with a sunk cost is to ignore it — to make decisions without thinking about the money or time you’ve already invested.
Think of it this way: If you’re horribly ill and you’ve spent a bunch of money on tickets to a show, there’s no point thinking about how much the tickets cost, because no matter what you do, you can’t get it back. What you should be thinking about is whether you will enjoy the show in your current condition. Making yourself miserable will not somehow rescue the money; it just layers another cost — the agonizing hours you will spend wishing that you were home in bed — on top of the cash you used to buy the tickets.
Unfortunately, human beings are terrible at thinking this way. Once we have lost something, we become desperate to get it back. The sunk cost fallacy appears over and over in all facets of human life: Think of companies that spend vast fortunes trying to salvage doomed IT products, or compulsive gamblers who go back again and again trying to get even with the house, a feat that is mathematically nearly impossible over the long run. Even if we’ve never darkened the door of a casino, when we are dealing with sunk costs, all of us easily turn into wild gamblers, ready to take ultra-long shots rather than admit the loss and move on.
And boy, does it show up in relationships. I cannot count the number of women I have watched throw year after year into a doomed relationship because they are desperate to redeem the prime dating years they have already wasted on a man who does not want to share his future with them. Every one of them said afterward that she wished she’d cut things off when it became clear that he wasn’t as enthusiastic as she was.
Megan McArdle, “Happy Valentine’s Day! Now Cut Your Losses”, Bloomberg View, 2015-02-13.
August 2, 2016
All taxes have something called a “deadweight cost”. This is simply economic activity that doesn’t happen because of the simple fact that we’re levying a tax. If we tax the purchase of apples then fewer apples will be purchased. This is entirely divorced, by the way, from any good that might be achieved by how we spend that revenue collected. We also know that different taxes have different deadweight costs. We even have a ranking of them. At the top, with the highest costs for the revenue collected, we’ve transactions taxes like the financial transactions tax under consideration. This is so expensive that it’s a really, really, bad idea to tax in this manner. Then come capital and corporate taxes, then with lower again deadweights incomes taxes, then consumption and then finally repeated taxes on real property, or land value taxation. If we were interested only in efficiency (we’re not, equity is important too) then we would collect as much as we could from a land value tax, then from Pigou and sin taxes (carbon emissions, cigarettes, booze) then general consumption taxes and so on. Perhaps leaving corporates and capital entirely untaxed. And there’s a whole field of study, optimal taxation theory, that suggests that we really should do that and the general prescription is the progressive consumption tax. There’s general agreement that on purely those efficiency grounds this is about the best we can do with a tax system.
Tim Worstall, “Surprisingly Perhaps, State Republicans Are Actually Correct On The Economics Of This”, Forbes, 2015-02-14.
July 29, 2016
Curiously, as a man of the thirteenth century, I “believe” in the price mechanism. (You know: wheat crop fails, price goes up; too much wheat, price goes down.) As a visitor to the twenty-first, I believe it is no longer working. Nearly one full century into the experiment of unlinking money from things, and linking it to “policy” instead, not one person is left on the whole planet with the fondest idea how our system works.
Some years ago I assembled a little team to study what had gone into the price of a loaf of bread. We had to give up. It was too complicated. Bread was officially “untaxed” in the jurisdiction; yet about the only thing we could establish with any confidence, after looking through the production process, was that more than half the price was cumulative direct and indirect taxes.
David Warren, “Deflationary asides”, Essays in Idleness, 2015-01-27.
July 21, 2016
Published on 26 Jun 2015
Description: What do we mean by “nonexcludable” and “nonrival” when talking about public goods? Public goods challenge markets because it’s difficult to charge non-payers and it’s inefficient to exclude anyone — so, how do we produce them? Public goods provide an argument for taxation and government provision. But how do we know which public goods should be provided? In this video we cover the free-rider problem and the forced-rider problem in regards to public goods. We also discuss examples of the four different categories of goods, which will be covered in future videos: private goods, commons resources, club goods, and public goods.
At the heart of [Trump’s] argument is the belief that selling to countries is good and buying from them is bad, the crude mercantilist fallacy that Adam Smith’s Wealth of Nations debunked in the same year that America embraced the Declaration of Independence. Smith, the brilliant British political economist, argued that unless people start eating gold bullion, the point of wealth is to buy not sell; to consume not produce. If China starts shipping free plasma TVs to America, a few American companies may be thrown out of business, but American consumers will be better off. What’s more, they’ll be able to spend their savings on goods from other companies. The only folks that protectionist policies benefit are crony capitalists who face less competition — the very thing that Trump says he’s fighting.
Shikha Dalmia, “Donald Trump’s free-trade follies”, The Week, 2016-06-30.
July 15, 2016
I would point you to one of the great economic resources of our times. The work of Angus Maddison. Download that database (it’s a simple Excel file). Play around with it. And then think about it.
While you think about it, ponder the point that Brad Delong likes to make (derived in part from Maddison and also from his own work). The one fact of economics that we need to explain is what the heck happened around 1700? Why did living standards flatline, roughly and around about, from the founding of Ur until someone worked out how to use a steam engine? That’s the one supreme puzzle. Now, we think we’ve found a lot of answers, Malthusian growth giving way to Smithian (and possibly, as Deepak Lal puts it, Promethean). We might want to ascribe it to capitalism, to markets, to the welfare state, to a step change in technology: and bits and pieces of all of those have obviously contributed to where we are now. But something the heck happened which was different from everything that preceded it.
And now back to Maddison’s numbers. To explain them a little bit (and this again draws on points I’ve lifted from Delong). They are in constant dollars. So, an adjustment has been made for inflation over the decades and centuries. We can’t say that sure, peoples’ incomes in the past were low but so were prices. These numbers are at modern prices (actually, the prices of 1992 if I recall correctly, so adjust by 20 odd years mentally). They are also PPP adjusted, another version of the same thing. So they really are (trying, this is more of an art than a science at this distance) trying to reflect different prices in different places as well as the inflation adjustment across time.
Finally, they are of GDP per capita. This isn’t the same as the average income, not at all. Some amount of GDP will flow to capital, there will be inequality of distribution and so on. However, the average living standard of a place and time cannot be more than that GDP per capita. And then look at the numbers again. Up until 1600 or so GDP per capita wandered around between $500 a year and $1,000 a year or so. All over the world. Up a bit, down a bit, the central years of the Roman Empire were better when the Romans were civilising my Celtic forbears than when the Saxons were slaughtering my Celtic forbears but no real breakout from that range.
And remember: this is at 1992 prices. We really are saying that people had the standard of living that we would have if we had $500 or $1,000 a year to go spend in a 1992 Walmart. Now go look at 1890s America. That house on the prairies time. We really are saying that the average American in 1890 (less than in fact, that difference between incomes and GDP, distributional effects) was living on $3,900 a year. And no, not at some different price level. All housing, clothing, heating, food, everything, at the prices that we would see in a 1992 Walmart.
In the year of my birth it was $12,200: better, certainly, but simply nowhere near as good as today.
It really is important to understand this point. The past was unimaginably poor by our current standards. As are parts of ther world today. Or, as the man said, the Good Old Days are right now.
Tim Worstall, “Joni Ernst, Bread Bags And The Poverty Of The Past”, Forbes, 2015-02-02.
July 6, 2016
Published on 26 Jun 2015
While the probability of an asteroid hitting the planet is very low, its effect would be disastrous for all of us. So, who should pay for asteroid protection? A good like asteroid defense — a public good, meaning it’s nonexcludable and nonrival — has some unusual properties that challenge markets. We explore the curious case of public goods in this video and others in this section.
July 1, 2016
Virginia Postrel says the state’s high speed rail boondoggle may finally run out of chances:
California’s high-speed rail project increasingly looks like an expensive social science experiment to test just how long interest groups can keep money flowing to a doomed endeavor before elected officials finally decide to cancel it. What combination of sweet-sounding scenarios, streamlined mockups, ever-changing and mind-numbing technical detail, and audacious spin will keep the dream alive?
Sold to the public in 2008 as a visionary plan to whisk riders along at 220 miles an hour, making the trip from San Francisco to Los Angeles in a little over two and a half hours, the project promised to attract most of the necessary billions from private investors, to operate without ongoing subsidies and to charge fares low enough to make it competitive with cheap flights. With those assurances, 53.7 percent of voters said yes to a $9.95 billion bond referendum to get the project started. But the assurances were at best wishful thinking, at worst an elaborate con.
The total construction cost estimate has now more than doubled to $68 billion from the original $33 billion, despite trims in the routes planned. The first, easiest-to-build, segment of the system — the “train to nowhere” through a relatively empty stretch of the Central Valley — is running at least four years behind schedule and still hasn’t acquired all the needed land. Predicted ticket prices to travel from LA to the Bay have shot from $50 to more than $80. State funding is running short. Last month’s cap-and-trade auction for greenhouse gases, expected to provide $150 million for the train, yielded a mere $2.5 million. And no investors are lining up to fill the $43 billion construction-budget gap.
June 30, 2016
Published on 7 Apr 2015
Do unions raise wages for workers as a whole? If not, can unions raise the wages of some workers? The answer is, well, it depends. Unions have the ability to restrict the supply of labor to a job, which can increase wages for some workers. However, unions can also lower wages. For example, work stoppages and strikes supported by unions can slow down economic growth, lowering real wages. To illustrate this, we take a look at what happened to Great Britain’s economy during the 1970’s union strikes.
It’s important to note that unions are not just about wages — they can be helpful in protecting workers from arbitrary abuses and maintaining positive workplace relationships.
Finally, we ask — are there differences between professional associations and unions? How are they similar? Watch to learn more about how unions affect the economy.