Matt Nolan

Marital Economics

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The Economist Blog pointed out the following blog article. In this article Michael Munger points out how a marriage is like a firm, in the way that it internalizes all the transaction costs associated with purchasing ‘relationship’ goods (this is an application of the Coase theory of the firm). Although the Economist Blog agrees with this underlying way of looking at a relationship the two authors disagree on whether a two person relationship is optimal.

The Economist does have a point in that, a relationship with three or four people could hypothetically work, hell they do occur in real life. The way to analyse whether it would work is to look at the margin. Ultimately, the relationship should be willing to accept one more person if the marginal benefit of getting them in-house is greater than the marginal cost. In most monogamous relationships, the benefits of having another partner (Partnership, sex, love) are less than the costs associated with that partner (Putting up with another person all day, cost for deviating from social norms, costs of co-ordination 😉 ), as a result it is often optimal to stay in a two-person relationship.

Ultimately the optimal size of the firm/marriage depends on the preferences of the individuals involved, and the market of available suitors. Isn’t it beautiful to hear economists talk about love 😉 .

Matt Nolan

Housing equity schemes

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Another stunning article from someone I work with (I swear I’m not biased 😉 ), this one is about housing equity schemes.  Now it seems the government is keen to introduce a housing equity scheme, having put money in the Budget for it.

Now, the article covers most of the problems with a shared equity scheme, so all you have to do is read it and tell me if you agree 😉 .

One thing I am going to say is that I think most of government/bank money put into the scheme, when the housing market is this tight, will go to the person selling the house.

In the case when the loan is avaliable to all but not income tested, everyone would be able to take out the loan to buy the house, but as their reservation value of the house hasn’t changed (and thats what they are willing to pay + the loan) the price will just go up.  This is because the effective price is no different, and as agents are rational and know that the price of property will remain elevated, the rate of return on property won’t change the investment incentive either.

In the case when it is income tested, people on low incomes will be able to drive up the price of lower quality housing, much to the dismay of people on the margin who are unable to get the loans. Most people apply for a no credit check loan, and are able to get the loan that way. Here the full surplus may not go to the seller (as they face competition with other property types, and the whole demand curve is not getting subsidised), but some negative distributional effects will eventuate.  In this case we are likely to find that those on low-moderate incomes (not low) are forced out of the housing market, does the government think that these people are worth less than the very poor?

Matt Nolan

The regulation of beer

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I realise that a lot of important economic figures were released today, however, I have found an issue more important than any amount of labour market data, the regulation of beer.  Now, according to this article, most binge drinkers drink beer.  So they think we can reduce binge drinking by taxing beer, and reducing availability late at night.

I think that they have ignored that fact that their are substitutes to beer, and that if someone wants to binge drink they will drink them instead.  The reason I drink beer when I go on a bender is to minimise the damage the next day.  If they banned beer from me I would drink Vodka, and that would cause significantly greater negative social externalities, and leave me with a worse hangover.

Having a tax on alcohol is a different story.  If alcohol causes a negative social externality, tax it so that the social cost=the social benefit.   However, taxing beer alone simply gives people the incentive to find other drinks, as those other drinks are more potent regulation is likely to worsen the social externality.   Do you think the same argument holds for taxing cigarettes?  When we tax cigarettes are we really giving people the incentive to move onto harder drugs instead?

Matt Nolan

Porn and manipulation

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I was reading a post on how advertising manipulates preferences, or in other words it gives us mis-information, leading us to make the wrong choices.  At the same time I was thinking about porn, and that lead me to tie the two together and discuss how porn may lead to manipulation.

Now in the advertising case, the manipulation was caused by mis-information, which made us make the wrong choice even when the ‘right’ choice was avaliable.  The manipulation of people in the porn industry is very different.  People who are manipulated into a life of making porn movies may not be mis-informed, they may well be making the best choice of their avaliable options.  However, some of these individuals may be making this choice because all other reasonable alternatives have been closed off to them.

So we have two different types of manipulation.  Type 1 manipulation is where someone has a full choice set, but some other player influences their belief structure in such a way, so that they make a sub-optimal choice.  Type 2 manipulation is where someone is unfairly constraining this persons choice set, and the persons’ choice is is constrained by action.  These two types of manipulation are completely different, the Type 1 manipulation does not seem as serious to me, as with research a person could overcome it.  Type 2 manipulation does concern me, I don’t like to see people choice sets too heavily constrained.

Government policy help solve both these types of market failure.  The government tries to prevent mis-information and provide informationk.  Furthermore, the idea of the welfare state and universal education help expand peoples choice sets, while police try to prevent one person limitting anothers choice set unfairly.  Another awesome score for our hypothetical, normative, and imaginary government.

Matt Nolan

Image does make a difference

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So food with a McDonalds wrapper does taste better. Now I’m sure many people will take this as a sign that advertising is evil, as it can lead to children being overweight, however I think it is an awesome service provided by McDonalds. You see McDonalds advertising makes food taste better, they increase the value of the product to an individual by advertising it, and getting all your senses excited. Although two otherwise identical products might seem homogeneous to you, the fact that the McDonalds wrapper is on one and not the other implies that one has the value associated with advertising while one doesn’t. As all McDonalds is doing is increasing the value of their product, thereby increasing demand I don’t have a problem with it.

However, there may be a role for government intervention yet. If McDonalds is an addictive good, and the consumer had no a priori knowledge that it was addictive, then the increase in future consumption (and the associated negative effects) of McDonalds is not taken into account when the person purchases a product. By advertising, they can increase demand and make more people fast food addicts. Now to do not know the degree with which fast food is addictive. However, government regulation, such as education or limits on advertising could be useful.

Update: Hehehe a cartoon.

jamesz

Artificial environmental goodness

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Arnold Kling at EconLog isn’t impressed by Planktos who claim to

…restore damaged habitats in the ocean and on land. Through iron-stimulated plankton blooms in the oceans and afforestation projects in Europe, we are able to generate carbon credits. We then sell these offsets to individuals and businesses that are looking to reduce their carbon footprint and lower their impact on climate change.

He claims that this ‘nonsense’ is the product of artificial markets created by the government and should really be the preserve of charitable organisations. I can’t see how leaving the externality damage of markets to be cleaned up by charities is a particularly efficient solution. Surely, the creation of these ‘artificial’ carbon markets internalises the pollution externalities and results in increased market efficiency. It’s a textbook government intervention to correct a market failure. Planktos’ idea seems to be the exact sort of thing that everybody hopes such markets will generate, and excellent evidence that they work to stimulate innovation in environmental protection. The sooner NZ gains a few of these artificial markets, the better, I say.