Another land-use regulation that makes space more expensive is municipal requirements that establish a minimum number of parking spaces per housing unit.
According Donald Shoup’s analysis, parking requirements add significantly to the cost of housing, particularly in areas with high land values. For example, in Los Angeles, parking requirements can add $104,000 to the cost of each apartment. Parking requirements limit consumers’ choices and increase the cost of housing even for those who prefer not to pay for parking.
Developers typically build only the minimum amount of parking required by law, which indicates that those requirements are binding. That is, in a less-regulated environment, developers would devote less land to parking and more land to living space. A greater supply of living space will, other things equal, lower the cost of housing.
Sandy Ikeda, “Shut Out: How Land-Use Regulations Hurt the Poor”, The Freeman, 2015-02-05.
September 20, 2016
September 15, 2016
Published on 23 Sep 2015
In this video, we discuss asymmetric information, adverse selection, and propitious selection in relation to the market for health insurance. Health insurance consumers come in a range of health, but to insurance companies, everyone has the same average health. Consumers have more information about their health than do insurers. How does this affect the price of health insurance? Why would some consumers prefer to not buy health insurance at all? And how does this all relate to the Affordable Care Act? Let’s dive in.
September 9, 2016
Megan McArdle explains why some Apple fans are not overjoyed at the latest iPhones:
You’ve probably been thinking to yourself, “Gee, I wish I couldn’t charge my phone while also listening to music.” Or perhaps, “Gosh, if only my headphones were more expensive, easier to lose and required frequent charging.” If so, you’re in luck. Apple’s newest iPhone, unveiled on Wednesday, lacks the familiar 3.5-millimeter headphone jack. You can listen to music through the same lightning jack that you charge the phone with, or you can shell out for wireless headphones. The internets have been … unpleased with this news.
To be fair, there are design reasons for doing this. As David Pogue writes, the old-fashioned jack is an ancient piece of technology. It’s been around for more than 50 years. “As a result,” says Pogue, “it’s bulky — and in a phone, bulk = death.”
Getting rid of this ancient titan will make for a thinner phone or leave room for a bigger battery. Taking a hole out of the phone also makes it easier to waterproof. And getting rid of the jack removes a possible point of failure, since friction isn’t good for parts.
For people who place a high value on a thin phone, this is probably a good move; they’ll switch to wireless earbuds or use the lightning jack. But there are those of us who have never dropped our phones in the sink. We replace our iPhones when the battery dies, an event that tends to occur long before the headphone jack breaks. There are people in the world who take their phones on long trips, requiring them to charge them while making work calls, and they won’t want to fumble around for splitters or adapters. Some of us do not care whether our phone is merely fashionably slender or outright anorexic. For these groups, Apple’s move represents a trivial gain for a large loss: the vital commodity that economists call option value.
Option value is basically what it sounds like. The option to do something is worth having, even if you never actually do it. That’s because it increases the range of possibility, and some of those possibilities may be better than your current alternatives. My favorite example of option value is the famous economist who told me that he had tried to argue his wife into always ordering an extra entree, one they hadn’t tried before, when they got Chinese takeout. Sure, that extra entree cost them money. And sure, they might not like it. But that entree had option value embedded in it: they might discover that they like the new entree even better than the things they usually ordered, and thereby move the whole family up to a higher valued use of their Chinese food dollars.
September 6, 2016
Other things equal, the larger the lot, the more you’ll pay for it. Regulations that specify minimum lot sizes — that say you can’t build on land smaller than that minimum — increase prices. Regulations that forbid building more units on a given-size lot have the same effect: they restrict supply and make housing more expensive.
People who already live there may only want to preserve their lifestyle. But whether they intend to or not (and many certainly do so intend) the effect of these regulations is to exclude lower-income families. Where do they go? Where they aren’t excluded — usually poorer neighborhoods. But that increases the demand for housing in poorer neighborhoods, where prices will tend to be higher than they would have been.
And it’s not just middle-class families that do this. Very wealthy residents of exclusive neighborhoods and districts also have an incentive to support limits on construction in order to maintain their preferred lifestyle and to keep out the upper-middle-class hoi polloi. Again, the latter then go elsewhere, very often to lower-income neighborhoods — Williamsburg in Brooklyn is a recent example — where they buy more-affordable housing and drive up prices. Those who complain about well-off people moving into poor neighborhoods — a phenomenon known as “gentrification” — may very well have minimum-lot-size and maximum-density regulations to thank.
When government has the authority to restrict building and development, established residents of all income levels will use that power to protect their wealth.
Sandy Ikeda, “Shut Out: How Land-Use Regulations Hurt the Poor”, The Freeman, 2015-02-05.
September 5, 2016
Published on 8 Jan 2015
George Akerlof, a Nobel Prize-winning economist, analyzed the theory of adverse selection – which occurs when an offer conveys negative information about what is being offered. In the market for used cars, Akerlof posited that sellers have more information about the car’s quality than buyers. He argued that this leads to the death spiral of the market, and market failure. However, the market has developed solutions such as warrantees, guarantees, branding, and inspections to offset information asymmetry.
August 24, 2016
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 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.