Matt Nolan

Where is the externality here?

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There have been wild debates surrounding the BERL report into the social costs of alcohol.  I haven’t read the report, I haven’t read the replies, I have to admit I have been busy.

However, in one of Eric Crampton’s many posts on the issue I see that generally an externality from lost output, excessive unemployment, and forgone wages has been assumed in the discussions.  I’m sorry but what?

The labour market is a market, how can we have an externality when there is a market with a market price (wages).  Yes, alcoholics produce less, less of them are employed, and they tend to have lower wages – but this isn’t an externality it is part of the market process.  They are paid less because their marginal product is lower, and they are willing to be paid less because the benefit they receive from consuming alcohol is sufficient compensation – this is a completely internalised decision for the drinker isn’t it, so where is the social cost.

And don’t say it is too the firm – the firm can set a lower wage because of the fact that the marginal product of this worker type is lower.

And if we are going to look at it in terms of society as a whole (which involves moving away from externality logic), sure having a lot of alcoholics lowers our “capacity to produce”, but given that this is the result of a maximising choice by individuals we can say that the benefit of drinking exceeds the cost of this lost production – the fact that people are doing all this drinking illustrates that the drinking is more highly prized among society as a whole than the output they could have produced.

As the ultimate goal of “production” is to lead to create outcomes that satisfy peoples preferences through consumption we can ultimately say that the forgone production is being consumed in an optimal way everytime an alcoholic has a drink – excellent, go alcoholics!

The only market failure I can think of stems from asymmetric information.  A firm hires someone without knowing they are an alcoholic and agrees to pay a wage, through selection we could end up with an adverse selection problem.  But I don’t really buy it, given that these attributes are partially observable, and future wage increases do help us push towards the market clearing price for alcoholic labour.

So convince me that there is an externality here …

goonix

Changing tastes and preferences in the market for NZ wine

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The owner of Montana Wines and New Zealand’s largest wine company, Pernod Ricard, is set to cull its contracts with wine growers in the Gisborne region.

This action is in response to falling demand for chardonnay and sparkling pinot noir wine, both domestically and internationally. Chardonnay exports reportedly fell 12-14% last year alone. The culprit? Chardonnay’s fairer sister, sauvignon blanc. Apparently we are seeing a significant supply-side ‘correction’, as producers respond to a structural demand shock – consumers’ changing tastes and preferences. Indeed, last year sauvignon blanc overtook chardonnay as New Zealand’s most consumed white wine.

Try as they might, Pernod Ricard have not been able to sway the mighty consumer to stick with the product they have contracted for, despite “new product development, innovative packaging, capital investment and changes in wine style”.

I know at least one TVHE author that might be a little disappointed seeing his favourite varietal taking such a pounding. As for me, well I’ll stick with my reds thanks.

jamesz

It’s not about the (plus) size

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Apparently American clothing stores are cutting their plus-sized clothing lines at the moment, even as the average American woman gets larger. Why? Because the mean size isn’t the important one. There’s an excellent explanation here:

…it has to the do with the fact that the distribution of weights is skewed to the right. The costs of production result in a focus toward the modal body size, not the mean or median.

Basically, it costs more to make more sizes. The manufacturer wants to make the fewest sizes to fit the most people. Lots of people fit the small sizes. Large people span a huge range of sizes, so not many will fit each big size. Hence, it’s profit maximising to produce only the smaller sizes.

Weight distribution of American women

Weight distribution of American women

Read more

jamesz

Apple isn’t a cuddly teddy bear

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With the way the media view ‘price gouging’ I have no idea why Apple is so loved: Are they the best company in the world at price skimming?

Apple Inc. halved the price of its entry-level iPhone to $99 and rolled out a next-generation model, looking to sustain the momentum for its popular smart phone amid the recession and fresh competition.

They somehow manage to charge enormous premiums to early adopters and still get viewed as customer focussed and friendly. Given the way they must hog consumer surplus I can only attribute their positive public image to fantastic marketing. Bravo to their marketing department!

jamesz

A good reason to complain

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Matt’s bout of food poisoning has prompted an email discussion on whether he should complain to the store that sold him the offending item. He is of the opinion that a certain percentage of products are always going to be bad and he was just unlucky, so why bother complaining. I think he’s ignoring the other half of the equation: the vendor wants people to complain.

It is true that a certain percentage of products will end up being bad. As a vendor I face a trade-off between production costs and production quality. The number of bad products is an important measure of my product quality, so I’m going to be very interested in how many poison my customers. If customers don’t complain then I have no information beyond my own internal testing. To remedy the information problem I offer freebies to people who complain as a payment for taking the time to provide me with information on the quality of my product. So freebies may be a way to make complainers go away, but they may also be a way for companies to gather better information about the quality of products reaching their customers. Read more

Matt Nolan

Cruelty to pigs, willingness to pay, and intrinsic animal rights

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Brad Taylor has an interesting post discussing how New Zealand pig farmers are using the issue of stall vs non-stall pigs as a way to increase protectionism in the New Zealand pork industry.

Now if all that matters is how humans value the issue then Brad is right – the efficient solution requires no regulation.

Why? If people value pigs not being hurt, they will be willing to pay to eat non-stall pigs. If all overseas pigs are stall pigs (as the farmers are saying) then this creates an opportunity for NZ farmers to differentiate and tap into this market. If people aren’t willing to pay sufficiently enough more, then there is no market for it.

As a result, as long as all that matters is how humans value and the choice of conditions is observable there is no need for “protection against overseas pork”.

However, we may instead believe that animals have some intrinsic right not to be tortured. As pigs don’t actually have a choice in the matter we may require regulations if we want their rights to be valued.

In this case, a tax on stall pig meat that captures the value of the pigs suffering WOULD be the solution – as there is a clear externality on pigs that cannot be solved through Coase bargaining.

As a result the key question we have to ask is, what intrinsic right to the lack of torture do pigs have?  If we can define that then a mixture of clear labeling and a tax on pork from stall pigs could be the solution.