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    Holiday Dilemmas

    Dec 11 • Behavioral Economics, Demand, Supply, and Markets, Households, Thinking Economically • 549 Views

    Can doing good be bad?

    1. At food banks, the holiday season brings an avalanche of food from donors when the charity could purchase the food more cheaply and use volunteer time more wisely. As a result, charitable food donations misallocate resources.
    2. According to research from economist Joel Waldfogel, we tend to undervalue the price of a gift we dislike while giving much greater value to what we buy for ourselves. As a result, gift giving destroys value.

    However, this Economist article suggests remembering that 1) a gift we dislike may be good for us, 2) a gift can be an extravagance we otherwise would not purchase, and, perhaps most importantly, 3) the process of giving adds intangible value to the gift.

    The Economic Lesson

    Wasted giving could be called “deadweight loss.” Described by Freakonomics, it represents the difference between the cost of an item and how much the recipient values it. So, if you are a Yankee fan and someone gives you a Boston Red Sox hat, the deadweight loss would be 100% of the price. The amount by which pleasure falls is the deadweight loss.

    But, is the deadweight loss of gift giving to friends and charities offset by its intangible benefits?

    An Economic Question: How might you estimate the deadweight loss of gifts you have received?

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  • a queue..a line..16798_8.12_000009783048XSmall

    A Line Primer

    Dec 10 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Innovation, Thinking Economically • 591 Views

    Done with grocery shopping, you scan the registers and select the shortest line. Standing there for 2 minutes, your time flies. Another minute? Okay. But then, according to research, when the time hits 4 minutes, you believe you have been there for 6 and 5 minutes feel like 10.

    In one unscientific study, a reporter compared wait times at 5 NYC supermarkets. He concluded that a central line that directed people to one of 30 registers moved people along quickly. By contrast, with a slow checker or a problem buyer delaying customers, the slowest system was the traditional line at each register. (Studies have confirmed his conclusions.)

    Random line facts:

    • To choose a quicker line, a researcher says to divide the number standing in line by the number of customers that join the line each minute. (But, how much time will that use up??)
    • Waiting in line, men typically become impatient at 2 minutes and women at 3.
    • Some suggest avoiding lines with people who tend not to rush like the elderly.
    • Lines surely sped the demise of the former Soviet Union. Employed by the state, sellers cared little about customer service.  Consequently, hours of standing in line eliminated massive amounts of productive activity.

    Discussing the merits of the reverse pyramid and back to front, econlife looked at airplane boarding lines here.

    The Economic Lesson

    A line represents a transaction cost. Defined economically, cost means sacrifice. Standing in line, we are sacrificing what we otherwise might have been doing and thereby adding to the cost of the purchase. During the business day, the transaction cost of a line can be high. During a summer vacation, the cost of standing in line for ice cream can be minimal.

    An Economic Question: Using the economic definition of cost, explain why certain people might not mind standing in line while others avoid the experience.

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  • PNC Wealth Management Measures Inflation With Its Christmas Price Index

    The Christmas Price Index

    Dec 9 • Demand, Supply, and Markets, Economic History, Economic Humor, Households, Macroeconomic Measurement • 598 Views

    You might want to check the CPI (the Christmas Price Index). Calculated by PNC for the last 28 years, it tells us the value of the items in “The 12 Days of Christmas.”

    This year, the PNC CPI totaled $24,263.18 for anyone purchasing one set of each item. Repeating each item as the song suggests brings cumulative spending (364 gifts) to $101,119.84. At the PNC CPI site, you can see a whimsical interactive animation of the index and check out how the index has fluctuated since it began.

    Here is last year’s econlife look at the index.

    The Economic Lesson
    This year, the annual increase for the song’s gifts, 3.5% was the same as the change in the CPI, end of October 2010-end of October 2011.
    Looking specifically at the Christmas Index, we would see that prices varied. The ladies and maids prices were stable while the 7 swans-a-swimming at $6300, were 12.5% more than last year. (Petsmart was one source of PNC’s prices.)
    An Economic Question: You can calculate how long it will take a certain statistic to double by dividing 70 by that number. For example, if the inflation rate is 3.5%, how long will it take prices to double?  (You can see why economists target an inflation rate that is closer to 2%.)

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  • Organ Markets

    Dec 8 • Demand, Supply, and Markets, Economic History, Regulation, Thinking Economically • 708 Views

    When a San Francisco court said that certain bone marrow donors could be paid, they did not have to focus on medicine. Instead, the 3 judge panel could have discussed the market.

    The court said it was all about new technology that made bone marrow donation more similar to giving blood than an organ. While it is legal to pay a blood donor, compensating someone for an organ is a felony.

    Instead though, we could say the case was about the size of the market. The judges’ decision, if it is not reversed, has expanded the bone marrow market. Originally, prohibited, now demand and supply will play a role in determining availability and price for bone marrow donations.

    The Economic Lesson

    The size of markets can differ and change. With prohibition, the size of the market for alcohol diminished. For votes, substitute SAT test takers and kidneys, markets are illegal. In Why Things Should Not Be For Sale, philosopher Debra Satz suggests 4 criteria that “make particular markets noxious” (p. 9).

    • Looking at participants, she cites 1) people who might be so poor or desperate that they are especially vulnerable and also those with little information that she characterizes as 2) having “weak agency.”
    • Looking at a market’s results, she suggests being aware of “extremely harmful outcomes” 3) for individuals and 4) for society.

    With economist Russ Roberts, Dr. Satz discusses her perspective while in this Teaching Company lecture (#29), you might enjoy listening to a half hour discussion of issues that relate to organ transplant markets.

    An Economic Question: Thinking of Dr. Satz’s criteria and others that emphasize the lives that would be saved if organs could be bought and sold, would you expand the market for human organs?

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  • 16790_cheating..12.7.11_000016337564XSmall

    Why Might People Cheat?

    Dec 7 • Behavioral Economics, Businesses, Economic Thinkers, Financial Markets, Households, International Trade and Finance, Labor, Regulation, Thinking Economically • 581 Views

    When are people more likely to cheat? Behavioral economist Dan Ariely says to look at sweatshirts, the Ten Commandments, dollar bills and cans of Coca-Cola.

    In one experiment, Ariely discovered that more students would copy someone’s seemingly dishonest behavior during an exam when that person was wearing their (elite) school’s sweatshirt. Ariely’s conclusion? People are more likely to replicate dishonesty if it comes from a group with which they want to identify.

    In this fascinating TED talk, he also connected minimal recall of the Ten Commandments to (less) cheating and explained why we take cans of Coke rather than dollar bills from a communal refrigerator.

    Our bottom line? Ariely’s research provides insight about the cheating and corruption that disrupt economic activity.

    The Economic Lesson

    In the World Bank’s “Doing Business” Index, Greece has a relatively low rank.  I wonder whether it is tougher to do business there because its macro statistics have been “misreported,” taxes are “under-collected” and the underground economy abounds.

    An Economic Question: Explain why corruption and cheating affect the ease of starting businesses.

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