With alcohol regulation we decided to remember that it is the external cost that matters. Now one reason private costs might matter in terms of regulation is internalities. There is a discussion of this with regards to boozing here.
This brings me to the idea of “addiction”. What is addiction, and why are we so scared of it. Looking at a search of TVHE, I can tell that the authors here are not scared of addiction, we view it a little differently to the black and white box often given by (say) health professionals (ht Dim Post).
For me, all addiction tells us is that the consumption of the good CHANGES the costs and/or benefits of the consumption of the good in the future. As a result, what is important is:
- Information with regards to how addiction functions (and the costs and benefits of consumption) for people,
- Having mechanisms available so people can “pre-commit” to consumption patterns in the face of an addictive good.
When we have these two pieces of the puzzle we can figure out what tax and what institutional policies can be established to improve outcomes with regard to the consumption of this specific good.
There is NOTHING wrong with addiction per see. If we banned things on the basis of addiction we would ban pretty much everything.
Personally I think of addiction as follows: A good is addictive if consuming it increases the marginal benefit of consuming it in the future and/or it increases the marginal cost of NOT consuming it in the future. The first type of addiction is unambiguously good, the second type is not – but it is internalised as long as people know about it, and people are able to deal with issues of time inconsistency.
The Freakonomics blog provides another perplexing picture (the last one was discussed here). This time we have a situation where it costs LESS to buy two of something then to buy just 1. So they are PAYING people to take the second unit. What gives?
The way I see it, there are two likely explanations:
- Firms realise that, given buying two units is cheaper than buying one, everyone will buy two units. However, by pricing a single unit at such a high level they give people the impression that the good is worth more – fundamentally, in this case, the value associated with buying the good is related to its price.
- Individuals are time inconsistent. Realising that one way to prevent themselves being in a situation where they suffer from this inconsistency, they want to limit the amount of the product they buy. We discussed this with chippies a while back. If there are two sets of customers that value the good differently, and a time inconsistency problem, this could be a form of PRICE DISCRIMINATION between the two sets of consumers. In essence we could have one set of customers that values the commitment device strongly, and one that doesn’t!
In both cases we have to assume that there will be no resale – the search cost associated with finding a matching partner for resale is prohibitively high. However, given this assumption both explanations could work – people could determine there value of a good based on a related price, or it could be a form of discriminating between customers based on how heavily they view buying a small packet as a commitment device.
I prefer the second explanation, as we don’t have to make an additional assumption regarding what people value. I find the first explanation believable as well.
The main lesson I take from this is, market pricing is a crazy thing that is hard to understand – but it gets the job done. I doubt that we can effectively try to determine what the right prices are ourselves, when we can’t understand the mechanisms firms use to maximise their profit. So let the market do its thing, and use the government to solve identifiable market failures and co-ordination problems and redistribute.
I realise this is the lesson I take from everything …
Over at Worthwhile Canadian Initiative, Nick Rowe suggests that central banks should find something else to discuss instead of interest rates. The analogy provided is that of oligopoly competition: namely how the Cournot-Nash and Bertrand games have exceedingly different outcomes, even though the only superficial difference is that one game involves choosing output and the other game involves choosing price.
However, in the same way I don’t believe the difference in these games is just the product of “framing”, I am not sure if the call to arms against using interest rates as a focal point is necessarily that compelling.
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Well that is one of the interpretations from the Google autocomplete results for the search “how can I get my boyfriend/girlfriend to” (ht Offsetting Behaviour).
Why? Well the third highest result when asking about boyfriends, and the fifth highest when asking about girlfriends is “how can I get my boy/girl to love me again”. The prevalence of the search suggests that love is something that is valued by both sexes, yet even in terms of a relationship (which is partially just a tacit agreement for providing the service of love) there appears to be an underprovision of love. (More evidence of a hole in love provision?)
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When it comes to climate change the biggest argument against unilateral action is the lack of any tangible benefit. What can a single country really do to mitigate climate change? However, an article by Akira Yakita suggests that there are welfare benefits to action outside of the benefits to the climate.
His central argument is that preferences are not stationary and can be influenced by publicly expressed attitudes. So, if the government subsidises green technologies as part of its climate change policy, then people’s preferences shift towards green products. Because the subsidy increases the production of green products, which are now preferred, total welfare might increase. Obviously the final welfare outcome depends on the coefficients on each effect, but Yakita shows that an increase in welfare is possible.
While that’s all well and good in theory it’d be nice to have some evidence of the effect. After all, it could get awfully close to saying that anything the government does is good because people will grow to love it. Yakita’s evidence for the effect comes from two industries. First, he points to the explosion of interest in hybrid cars, where sales growth has been huge despite the 50% price premium they command. Sales of hybrids in Japan have grown by 19%pa from ’98 to ’06, while the overall growth in car sales is ~1%pa.
Secondly he points to sales of organic food. While there may be dispute over whether organic foods are actually environmentally friendly, there is no doubt about how they are generally perceived. He reports that the organic food market has grown 15%pa over the last decade as the environmental movement has taken hold.
Those two pieces of evidence together do suggest that preference shifts have taken place. However, it’s a bit of a jump from there to suggesting that government action can instigate a preference shift. I’m willing to believe that preference shifts could make it worthwhile for the government to promote green activities to boost welfare, but I’d suggest the causation has to run from preference shift to government action rather than the other way around. Nonetheless it’s a novel way to look at the benefits of unilateral action on climate change.
The Herald reports that most music is bought by the very same people who illegally download a lot of tracks. It says
plans … to crack down on illegal downloaders by threatening to cut their internet connections … could harm the music industry by punishing its core customers.
Now that seems like a stretch. The key here is to figure out a plausible counterfactual to the present situation. The Herald seems to be suggesting that, if these people didn’t have access to an internet connection then they’d lose all interest in music. Which is pretty unlikely! Let’s think about what might be a more plausible counterfactual.
Suppose there are two kinds of music: paid for and illegal. If illegal becomes more expensive all of a sudden – because of the risk of your internet being cut off – then two things happen. First, you’ll probably consume less music overall, because it’s more expensive now. Secondly, you’ll switch out some of your illegally obtained music for paid music because the two are substitutes. So a first look suggests that the music industry would probably be better off if the cost of illegal downloads went up, even if everyone who buys also downloads.
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In my wanderings I found this neat little example using dinner parties to explain two sided markets (source):
The task facing a certain kind of entrepreneur these days is no more unfamiliar than the engineering of a successful dinner party. The French ambassador would never so much as respond to an invitation — unless you intimated that Rupert Murdoch, say, would be there, in which case he would accept. Murdoch, if he thought that the Attorney General would attend, would show up, too. And if you led the AG to think his dinner partner would be his favorite movie star, who, you let slip, so badly wanted to meet him (while telling her the same thing) …. Well, pretty soon you’d have a famous dinner party. After three or four such successes, your reputation as a host would make your job much easier, with chefs, provisioners, decorators, and florists anxious to work for you.
Interesting analogy, I imagine anyone who has ever oranised a party will sympathise with this description:)
It seems that the debate about the fundamental “theory of the firm” is going on. Now there are issues with the theory of the firm, things that economists have been busy plugging away on for a long time now – but the critique that Steve Keen has put forward is not one of these issues. In this post I will attempt to discuss his push to change the Cournot model, which I don’t agree with. This will give us scope to discuss perfect competition another time.
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Both Tyler Cowen and Andrew Sullivan have turned on the attack against the “dating game”, specifically the “neg“.
Now any attack on moral grounds could be justifiable (as could any defence), it is just about personal value judgments. But both authours mention that they see the neg as a suboptimal strategy. On these theoretical grounds I do not think they are quite right.
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In a recent post, Paul Walker criticises the idea that “deadweight loss wouldn’t exist if we had a government monopoly”. He is right but in another idealistic sense the idea of no dead-weight loss is also correct right.
If the government acts as a monopoly we will still have dead weight loss, as it comes from the “loss of surplus” relative to the situation where “surplus” is as large as possible (given demand and the monopolies cost structure).
But if government blatantly sets price equal to the marginal cost of the last unit dead weight loss will melt away. This does not imply that profit is dead weight loss in any sense of the word, and it does not tell us that the solution will be “dynamically efficient” (where is the incentive to invest, to develop), but it does tell us that a government that is behaving this way could achieve the “perfectly competitive” price and quantity.
However, this is all 100 level stuff that I don’t particularly care about. My interest lies with the “debunking of microeconomics” that Steve tries to achieve on Paul Walker’s blog.
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