India's Diesel Pricing Policy Change

The Wall Street Journal reports that India has changed their diesel fuel pricing policy and moved from a pricing policy that is essentially a per unit subsidy to letting diesel prices being determined by market forces.  In Principles of Microeconomics I examine the economic welfare of a per unit subsidy and show that while producers and consumers are better off in terms of surplus that the government is worse off, and that the loss to the government is greater than the aggregate gains to the consumers and the producers.  Given the substantial expenditures that the government of India is incurring, the policy is changing from government administered pricing to market driven pricing.

Chinese Milk Market

The Wall Street Journal has a good article on how changes in demand and supply have been impacting the import prices of milk over the last few years.  As you can see in the article increases in demand lead to higher milk import prices and then lead to an increase in the supply of milk by domestic and foreign producers - such as in New Zealand.  As supply increased the amount of milk imported into China fell dramatically - as did milk import prices.  With Russia banning European food products prices decreased again.  As a result domestic milk producers are culling dairy cows in order to reduce losses from the lower prices.  Additionally, notice that domestic producers are also trying to diversify their cattle for meat as opposed to only for milk.

Glass Recycling

In my Environmental Economics course I have a section of the class on the economics of recycling and part of that covers the economics of recycled glass.  The Wall Street Journal has a good article on the difficulties of making glass recycling economically feasible.

As the article states, there is definitely demand for recycled glass from glass manufacturers and there is plenty of supply from consumers, the problem is in the collecting, sorting and transportation of recycled glass.  Since much glass is mixed with other recyclable products or debris causing the cost of providing recycled glass to glass manufacturers to dramatically increase.

From the theory of the firm, we know that as marginal costs shift upwards, firms have a profit maximizing incentive to decrease production; and that is exactly what the article linked above is showing.  Some areas are refusing to allow glass to be collected as a recyclable or asking residents to bring the glass to a central location or just throw the glass in the trash.

Prison Communication Monopoly

The New York Times reports that prices for cell phones, emails and wire money transfers are "sky-high" and the reason is a lack of competition.  In fact in some cases, the private firms that are providing these services are the prisoner's only options, meaning for that list of customers, they are monopolist's, and as I demonstrate in Prin. of Microeconomics, firms that are monopolists have a profit maximizing incentive to charge higher prices than firms in more competitive markets.

Electricity Production

Electricity producers are changing from nuclear power to natural gas powered due to the decline in the price of natural gas.  Notice that as natural gas prices decrease so does the marginal cost of producing electricity.  When marginal cost's decline this can shift the supply of electricity to the right which results in a decrease in the electricity prices.  As electricity prices fall some electric producers are choosing to shut-down higher operating costs plants.

Willingness To Pay For Luxury Goods

The Wall Street Journal reports that as the price of luxury goods have been rising, wealthy consumers have been less willing to pay for those goods, which is the law of demand.  We also can infer that consumer surplus is also falling since some consumers are dropping out the market completely.

Change in Demand and a Change in Quantity Supplied

The demand for hummus (which uses chickpeas) is increasing, leading hummus producers to find new suppliers for chickpeas as reported in The Wall Street Journal.  Notice that from the demand and supply model, the demand for chickpeas is shifting out to the right resulting in an increase in the quantity supplied of chickpeas.

Economics and Statistical Analysis

I have been teaching a course called Sports Economics for over 15 years, meaning that I am old.  In the teaching of this course, I require the students to read a plethora of peer-reviewed economic research that employs statistical analysis.  Each semester I take a full class period to review a topic called linear multivariate regression and then build on that as the semester moves forward, with the realization that my Sports Economics course is NOT a course on statistics but uses and analyzes a plethora of statistical concepts.  As a help, I have decided to include some links on statistics that occur in Sports Economics.

First, the course is based on regression analysis using the subject called econometrics.  Here is a great piece by Thoma on in how economists use econometrics and why.  Once a statistical analysis has been performed, Stevenson and Wolfers explain what should you be looking for in terms of the big picture as to whether this is important or even interesting.

In terms of tying some of this statistical terminology to everyday thinking, here are some helps:

The difference between Type I errors (false positive) and Type II errors (false negative).
Examples of spurious correlations (i.e. variables that are correlated, but have nothing to do with each other).
A nice critique of only using p values in statistical analysis.
How some state insignificant (p-value) results.

Using dance to explain some statistical concepts.

Chinese Car Production Subsidies

The Wall Street Journal reports that various branches of the Chinese government are subsidizing auto manufacturing.  One of the problems that we see in Prin. of Microeconomics of subsidies is that they give incentives to firms to "over-produce", meaning that the amount of output produced is more than can be sustained.  As you can see in this article, that is exactly what is happening.

The Music Industry's Income Inequality

One of the topics covered in the Principles of Microeconomics text is income inequality.  Unfortunately, I run out of time in the class to discuss this issue, but given it is finals weeks, here is an article arguing that the US economy's income inequality is similar to the music industries income inequality, where the top 1% of music performers take about 56% of concert revenues and the top 5% of music performers take about 90% of concert revenues.  The US economy is not this distorted, but the top earners are taking more of the overall income "pie" over the last few years.

Automobile Insurance Incentives

In terms of choosing to purchase or not purchase automobile insurance - even though it is required by state law, the rational criminal will weight the costs and benefits at the margin to determine if it is "worth it" to purchase the insurance.  Typically, the cost is a fine and that may be less than the annual liability insurance policy.  Thus the individual weights the probability of being caught and the fine plus court costs against the costs of the insurance.  If the former is less than the latter, then the individual rationally chooses to not purchase automobile insurance.  This is exactly what the rational choice crime model proposes, and what you will find in this Wall Street Journal article on uninsured drivers.

The article goes forward with how to change the policies so that the costs of not purchasing insurance rise or the benefits of suing without automobile insurance fall, all designed to increase the number of individuals choosing automobile insurance.

Starbucks Pricing in China

The Wall Street Journal has a story on Starbuck and latte pricing in China.  Basically, Chinese customers feel that the price is too high.  Unfortunately, the article linked above does not have the price breakdown graphic that was in the print edition, so I will put that information here.

Other Operating Expenses = 0.23
Equipment Costs = 0.17
Tax = 0.24
General & Administrative = 0.28
Labor = 0.41
Raw Materials = 0.64
Store Operating Expenses = 0.72
Rent = 1.25
Profit = 0.85
Price = 4.80 (does not add up to 4.79 due to rounding)

So given the information above, we can see that Starbucks has market power in that they are able to charge a price above their marginal costs.  Some of the costs above are fixed (Rent, General & Administrative are two good examples) and some are variable costs (Raw Materials, Tax are two good examples).  Thus since the price is greater than marginal cost, this product is profitable to Starbucks.

Raising Profits by Reducing Output

The New York Times reports that Paramount Pictures is reducing the number of movies it makes and while this is reducing the firms revenue, it is increasing the firms profits.  This is exactly the conclusion from the market structure models we look at if the firm is producing at a point where marginal revenue is less than marginal costs.

Benefits Measurement of Government Regulation

The Wall Street Journal has a very interesting article on how to determine if a government regulation's benefits are worth the regulation's costs, by using the economic concept of the value of a statistical life.

Pigouvian Energy Taxes

The New York Times has a good article on energy (i.e. Pigouvian) taxes internationally, with the US lagging significantly behind in terms of carbon taxes.

Energy Subsidy Welfare Losses Estimated

The Wall Street Journal reports that the International Monetary Fund has estimated the economic welfare losses of energy subsidies and worldwide it comes to be about $1.9 trillion a year.

Subsidies Run Amok

The New York Times reports that Thailand is facing a growing group of industries (here corn producers) lining up to receive subsidies, similar to the subsidies that were enacted in 2011 for the rice industry.  Thailand is struggling with the impact that these subsidies are having on the growth in the national debt as predicted by the supply and demand model presented in class.

States and Corporate Subsidies

The New York Times has an excellent article on state corporate subsidies (business incentives).  As I demonstrate in class using the demand and supply model, subsidies have a positive effect on producer surplus in that they allow firms to convert lower costs into higher profits, but total welfare (the combined effect of consumers, producers and government) is negative since the costs of the subsidy outweigh the gains to producers and consumers.

This seems to be the question in the article linked above.  Do the gains outweigh the costs in reducing other public services such as education?  While there is no definitive answer, this is an excellent empirical question for economic research -  what are the economic welfare (or economic well-being) from state business incentives.  Additionally, if the answer is positive, then what is the rate of return to the states (or taxpayers) from these incentive packages as compared to the rate of return from other uses of state taxpayer funds?

Subsidy Database

The New York Times has created a database for government subsidies, which result in over $80 billion annually.  Here is the list of companies that receive state subsidies in Iowa.

Organ Transplant Rules

Bloomberg reports that the rules for who gets human organ transplants may change and might actually hurt children who need a human organ transplant.  Why do we have rules for human organ transplants?  We do not have rules for buying or selling cookies, and we certainly do not restrict the price to be equal to zero.  Rather we allow markets to bring buyers and sellers together to find the goods/services that are the best for each market participant.  In the same way, we could allow markets for those in need to search out compatible options for human organs.  Would it be an unfettered market - no.  There would be a plethora of regulations as there are now in terms of compatibility, but still provide a more efficient (save more lives) way of allocating a very scarce and valuable resource.