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    Utilities Included

    Aug 17 • Demand, Supply, and Markets, Economic Thinkers, Environment, Households, Thinking Economically • 186 Views

    In NYC, there are 250,000 housing units that use more electricity than most others. The reason? Buildings without meters for each apartment have leases that say “utilities included”. So, whether tenants use more or less power, the rent is the same.  Consequently, they perceive that their electrical consumption is “free”.

    What happens when we think something has little or no cost? We tend to use more of it.

    Elinor Ostrom, winner of the Nobel Prize in economics wrote about how people abuse a good that appears free because it is owned by all of us. Called the tragedy of the commons, for a pasture, we overgraze our cows. For a workplace refrigerator, we create a mess. Factories tend to pollute more when there is no cost. Parking is tough to find when no one has to pay for a space. Dr. Ostrom believed though, that when people care about their common pasture or refrigerator or air, they can willingly formulate a solution together.

    The Economic Lesson

    With price as the y-axis and quantity as the x-axis, a demand curve is downward sloping. Lower prices make us willing and able to purchase more of an item. With a lower price, the item requires less sacrifice and we have more to spend elsewhere.

    According to British economist Arthur Pigou (1877-1959), the tragedy of the commons can be solved with a fee or tax that makes an overused commodity more expensive. For those NYC overusers of electricity, individual meters that connect cost to usage would eliminate the extra expense to landlords and diminish the ease with which additional greenhouse gases can be created.

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    Parking Problems

    Aug 16 • Demand, Supply, and Markets, Environment, Thinking Economically • 277 Views

    Parking expert Professor Donald Shoup has identified a traffic problem with implicatons far beyond city streets. Essentially he says that cheap city parking is really rather expensive.  Throughout parts of NYC, for example, drivers can select meters that might require $1.50 an hour or a free side street. With so low a price, demand is considerable and there are few empty spaces. Consequently, drivers create pollution, exacerbate congestion, and generate pedestrian challenges while searching for spots. Also, land used for parking might have a better alternative function. Explained economically, while “parkers” pay little, the cost (sacrifice) for everyone else is high.

    One way to solve the problem of underpriced public commodities is to charge more. San Francisco has begun to experiment with variably priced meters and parking lots. Spaces with higher demand will become more expensive. The result? Fewer people will demand them and negatively impact the neighborhood. Correspondingly, as suggested by George Mason economics professor Tyler Cowen, “…if we are ging to wean ourselves away from excess use of fossil fuels, we need to remove current subsidies to energy-unfriendly ways of life.”

    One concern: Should we care that more expensive parking is regressive? Other costs?

    The Economic Lesson

    An externality is the impact of a behavior or contract that is experienced by a third uninvolved party. When the impact on third parties is undesirable, as with cheap parking, we call the result a negative externality. A benevolent impact on an uninvolved third party is called a positive externality. A community experiences the positive externality of flu vaccinations.

    How to diminish a negative externality? Increase its source’s cost. How to encourage a positive externality? Make it cheaper to create.

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    Social Insecurity: Part 3

    Aug 15 • Government • 186 Views

    Do you prefer adjusting COLAs or the full retirement age (FRA) to ensure the survival of the U.S. Social Security program? To decide, you might want to know how different solutions will affect high and low income earners.  

    One way to solve Social Security insolvency is to decrease COLAs. COLAs (Cost of Living Adjustments) typically increase the amount that Social Security recipients receive each year. For example, if a person got a $100 check during year 1 and the inflation rate was 3%, then a COLA would mean a $103 check during year 2. If COLAs are diminished then lower income and older beneficiaries will be hit hardest.

    Another solution is to increase the retirement age when people start to collect Social Security. A decade ago, the full retirement age was 65. While now it will be 66 for people who are currently 62, starting with individuals born during 1960, the retirement age will be 67. If the retirement age is the solution, then higher earners will feel it more than others.

    COLAs and FRA solutions take us to the benefits received side of the problem. Revenue increasing solutions such as higher taxes are also possibilities.

    The Economic Lesson

    Social Security is a progressive program with low earners collecting more than they paid in taxes and high earners getting much less. According to the August 2010 report from the Trustees of the Social Security Trust Fund, during 2014 deficits will begin because of the baby boomers. During 2037, when the trust fund will be depleted, benefits will decrease.

     

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    Netflix and Buggy Whips

    Aug 14 • Businesses, Economic Thinkers, Innovation, Tech • 233 Views

    After reading this NY Times article about Netflix, you might begin to think about buggy whips. I know it sounds distant but here is the connection.

    Entrepreneurs make an existing product or process obsolete. Netflix and Blockbuster. Amazon and Barnes & Noble. The Model-T Ford and buggy whips.

    Aware that someone else’s innovation could lead to their own demise, Netflix is creating its own DVD obsolescence by encouraging us to stream movies from them. Also though, through innovation, they have guaranteed their survival.

    Any other examples of this type of “creative destruction”?

    The Economic Lesson

    According to Joseph Schumpeter, economists should focus more on entrepreneurs and less on demand and supply.To Schumpeter, the entrepreneur, as an innovator, is the source of progress, change, and creative destruction. But also, by upsetting the status quo, entrepreneurs create conflict between the new and the old.

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    More About Lines

    Aug 13 • Businesses, Thinking Economically • 240 Views

    Next time you are in Starbucks, check how long you stood in line. They care. To save 14 seconds, for example, Starbucks designed a larger ice scoop which baristas could use for one dip instead of 2. Still though, in a “mystery shopper” survey of “limited service restaurant brands,” Starbucks was #6 in wait time, behind Dunkin’ Donuts (4 minutes 3 seconds) during 2008. Also concerned about line time, the NYC Columbus Circle Whole Foods uses a line manager, a single line system, and an unusually high number of check-out registers.

    The science of line movement is called queue management. One researcher says that we respond favorably to a wait time of up to 3 minutes. Then, though it starts to feel longer than the actual time. Also, our response can depend on what we are waiting for. People might not want to wait at a gas station but will accept long lines for new iPhones and concert tickets.

    The Economic Lesson

    Firms that compete in a market with many consumers and many firms are in a monopolistically competitive market. The characteristics of monopolistic competition include many sellers with a similar product, sellers creating an individual, unique identity, and sellers having some control over price. With Starbucks and Dunkin Donuts in a monopolistically competitive market, they can use their coffee, their product assortment, their image, and their wait time to compete.

     

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