Quotulatiousness

August 17, 2017

Words & Numbers: The Illusion of School Choice

Filed under: Bureaucracy, Economics, Education — Tags: , , , , — Nicholas @ 06:00

Published on 16 Aug 2017

In private schools, as in private enterprise in general, poor performance drives funding away by driving paying customers away. Yet in public schools, poor performance is used as an excuse for increased funding. With incentives like these, is it any wonder that public schools are failing our children so badly? Isn’t it time to inject some competition into the system?

Education for all is a worthy wish. So is food for all. But we don’t force poor people to eat state-produced food. Even food stamp recipients get to choose where to shop. Why shouldn’t beneficiaries of public education spending get to choose where to send their kids?

Our hosts James R. Harrigan and Antony Davies want to know…

August 10, 2017

Words & Numbers: Has Tipping Gone Out of Control?

Filed under: Business, Economics — Tags: , , — Nicholas @ 04:00

Published on 9 Aug 2017

In 1922, famed etiquette writer Emily Post advised her readers that 10% is the standard for tipping your waiter. Since then, “gratuity creep” has been so steady that tip jars are now ubiquitous and 25-30% is considered the rule in New York City. Uber once resisted this trend, but recently added a tipping feature to its app.

What is the economic rationale behind tipping? Does the usefulness of tipping diminish the more that a certain rate becomes an expectation? At a certain point, would it be better to do without the fuss involved and simply include that portion of a service-provider’s compensation in the wages paid by the employer?

Our valiant hosts, Antony Davies and James Harrigan explore these questions and more!

June 28, 2017

Concert-goers rejoice, for the government is here to help you!

Filed under: Business, Economics, Law — Tags: , , , , — Nicholas @ 05:00

Of course, if you have any experience of the utility of “government help”, you shouldn’t get your hopes up too high, as Chris Selley explains:

The results of an online public consultation were clear, said Naqvi. “One: the current system clearly is not working for fans; and two: Ontarians expect the government to take action.” We should have expected nothing less: ticket rage is a real thing among concertgoers in particular — a mind-boggling 35,000 people completed the online consultation — and besides, the survey didn’t include an option to suggest the government do nothing.

Among other things, Naqvi said, it will be illegal to resell tickets for more than 150 per cent of face value, and it will be illegal to use bots. Soon, he promised, “everyone (will have) a fair shot at getting the tickets they want.” Ontario, he said, will become “a world leader in ticket sales regulation.”

You’re supposed to think that’s both plausible and desirable. You should instead be very, very skeptical. So long as U2, the Tragically Hip and other artists insist on pricing their tickets vastly below what people are willing to pay for them, there will be an enormous incentive to circumvent whatever laws are in place to prevent third parties from reaping those foregone profits. A 150-per-cent cap would reduce the incentive, as Naqvi says — but only if the entire scalping community decided to respect it.

It won’t. It doesn’t. Scalping is illegal in Arkansas. Tickets for the University of Arkansas Razorbacks’ Nov. 24 game against Missouri are going on Stubhub for well over twice face value. Scalping is illegal in Quebec. Stubhub will put you in the third row for Bob Dylan’s show at the Montreal Jazz Festival next month for US$275; face value is $137.50 Canadian. The experiment works in every scalping-restrictive North American jurisdiction I tried. Heck, scalping used to be illegal in Ontario. That sure didn’t deter the gentlemen who prowled around outside Maple Leaf Gardens and SkyDome.

Many Stubhub users aren’t even in Ontario — that’s even more true for the people with the bots. Is the Attorney General really going to prosecute people for the crime of selling tickets at prices people are perfectly willing to pay? People in other countries? That would get awfully old in an awful hurry.

As he points out in the article, this is yet another instance of the Ontario government pandering to the demands of economic illiterates (recent examples include slapping on new rent controls in the middle of a housing crunch and significant increases in the minimum wage as new workforce entrants are already finding it tough to get hired). It’s as though the government is reading the economic textbook upside down … bringing in exactly the wrong “solutions” to every problem they see.

June 21, 2017

QotD: Profit

Filed under: Business, Economics, Quotations — Tags: , , — Nicholas @ 01:00

While capitalism has a visible cost – profit – that does not exist under socialism, socialism has an invisible cost – inefficiency – that gets weeded out by losses and bankruptcy under capitalism. The fact that most goods are more widely affordable in a capitalist economy implies that profit is less costly than inefficiency. Put differently, profit is a price paid for efficiency.

Thomas Sowell, Basic Economics (fifth edition), 2015.

June 1, 2017

QotD: Economics

Filed under: Economics, Education, Quotations — Tags: , — Nicholas @ 01:00

Science may be the noblest endeavor of the human mind, but I believe (though I cannot prove) that the most crippling and dangerous kind of ignorance in the modern West is ignorance of economics, the way markets work, and the ways non-market allocation mechanisms are doomed to fail. Such economic ignorance is toxic, because it leads to insane politics and the empowerment of those whose rhetoric is altruist but whose true agenda is coercive control.

Eric S. Raymond, “What Do You Believe That You Cannot Prove?”, Armed and Dangerous, 2005-01-06.

May 31, 2017

Introduction to Consumer Choice

Filed under: Economics — Tags: , — Nicholas @ 05:00

Published on 30 May 2017

Everyday, you make tons of decisions about consumption. Your choices about what and how much of a good to buy are influenced by the laws of supply and demand. These choices are nearly endless. For example, at Starbucks, each drink is highly customizable. In fact, they offer over 80,000 combinations!

When you buy a good or make a decision about how to use your time, you’re getting some sort of value, like a sense of happiness or satisfaction, out of it – economists call this “utility.” The increase in that value from buying an additional unit of a good or service is its marginal utility. When you make these decisions, you’re thinking at the margin, even if you don’t realize it.

Think about how wonderful a shot of espresso, or your beverage of choice, is first thing in the morning. You probably derive quite a bit of utility! But how about a second, third, or even fourth shot of espresso? With each extra shot, you probably get a little less utility. At some point, the cost will outweigh the marginal utility.

When you add up the satisfaction you get out of all of the shots of espresso, that is your total utility. Since each additional shot of espresso has a little less utility, economists refer to this concept as diminishing marginal utility.

This is true for all goods and activities, but the amount of utility and marginal utility depends on the individual. For example, let’s say that Starbucks drops the price of shot of espresso. This can change the quantity demanded on aggregate because for some people, the drop in price will make the marginal utility they derive from an extra shot now worth the cost. But perhaps that’s not true for you and your consumption will not change.

Are you starting to see how you instinctively think and act at the margin in your daily life?

Up next, we’ll explore other factors beyond price that affect your habits as a consumer, such as preferences and income.

QotD: Capitalism

Filed under: Economics, History, Quotations — Tags: — Nicholas @ 01:00

Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort…. [T]he capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standard of life of the masses.

Joseph Schumpeter, Capitalism, Socialism, and Democracy, 1942.

May 16, 2017

How service companies might respond to a mandated increase in the minimum wage

Filed under: Business, Economics — Tags: , , , — Nicholas @ 05:00

At Coyote Blog, Warren Meyer discusses how real world service companies that employ a lot of minimum wage workers are likely to respond when the minimum wage is raised:

When I discuss this with folks, they will say that the increase could still come out of profitability — a 5% margin could be reduced to 3% say. When I get comments like this, it makes me realize that people don’t understand the basic economics of a service firm, so a concrete example should help. Imagine a service business that relies mainly on minimum wage employees in which wages and other labor related costs (payroll taxes, workers compensation, etc) constitute about 50% of the company’s revenues. Imagine another 45% of company revenues going towards covering fixed costs, leaving 5% of revenues as profit. This is a very typical cost breakdown, and in fact is close to that of my own business. The 5% profit margin is likely the minimum required to support capital spending and to keep the owners of the company interested in retaining their investment in this business.

Now, imagine that the required minimum wage rises from $10 to $15 (exactly the increase we are in the middle of in California). This will, all things equal, increase our example company’s total wage bill by 50%. With the higher minimum wage, the company will be paying not 50% but 75% of its revenues to wages. Fixed costs will still be 45% of revenues, so now profits have shifted from 5% of revenues to a loss of 20% of revenues. This is why I tell folks the math of absorbing the wage increase in profits is often not even close. Even if the company were to choose to become a non-profit charity outfit and work for no profit, barely a fifth of this minimum wage increase in this case could be absorbed. Something else has to give — it is simply math.

The absolute best case scenario for the business is that it can raise its prices 25% without any loss in volume. With this price increase, it will return to the same, minimum acceptable profit it was making before the regulation changed (profit in this case in absolute dollars — the actual profit margin will be lowered to 4%). But note that this is a huge price increase. It is likely that some customers will stop buying, or buy less, at the new higher prices. If we assume the company loses 1% of unit volume for every 2% price increase, we find that the company now will have to raise prices 36% to stay even both of the minimum wage increase and lost volume. Under this scenario, the company would lose 18% of its unit sales and is assumed to reduce employee hours by the same amount. In the short term, just for the company to survive, this minimum wage increase leads to a substantial price increase and a layoff of nearly 20% of the workers. Of course, in real life there are other choices. For example, rather than raise prices this much, companies may execute stealth price increases by laying off workers and reducing service levels for the same price (e.g. cleaning the bathroom less frequently in a restaurant). In the long-term, a 50% increase in wage rates will suddenly make a lot of labor-saving capital investments more viable, and companies will likely substitute capital for labor, reducing employment even further but keeping prices more stable for consumers.

As you can see, in our example we don’t need to know anything about bargaining power and the fairness of wages. Simple math tells us that the typical low-margin service business that employs low-skill workers is going to have to respond with a combination of price increases and job reductions.

May 14, 2017

The earliest lesson in economics

Filed under: Economics, Humour — Tags: , , — Nicholas @ 05:00

Steve Kates posted this at Catallaxy Files, saying it was everything you need to know about public spending:

December 31, 2016

Signaling

Filed under: Economics — Tags: , , , — Nicholas @ 04:00

Published on 23 Sep 2015

A signal is an action that reveals information. Let’s look at higher education, for example. A large fraction of the value you receive from your degree comes on the day you earn your diploma. Your expected wages don’t increase with each class you complete along the way; instead, they spike sharply at the end when you receive your diploma. This is often referred to as the “Sheepskin Effect” because diplomas used to be printed on sheepskin.

Nobel Prize winner Michael Spence did research on this subject and found that education is valuable not necessarily because it creates valuable skills, but rather that it signals valuable skills. So how does the signal, represented by a degree, alleviate asymmetric information?

Employers don’t necessarily know how smart or skilled you are. Your degree, however, provides a credible signal of these traits and gives them more information they can use in the hiring process.

What other signals exist? We discuss examples like diamond engagement rings, why criminals tattoo their face, and why a peacock has a colorful tail. Let us know what examples you come up with in the comments.

December 27, 2016

QotD: The economics of price gouging

Filed under: Business, Economics, Quotations — Tags: , — Nicholas @ 01:00

Soaring prices after a natural disaster or during extreme weather are simply, economists would say, the market’s response to changing supply and demand, as disruptions make it harder to get some things just as demand spikes (for instance, for generators, gasoline, bottled water, first aid supplies). The price increase helps cut down on marginal uses (taking a bath with your bottled water), while drawing new supply in from unaffected regions, because people there now have a strong incentive to load up supplies and go sell them in the affected area — quickly. The market is working. But the optics are terrible. Humans intuitively see price gougers as bad agents, exploiting the suffering of others. So even in the absence of price-gouging laws, businesses try to avoid raising prices under extreme conditions. Whatever they could gain in immediate revenue, they would lose more in future sales as disgusted customers walk away.

Megan McArdle, “The Price Is Right, or Uber Will Raise It”, Bloomberg View, 2015-05-19.

December 25, 2016

Repost – The market failure of Christmas

Filed under: Economics, Government — Tags: , — Nicholas @ 02:00

Not to encourage miserliness and general miserability at Christmastime, but here’s a realistic take on the deadweight loss of Christmas gift-giving:

In strict economic terms, the most efficient gift is cold, hard cash, but exchanging equivalent sums of money lacks festive spirit and so people take their chance on the high street. This is where the market fails. Buyers have sub-optimal information about your wants and less incentive than you to maximise utility. They cannot always be sure that you do not already have the gift they have in mind, nor do they know if someone else is planning to give you the same thing. And since the joy is in the giving, they might be more interested in eliciting a fleeting sense of amusement when the present is opened than in providing lasting satisfaction. This is where Billy Bass comes in.

But note the reason for this inefficient spending. Resources are misallocated because one person has to decide what someone else wants without having the knowledge or incentive to spend as carefully as they would if buying for themselves. The market failure of Christmas is therefore an example of what happens when other people spend money on our behalf. The best person to buy things for you is you. Your friends and family might make a decent stab at it. Distant bureaucrats who have never met us — and who are spending other people’s money — perhaps can’t.

So when you open your presents next week and find yourself with another garish tie or an awful bottle of perfume, consider this: If your loved ones don’t know you well enough to make spending choices for you, what chance does the government have?

December 24, 2016

“Ebenezer Scrooge is underrated”

Filed under: Books, Economics — Tags: , — Nicholas @ 03:00

Last year, Tim Harford sang the praises of poor old Ebenezer:

Ebenezer Scrooge is underrated. Literature’s most notorious misanthrope gets no respect from anyone. He’s a miser, a bully and a sociopath. Only with the most strenuous pleading from three supernatural mentors does he embrace the spirit of Christmas and, in so doing, join the human race. Dickens’s story is viewed as a journey of redemption; I am not so sure.

In his original, miserly form, Scrooge actually gives us much to admire. He was a model of inadvertent benevolence. He earned vast sums and avoided spending so much as a farthing if he could help it. The economic implication of this? Regardless of Scrooge’s motives, because he spent little, everyone else enjoyed more, as surely as if Scrooge had divided his fortune and sent a few coins to everyone in the country. As the economist Steven Landsburg once wrote: “There is nobody more generous than the miser — the man who could deplete the world’s resources but chooses not to.”

[…]

It is hard for us to grasp the discrepancy between how we see the world when giving gifts and when receiving them. Recipients may appreciate cash or presents from a list and not fuss too much about expensive gifts; gift givers, in contrast, imagine that the ideal present is an expensive surprise. It isn’t. All this suggests we should probably be spending less on presents, and thinking a lot more about the presents we do buy.

Which brings us back to Scrooge himself. When he finally did decide to embrace the conventional spirit of Christmas, he didn’t waste his money on demonstrative extravagances for people whose desires he didn’t really understand. Instead, he gave three superb gifts. First, a prize turkey that he knew — thanks to a ghostly premonition — was much needed by the Cratchit family. Second, the gift of his time and attention, playing games and making merry with his nephew. Finally, he gave Bob Cratchit the greatest Christmas gift of all: a pay rise.

As I say: underrated.

December 6, 2016

Alex & Tyler’s Economist’s Christmas

Filed under: Economics — Tags: , , , , — Nicholas @ 02:00

Published on 5 Dec 2016

This week: Let’s get in the holiday spirit! What would an economist do about Christmas gifts?

What do you really want for the holidays? And how can you be sure you’re giving the perfect gift to someone else?

Of course, you want to get your loved ones something they will appreciate, but you face a knowledge problem: you don’t know everything about their wants and needs. You also have an incentive problem: oftentimes people aren’t quite as careful choosing a gift for others as they would be if buying something for themselves.

We’ve all received a present that we didn’t really want. When that happens, the value that we place on the gift can be less than its cost. According to research by economist Joel Waldfogel, gift givers spend an average of $50 on gifts that recipients only value at $40. Given that Americans spend around $100 billion on Christmas gifts, we’re wasting $18-20 billion every holiday season!

Is there a solution to this costly problem? Well, you can always give cold, hard cash! Many gift recipients would prefer it. But if you know the recipient’s tastes very well, you do have the opportunity to give them a non-cash present that they’ll love and that creates value by lowering their search costs.

There are, of course, occasions where the gift of money doesn’t make sense. Perhaps you want to signal that you care in a different way, or maybe there’s a custom you want to follow. You’ll just have to risk it in these situations.

Around the holidays, there’s also a spike in charitable giving. If you face knowledge and incentive problems in giving gifts to loved ones, you can imagine that these issues increase when you’re giving to someone you’ve never met. To combat this problem, some charities, such as GiveDirectly, give cash to people in need so that they spend charitable donations however meets their needs.

The efficiency of an economist’s Christmas may feel less warm and fuzzy, but the value creation is no less generous!

November 24, 2016

Solutions to Moral Hazard

Filed under: Economics — Tags: , , , — Nicholas @ 02:00

Published on 23 Sep 2015

What are some solutions to moral hazard? We could try to make information less asymmetric — meaning both parties have similar information, making it harder for one party to exploit the other. We could also try to reduce the incentive of the agent to exploit their information advantage. Online ratings and reviews on Yelp, Angie’s List, or Amazon, for instance, incorporate both of these solutions. The reviews give you more information about a product or service and close the information gap between buyers and sellers. In addition, sellers’ incentives change, as they now have to think about their reputation. They likely won’t want to exploit you if they know it will result in a negative online review.

What are some other approaches to modifying the incentives of those with an information advantage? One approach is to split the diagnosis of a problem from the actual work that needs to be done — for instance, home inspectors don’t fix the problems they identify during their inspection. Another approach is to alter the payment structure to change incentives. For instance, a lawyer is less likely to run up their hours when payment is contingent on winning your case as opposed to the number of hours they work on the case. Ethics also plays a role. Doctors swear to the Hippocratic Oath, which provides them an incentive to not exploit their information advantage. As you can see, there are many solutions to addressing moral hazard.

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