Showing posts with label Public Goods and Services. Show all posts
Showing posts with label Public Goods and Services. Show all posts

Tuesday, March 29, 2011

Risk-Pricing, Adverse Selection and Moral Hazard

There's an entertaining article in today's edition of The Wall Street Journal that has all kinds of possibilities for the classroom. The article is about subway riders in Scandinavia who ride for free. Instead of buying tickets, they contribute to a pool that pays their fines if they get caught. They've set up a kind of "insurance" pool.

But if we think about it, we have an excellent example of adverse selection. I suspect the only ones who are paying into the pool are those who have no intention of purchasing a ticket and thus know they run the risk of being caught. Once a person has purchased the "insurance", they will likely be even less inclined to pay a fare.

So what keeps the premium from being the same as the amount of the fine? It's the likelihood or risk of being caught. If chances were 100% that you would be caught and fined, the pool would have charge a premium equal to the fine. This scheme can only work as long as enforcement by the authorities is lax enough to keep the premium less than the fare. Once the risk rises to the point where the premium costs more than the fare, it is cheaper to buy the ticket.

There is much more to this issue, as you'll see when you read the article. I'm sure you will see more possibilities. I did. But I hope you will share your ideas.

Wednesday, January 5, 2011

Tragedy of the Commons Meets Institutions

There are always lots of examples when discussing the tragedy of the commons. But today's edition of The Wall Street Journal has a new take on an old issue - fishing. The story (free content at this writing) is about fish migration in the Bosporus - that narrow stretch of water near Istanbul that connects the Black Sea to the Mediterranean.

It seems that the annual fish migration has drawn fishermen for centuries. But in recent years, the take has been diminished – a classic example of overuse of a common resource. But what makes this story a little bit different is the institutional twist. Turkey is seeking admittance to the EU. The EU may put restrictions on Turkish fishing as a condition of admittance. (Remember, rules set up the incentives that impact decision-making.) Turkey doesn't think limits are warranted. But there are ethnic issues involved, as well. (Cultural norms are part of the institutional matrix.)

The article also has a slide show and brief video to accompany it. I think you'll find it a worthwhile resource.

Thursday, December 30, 2010

Ronald Coase & Externalities


Yesterday was the 100th birthday of Ronald Coase who gave us the Coase Theorem.  I missed it (for which I apologize), but EconGirl, Jodi Biggs, did not. She put up a truly superb post explaining Coase’s importance and providing a great example of the Coase Theorem at work. 

I suggest you add this to your arsenal for discussion of externalities. It is clear. It is interesting. And it is real. And it’s hard to find examples that meet all those requirements.

Friday, August 20, 2010

Regulatory Capture

If you are looking for a good illustration to explain regulatory capture, you might want to consider this Dilbert comic strip.
Dilbert.com

Wednesday, June 16, 2010

Economics of the World Cup

While I know most of you are out of school, you may still be looking for interesting graphics to use during the forthcoming school year.

If you have soccer players, coach soccer, or like soccer, here is a very good graphic courtesy of The Mint. It shows some of the economics of the World Cup. This could be especially useful when discussing the economics of big events or sports facilities.  One could even dig further by researching the economics of previous World Cups or Olympics.  (One of my students said he had heard a story that the Athens Olympics was one reason Greece was in the condition it is in. We had a good, short discussion on whether or not that might be true.) 

***UPDATE***
Here is a link (free access at this writing) to a story in today's (6/17/10) edition of The Wall Street Journal that seems to confirm my student's comment.

Wednesday, March 3, 2010

GDP and School Kids

National Public Radio's Money Blog has this podcast on the correlation between gross domestic product and kids, particularly schooling. It appears to be part of a longer series, so there may be more on GDP. I would think it can also be used when discussing coincidence, correlation and causation.

The podcast in this link is about 25 minutes long, so I'm not sure I would play it in class. However, some of you may be able to assign it or download it and put it on your class webpage as an ancillary resource for use next semester or next year when you discuss GDP and its importance.

If you have a chance, please share your reactions.

Tuesday, February 2, 2010

Calvin Questions Political Economy

Calvin, of Calvin and Hobbes fame, is one of my favorite "economists."  In this installment, he voices a concern common to many people who depend on the largess of government. 

I look forward to your thoughts.

Thursday, January 21, 2010

So Pedestrian It's Interesting

Often things we think of as pedestrian can offer a wealth of opportunity. This article from today's edition of The Wall Street Journal (free at this writing) is an excellent example.

The story is about a skywalk that was built in Mumbai, India. It's just one of a network of 50 planned for the city. They are necessary because the city's population is growing. Mumbai is also, according to the article, one of the more pedestrian metropolises in the world.

The article offers several different points of departure: discussions about externalities, the role of government, resource constraints (scarcity), and unexpected consequences are all available. Additionally, there is video, a slide show, and an interactive graphic to help illustrate the problem.

I highly recommend the article. And I look forward to hearing how you think it can be used (or if it can be used) in your classroom.

Wednesday, February 25, 2009

"Tragedy of the Commons" or Market Failure?

This post relates to the following Keystone Economic Principles:
4. Economic systems influence choices.
and
5. Incentives produce “predictable” responses.

On Monday evening, I spent a little time discussing the "tragedy of the commons" with my class. We've also spent time some time talking about proper pricing in the market place. My question for them, and one that you can pose to your students, is "Does this story represent a simple market failure due to improper pricing, or is it an example of the tragedy of the commons - property owned by everyone is generally taken care of by no one?

You can make prima facie cases both ways. It's a market pricing failure because the property is owned by a private firm. The use was just not properly priced. It's a commons issue because the price was subsidized by the government (owned by everyone), and there was no subsequent incentive for proper use.

I know what my thoughts are. Please share your thoughts and those of your students. I will do likewise once I've gotten their responses.

***UPDATE***
There's a free lesson plan and another story related to this one on today's Izzit.

Tuesday, January 6, 2009

Tuesday, July 29, 2008

Price Affects Behavior

A couple of articles in today's issue of The Wall Street Journal could be easily used to help students understand how price affects behavior. Both of them are worth looking at if you're looking for current issues to illustrate your discussion.

The first article is about the decision facing the town of Plymouth, Mass. As a method of dealing with increasingly high volumes of trash, Plymouth has decided to follow the lead of other cities and adopted a "pay as you throw" (PAYT) system. In it, residents pay a basic monthly fee (lower than it was in the past). Items that can be recycled are placed in separate containers and picked up "free" - we know there's no such thing as a free lunch...or free trash. All other items must be placed in special plastic bags that cost $1.25 each. The concept is economically sound. Those who generate the greatest volume of trash (non-recyclable) will pay the most.

Many residents have embraced the idea. Many are against it. And your students may be able to predict how behavior changes. According to the article, 20% of the communities that have adopted PAYT have experienced illegal dumping. Likewise people, acting rationally, try to cram more trash into each bag. And while the article doesn't mention it, I suspect there's an increase in the amount of non-recyclable material in the recycling bins.

The reaction, while predictable is interesting. In most communities, citizens pay for trash removal, just not directly. The costs of the service are "hidden." And in many cases, the cost may not bear a relationship to the volume of trash generate. For many people, trash removal is a public service. But can it also be seen as an externality - a benefit or cost shared by people outside of a transaction? Here's what I'm suggesting. In systems where there is little or no direct relationship between volume and price, those who generate large volumes may be paying less than their share, thus receiving a benefit they don't pay for - a positive externality. Those who generate less may end up paying more than their rightful share - paying for a benefit they don't receive - a negative externality. Does adopting PAYT minimize exteranalities and allow for costs more accurately assessed? Who knows, a positive consequence out of this may be an increased outcry about packaging.

Now, let's take a look at the second story. This one concerns power blackouts in Indonesia, a nation that is a major coal producer and that generates much of its electricity using coal. This may seem odd, but the story gets more interesting. Indonesia's coal producers, like many coal producers elsewhere, can sell their coal domestically or to the foreign market. Now, your students may wonder "Who cares? What difference does it make?" Enter the price mechanism. In Indonesia, coal sold to the domestic state-owned power company is sold at a controlled price. This is done to control the price of electricity for consumers, either businesses or homes. However, with the worldwide energy situation, the price of coal for foreign consumption has risen. This means more profit for the producers, giving them the ability and incentive to find and produce more coal.

Again, because of an existing price structure, people are not bearing the full cost of their use. Government is subsidizing the use, while at the same time asking people to reduce consumption - something they have no real incentive to do, given the price. This is an artificial price constraint. And the artificially low price encourages consumption. If the domestic price controls are extended to exports, through a tax of some kind, for example, they may actually discourage production. The incentive of an artificially low price is to reduce production and encourage consumption, which leads to shortages.

If the Indonesian government were to move to a domestic energy price that more closely reflected actual costs, there would undoubtedly be political unrest. But I hardly think repeated blackouts such as they are currently experiencing will be a viable alternative.

These both provide good examples of mind exercises to use with your students. And at the same time, they will provide some discussion about government in the economy. I look forward to your comments.

Tuesday, July 22, 2008

Teaching Fiscal Policy

Megan McArdle is a regular blogger for The Atlantic magazine. In this post, she explains why using fiscal policy to stimulate the economy may be more limited than in the past. Granted, Congress and the Administration could always issue another stimulus check, but the idea of increased spending on things such as infrastructure, as in the New Deal, may be a bit naive. She points to issues of timing and regulatory barriers as reasons why this aspect of fiscal policy may have more of a lag than monetary policy.

And as to the impact of a stimulus check, check out the last half hour of this interview with Allan Meltzer by Russ Roberts over at EconTalk.

There are some interesting things to work into your classroom presentations, to be sure.

I look forward to your comments.

Saturday, March 29, 2008

Institutions, Productivity and Growth

A couple of days ago, I mentioned that I will be reviewing Gregory Clark's A Farewell to Alms. And I will. I'm extremely close to finishing and I give you my complete thoughts when done. But something in today's Weekend Edition of The Wall Street Journal clicked and links to part of what I've been reading in Clark's book.

This article illustrates the condition of India's milkmen. It seems that the dairy's used to government-owned and delivering milk was a prestigious public job. But when the industry went private, business dried up. The problem is that these government employees couldn't really be dismissed. Consequently they continue to report to work every day even though they have nothing to do. The trucks have all been sold. So the milkmen keep collecting the check and waiting to retire. (By the way, check out the photo slideshow.)

This relates to Clark's book because he discusses worker productivity as a source of income inequality between nations. I'm not going to say this story illustrates the sole source of a problem. Nevertheless, a nation's productivity and income can't help but be negatively affected if the institutions in place tolerate or even encourage non-production. Or am I missing something? Let me know your thoughts
after reading the article. (And additional information is welcome.)

Friday, July 20, 2007

Trade Distortions

This will be the last post for today. I promise. I'm just trying to get caught up, and there's been a lot of interesting things to post about at the same time I've been doing workshops here.

Whenever I try to teach about trade, I try (not always successfully) to talk about the impact of all kinds of trade distortions. Students usually understand tariffs easily enough. When a tax is paid to bring an item into a country, that is an additional cost incurred and is reflected in the price paid by the consumer. A little harder for some of them to understand are non-monetary barriers represented by quality requirements applied to foreign goods and numerical quotas. They usually understand how numerical quotas reduce supply, thereby increasing scarcity and artificially driving up the price. Quality issues are different because nations frequently impose quality controls on product produced domestically. Is this a distortion? One can argue.

But the hardest distortion for students to understand is frequently the subsidy. It is sometimes hard for students to see that the country that is subsidizing an activity is actually charging its own citizens to provide goods/services at a lower price. That may not be an issue if the consumption is domestic. It can be an issue if it has impact in the international market place.

Earlier this week, The Wall Street Journal published an article on how the Global Fishing Trade Depletes African Waters (subscription required). (However, you may find it somewhere on line by typing the title into your browser.)

The article explains how fishermen in Mauritania are suffering because fishing fleets from other nations are over-fishing the waters they depend on for their livelihood. Larger nations (China, Russia and Spain are mentioned) pay fees to the Mauritanian government for the right to fish in their waters. But often, those same countries provide subsidies to their fishing fleets. The subsidies reduce the cost of operation. This in turn can reduce the price of the product. This in turn can increase demand. You and your students can take it from there. The Mauritanian fishermen apparently receive no subsidies or other support. Consequently, their incomes are affected. This is a great article with lots of discussion possibilities.

Your comments are welcome, as always.

Posted by TSchilling at 3:17 PM | Comments (0)

Thursday, April 26, 2007

Gasoline, Taxes, Public Goods, Secondary & Tertiary Effects

In the April 25, 2007 issue of The Wall Street Journal, there was an interesting article on the impact of fuel-efficient cars on state road budgets.

It seems that as oil prices climb, people opt for more fuel-efficient vehicles. More fuel-efficient vehicles use less fuel, generating lower fuel tax revenues for states. Lower fuel tax revenues make it harder to fund road maintenance and new projects.

Now the easy answer is "raise fuel taxes." But that provides a bigger incentive to more people to move to more fuel-efficient cars (or even public transportation), which cuts down on fuel tax revenues...you see where this is going.

Much depends on how you fund roads. Excise taxes that are based on the number of gallons of fuel (x cents a gallon) sold clearly don't work. Even a sales tax on gasoline (x cents per dollar) would make some sense, although it would seem to decrease demand as price rises (assuming a certain level of elasticity). Another option is converting roads to toll roads and moving toward congestion-based pricing, where the toll is based on the time of day -- higher tolls during rush hour, etc.

This is an interesting discussion topic/exercise for use with your students. How does it work for you?

***Update***
Bill Testa, fellow blogger and head of the regional research group at the Federal Reserve Bank of Chicago, has an interesting post on Congestion Tolling and Privately Operated Roads which can provide more information for you and your students as you discuss this issue. It's very thorough and worth reading as you tackle this topic.

As always, your comments are welcome.

Posted by TSchilling at April 26, 2007 2:06 PM


Comments
I THINK THAT THE PRICE OF GAS IS (ludicrous) AND THAT IT SHOULD BE LOWERED. I ALSO THINK THAT AMERICA WOULDN'T (struggle) AS BAD IF PEOPLE DIDN'T BUY (foreign) CARS.

Posted by: brian at May 7, 2007 12:30 PM

While I can understand your response to the current nominal price of gasoline, the fact is that in real terms (adjusted for inflation) we're still below the prices we paid in early 1980s (1.15 inflation adjusted price today vs. 1.25+ then). As to your other concern, I point out that, according to one source, a Toyota Cienna has more domestic content than a Ford Mustang. It's a matter of how you view things.
Posted by: Tim at May 7, 2007 3:31 PM