• Economic news summary and soda taxes

    Berkeley’s Soda Tax Surprise

    Aug 23 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Government, Health Care, Lifestyle, Regulation • 140 Views

    Mandating one-cent per ounce,  the sugary drink tax in Berkeley, California was approved by voters during November 2014. Called Measure D, the proposal was supposed to diminish obesity and encourage healthy eating.

    It did not quite work out that way.

    Where are we going? To who winds up paying a tax.

    The Berkeley Tax

    As the first city level sugary drink tax in the U.S., the Berkeley penny per ounce approach targeted the producer side of the market. Advocates of the tax expected the cost to be passed from the sell-side to the consumer. Then, as any logical person would predict, consumers would buy less because of the price increase.

    However, as you can see below, the price barely budged. Rather close to San Francisco’s prices where no sugary drink tax had been levied, Coke’s mean price per 20-ounce bottle increased by 8.2 cents rather than 20 cents (a penny an ounce).

    the incidence of Berkeley's sugary drink tax

    From: “The Incidence of Taxes on Sugar-Sweetened Beverages: The Case of Berkeley California”

    As a result, consumers had little incentive to change their buying behavior.

    What Happened?

    The Berkeley response was a surprise. On the national level, from Fiji to Finland to France, sugary drink taxes have affected consumption. Furthermore, when a tax had to be paid by the supply side, as in Mexico, some sellers even increased that price more than the tax.

    So, some economists are hypothesizing that Berkeley was too small a geographical unit to have success. After all, extending across only only 10.5 square miles, Berkeley is rather small. It is possible that sellers decided it would be too easy to shop outside the city. Consequently they absorbed more than half of the tax.

    Out Bottom Line: Incidence of a Tax

    When a tax is levied on the supply side, lawmakers can never be sure who will pay it. If the distributor or the retailer passes along to the consumer a price hike higher than a tax, we say the incidence has been overshifted. On the other hand, if consumers wind up paying less, we say the tax has been undershifted. In econ texts, undershifting can be explained by demand elasticity. If buyers have a disproportionate response to price, sellers will have an incentive to bear at least some of the burden or the incidence of a tax.

    And that returns us to Berkley’s sugary drink tax. Whether a municipality wants to control obesity or just to raise revenue with taxes on soda and other drinks to which sugar has been added, it needs to know about incidence and elasticity.

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  • The econlife.com economics news summary

    Weekly Roundup: From Slow Mommy Tracks to Fast Wall Street Traders

    Aug 22 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Growth, Economic History, Financial Markets, Gender Issues, Households, International Trade and Finance, Labor, Tech, Thinking Economically • 137 Views

    Posts Roundup

    Google's new name and branding Sunday 8.16.15

    Why Google changed its name…more

    Chinese yuan and the currency war created by devaluation Monday 8.17.15

    The devalued yuan and the Big Mac…more

    economic news summary and parental leave Tuesday 8.18.15

    How parental leave hurts women…more

    Economic news summary and The American Dream Wednesday 8.19.15

    Where families earn more…more

    Economic news summary and pay what you want Thursday 8.20.15

    How we respond to choosing our own price…more

     

    economic news summary and high speed trading Friday 8.21.15

    Why investors needed pigeons…more

    Ideas Roundup

    • branding
    • oligopoly
    • market structure
    • oligopoly
    • foreign exchange
    • purchasing power parity
    • devaluation,incentives
    • parental leave
    • unintended consequences
    • tradeoffs
    • inequality
    • income mobility
    • poverty
    • free riders
    • prices
    • social norms
    • behavioral economics
    • arbitrage
    • high speed trading
    • investing
    • asymmetric information
    • stock markets

     

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  • economic news summary and high speed trading

    Some High Speed Trading History

    Aug 21 • Behavioral Economics, Demand, Supply, and Markets, Economic History, Financial Markets, Innovation, Tech • 113 Views

    As the first U.S. Congress met in Federal Hall on Wall Street, rumors spread outside that they might fund worthless Revolutionary War bonds. Reacting quickly, speculators were said to have boarded fast boats for New Jersey (and beyond). Their goal was to purchase cheap war bonds from holders with no access to up-to-date news. The story ends with the speculators making huge money but being vilified as “rapacious wolves” who took advantage of the ignorant souls who owned the bonds.

    For us though, the story is about information. Wherever we have financial markets, the speed with which investors secure information has affected their ability to profit.

    There are some good speed stories.

    Pigeons and Optical Networks

    During the 19th century, investors used pigeons and optical networks for early access to information that they could use for trading decisions.

    Pigeons

    During the 19th century, the Rothschilds used homing pigeons to transport information. Written in coded Hebrew characters, information that no one else yet knew was flown to their offices in Vienna, London, Frankfurt, Paris and Naples. I’ve read that they used a code: “A B in our pigeon dispatches means buy stock, the news is good. C D … means sell stock the news is bad…” One legend has them learning about and profiting from Napoleon’s 1815 defeat at Waterloo 24 hours before the British government.

    Optical Networks

    The Chappe telegraph was a system spaced every 10 or 20 miles composed of telescopes on towers that had wooden arms with seven positions (users had a code book). First located between Paris and Bordeaux, the network passed along information from station to station. Whereas the trip between the two cities could take several days, the signal reached its destination in hours. In the U.S. during the 1840s, this sort of optical network was used to convey stock and bond prices between New York and Philadelphia.

    Our Bottom Line: Information Asymmetry

    As an investor, being able to benefit from little known information just means beating how fast the news travels. Centuries ago, pigeons came in handy. Now we have computers doing high speed trading. Both though facilitate an information asymmetry through which one group of investors profits from knowing more than anyone else.

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  • Economic news summary and pay what you want

    The Restaurant That Lets You Pay What You Want

    Aug 20 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Entertainment, Households, Labor, Lifestyle, Thinking Economically • 256 Views

    Specializing in Contemporary American cuisine, Restaurant Blu is typical of an upscale highly rated restaurant in an affluent suburban community. There is only one difference. As you can see below, they ask diners to Pay What You Want (PWYW).

    Pay What You Want for restaurant pricing

    Where are we going? To how PWYW distorts price.

    Restaurant Blu

    Restaurant Blu’s PWYW is temporary. As they explained in a NY Times article, they will be closing at the end of August and wanted to thank the community with a month of letting diners decide what they want to pay. The response has varied.

    Reciprocity

    This review in Open Table is an example of a consumer who paid because of “reciprocity.” The meal was excellent so she paid for it:

    PWYW and restaurant prices

    Free Rider

    Free riders would perfectly characterize the group of five individuals that paid $15 and a $5 tip for 25 dishes. As you would surmise, free riders are group members who use the goods and services that their group can access. However, they do not and need not pay because the entire group is willing to share the cost unequally.

    Fair People

    The PWYW phenomenon typically attracts a cohort that believes in fairness. Those people try to determine what their consumption is worth and then pay that amount. For them it helps to have a reference point–a price from the restaurant’s usual menu or perhaps from comparable establishments. Or, the amount they leave could reflect a good or bad dining experience.

    Self-Identity

    When some of us PWYW, our behavior reflects what we think of ourselves. To try to capture that self identity rationale, in another PWYW experiment that involved online video games, researchers included a questionnaire.  Asked to check what best described the decision making process, people could check, “they were “a cheap bastard and proud/ashamed of it.”

    Maybe also, the family that left the following note fits in the self-identity category. “The food and service were worth way more than we were able to leave…As a kid in college and a mother doing inconsistent freelance, without the deal we wouldn’t have gotten the chance to come.”

    Social Pressure

    Another consideration for some people was social pressure. If they knew the chef, other diners, or planned to patronize another establishment owned by the same people, these individuals felt an external pressure to pay a fair or high amount. In other words, they felt compelled to observe a social norm because others would be judging them.

    Our Bottom Line: Price Mechanisms

    Because prices at restaurants relate to supply and demand, they provide information. On the supply side, we have firms that use price to make decisions about their land, labor, capital and profits. Meanwhile, on the demand side, price is a handy way to assess quality and and quantity.

    So, we can say that with the owner of Blu averaging half his old menu’s prices through PWYW, price is sending him a pretty potent message.

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  • Economic news summary and The American Dream

    How to Find More of the American Dream

    Aug 19 • Behavioral Economics, Economic Debates, Economic History, Education, fiscal policy, Government, Households, Labor, Lifestyle, Thinking Economically • 165 Views

    During 1931, we would have first heard about the American Dream. Although economic growth was evaporating and unemployment was heading toward almost 25 percent, in The Epic of America, author James Truslow Adams told us that the American Dream is…

    “…that dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement…It is not a dream of motor cars and high wages merely, but a dream of social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position…”

    Thoughts about the American Dream took me to a new study on the importance of where you live.

    Neighborhood Matters

    At age 26, someone in the 25th percentile of income distribution who was born and raised in Cincinnati can expect to be earning an annual average income of $23,000. For Pittsburgh, the number is $28,000. But if you moved from Cincinnati to Pittsburgh at age 9, then, 17 years later, you would have earned $25,500. In other words, moving enabled you to make up 50 percent or so of the difference.

    Income mobility and neighborhoods

    From: “The Impacts of Neighborhoods on Intergenerational Mobility”

    Our basic story is that researchers were able to gather huge data that let them follow low income families that moved to new neighborhoods. The data indicated that the younger the child, the higher the income boost from the move. And, you need not be low income. Even the top one percent got that nudge upward.

    You can see how big the boost is for different U.S. counties:

    Neighborhod impact on income mobility

    From: “The Impacts of Neighborhoods on Intergenerational Mobility”

     

    Asked why living in certain counties increased future income, the researchers said they were not sure of specific causation. Instead they identified five variables that they assumed made a difference:

    • less violent crime
    • more two parent households
    • less segregation based on income and race
    • better schools
    • less income inequality

    Our Bottom Line: Income Mobility

    In a 1990s Congressional anti-poverty program called Moving to Opportunity, poor families received vouchers that they could use to move to better neighborhoods. At first considered a failure, the program is now considered a success because researchers have begun to focus on the income impact of a child’s age. As they expressed it, “Where children grow up affects their outcomes in adulthood in proportion to the time they spend in the place.”

    Knowing more about income mobility, federal policy makers can better enable more of us to achieve the American Dream.

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