Quotulatiousness

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.

November 16, 2016

Moral Hazard

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

Published on 23 Sep 2015

Imagine you take your car in to the shop for routine service and the mechanic says you need a number of repairs. Do you really need them? The mechanic certainly knows more about car repair than you do, but it’s hard to tell whether he’s correct or even telling the truth. You certainly don’t want to pay for repairs you don’t need. Sometimes, when one party has an information advantage, they may have an incentive to exploit the other party. This type of exploitation is called moral hazard, and can happen in many situations — a taxi driver who takes the “long route” to get a higher fare from a tourist, for example. In this video, we cover moral hazard and what is known as the principal-agent problem.

October 24, 2016

QotD: Eliminating the middleman

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

You hear them daily: advertising pitchmen exclaiming on radio and TV that this jewelry store or that furniture retailer “saves you money by bypassing the middleman!”

Seems sensible, doesn’t it? Wholesalers and other middlemen don’t work for free; they must be paid. So if a retailer “bypasses” or “eliminates” the middleman, that retailer has “savings” that it can “pass on to you.”

But if middlemen only raise retailers’ costs, why does anyone ever use such parasites to begin with?

Simply to ask this question about middlemen is to cast doubt on the widespread myth that the dominant effect of middlemen is to raise the retail costs of goods.

It’s true that middlemen must be paid for their services. These services are valuable, however, because they reduce the final prices that consumers pay at retail.

Middlemen who fail to reduce the final price go bankrupt; these middlemen are “bypassed.” But middlemen in general reduce the costs that consumers pay at retail.

To see the value of middlemen, it’s helpful to realize that retailers themselves are middlemen. The furniture store that brags of “eliminating the middleman” by “buying direct from the factory” doesn’t itself manufacture sofas, beds and dining-room tables. That retailer specializes in acquiring inventories of furniture and assembling these inventories in locations that are convenient for you to visit (such as the strip mall down the street).

If it were generally true that middlemen raise consumers’ costs, you’d be foolish ever to buy furniture from a retailer — including the one who “eliminates the middleman.” You would be better off going directly to the factory to shop for furniture.

But you almost never do so. You buy furniture from retailers. The reason you don’t “eliminate the middleman” — the retailer — when you buy furniture is that the middleman saves you money.

To “eliminate the middleman” here would require you to rent a large truck and drive it (depending on where you live) hundreds of miles to the nearest furniture factory. The factory owner might be willing to sell to you a nightstand or chair for less money than you’d pay at retail. But this price discount likely isn’t worthwhile. Not only do you spend time and money driving to and from the factory; once at the factory, you can’t easily compare that factory’s offerings with the offerings of competing furniture producers. To make such comparisons, you’d have to get back in your truck and drive to other furniture factories.

By the time you do all this driving around, the price reduction that you get by “eliminating the middleman” won’t be worthwhile. You’ll bankrupt yourself by trying to save money!

Don Boudreaux, “Ode to the middleman”, Pittsburgh Tribune-Review, 2012-02-22.

October 5, 2016

QotD: Why professional athletes and actors get paid much more than firefighters and teachers

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

I agree that most people are troubled that the likes of Tom Brady and Jennifer Lawrence earn far higher pay than does any firefighter or school teacher. But this reality reflects not people’s correct understanding of a failing economy but people’s incorrect understanding of a successful economy. It reflects also a failure of economists to better teach basic economics to the general public. So let me ask: would you prefer to live in a world in which the number of people who can skillfully fight fires and teach children is large but the number of people who can skillfully play sports and act is very tiny, or in a world in which the number of people who can skillfully fight fires and teach children is very tiny but the number of people who can skillfully play sports and act is large?

I’m sure that you’d much prefer to live in a world in which skills at fighting fires and teaching children are more abundant than are skills at playing sports and acting. Precisely because saving lives and teaching children are indeed far more important on the whole than is entertainment, we are extraordinarily fortunate that the numbers of our fellow human beings who possess the skills and willingness to save lives and to teach children are much greater than are the numbers who can skillfully play sports and act.

The lower pay of fire fighters and school teachers simply reflects the happy reality that we’re blessed with a much larger supply of superb first-responders and educators than we are of superb jocks and thespians. Were it the other way around, then while we’d be better entertained with more top-flight sporting events and movies, all but the richest amongst us would suffer significantly greater risks of being unable to educate our children and of dying in house fires and from other mishaps.

Don Boudreaux, “Thinking At the Margin: It’s Revolutionary”, Café Hayek, 2016-09-01.

October 1, 2016

QotD: Thinking at the margin

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

Thinking at the margin is much more crucial than it seems to non-economists when it is first explained to them. Only by thinking at the margin can we correctly understand, for example, why the wages of life-saving first-responders are lower than are the wages of NFL players and of Hollywood starlets and why this fact is a good thing for society. Only by thinking at the margin can we understand the error of those who assert that firms that have lots of money stashed away in reserve, or that are currently earning higher-than-normal profits, will respond to a hike in minimum wages simply by raising the pay of all of their affected workers. And only by thinking at the margin can we come close to fully understanding why there is no objectively correct minimum standard of drug safety, workplace safety, food safety, or of any other kind of safety.

Don Boudreaux, “Quotation of the Day…”, Café Hayek, 2016-08-30.

September 15, 2016

Asymmetric Information and Health Insurance

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

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

Apple may learn the lesson of “option value” with the latest iPhone release

Filed under: Business, Economics, Technology — Tags: , , — Nicholas @ 03:00

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 5, 2016

Asymmetric Information and Used Cars

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

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

The Tragedy of the Commons

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

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 20, 2016

Club Goods

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

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.

July 21, 2016

A Deeper Look at Public Goods

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

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.

July 6, 2016

Public Goods and Asteroid Defense

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

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.

June 30, 2016

Do Unions Raise Wages?

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

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.

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