• Everyday economics of LED bulbs

    The Unexpected Consequences of More Efficient Lighting

    Oct 14 • Behavioral Economics, Demand, Supply, and Markets, Developing Economies, Economic Growth, Environment, Households, Innovation, Tech, Thinking Economically • 145 Views

    With one LED bulb lasting up to 100 times as long as an incandescent bulb and 10 times longer than fluorescent lights, you can see why the scientists who developed LED lighting just received the Nobel Prize in Physics for the energy and materials their innovation will save.

    A 19th century economist would disagree.

    In The Coal Question (1865), William Jevons tells us that, “It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is truth.”

    Called the rebound effect, 150 years ago, the efficiency created by the steam engine encouraged more coal use rather than less. After that, as we moved from coal to whale oil to kerosene and electricity, more efficiency expanded energy use as the market responded to a better, cheaper product.

    And therein lies the rebound effect. Described in a Congressional Research Service (CRS) report, the rebound effect has a triple source:

    1. We use more energy because it is less expensive. When gas is cheaper we tend to drive more.
    2. With the money we do save, other energy guzzling purchases become affordable.
    3. Lower resource prices can encourage subsequent innovations that increase the use of that resource. Starting as illumination, electricity spread to run our appliances.

    But, the CRS report also explains that the rebound effect is most evident in a developing economy because slack demand provides considerable room for a boost in energy use. By contrast, in a mature market, the rebound effect is less pronounced and more unpredictable.

    Indeed, imagine an entire world that is LED lit at night rather than (below) developed and urban areas.

    The lower opportunity cost of LED lighting will fuel its spread in the developing countries.

    From: Vox

    Our Bottom Line: Opportunity Cost

    As economists, we can say it is all about opportunity cost. As the opportunity cost of using a commodity decreases, we tend to use more of it. Diminished opportunity cost is one reason that demand slopes downward. The lower the price, the more we want because we sacrifice less to get it.

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  • Everyday economics indicators

    Surprising Economic Indicators

    Oct 13 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Growth, Economic Thinkers, Entertainment, Government, Households, Labor, Macroeconomic Measurement, Thinking Economically • 126 Views

    Eleven months before the great recession began in December 2007, the number of dental patients who returned for a follow-up plummeted as did the demand for x-rays. People continued having their teeth cleaned but rejected most other discretionary procedures.

    Calling it “toothenomics,” Bloomberg News has hypothesized that, like stock prices and building permits, dental care is a leading economic indicator that tells us where the economy is heading.

    Looking below at the Bloomberg graph of the number of dental patients who returned for a follow-up, do note a recent and perhaps worrisome decline:

    Economic Indicators

     

    Unusual Economic Indicators

    While stock prices and building permits are two of the 11 leading economic indicators that government statisticians compile to generate an index number, I suspect, after checking dental revenue trends at the Journal of Dental Education, that dental care would better fit with a much less rigorous list.

    And that takes us to the Men’s Underwear Index (MUI). Said to have been monitored by former Fed Chair Alan Greenspan, a dip in the MUI is a signal that “here comes trouble.”

    As NPR Radio Lab host Robert Krulwich explained in 2008, “[Greenspan] once told me that if you think about all the garments in a household, the garment that is most private is the male underpants because nobody sees it except people in the locker room and who cares. Your children need clothes. Your wife needs clothes…You need clothes on the outside. But the last purchase that you don’t have to make is underpants…”

    Other possible recession indicators:

    • diaper rash cream sales (up)
    • lipstick sales (up)
    • sleep hours (up)
    • divorce rates (down)
    • shark attacks (down because of fewer vacations)

    Our Bottom Line: Income Demand Elasticity

    Like a rubber band, our spending can be somewhat elastic. During prosperity, for certain goods and services, our spending stretches a lot. Then, however, for those same items, when recession hits we buy much less. Called the income elasticity of demand, when we have noticeable changes in the quantity that we demand because our income rises or falls, our buying behavior becomes an economic indicator. What economic indicators will you be sending out as you go about your day today?

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  • Everyday economics and human capital formation

    When Does Practice Really Matter?

    Oct 12 • Behavioral Economics, Economic Debates, Economic Growth, Economic Thinkers, Education, Innovation, Labor, Macroeconomic Measurement, Thinking Economically • 136 Views

    It’s been four years since Dan McLaughlin decided to leave his commercial photography job and devote his existence to golf. As of October 4, he had practiced golf for 5,592 hours. With a 10,000 hour goal, he’s got 4,408 to go.

    The Dan Plan as he calls it, is all about the 10,000 hour rule. Known as deliberate practice by psychologists, the basic idea is that practice counts and 10,000 hours really make a difference.

    Where are we going? To how we develop expertise.

    The 10,000 Hour Rule

    Popularized by Malcolm Gladwell, the 10,000 hour theory originated with a psychology professor at Florida State University. Looking at violin students at a West Berlin Music Academy, Dr. K. Anders Ericssen concluded that practice time determined who would excel. While he emphasized that people differed, he said the average time needed to become a “prodigy” was 10,000 hours of disciplined solitary practice before age 20. By contrast, becoming pretty good required 7,500 hours while those with 5,000 hours became teachers.

    Not everyone agrees with Dr. Ericssen’s work. Crucially, they remind us that his data is retrospective. Because it depends on his subjects’ recall, bias and inaccuracy are bigger problems than with data from daily logs.

    One study also pointed out that the “domain” matters. Utilizing meta data from all relevant research, they concluded that practice counts more for athletes than for teachers. One reason was predictability. Your practice makes more of a difference when you know precisely what to expect.

    Below, you can see that the results of the meta-data study indicate the impact of deliberate practice on expertise was not substantial and diminished to almost nothing for educators and professionals.

    Human capital formation and debating the 10,000 hour rule

    From: “Deliberate Practice and Performance in Games, Music, Sports, Education, and Professions: A Meta-Analysis”

    Furthermore, like me, I assume you are also asking, “What about genes?” After all, there were more than 20 musicians in the Bach family. Investigating how expertise develops, researchers have also cited starting age, working memory capacity, intelligence and personality.

    Our Bottom Line: Positive Externalities

    Thinking about the debate surrounding deliberate practice, I kept returning to education. Deliberate practice is all about unbundling the skills that create expertise. Whether we agree with the idea or not, focusing on deliberate practice involves figuring out how best to initiate the ripple of positive externalities that start with human capital formation.

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  • The econlife.com Weekly Roundup

    Our Weekly Roundup: From Cheap Gas to Expensive Soda

    Oct 11 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic History, Government, Health Care, Households, Macroeconomic Measurement, Money and Monetary Policy, Regulation, Thinking Economically • 98 Views

    everyday economics of college ranking SUNDAY 10.05.14

    The reason there is more to a college rank than a number…more

    Everyday economics, game theory and next day delivery MONDAY 10.06.14

    How next day delivery is about game theory…more

    Because of price controls, Venezuela has perverse incentives that create shortages, inflation and underutilized resources. TUESDAY 10.07.14

    The perverse incentives that price controls create…more

    everyday economic of subsidized gas WEDNESDAY 10.08.14

    Why cheap gas is really expensive…more

    Everyday economics and trademark law THURSDAY 10.09.14

    The word that trademark law might not let us own…more

    Inelastic demand is one reason that sugary drink taxes might not be effective. FRIDAY 10.10.14

    The unexpected consequences of sugary drink taxes…more

     

    Economic Ideas Roundup

    • human capital
    • prisoner’s dilemma
    • monopolistic competition
    • incentives
    • price controls
    • entitlements
    • subsidies
    • intellectual property rights
    • inelastic demand

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  • Inelastic demand is one reason that sugary drink taxes might not be effective.

    Problems With Sugary Drink Taxes

    Oct 10 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Economic History, Government, Health Care, Households, Lifestyle, Regulation, Thinking Economically • 141 Views

    A sugary drink tax is on the ballot in Berkeley, CA. Called Measure D, the proposal mandates a one-cent per ounce tax. The goal is to diminish obesity and encourage healthy eating.

    Sadly, it is not quite that simple.

    Municipalities debating a tax on sugary drinks have to decide whether they want to raise revenue or diminish obesity. If the tax is not very high, people will continue buying sugary drinks and generate revenue. On the other hand, if the tax is high enough and people buy fewer sugary drinks, then obesity diminishes.

    Perhaps.

    But, we also have to think about substitution. If the tax discourages sugary beverages, drinkers might switch to some equally caloric alternative. However, when all junk food is covered, researchers have observed that consumers absorb the higher prices.

    And still it gets more complicated.

    One study indicated that only households in middle income quintiles will respond to a sugary drink tax. For the most affluent, the tax is relatively small and easy to ignore. For the lowest earners, consumption continues while other spending decreases.

    And finally, we might not even know we are being taxed. When a two-liter bottle of Coca-Cola is marked an untaxed $2.50 in the supermarket aisle, most of us do not even recognize the taxes we pay at the register. (Interestingly, the Berkeley tax would be paid by distributors, not consumers.)

    State Sugary Drink Taxes

    According to a 2014 paper looking at a 5.5 percent tax in Maine during the 1990s and a 5 percent tax in Ohio in 2003, the impact was insignificant. Most researchers suspect that municipalities need a much heftier tax to get us to respond.

    Soda tax facts:

    Inelastic demand might make soda taxes ineffective.

    From: Robert Wood Johnson Foundation/Bridging the Gap

    To see your own state, here is a sugary tax list.

    Our Bottom Line: Inelastic Demand

    Price increases can always take us to demand elasticity. As with medication, if price changes a lot and the quantity we buy remains pretty constant, then our demand is inelastic. By contrast, if price swings have a big impact, then our response is elastic. For soda, within a certain price range our demand is inelastic. Maybe a 35% tax (or more) would nudge us into elastic territory.

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