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Archive for the ‘economics’ Category

A new PSA to make movie pirates feel guilty has been released:

Clever how it plays on our natural sympathies towards boom operators, isn’t it?

Problem is, the logic applies any time a movie is seen second-hand. Watch a DVD at a friend’s house? So long, key grips! Friend loans you a movie? Goodbye, gaffers! Buy a used blu-ray? Y’all take care now, dialect coaches!

Imagine some rich guy has such a passion for movies that he regularly buys and broadcasts full-quality movies for free all across the world via multiple formats. Is he violating copyright law? Yes. Would this have longer-term consequences that were bad for the film industry (and possibly fans)? Yes. But is he acting immorally? Are the people who watch the movies engaging in theft?

And how about this doozy: if my willingness to pay for a given movie is $0.00, then I’m not putting anyone out of work by pirating because otherwise I’d just not see the movie. If that isn’t a victimless crime, then anyone in the world who failed to see the movie is also complicit, which seems excessive.

Many people are not like me, however, and they’d be willing to pay $.50 or even $10 for a given ticket. But so long as that maximum willingness to pay is below the ticket price, they’re not going to buy. The result for the studios is less revenue from unsold tickets, and less revenue from concessions for the theaters. This is a losing proposition for both the industry and for customers, but it’s worse for the industry since some of those potential customers are going to see the movie anyway for free.

Movie theaters could respond by introducing demand pricing (and a quick google reveals I’m not the only one with this idea).  Instead of one price to rule them all, theaters could adjust prices to reflect people’s willingness to pay, much as airlines and now even sports and music venues do*.  The average ticket price would happily decrease for movie-goers, and profits would happily increase for movie-makers. Further, since the marginal cost of a ticket is near zero,  theaters could actually give away unsold seats for free and still make some money on the popcorn**. How’s that for an anti-piracy measure?

*After all, if you’re going to copy stadium-style seating, it only makes sense to copy stadium-style pricing, right?

** Note: this would not work on me, for I am in my soul an economist.

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People recycle because they don’t want to waste resources. Throw a yogurt tub in the trash instead of a colored bin, and you lose forever to a landfill whatever use could be gotten from that plastic.  But recycling itself also consumes resources, so how can you judge the trade-off? Such is the worry of a Mother Jones reader:

City recycling instructs you to put clean containers in the recycle bins. But I’ve become increasingly frustrated trying to get certain pet-food cans, yogurt containers, and margarine containers cleaned without using a lot of water. I feel that the water I use, the gas to heat the water, the dish soap, and the paper towels are wasting natural resources as well as costing me money. So how clean is clean enough?

The columnist ignores the question of resources, instead saying that 1) you don’t have to get the containers squeaky clean, but 2) the cleaner they are, the more valuable they are, so “by providing clean recyclables, you can actually save your city (and ultimately, taxpayers) money.”

By the logic of the second point, everyone should also not only be sorting and cleaning their recyclables, but also personally transporting them to the recycling center, perhaps stopping along the way to dive a dumpster or two for more revenue-generating recyclables.  Think of all the money you’d be saving taxpayers!

Ikea furniture is cheap, but the price can be misleading because you’re performing the value-added process of building the furniture yourself. For some the labor and time involved is a trade-off worth making. For many people, however, it’s better to pay a higher price for a typical piece pre-assembled by an expert.

Cleaning recyclables is also a value-adding process, and if your goal is to conserve resources, you want that process done as efficiently as possible. The single best way to ensure that efficiency is to pay the specialist to do the recycling for you. Don’t waste any resources cleaning the yogurt tub, just throw it in the bin as is .* If a modern recycling facility can’t turn a dirty yogurt tub into a valuable resource, then how in hades do you expect to do better in your kitchen!

* Prediction: As automated scanning and sorting technologies improve, and the economic value of recycling increases, sorting at the home will disappear entirely. Sci-fi writers and futurists feel free to include this prediction in your works.

 

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This past week’s This American Life podcast is called “The Invention of Money,” tackling what host Ira Glass calls the “stoner-ish question” of what money is.

 

 

In the prologue, the discussion revolves around the confusion a reporter feels when during the peak of the financial crisis in 2008 he heard news reports of billions and trillions of dollars disappearing from the stock market. How could money just disappear, he wonders; where did it all go? His answer, which he receives from some businesswoman aunt, is that the money never existed because money is “fiction.” Cue soundtrack from The Social Network.

The podcast proceeds from this conclusion, and while the episode is entertaining the content fell short for me as a result. The main mistake is to think of money in terms of a) only coins and bills, and b) only as a medium of exchange. The reason billions of dollars can disappear from the stock market is not because the physical currency was “fictional” but because money in this case is serving as a measurement of value (the economics term is the not-so-descriptive unit of account). And value, like beauty, is measured subjectively. If I intended to buy 5 pounds of potatoes but only went home with 3 pounds because the grocer’s scale was off, it’s fair to say 2 pounds of my potatoes have become fiction. If I go home with £5 of potatoes today and discover that I can only sell them for £3 tomorrow, however,  the two pound difference is reality.

In Act One, the fiction line is cast to Brazil, where its currency switch in 1994 to the real is framed as grand scheme that successfully duped the people into thinking the new money had value. This misses the real magic, which is something more akin to the food fight scene in Hook:


The real had value not because folks believed in a lie, but because they trusted the government and each other that the new currency could be used to exchange for things they wanted. When the people acted as though the bills and coins were money, they became so; the real became real.

Act Two, which is my favorite segment of the bunch (and not just because of the title), does a good job of explaining the Federal Reserve vis-à-vis the financial crisis. I especially liked how they avoided the typical journalist mistake by explaining that the Fed works with the money supply, and not interest rates directly. My quibble here is that they give listeners the impression that only a central bank can create money,  when in fact any bank in the world that loans out some of its deposits (i.e. fractional reserve banking) is doing the same thing, just on a smaller scale.

For the non-pedantic non-economists among you who nonetheless find interest in the inscrutable nature of money, do give it a listen. You may also enjoy revisiting this short but content-packed interview with Niall Ferguson on the Colbert Report from a couple of years ago.

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Readers should know by now I love me some economics, but many of its practitioners in recent years have done their discipline a disservice by inflating its explanatory power to cover all decisions made by all people at all times.  My heart is thus sent a-flutter when simple standard economics can be applied appropriately to a problem and do some good. Take parking:

Yes! We’ve got  a supply of parking spaces, we’ve got demand for them, now use prices to match them up! Now, as Felix Salmon notes, there’s  no reason the pricing couldn’t be more dynamic and variable (which would help on the demand side), and as Matt Yglesias says, cities could leave parking space construction to the purview of private people  (which would help on the supply side). Nonetheless, an improvement over the status quo thanks to good economics.

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This Foreign Policy article on the West’s deleterious notions towards food production is the best I’ve read on any topic in weeks. After finishing it all I can do is wonder whether there is any other sector of the economy in which marketing and bias has persuaded more people to make choices opposite of what a large body of evidence–scientific, economic, moral–would indicate is best:

Influential food writers, advocates, and celebrity restaurant owners are repeating the mantra that “sustainable food” in the future must be organic, local, and slow. But guess what: Rural Africa already has such a system, and it doesn’t work. Few smallholder farmers in Africa use any synthetic chemicals, so their food is de facto organic. High transportation costs force them to purchase and sell almost all of their food locally. And food preparation is painfully slow. The result is nothing to celebrate: average income levels of only $1 a day and a one-in-three chance of being malnourished.

What could be more cosmopolitan and progressive than opting to buy from the rich farmer a few miles down the road rather than the poor one a world away?

Keep your government hands off my fat farm bill...rooster.

Take industrial food systems, the current bugaboo of American food writers. Yes, they have many unappealing aspects, but without them food would be not only less abundant but also less safe.

Health professionals also reject the claim that organic food is safer to eat due to lower pesticide residues. Food and Drug Administration surveys have revealed that the highest dietary exposures to pesticide residues on foods in the United States are so trivial (less than one one-thousandth of a level that would cause toxicity) that the safety gains from buying organic are insignificant. Pesticide exposures remain a serious problem in the developing world, where farm chemical use is not as well regulated, yet even there they are more an occupational risk for unprotected farmworkers than a residue risk for food consumers.

(…)

Where industrial-scale food technologies have not yet reached into the developing world, contaminated food remains a major risk. In Africa, where many foods are still purchased in open-air markets (often uninspected, unpackaged, unlabeled, unrefrigerated, unpasteurized, and unwashed), an estimated 700,000 people die every year from food- and water-borne diseases, compared with an estimated 5,000 in the United States.

Food grown organically — that is, without any synthetic nitrogen fertilizers or pesticides — is not an answer to the health and safety issues. The American Journal of Clinical Nutrition last year published a study of 162 scientific papers from the past 50 years on the health benefits of organically grown foods and found no nutritional advantage over conventionally grown foods. According to the Mayo Clinic, “No conclusive evidence shows that organic food is more nutritious than is conventionally grown food.”

I’ve been inspired to poetry by organic baby carrots, so I am no stranger to organic’s bulbous allure, but underneath hides rot:

If Europe tried to feed itself organically, it would need an additional 28 million hectares of cropland, equal to all of the remaining forest cover in France, Germany, Britain, and Denmark combined. Mass deforestation probably isn’t what organic advocates intend.

Noooooooooo!

While I vigorously support cutting down millions of trees–they often obstruct otherwise pristine vistas–the idea doesn’t seem particularly sustainable.  Contrast that with what’s been happening with industrial agriculture:

In 2008, the Organization for Economic Cooperation and Development published a review of the “environmental performance of agriculture” in the world’s 30 most advanced industrial countries — those with the most highly capitalized and science-intensive farming systems. The results showed that between 1990 and 2004, food production in these countries continued to increase (by 5 percent in volume), yet adverse environmental impacts were reduced in every category. The land area taken up by farming declined 4 percent, soil erosion from both wind and water fell, gross greenhouse gas emissions from farming declined 3 percent, and excessive nitrogen fertilizer use fell 17 percent. Biodiversity also improved, as increased numbers of crop varieties and livestock breeds came into use.

I’ve seen films like Witness and Caspar David Friedrich gefällt mir sehr, but the bucolic beauty of dirt-poor peasant agriculture lies only in the eyes of the Western beholder. Farmers earn income based on what they produce, and to produce more they need the trappings of modernity, greasy and grimy in its mechanical glory.

"Let's plant modern seeds...of DESTRUCTION!"

What’s so tragic about this is that we know from experience how to fix the problem. Wherever the rural poor have gained access to improved roads, modern seeds, less expensive fertilizer, electrical power, and better schools and clinics, their productivity and their income have increased. But recent efforts to deliver such essentials have been undercut by deeply misguided (if sometimes well-meaning) advocacy against agricultural modernization and foreign aid.

Remember, it’s a feature, not a bug (Boll weevil? Could I have just written boll weevil there?) that so many barns in the US are quaint landmarks of a bygone era.

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When I graduated from university, my work colleagues at the think tank treated me to a nice evening out. Altogether lustrous it was, but dimmed (OK, only very slightly) because I could not for the life of me convince someone of the logic of opportunity cost. He was a smart, successful, middle-aged guy, but the implications of it struck him as counter-intuitive at best and nonsensical at worse.

The concept is easy to define and explain, but hard to take seriously. A Kindle is too expensive for me, but if someone gave it to me, I’d probably keep it, thereby paying the price for which I could have sold it. Some of this can be charitably excused by the endowment effect, or the idea we value things more once we possess them, but too much of it is just ignoring unseen costs.

But a hope again rises, for even if I don’t myself always follow the illuminated path, there’s a new and better way to shine a lamp unto the feet of others. Here’s a description of new economics research:

The economists worked with the managers of a Chinese electronics factory, who were interested in exploring ways to make their employee-bonus scheme more effective. Most might have recommended changes to the amounts of money on offer. But Mr Hossain and Mr List chose instead to concentrate on the wording of the letter informing workers of the details of the bonus scheme.

At the beginning of the week, some groups of workers were told that they would receive a bonus of 80 yuan ($12) at the end of the week if they met a given production target. Other groups were told that they had “provisionally” been awarded the same bonus, also due at the end of the week, but that they would “lose” it if their productivity fell short of the same threshold.

Objectively these are two ways of describing the same scheme. But under a theory of loss aversion, the second way of presenting the bonus should work better. Workers would think of the provisional bonus as theirs, and work harder to prevent it from being taken away.

This is just what the economists found.

The article is about endowment and framing effects and not explicitly about opportunity cost, but what a great way to make the idea clearer. If we think of having something and provisionally losing it, suddenly the cost becomes far more salient than if we think of not having something and provisionally gaining it.

Better to have loved and lost, than never to have loved at all?

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Nairobbery

Ever since I wrote a post on price discrimination, I’ve noticed more and more examples of it in my own day-to-day. My circle’s favorite lunch buffet in Kigali, for example, just instituted a new three tier price system depending on what food one scoops up: the first tier is salad only, the second tier is everything except fish, and the third tier is all-inclusive. This new scheme is not clearly advertised, however, and the waitstaff will usually default charge the full price. Only regulars or other keen customers will recognize the mistake and have the bill corrected (having a three-tiered pricing also allows for market segmentation and, one would guess, higher profits).

Another example I came across on my recent holiday trip to Nairobi. Many of the touristy-places in and around the city had signs like these:

I’m charged 7 times more just because I’m from a different country!?! How blatant!

What’s especially intriguing about this example is that while most forms of price discrimination irritate customers if discovered, this one is benign and blasé. Somehow it just seems fair that locals get a better deal, particularly since they’re probably poorer than foreign tourists. When this is true, there’s no need to be coy or obfuscatory about what’s happening.

I’ve put some thought into finding other examples where price discrimination occurs in plain sight because it’s congruous to a sense of fairness, but so far I’ve drawn a blank. Might readers be able to?

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