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    Jul 14 • Thinking Economically • 243 Views

    Called “LeBronomics” by NPR’s Planet Money, LeBron James’ decision to go to Miami was about much more than $99 million. Instead, the key issue was “utils”.

    Whenever economists want to quantify satisfaction, they use the “util”. If LeBron had selected Chicago, local residents might have felt 10 extra utils every time they watched their team play. (I just chose 10. The number does not matter.) Choosing New York, though, would have resulted in many more utils. 2009-2010 was a 50-loss, disappointing season for Knicks fans. Consequently, just seeing LeBron at every game would have generated lots of extra happiness for many New Yorkers.

    By contrast, according to the Planet Money people, selecting Miami created the least extra happiness in the United States. Because Miami already has other superstars, adding a third would not create very many more utils. We could compare this to the utils we get from the first bite of a chocolate chip cookie and the 15th bite. We get much more pleasure at the beginning before adding lots more.

    The Economic Lesson

    Getting less extra satisfaction from each additional unit is called diminishing marginal utility.

    We might add that LeBron James did not experience diminishing marginal utility when he added to his income because Florida tax rates are among the lowest in the country.

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    A Free Ride For Electric Cars?

    Jul 13 • Environment, Macroeconomic Measurement, Regulation • 210 Views

    Imagine a world filled with electric cars. In private homes, people could install their own charging devices. Others could be built in apartment building garages and on city streets. Some envision restaurants, department stores, and movie theaters offering a charge as you eat or shop. One firm hopes to build battery switching stations “manned’ by robots that would replace depleted car batteries during long trips. Demand for oil would drop. Energy independence could become a reality. Yes? Not so fast.

    Let’s first look at home. For a 20 hour charge, it would be easy. Just use your wall outlet. More speed, though, means lots more voltage and upgrading home capacity.

    We should also ask about the role of government. Raleigh, N.C. officials told Nissan that it would require permits, inspections, and electricians for homeowners to install faster charging docks. Electric utilities point out that 15 minute fast charges requiring 440 volts could overload grid capacity. In response, California regulatory authorities expressed concern while Houston says it can turn to wind farms and natural gas fired facilities to satisfy higher demand. In addition, California says it will end its HOV perk for hybrid owners but not for electric and natural gas powered vehicles.

    The U.S. auto-related infrastructure began to develop 100 years ago. In 1909, there were 3 “filling stations” in the United States. By 1925, millions owned Model-T Fords and General Motors advertised a car for every pocketbook by producing Chevrolets, Pontiacs, Oldsmobiles, Buicks, and Cadillacs. Government built an interstate highway network and private industry took care of gasoline stations, motels, and roadside restaurants. Is the next step electric?

    The Economic Lesson

    Two economic questions come to mind that always apply to innovation: 1) What are the tradeoffs? Yes, there are benefits but what are the costs? 2) What role should government play? 

    Furthermore, we should remember Joseph Schumpeter’s explanation of how creative destruction accompanies innovation.

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    Everyone Rations

    Jul 12 • Thinking Economically • 316 Views

    I am concerned that the word “ration” has a bad reputation. In a recent CBS story about a new Medicare/Medicaid head, and throughout the healthcare reform debate, stories about reputed “rationing” kept popping up. There was no need, though, to search for examples because rationing is everywhere. Healthcare has always been rationed because its supply is limited. 

    Actually, the supply of everything is limited. As a result, societies have to have a way to decide who gets what. They have to ration. In the U.S., most goods and services are rationed through a market system. In the market system, prices act as a rationing mechanism. For example, when price rises, consumers typically buy less. 

    During World War II, rationing was more extreme. With very limited domestic quantities of such goods as butter, sugar, and gasoline, consumers were allocated specific amounts through books of coupons. Others, hoping to buy more than their coupon totals, located black markets in which an illegal demand and supply price system also rationed goods.

    It is true that we usually use the word ration to describe a more extreme drop in distribution. Still though, I hope we will remember that whether we have a lot or a little, still a limited amount has to be allocated. As a result, everyday, our economy rations pizza and eggs and doctor’s appointments.

    The Economic Lesson

    In order to produce and distribute goods and services, all societies have to answer three basic economic questions: 1)What goods and services should we produce? 2) How will land, labor, and capital be used to produce goods and services? 3) To whom will incomes go?

    Societies have answered “what, how, and to whom” using three basic systems: 1) the market: demand and supply, 2) command: someone decides and others obey, 3) tradition: the same tasks are passed down through generations

    The market, command, and tradition are all rationing systems.

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    Indian Protests Fueled By Gas Price Hike

    Jul 11 • Demand, Supply, and Markets, Developing Economies, International Trade and Finance • 266 Views

    A government decision to stop subsidizing gasoline prices in India fueled protests last week. The subsidy cost the indian government 2.5% of its budget ($5.5 billion). Now, with prices responding to the market, the record high deficit can drop. However, a liter at the pump will increase by 3.5 rupees or 8 cents (6.7%)–the equivalent of almost 30 cents a gallon. Protesters also claim that expensive gas will send the Indian inflation rate beyond a 10% rate.

    Events in India took me to gasbuddy to see where the price of gasoline has been in the United States. A five year chart reveals that a gallon of unleaded regular averaged between $2.11 and $3.11 in 2005, touched $4.12 in July, 2008, and dropped to $1.61 soon after. Now, we are at about $2.70.

    The Economic Lesson

    When economists discuss gas prices, sooner or later the topic turns to elasticity. If price changes a lot and the quantity we buy remains relatively stable, then our price elasticity of demand is inelastic. By contrast, if price swings have an impact on buying, then our response is elastic. Economists believe that our demand for gas tends toward inelastic. Consequently, to encourage less fuel consumption, we could not depend on moderate price hikes at the pump. Instead we would need big price jumps, income drops, and more hybrids. 




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    A Federal Workers Cost Cutting Contest

    Jul 10 • Government • 197 Views

    Last year’s winning idea for the second annual federal worker’s cost cutting contest (SAVE) was from A Department of Veterans Affairs employee. Scheduled for the fiscal 2012 budget, the suggestion will save a projected $14.5 million by 2014 by enabling patients to take medication and bandages home with them after being discharged.

    Total spending for 2011 is projected to be close to $4,000 billion. $124,000 million ($124,000,000,000) is for the Department of Veterans Affairs. And, the most we could save was $14.5 million during a two year period–$7 million a year? 

    The Economic Lesson

    The federal budget is composed of mandatory and discretionary spending. Mandatory spending (required by law) for Medicare, Medicaid, and Social Security totals close to half of the budget. Then, if we add defense and interest that is due for money borrowed by the government, that takes us to more than 75% of all spending. Discretionary items cover a multitude of categories including agriculture, foreign affairs, justice, transportation, education, NASA and the EPA. You can see where this going. If we want to control the budget, suggestions for freezing discretionary items will have a minimal impact.

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