Conservation as Conspicuous Consumption

Yesterday, I heard a very interesting interview on Marketplace, the public radio program. The interview was with Stephen Dubner, coauthor of Freakonomics and host of Freakonomics Radio. Dubner talked about the idea of conspicuous conservation. 

Now you probably know about conspicuous consumption. The phrase was coined by Thorstein Veblen who stated that one reason we spend money can be to show off our wealth. Basically what we buy can signal our wealth to others and can, presumably, have an effect on our status or how others view us.

I often ask my students why they buy certain brands of clothes, etc. when other cheaper brands would provide the same function. This leads to a discussion of utility and an understanding that many people place a high value on the perceived ability of certain products to impress other people.

This brings us back to the interview. As I said, Dubner was talking about conspicuous conservation - how certain people will buy certain things to show how "green" they are, and he cites some research by a pair of economists that indicates the payoff for making these choices can be quite high in certain communities.  In essence, the purchasers may be willing to pay a higher price in order to secure higher prestige in a given community.  This offers a great opportunity to discuss value and utility. Because certain choices may not necessarily be the best in terms of actual effect, but may have a higher value as "conspicuous conservation/consumption." Let me know what you think of the interview.

Comparative Advantage and Tradeoffs

When discussing comparative advantage, students will often ask if it's possible for a nation to gain a comparative advantage where there originally is none. The answer of course lurks in that basic concept opportunity cost. Don Boudreaux at Cafe Hayek gives a good explanation while discussing the idea of energy independence.

I would suggest you could even use a production function to help with the explanation. What do you think?

Prices as Signals to Suppliers

We often tell our students that prices are important because they send messages. They don’t just send messages to consumers about what to buy and how to prioritize their wants. They also send messages to producers. They provide answers for the basic economic questions "What to produce?", "How to produce?", and "For whom to produce?"

The message can become clearer in articles like this one from The Houston Chronicle (HT to Izzit - you can find a lesson plan to accompany the article at the site under April 21, 2010).

The article talks about high technology designed to find deep oil. The cost of this technology and the recovery of the oil are only economically feasible because of higher prices. And the prices are a product, not only of the higher costs of recovery, but of the increasing demand. (Remember price is a scissors.)

Take a look at the article. I'd be interested in your thoughts.

Think Outside the Box

One of the things I challenge my econ students to do is to use their understanding and knowledge (not just of economics) to look beyond the headlines, to ask "Is there more?" Here are three articles that go the extra step and, in the course of doing so, ask those additional questions.

The first comes from The Wall Street Journal. There are a number of reasons behind the push for alternative energy. One is energy independence, but another is that green energy is better for the environment. But it seems that at least one of these alternatives, wind-generated electricity, is having an impact on bird populations. Some may have expected that, but the number of birds killed by windmills is quite significant. And according to the article, in some cases it is larger than that from more traditional energy sources. (I expect some selection was involved in the information, but I digress.) In economics, we would call this effect a negative externality - a cost born by those outside the transaction (the producers and consumers of energy). The standard economic response is to "internalize the externalities," to somehow put a cost (either through fines or correction of the problem) on the activity and pass it on to the producers and consumers of the good or service.

But it appears that wind-generated electricity is not being held to the same standard as more traditional energy sources. I expect the cost to reduce this externality could be significant. That could really hurt the claim that this source of energy is "cheap."

The second article is from an article by the Associated Press, available here at Izzit.org. (Izzit.org is a great source of current topics for integration in social studies.) One of the hot financial topics lately is the role of speculators in commodity price volatility. Specific attention is usually drawn to the wild swings in oil prices over the past couple of years. And there are calls to curb speculation in basic commodities because the price volatility in the commodities eventually works its way to the consumer.

But this article presents a good argument that speculators can actually reduce volatility. After all, many of them (like the individual spotlighted in the article) want to buy low and sell high. If they're successful, they will be acting at the bottoms and highs in ways that break trends - their selling helps find the top and end the upward trend. Their buying helps to determine the bottom and brings the downward slid to an end. And isn't that how prices are supposed to work?

While the third article doesn't have quite the same level of economic content, it still fits the theme of thinking beyond. And it also comes courtesy of Izzit.org, although the original story is from the Los Angeles Times.
Also, my original training was in history, so I find that angle interesting. According to this article, a previous period of global warming actually had some positive effects - for the Incas. It seems that the negatives of climate change in one place may have benefits elsewhere.

I do not maintain that these articles reveal great truths and should be taken as the last word on the issues they address. But they do represent "taking the next step" and thinking outside the box. What do you think?

***UPDATE***
An article in the new issue of The Economist seems to provide more fodder for discussion on the issue of speculators, at least in the oil market.

Economics of Biofuels

This past Thursday (8/27/2009), The Wall Street Journal contained an interesting story (currently subscriber content) on the current downturn in the biofuel market. It was quite good and if you poke around using your browser, you might find most of the text in one or more sites.

What I found interesting were the various economic concepts that were illustrated in the story. I played with it a bit and came up with a PowerPoint® presentation that uses various quotes from the story and relates each one to basic ideas in economics - some with simple graphs to demonstrate them.

I'm interested in finding out whether this type of presentation would be helpful to classroom teachers. As a result, I will send a copy of the presentation to the first 25 high school teachers who reply to this post and request a copy. However, I will request three things: your name, the school you teach at and its location, and your analysis of the presentation. Let me know if it would be useful for your class or not. If not, why not. I'd be most grateful.

An Alternative Way of Looking at Things....

I don't decry or denigrate Earth Hour. But, in my opinion, this is a more optimistic way of looking at the past and the future, and something worth celebrating. We have the ability to solve the problems - and it shouldn't mean sitting in the dark.

I welcome your thoughts.

This post relates to the following Keystone Economic Principles:
1. We all make choices.
2. There ain’t no such thing as a free lunch.
3. All choices have consequences.
4. Economic systems influence choices.
5. Incentives produce “predictable” responses.
and
8. Quantity and quality of available resources impact living standards.

Eco:nomics

This post relates to the following Keystone Economic Principles:

1. We all make choices.
2. There ain't no such thing as a free lunch.
3. All choices have consequences.
4. Economic systems influence choices.
5. Incentives produce "predictable" responses.
6. Economic thinking is marginal thinking.
and
8. Quantity and Quality of available resources impact living standards

On Monday of this week, The Wall Street Journal had a Special Report on the Economy and the Environment. It was a summary of a conference that included presentations by a number of people with excellent credentials at the interface of environment and the economic.

I found a number of the presentations interesting and thought-provoking, not least of all one by Vaclav Klaus - who provided a credible cautionary note about global warming and the "rush to judgment." Also of interest was an interview with T. Boone Pickens regarding his proposal to help the U.S. become more energy independent. And there are others, as well.

While I have no particular ideas on how to use this in the classroom at this moment, I'm sure some will occur to me and to you. A resource like this can provide an interesting platform for classroom debates about policy, the role of government, and the power of markets. I hope we can share some ideas.

Forward Thinking

An interesting article on Marketwatch.com provides an interesting example of forward-thinking. China is upping its fuel taxes substantially - at a time when the economy is slowing down. Why? China is taking advantage of falling fuel prices to offset the increase that the tax would represent, making it easier for consumers to adjust both now and later should fuel prices rebound. (Everyone who thinks fuel prices won't rebound within the next twelve to twenty-four months, raise your hand.) And rather than depend on falling fuel prices to mitigate the tax bump, China is dropping some transportation fees.

According to the article, the goal is to encourage conservation and assist in restructuring (of the fuel market and energy use, one presumes).

This is an excellent example of how different governments can use fiscal policy to influence behavior for the long-run. It also shows how world market conditions offer opportunities to price commodities in such a way as to begin the move toward substitutes and alternative energy, and hopefully reduce waste - to "internalize the externalities" as one of my old professors used to say.

I look forward to your comments.

Anecdotes Are Not Data, But...

Back in May when fuel prices were rising and every firm and their competitors were adding "surcharges" to products to offset transportation costs, I wondered how long it would take for falling fuel prices to result in a removal of those surcharges.

This story from yesterday's edition of the local newspaper, The Richmond Times-Dispatch seems to indicate it is happening, at least in this area. Anyone else have stories to share that have otherwise been missed? This makes great discussion about how markets work, but especially about the idea of "downwardly sticky." This is usually applied to wages. (We're less willing to accept pay cuts than raises - go figure.) But it is frequently applied to prices, although in more competitive markets I'm not sure the effect is as pronounced.

What are your thoughts? Does anyone have stories to share?

***UPDATE***
I no sooner get this posted and get a chance to open today's newspaper and look at what I find in The Wall Street Journal. It's an interesting article on what it costs airlines to fly your luggage. Maybe hoping that some surcharges would be disappearing was too much expect. As it says at the top of the post, anecdotes are not data.

The Price Mechanism and Demand

Julia is a regular commenter and lives in the shadow of the Golden Dome. She sent me a note about this op-ed piece in The New York Times by Dan Ariely, which she first caught thanks to Greg Mankiw.

Ariely wonders why get more agitated about rising gasoline prices as opposed to rising other prices. In the article he talks about the fact that the way we buy gasoline may have something to do with it. We stand there, watching the price dials spin faster and the volume spin more slowly (although the past week or so that trend is reversing, somewhat). This gives us time to reminisce about "the good old days." I try to wash the windows specifically in order to avoid that agitation.

Ariely also mentions that with food prices, we don't watch the prices spin up, and he also submits that we don't purchase multiple units. I suspect this is because of standardized packaging on most food goods. (Safely issues aside, imagine if you could only buy gasoline in 2.5 gallon containers - or whatever.)

Likewise, to borrow Ariely's examples, what if we bought bread by the slice or yogurt by the ounce in variable size packages, as we needed? Furthermore, I submit that many of us may purchase gasoline more frequently than we purchase groceries. And I'm willing to bet that the same definitely goes for the frequency of paying the electricity, natural gas, water or other bills.

If we confront price changes less frequently, and we pay for "single packaging", does the price mechanism become less effective? We can post the "per ounce" or "per unit" costs on the grocery store shelf or break out the cost on a utility bill, but it remains true that you confront the price less frequently and in different form. In turn, this may make it harder/easier to change behavior.

When confronted with an abnormally high electric bill we might call a family conference and encourage everyone try to cut back. The next month, if the previous entreaties have failed, we may institute family "fines" - that usually works until the bill payer gets caught.

Julie suggested that she would use the article in the coming school year to lead into the course and discuss opportunity cost. I think using this article for opportunity cost has some real possibilities. The feedback from the gas pump is immediate, and it's easy to visualize "what is my next best alternative."

I would suggest that this discussion of the price mechanism may also be used to explain aspects of price elasticity. One would think that the more frequently we confront prices; the easier it would be to change behavior, and change the elasticity of the good. But what is the reality? Is it easier or harder to cut back on certain groceries, utilities, entertainment or transportation? Why? Recent
data seems to indicate we're driving less; and that we're trading in some (not all) larger vehicles in favor of more fuel-efficient models. But how long did it take? Why wasn't it immediate?

This can also be related to how we consume - and how non-essentials are soon seen to be essential or even vital. And I think you'll find other interesting ways to use this article.

This will be my last post for a while. I'm taking a short break with the family before school reconvenes. I'll see you in ten days or so.

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.

Food Policy

Perhaps one of the better economic issues for classroom discussions about markets, price and price distortion is the current food crisis. To that end, I want to point you to a couple of interesting articles, the first three with an admittedly market-oriented view. The first is an article by Adam Lerrick of the American Enterprise Institute from today's Opinion Page of The Wall Street Journal. In it, Lerrick notes that the current crisis is less a result of speculation than bad agricultural policies. These policies are hurting the countries that can least afford rising commodity prices, and were often put in place by countries that needed protection the least. And while Lerrick offers little in the way of data and policy recommendations in this article, it is easy to read.

The second article, also by Lerrick, is published by the American Enterprise Institute (AEI) and is similar to the first. But it offers a bit more in the way of policy recommendations, and data in the form of some graphs on various foodstuffs.

The third resource is the summary of a recent (July 2) AEI conference titled "Was Malthus Right?" Malthus has long been in disrepute, but in my opinion it is largely a result of his bad timing. Specifically, he failed to foresee the full impact of the Industrial Revolution. But, so did his other contemporaries. The value of his teaching is that it shows how, without changes in our productive resources (specifically capital - human or physical), we can run into the occasional productive wall.

The final piece comes in the form of an article that appeared in the British newspaper, The Guardian. Unlike the first three sources, The Guardian is a self-styled liberal news source. The article claims to reference an internal World Bank study which seems to place the blame for the current crisis at the feet of biofuels. It is a different perspective but it ties in with these other articles nicely. Now, I admit I'm always a bit skeptical about "secret reports" as sources regardless of the politics of the writer. But the four articles together provide some nice ideas to kick around the classroom.

I look forward to your comments.

Energy Economics

As you know, energy issues (particularly oil and gasoline) are great issues to use when teaching economics. The volatility of markets and the connection to larger themes (cartels, regional politics, etc.) make for interesting discussion and interested students.

Energy can offer other opportunities. Today's issue of The Wall Street Journal has a special report on energy. The lead story is a debate about the pros and cons of nuclear energy as a source. Most interesting is that both sides are written by the same author. By itself the debate is well-written and balanced, and worth a look for that reason.

But the link I've provided gives you access to a wide variety of articles, a podcast, and even an entertaining look at energy in the movies (think The Matrix and Back to the Future). I think if you've got the time to browse through this, you're bound to find an item you can use, and very likely more.

I look forward to your comments and observations.