Policy Trade-offs

My son is involved in Special Olympics programs, and his current activity is basketball. At a recent game, I noticed that while his team was warming up, waiting for the other team to show, there were a large number of young boys from the local community shooting at other baskets in the gym.

I was reminded how policy decisions generally involve a trade-off between equity and efficiency. Certainly reserving the gym for my son's team to use for practice and games involves providing equity, given the small number of people on the team vs. the number of who could/would be using the facility.

Making the facility available to the larger numbers would be more efficient use of resources, but would not be equitable to the small group of Special Olympians who play on the team.

When discussing policy options with my students I used to ask them to analyze the proposal a number of ways, but always to consider equity vs. efficiency, and to remember that one frequently comes at the expense of the other.

Your thoughts, as always, are welcome.

Posted by TSchilling at December 22, 2005 2:56 PM

Comments
Equity versus efficiency may be an artificial dichotomy. We could parse the definitions of both, but given that value is totally subjective, and the practice of being able to measure value (the exercises of diminishing marginal utility) we can adequately state that the value the Special Olympian receives in utilizing the gym is likely far greater than the utility others would receive for that same time. Therefore, making the scarce gym space available to all increases the efficiency of distribution of this scarce space, and to get away from the 'cold, dismal science', makes all of us realize what is truly important, providing us an attitude adjustment in what really counts in the long run. Equity and efficiency may be the same thing.

Posted by: Robert Wiersema at December 26, 2005 3:58 PM

Utility and Value, Part II

One of the interesting things about teaching economics is that it allows students to see that it is the individual in society that makes up the composite--that the national data that is reported is nothing less than millions upon millions of individual choices that have been made and acted upon.

The blog Asymmetrical Information (link to this post is no longer available) once hosted an interesting discussion. The author posted her thoughts on handling money on December 9, 2005. There were a large number of comments, many of them attacking her (unjustifiably, I thought) for her allegedly New York-centric view of what constitutes the good life.

But subsequent entries (and comments) showed that her view was that value (as she defined it) arose from utility--what made things, places, events most useful to her. The postings and comments can lead your students down an interesting path about what constitutes value and whether value is determined in the production or the
consumption of a good or service.

As Rod Serling used to say, "submitted for your approval."

Posted by TSchilling at 6:05 PM Comments (0)

Simple Rules

Over at The Dismal Educators blog, the November 28 post lists Ten Rules of Economic Thinking. It's useful and could easily be posted in your classroom.

Another, similar item is the "Handy Dandy Guide" to economic thinking. It is used in many of the materials produced by the National Council on Economic Education, particularly their Capstone Course. The Handy Dandy Guide goes something like this.

1. People choose.

2. People's choices involve costs.

3. People respond to incentives in predictable ways.

4. People create economic systems which influence individual choices and incentives.

5. People gain when they trade voluntarily.

6. People's choices have consequences which lie in the future.

These, too, could be posted and referred to as you discuss economic issues and topics.

I look forward to hearing about similar lists or your comments about these lists.

Posted by TSchilling at December 12, 2005 4:33 PM

On the Margin

I recently had an opportunity to hear some college students present an economic analysis and monetary policy recommendation. I was reminded of something that often escapes our students.

One of the characteristics of monetary policy is the long lag time between change and full impact. This is because each change does not affect all players in the economy equally. Each change has a more significant impact on those economic players at the margin--at the point where the additional rise or fall in rates results in a
deal-breaker/deal-maker scenario. That relatively small number of transactions then ripples through the entire economy in the form of changed orders and decreased or increased consumption and production.

Many students don't get this.

Your comments are welcome.

Posted by TSchilling at 8:30 PM | Comments (0)

Catch 'em Where They Live (or Drive)

One way to get the attention of many of your students is to use cars and things car-related as examples when describing economic issues, events, and concepts. Way back in May of 2005, the Government Accounting Office (GAO) published a report on Motor Fuels: Understanding the Factors That Influence the Price of Gasoline. Is it pre-Katrina? Yes. Is it informative? Definitely. Is it useful for the high school class? Well, it has a lot of charts and graphs that your students are sure to find interesting and maybe even surprising.

And to help your students understand the whole “price-gouging” kerfuffle, you might want to check discussions Macroblog by David Altig, the Becker-Posner blog, Jane Galt (link to this post is no longer available), or or William Polley's blog.

I look forward to your comments.

Posted by TSchilling at 3:15 PM Comments (0)

How Do You Teach "Rich?"

In early stages of economics and personal finance classes, students often talk about their desire to be "rich." The topic often arises again when talking about income distribution or tax policy. But I always found it thought-provoking and instructive to ask the students to define "rich."

They frequently begin throwing numbers around, but I tell them they still aren't telling me enough. I like to ask them whether rich is defined by income, or by wealth, or by some combination of the two. This gets students to start thinking in terms of flows (income) vs. stocks (wealth). It also helps them realize that a person can be wealthy and yet have a small income (i.e. the "landed gentry" in their history texts that were land rich and money poor). That realization has implications that can contribute further to the discussion. And you can ask some interesting hypotheticals about people and companies that are wealthy, yet income poor, or those that have strong flows and are yet tottering at the edge of bankruptcy.

Feel free to share your thoughts.

Posted by TSchilling at November 16, 2005 3:58 PM

Comments
I remember reading, a number of years ago, an article in The Wall Street Journal titled something like, "The Poorest Man in the World." The article was about a Japanese business man who owned large amounts of Tokyo commercial real estate that, due to the collapse of real estate values, was worth considerably less than the money borrowed to buy it, leaving the gentleman with a negative net worth of several billion dollars, hence the label of "world's poorest man."

Yet, due to his creditors reluctance to foreclose, he continued to manage the properties, continued to live in a penthouse atop one of the large buildings, continued to ride in a chauffeured limousine, continued to live a life of luxury that a person with a net worth of several billion dollars more (i.e. a net worth of "zero") could only dream of living.

Was this man "rich?" Apparently at that time he was, regardless of his net worth.

Posted by: Max at November 20, 2005 3:00 AM

Utility and Value

As indicated in an earlier entry, I've been reading Nature's Metropolis. It's an interesting blend of history, economics and geography. But in the closing pages, I was reminded of the concept of utility. Not marginal utility. I'm referring to form, place and time utility. Aside from one of my earliest textbooks, I don't remember running across the concepts very frequently. However I have often referred to it when teaching.

In this context, utility refers to the "usefulness" or "value" that consumers find in objects. The old text I remember classified utility into form, place and time. Basically it said that consumers found a good/service useful because of the form(s) of the object, and/or when and/or where it was available. These qualities made a good/service useful to the purchaser of a good or service.

Nature's Metropolis gives very good illustrations of how time utility can add value to a good to the extent that a higher price is no longer an obstacle. It gives a number of illustrations that can be easily used in the classroom, showing how changing technology (frequently the railroad, but other technology as well) added time and place utility to a good or service, raising its value to the customer, often while reducing the cost.

For the geography and history teacher trying to integrate some economic understanding, the book is a great source. And likewise for the economics teacher trying to provide historical context or integrate geographic learning, the book is highly recommended.

If you have other books that you can recommend that do a good job of illustrating concepts and providing context, let me know.

Posted by TSchilling at 6:57 PM Comments (1)


Comments
It would be great to have a list of such books. I had a post about armchair economics reading list at
http://truckandbarter.com/mt/archives/2004/11/armchair_econom.html
-Paul

Posted by: paul at November 19, 2005 1:42 PM