Voting, Externalities and an "Invisible" Hand?

I've been too busy lately. I've found some time to read, but precious little to blog.  So this is about a week overdue. This article (HT to Marginal Revolution) is really a wealth of opportunity. You can connect all kinds of economic concepts to voting. The author makes some excellent arguments for voting and not voting. It is the latter that are most intriguing. In some instances, the author seems to be relying on normative judgments about what is a good policy.  In other instances, the argument of common good runs up against rational self-interest.

Do you agree with the author?

Externality

Greg Mankiw relates something that I'm sure many of us can remember seeing. Whether we think it's touching or it's corny and embarrassing, Greg points out an aspect I know I hadn't thought of before.How many incidents like this have I seen at football games alone over the years?

Elevator Externalities

Here's an interesting little mind exercise courtesy of a couple professors at Northwestern.  I think the set-up could be a great discussion starter, don't you?

HT to Marginal Revolution for the pointer.

Ronald Coase & Externalities

Yesterday was the 100^th 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.

On the Grinch, Pigouvian Taxes, Externalities and the Coase Theorem

Forbes magazine has this wonderfully entertaining take on a classic by Dr. Seuss. (Big HT to Greg Mankiw for this one.)

I'm going to share it with students. I hope you do, as well.

Positive Externalities and Wal-Mart

Finally, I know many people like to castigate Wal-Mart, but if you're looking for something new and current to use as counterpoint to the usual negatives, here's an interesting story about the positive externalities attendant to a new Wal-Mart. (HT to Carpe Diem.)

Unintended Consequences (of Subsidies and Aid)

There is a very interesting and deceptively intricate story on NPR’s Planet Money about the impact of foreign aid on Haiti’s rice farmers. It seems that well-intentioned aid for those caught in the devastating earthquakes in Haiti, is having a negative effect on the rice farmers of that country who live far outside the damage zone.  Free rice for the victims is depressing the price of Haitian rice.

When we choose to help others, those actions have effects far beyond the immediate. This is because, in any society or economy, actions impact those initially involved. But this changes conditions and changes the resource mix and other choices that have to be made. These are secondary effects. They are costs imposed on others outside the initial action. By my way of thinking, you might want to use this story to illustrate a number of concepts: unintended consequences, secondary effects, externalities, interdependence.

I also found myself wandering down a different mental road. Would the rice farmers be in the same situation if U.S. rice production wasn't subsidized? Wouldn't it be preferable if various aid agencies in the U.S. and elsewhere, bought local rice first to help the quake victims? Wouldn't that minimize the effect on the local market?  Why should subsidized U.S. rice be used if it is negatively impacting the Haitian producers? Evidently, the practice is prompting questions elsewhere.

Positive Externality or Unintended Consequence?

Finally, a post AP Test question that your students should be able to answer.

Negative Externalities?

Here's a funny cartoon.

Do you think it represents an example of a negative externality (cost imposed on others outside the decision/transaction)?  And if it's funny to outsiders, does that make it a positive externality for the observer?

Regardless, it reminded me of my days with the Chicago Fed. About the time the Treasury started putting security threads in the currency, students started telling us how easy it was to pull the threads out (something that has been remedied, I think). We used to remind them that doing so could have negative consequences for them when they were "identified" for passing "bad" currency or willfully "damaging" currency; or it might result in unnecessary costs to others outside the transaction.

Enjoy what's left of your weekend - even if you're suffering from "busted bracket syndrome."

Something New on Globalization

Here are a couple of links that you may find interesting. I did. The first is from Real Time Economics, one of the blogs of The Wall Street Journal. It highlights some recent research that sees a correlation between trade and peacetime. From reading the post, I get the impression that the authors of the study feel that the direction may run from peace to trade.

But I suggest that since it is correlation and not causation, it's possible it may run the other way. Trade promotes peaceful relations. I've read a few things that would suggest this, either directly or by implication. It's certainly worth thinking about.

The second link is to National Public Radio's Planet Money blog. The podcast (about 15 minutes long) is about globalization and the search for spices in the Middle Ages, and features a discussion with Tom Standage, author of An Edible History of Humanity. One of the more entertaining aspects of the interview was the discussion about the early Arab monopoly on the spice trade. It appears to me that the it rested (as many monopolies do) on an information asymmetry. And it was closely guarded.

And for those of you teaching World History, here's a bonus cut from All Things Considered that you may find valuable.



I look forward to reading your reactions.

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.

Is This a Positive Externality?

It depends on how fussy you want to be about the definition...and your point of view.

There’s No Such Thing as Free…

With many of us looking to Copenhagen (swell to "Wonderful Wonderful Copenhagen" in Hans Christian Anderson, starring Danny Kaye), it's fitting that we provide some links to a pair of climate-related stories. Both focus on the cost of a likely plan to reduce green-house gas emissions.

The first is from The Economist. And while the online article is short, the chart is good. The second story is from a special section that ran in yesterday's edition of The Wall Street Journal. Again, the graphics are pretty good. And I found the story - indeed the whole section - thought-provoking.

Expanding Our "Who's Who"

The current economy has given teachers ample opportunity to reference the "big names" in economic theory - Smith, Keynes, Friedman, Samuelson. It has even provided some renewed interest in less-known although not less-important thinkers like Fisher and Schumpeter.

But what has made this recession truly remarkable has been the increased public notice given to those whose names are generally known only to students of economic thought or referenced in articles read only by other economists. Two of the names in this latter category are Hyman Minsky and Arthur Cecil Pigou. (I admit to knowing nothing about Minsky until a few months ago, and only a little about Pigou.)  The fact that these names have come in to the public light means that you, being an interested economic educator, may have seen them referenced. You may have done some research on them. You may even have seen the two articles I am about to discuss.

The first is on Hyman Minsky and appeared back in September in The Boston Globe. Minsky was a Keynesian, and wrote about poverty and financial systems. It is his focus on the latter that many are citing in the current wave of Minsky popularity. He believed that financial instability was inherent to the capitalist system, and he saw debt as a significant factor in financial instability. The over-issuance of products like mortgage-backed securities and collaterlized-debt obligations (MBS and CDO) would certainly seem to fit the bill.

The second was in The Wall Street Journal (free content at this writing) this past weekend, and is about Arthur Cecil Pigou. Pigou was a contemporary of Keynes but not a Keynesian. He was the designated successor to Alfred Marshall and, as such, is considered a member of the neo-classical school. However, what is bringing him to the spotlight now is his work on social costs or externalities, as they are now called. His focus on that aspect of markets and market decisions makes him particularly relevant for discussions about health care, global warming, and even the financial crisis. And I’m sure many of you are already aware of Greg Mankiw’s Pigou Club.

I would welcome any leads to other articles of note on either of these economists.

Unintended Consequences and Negative Externalities

Finally, here's a very thought-provoking opinion piece from yesterday's edition of The Boston Globe (***UPDATE*** HT to Greg Mankiw.) on how incentives set up to promote one policy can have a negative effect on another, creating negative externalities that have to be accounted for in the process.

Unintended consequences are a result of any decision because we can't foresee everything. That doesn't mean we shouldn't do a good job in trying to find as many as we can.

I welcome any comments. Have a good weekend.

Video Interview with Joseph Stiglitz

First of all, thanks to Jason Welker for the link.

Here's a very good video interview with the Nobel-prize winning economist and Columbia University professor Joseph Stiglitz. It's from the on-line edition of The New Yorker.


Stiglitz is an outspoken critic of globalization (an area of disagreement I have with him). He has a rather pessimistic view of the recovery. He does think we need more investment and less consumption. He seems to be of the mind that incentives are misaligned.  Are there some externalities here?  I think one can make the case. Judging from what he said, there are clearly costs/benefits that are accruing to parties that were not part of the original transactions. My question is "to what extent are these the result of prior regulatory structures that no longer serve there purpose, or may not have been appropriate to begin with?"

Stiglitz's approach of government-directed investment strikes me as somewhat Keynesian. At the same time, he advocates a balance between government and business. He is as concerned about government failure as business failure. His views on institutional aspects of the economy are interesting; as are his criticisms about government intervention providing the wrong incentives. Give it a look, if you are so inclined.

I welcome your thoughts on the video.

How Traffic Jams Help the Environment

There's a thought-provoking article (free at this writing) from the weekend edition of The Wall Street Journal. It makes a case that traffic jams actually help the environment.

Now, before you write the article off as the ravings of some anti-environmentalist, I suggest you take a look at it. The main idea is that more congested streets provide the proper incentive for people to move to public transportation, and other environment-friendly alternatives.

Specifically, the author states that ideas like congestion-pricing, where fees are paid to use highways and streets based on time of day and/or volume of traffic may actually cause more environmental problems, while "solving" congestion problems.

In the author's view, reduced (or better managed) traffic volume makes the commute more enjoyable, and may actually encourage people to stay in their cars - just shift times of travel where possible. Further, he does not say to get rid of congestion pricing, rather to find the right price. (For example, he finds it "absurd" that, in New York, "the East River bridges still don't charge tolls and that curbside parking in much of the city is free." On that last point, I'm not sure that much of that free parking is convenient to where people work, but there evidently are spots available.

You could use this as a discussion starter when talking about externalities or demand elasticity (the incentive of a substitute). It might be interesting to see where the discussion goes.

I look forward to your comments.

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.

Benefits and Costs: From NIMBY to BANANA

First of all, there was an interesting article (free at this writing) in The Wall Street Journal just a few days ago. The article discussed how alternative energy projects, despite being seen as integral to developing "energy independence" are running into the NIMBY - "not in my back yard" - effect. This is a great discussion topic for economics classes. As a society, we often desire or need a variety of services - free clinics, homeless shelters, waste conversion, even prisons. Unfortunately, too often we think we can get the benefit and foist the cost off on someone else.

Wind turbines represent an interesting example. They seem to be a no-brainer, especially in parts of the country where there are consistent winds. But to put them near homes, cities, or even offshore near beaches runs into problems - noise, visual obstructions, not to mention potential obstruction for migrating animals. What is the result? We want it, but "not in my backyard." Unfortunately, if we all get our way, it leads to another phenomenon mentioned by Thomas Friedman in this interesting lecture (audio podcast, video adn presentation available) delivered at the London School of Economics - BANANAs - a term favored by developers of various projects which stands for "Build Absolutely Nothing Anywere Near Anything."

Sometimes we forget economics is about choices. And the choices are not easy. That may be why many choose to have others choose for us. But I don't think abdicating (or designating) the responsibility is the answer.

I look forward to your comments.

Cul-de-sac Revisited

A couple years ago, prompted by a piece on National Public Radio, I posted on the issue of cul-de-sacs. I questioned whether urban planning experts and governments had "better" knowledge than participants in the market who prefer homes on cul-de-sacs.

Fast forward a couple of years, and I have moved to Virginia and now live on a cul-de-sac. I like it, but I must admit I wonder about the ability of emergency vehicles, etc. to respond - I know how hard it is for a school bus to get in and out of our cul-de-sac to pick up and deliver my son.

Now the state of Virginia is legislating that all future housing developments require through streets and avoid cul-de-sacs to facilitate access and egress and minimize the volume on secondary roads, improving response time and maintenance. There is some push-back, as might be expected.

And while I appreciate the civic/social concerns, I still think the market is a better indicator of people's preferences. A better solution may be how we price and tax homes that require more resources to maintain. This may be an example of a negative externality that needs to be properly accounted for. Or as one of my old teachers used to say, “internalize the externality.”

I look forward to 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.
and
4. Economic systems influence choices.