Today’s typical environmentalist and locavore fancies that he or she possesses more and better knowledge than is contained in market prices. He or she is mistaken in his or her arrogance. The environmentalist who moralizes in favor of recycling cardboard containers and the locavore who boasts that he helps the environment by paying a few cents more for locally grown cabbages and cantaloupes focus on a small handful of visible aspects of production and distribution – such as the wood-pulp contents of the cardboard container or the fuel used to transport agricultural produces over long distances – and leaps without warrant to the conclusion that sticking that used cardboard containers into recycling bins, or reducing the amount of fuel burned to transport produce, generates net benefits for the environment. But there is simply no way that the recycling champion or the locavore can really know what he thinks he knows.
How much energy is used to recycle cardboard containers compared to the amount of energy used to produce new cardboard containers? What is the environmental impact of the chemicals used to cleanse used cardboard of the residue from its earlier uses so that that cardboard can be recycled for another use? How much fertilizer and energy – and what sorts – does your local small-scale farmer use to grow kale and cucumbers compared to the amounts and sorts used by the more-distant, larger-scale farmer? What is the full environmental impact of using land in suburbs such as Fairfax, VA, and Dobbs Ferry, NY, to grow vegetables for sale a local farmers’ markets compared to the impact of using that land differently?
The above are only a tiny fraction of all the relevant questions that must be asked and answered with reasonable accuracy before anyone can possess enough knowledge to be confident that recycling or ‘buying local’ are in fact good for the environment.
Don Boudreaux, “Quotation of the Day…”, Café Hayek, 2016-06-16.
June 28, 2016
QotD: The real locavore’s dilemma
June 27, 2016
Compensating Differentials
Published on 7 Apr 2015
Firms have an incentive to increase job safety, because then they can lower wages. In this video, we explore this surprising claim in much greater depth. Bear in mind that wages adjust until jobs requiring a similar level of skill have similar compensation practices. Why do riskier jobs often pay more? Why has job safety increased over the years? How does a firm’s profit motive play a role?
June 1, 2016
The Tradeoff Between Fun and Wages: No Such Thing as a Free Lunch
Published on 7 Apr 2015
If you had to choose, would you rather be a sewer inspector spending your days underground or a lifeguard on the beach? Most would say that being a lifeguard is a more fun job, but a sewer inspector has higher wages to compensate for the less-fun aspects of the job. In this video, we discuss the tradeoff between fun and wages and show how this illustrates that “There ain’t no such thing as a free lunch!”
May 31, 2016
QotD: The minimum wage
In truth, there is only one way to regard a minimum wage law: it is compulsory unemployment, period. The law says: it is illegal, and therefore criminal, for anyone to hire anyone else below the level of X dollars an hour. This means, plainly and simply, that a large number of free and voluntary wage contracts are now outlawed and hence that there will be a large amount of unemployment. Remember that the minimum wage law provides no jobs; it only outlaws them; and outlawed jobs are the inevitable result.
Murray Rothbard, “Outlawing Jobs: The Minimum Wage”, 1998.
May 18, 2016
Human Capital and Signaling
Published on 7 Apr 2015
Wages in America differ greatly among workers. Why is that? One reason includes differences in human capital — tools of the mind. Education is one of the biggest investments people make to increase their human capital. Which college majors offer the greatest returns? And are all returns on education due to human capital? A college degree can “signal” other factors as well, and we discuss what is commonly known as the “sheepskin effect.” In this video, we also discuss how globalization has affected wages in the U.S.
May 4, 2016
Econ Duel: Is Education Signaling or Skill Building?
Published on 8 Mar 2016
What’s the point of education?
Do you learn about things, because the learning itself matters, or is education all about the signal you — and your degree — send out to the world? Is education really about building skills, or does it serve only to transmit intangible traits, like your level of talent or your persistence?
These are the questions we’ll be tackling in this new Econ Duel debate from Marginal Revolution University.
And since we believe that nothing beats a good friend-vs-friend duel, we’ve picked two friends, whom you’re probably familiar with. For this debate on education as signaling vs. skill building, we’ve got Tyler Cowen and Alex Tabarrok, ready to go head-to-head.
You’ll see them argue about nearly everything—from peacocks, to private markets, to street sweepers, to Scandinavian education laws, and even the real value of Harvard University. In the end, you’ll see them duke things out, in a quest to determine education’s effect on our lives and well-being.
The video also asks:
-Why do students tend to rejoice when their professor cancels class?
-When we’re talking education, what really counts? Is it the soft skills, or the hard facts?
-If evolution still can’t sort out good vs. bad, can we really expect the market to do any better?
-Can the things you learn today still matter 20 years down the line?
-Why do peacocks still sport huge, colorful tails, despite the fact that evolution should’ve come up with a better signaling device by now?
Once you reach the end of the video, we have one specific request. It’s hugely important.
Ask yourself: “Is education only about signaling, or is it really about skill building?”
Think it through and then let us know by voting at the end of the video!
BTW, Alex is right in this debate.
April 23, 2016
The Marginal Product of Labor
Published on 7 Apr 2015
In this video on the marginal product of labor, we discuss some commons questions such as: How are wages determined? Why do most Americans earn so much by global standards? What exactly is meant by ‘human capital’? Do labor unions help workers, and if so, by how much? How does discrimination affect labor markets? How is the demand for labor different than the demand for a good? We’ll discuss how to derive the demand for labor based on the marginal product of labor, and use real-world examples — such as the demand for janitors in a fast food restaurant — to illustrate this calculation. We’ll also cover an individual’s labor supply curve vs. market supply of labor.
April 13, 2016
QotD: Why do gasoline prices rise at the moment crude oil prices rise?
One part of the explanation is that gasoline refiners are likely now switching to the production of summer-grade mixes, which are more costly to produce than are winter grades. But even if such switching is not taking place, we nevertheless expect prices at the pump to rise the moment crude-oil prices start to rise regardless of the prices that gasoline retailers paid for the fuels that they are currently selling. Furthermore, it’s good that prices at the pump rise as soon as crude-oil prices start to rise.
The reason […] is that markets are forward looking. If crude-oil prices start to rise today, this fact means that crude oil is today more scarce, relative to anticipated demand, than it was yesterday. Given this reality, we want consumers to start immediately to economize further on their use of gasoline, and we want refiners to have adequate incentives to refine enough gasoline to satisfy consumers’ anticipated future demands. Rising prices at the pump today promote both of these desirable responses.
But there’s an even deeper point: the value of something is not what the owner of that something paid for it or what it cost the producer of that something to produce it. Instead, the value of something is what people are willing to pay for it. And there’s nothing at all unfair or economically harmful about an owner of something selling that something for more than he or she paid for it. Suppose that today you buy 10 shares of Apple, Inc., at $100 per share. Further suppose that one year from today the price of Apple stock rises to $150 a share. Would you be wrong or unethical to sell your shares next year at $150 a share (or at any price higher than $100 a share)? After all, you paid only $100 a share to get them.
Of course you would not be wrong to sell your shares at a price higher than what you paid for them. What’s true for you and your Apple shares is true for all economic goods.
Donald J. Boudreaux, “Markets Are Forward Looking (And That’s Good)”, Cafe Hayek, 2016-03-18.
March 30, 2016
Bundling
Published on 7 Apr 2015
Bundling refers to when two or more goods are sold together as a package. Microsoft Office, Cable TV, Lexis-Nexis, and Spotify all provide examples of bundling. What if there were no bundling and you had to pay for Cable TV by channel rather than purchasing channels in bundles? Would you end up paying more or less? We explore this question and others in this video.
March 24, 2016
Tying
Published on 7 Apr 2015
What is tying and how is this a form of price discrimination? An example of a tied good is an HP printer and the HP ink you need for that printer. The printer (the base good) is often relatively cheap whereas the ink (the variable good) has a high markup, and eventually costs you far more than what you paid for the printer. Other examples include cell phones and data plans or the Kindle Fire and the accompanying books or music you purchase from Amazon. The base good is sold close to marginal cost, and the variable good is sold at above marginal cost. Why do companies tie their goods? Tied goods make it easy to price discriminate in a way that increases output and social welfare. Does tying increase or decrease social welfare? What is the difference between bundling and tying? We discuss these questions and others in this video.
March 19, 2016
The Monopoly Markup
Published on 18 Mar 2015
Ever wonder why pharmaceuticals are so expensive? In this video, we show how low elasticity of demand results in monopoly markups. This is especially the case with goods that involve the “you can’t take it with you” effect (for example, people with serious medical conditions are relatively insensitive to the price of life-saving drugs) and the “other people’s money” effect (if third parties pay for the medicine, people are less sensitive to price).
March 16, 2016
The Social Welfare of Price Discrimination
Published on 7 Apr 2015
Now that we’ve learned a little about price discrimination, we can begin to think about whether or not price discrimination is bad for society. How does price discrimination affect output, and what is this effect on social welfare? If price discrimination increases output, it is likely beneficial for society. If output isn’t increased, social welfare is reduced. What are some examples of perfect price discrimination? Universities practice perfect price discrimination all the time. Students pay different amounts for their education based on many different factors surrounding each student’s ability to pay. This practice increases profits and also increases the number of students able to attend college. For this reason, price discrimination by universities likely increases social welfare.
January 16, 2016
Introduction to Price Discrimination
Published on 7 Apr 2015
Price discrimination is common: movie theaters charge seniors less money than they charge young adults. Computer software companies sell to businesses and students at different rates, often offering discounts to students. These price differences reflect variations in the elasticity of demand for these different groups. When demand curves are different, it is more profitable to set different prices in different markets. We’ll also cover arbitrage and take a look at some examples of price discrimination in the airline industry
January 15, 2016
The Costs and Benefits of Monopoly
Published on 18 Mar 2015
In this video, we explore the costs and benefits of monopolies. We cover how monopolies and patents breed deadweight loss, market inefficiencies, and corruption. But we also look at what would happen if we eliminated patents for industries with high R&D costs, such as the pharmaceutical industry. Eliminating patents in this case may result in less innovation and, specifically, fewer new drugs being created. We also consider some of the tradeoffs of patents and look at alternative ways to reward research and development such as patent buyouts and using prizes to foster innovation.
December 25, 2015
Repost – The market failure of Christmas
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?
