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    Healthy Incentives

    Oct 24 • Behavioral Economics, Businesses, Macroeconomic Measurement, Regulation, Thinking Economically • 286 Views

    What happens in a school cafeteria when apples are placed in bowls rather than on a metallic pan? Sales more than double. Require trays? Students eat 21% more salads. Call corn “creamy” and more people ask for it. As displayed by the NY Times op-ed, “Lunchline Redesign”, school lunch decisions change when the incentives change.

    This takes me to a recent Brookings Institution paper on obesity. With two-thirds of all adults in the U.S. overweight and one-third obese, the impact is considerable. All of us would assume that medical costs are affected by obesity-related diseases. Also though, the paper explains that productivity, transportation, and human capital suffer. Whether looking at extra sick days, extra fuel costs, or less education, the cost of obesity affects our economy.

    Which incentives might make school cafeteria managers implement changes that encourage healthy eating decisions?

    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 obesity, 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 “lunchline redesign.”

    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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    Some Like It Hot?

    Oct 23 • Demand, Supply, and Markets, Economic History, Economic Thinkers, Environment, Innovation • 248 Views

    A warmer Detroit? A wetter New York? In the future world that UCLA professor Matthew Kahn describes, cities will adapt to climate change.

    Assuming that warming is gradual, populations will migrate and innovate. If San Diego becomes less habitable, people will leave for a more appealing climate in Detroit. Facing different weather conditions and a changing sea level, NYC would build new sewer and transport systems. Now in New Orleans, Brad Pitt’s “floatable homes” might spread to other water threatened communities. Worsened drought conditions in the Southwest could lead to water efficient technology. Market opportunities could abound for entrepreneurs.

    The Economic Lesson

    When Simon Kuznets developed national income accounting during the 1930s, for the first time the U.S. could more accurately determine its productive capacity. Consequently, during the Second World War, we were better able to determine how many tanks, for example, our land, labor, and capital could produce.

    With a global warming trend, economists again could play a crucial role, assessing newly created incentives, investigating resource allocation, and identifying new markets and mobility.

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    Mobile Home Ceilings

    Oct 22 • Demand, Supply, and Markets, Regulation • 283 Views

    When the Ukiah California City Council said yes to rent stabilization for a local mobile home park, senior citizens said, “Thank you.” In NYC, 50% of all housing in Manhattan is rent regulated. Sixty years ago, concerned that the middle class would flee the city, NYC created a huge complete with rent regulated housing called Peter Cooper Village.

    Primarily on the demand side of the market, the benefits of rent control include affordable housing, a diverse population, a safety net for low income households, and acclaim for politicians who vote yes.

    The costs take us to supply. In Ukiah, the one party that opposed the new regulation was the owner of the mobile home park. Why? Depending on the stabilization level, a large or small proportion of the landlord’s revenue is diminished. If the blow is “life threatening” then landlords abandon unprofitable properties. Correspondingly rent control can lead to less building construction, poorer maintenance of rent-controlled buildngs, and housing shortages. Still functioning today, a complex tale of financial challenges surrounds Peter Cooper Village.

    Also, as sometimes happens, government regulation can lead to unintended consequences. Harvard’s N. Gregory Mankiw tells the story. In NYC, universities are purchasing rent-controlled buildings cheaply because landlords do not want them. As he explains it, because senior faculty are offered the inexpensive apartments, the school can pay them less. Faculty members are delighted because of their deal for city housing and the school is happy because of its salary and tax benefits. 

    The Economic Lesson

    Rent control is one of those “It’s complicated” topics. Economically, we can draw a demand and supply graph with a horizontal line below the point at which demand crosses supply. Called a ceiling, that line displays the below market price that rent control creates. Then, locating the point where demand crosses the horizontal line, and where supply crosses, we see that the quantity demanded exceeds the quantity supplied. The result? A shortage. 

    Would you vote for rent control?

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    Chinese Big Macs

    Oct 21 • International Trade and Finance • 267 Views

    At 14.5 yuan or $2.18, a Beijing Big Mac is cheap. In the U.S. the price is closer to $3.71. As explained by The Economist, we just need to know about the Big Mac to know what the yuan should really buy. Dividing $3.71 (a US Mac) by 14.5 yuan (Chinese Macs) means that 1 yuan should equal 26 cents. 

    But…in foreign exchange markets, 1 yuan equals 15 cents.

    The Economic Lesson

    How does money become more or less expensive? In foreign exchange markets, basically, it is all about demand and supply. For example, buyers tend to want more goods and services when a currency is cheap and less when it costs more. Correspondingly, if supply changes, it too affects a currency’s value.

    For the Chinese though, rather than the market, the value of their currency also responds to a supply that they control. For a more specific explanation, you can look here.

     

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    Blockbuster’s Sunk Costs

    Oct 20 • Businesses • 314 Views

    When is it bad to be good at something? Blockbuster has the answer.

    As described by New Yorker columnist James Surowiecki, Toys ‘R Us, Barnes & Noble, and Blockbuster were known as “category killers” because they decimated their competition. They became so large and so successful that they made the rules. For Blockbuster, the “rules” were good and bad. They were the prime source of video rentals. Their stores were everywhere. Good? Yes, until the existence of the stores became the reason for keeping them. Bad? A delayed response to the internet. The success of Blockbuster’s business model stopped its creators from seeing its weaknesses. “Blockbuster just kept on throwing good money after bad.”

    The Economic Lesson

    The key idea here is “sunk costs”. When you have devoted 10 minutes to waiting in one position for a free parking spot, you have “sunk costs”. Having “spent” 10 minutes already, you are less likely to leave and look elsewhere.

    Similarly, businesses have sunk costs when they invest in physical and human capital. Having put considerable dollars into a venture, they are less likely to abandon the idea. For Blockbuster, the sunk cost was “bricks and mortar”. They had thousands of stores with employees from the “top” in management to the “bottom” as part time store workers. It would have been very difficult to abandon so huge an investment.

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