Wednesday, September 10, 2008

Markets, Complementary Goods, and Institutions

Discussion about how decisions are shaped by economic institutions (rules) is a repeating topic here. The idea is that rules (formal laws and informal beliefs) act to restrict our choices by imposing additional costs and/or providing additional benefits when faced with certain decisions. The costs can be monetary or physical (jail time); and benefits can range from subsidies to moral approbation (the “thumbs up" from peers). But, something we haven't dealt with very frequently (if at all) is the idea of complementary goods.

These are goods that see a corresponding rise or fall in consumption in conjunction with another good. Typical examples of complementary goods in economics classrooms are peanut butter and jelly, hamburgers and buns, or bagels and cream cheese. But another pairing that is frequently mentioned is automobiles and fuel. This brings us to the subject of today's post.

A recent issue of BusinessWeek has an article that is getting play in some corners of the blogosphere. The article deals with the Ford Fiesta Econetic, which is capable of 65 miles per hour, but won't be marketed here, in the U.S. Part of the reason it's not being sold here is that it runs on diesel fuel. The story is good fodder for discussion about markets (Why isn't it selling here? Demand questions.); complementary goods (Why would diesel fuel matter? Fuel taxes on and availability of diesel.); and institutions (What rules are relevant? Taxes again and public perception of diesel.). The article itself is kind of short, but you can get into more of the debate by checking out a blog entry by the author on "Can Diesel Ever Become Fashionable in the U.S.?" (I especially like the video in the second story -- sounds like Garrison Keillor singing.)

In my opinion, the downside to using this is that the question is open-ended, with insufficient information to bring discussion to a conclusion. I don't know how Ford reached the figure of 350,000 for the number units to be profitable, although I suspect it's a fairly straight-forward calculation of recovery of the cost to convert an engine plant. I suspect there may be a perception about the cost of diesel. I've not paid attention lately, but diesel was running at a 10 - 15% premium over gasoline around here, during the summer. However, if I had to pay even 20% more for the fuel and saw my mileage double, that may be attractive. But I would just need to know the price of the automobile to complete my cost/benefit analysis.

So you see, this little article is full of interesting twists and turns for you to use in an economics or even a personal finance class. (Of course, I don't know how these vehicles would run on diesel that contains 10% ethanol.)

I look forward to your comments.


Mike Fladlien said...

well if the car runs on ethanol that's got to create new jobs, stimulate economics recovery, and eliminate greenhouse effects, and be good for the environment, right? just you think barriers to entry are helping to monopolize the auto industry?

Catherine said...

It is possible that Ford believes people would be scared off buying this new model because it runs on diesel fuel, and they wouldn't be able to sell the number of models necessary to make a profit. A reason they could believe this could be because diesel fuel has gotten a rather bad reputation with the public, whether it's deserved or not. Even though the car may be fuel efficient, it is not as fashionable to drive an "eco-friendly" Ford as it is to drive a hybrid. If people are buying cars for fuel efficiency, it is more likely that they would buy a hybrid. Also, the fact that diesel fuel costs more has something to do with it. Although the car would get better gas mileage, the general public can't really get past the fact that they see the price is higher. ((Although it's possible I'm simply underestimating the ability of the general public to see completely through the decision.))