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    Driving Costs

    Jun 28 • Behavioral Economics, Demand, Supply, and Markets, Economic Debates, Environment, Regulation • 552 Views

    Describing traffic policy in several European cities, the NY Times tells of poorly synchronized green lights, congestion pricing, auto-free zones. When drivers are inconvenienced, there are fewer cars, fewer emissions, happier pedestrians and bikers.

    One question: How did cost compare to benefit?

    The Economic Lesson

    Referring to abuse of commonly owned resources, Nobel laureate Elinor Ostrom talked about a Swiss pasture. Animal owners endangered the entire pasture because it was communal.

    Called the tragedy of the commons, when a resource is shared by many rather than privately owned, it tends to be “misused” or “overused.” For a pasture, “misuse” is over grazing; in the ocean, fish populations are depleted; on roads, there are too many drivers; and in student lounges, people avoid clean-up.

    An Economic Question: Using the following facts, explain your cost/benefit analysis:

    In Traffic, Tom Vanderbilt describes the impact of tolls in Seattle on drivers with electronic devices that recorded where and when they drove. Just hearing that the cost of a trip would change, drivers left earlier, switched routes, changed plans. Then, when the tolls were imposed, their behavior changed even more. (p. 166) Researchers said the result of the tolls was a 13% drop in traffic that restored normal driving speeds.

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    More Oil Dilemmas

    Jun 27 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Environment, International Trade and Finance • 462 Views

    The recent International Energy Agency (IEA) announcement is about a lot more than a tank of gas. Everyday, for 30 days, 2 million barrels of oil will be released from strategic petroleum reserves (SPRs). The U.S. will be responsible for half of the 60 million barrel total while other IEA member nations will provide the rest.

    In addition to gasoline, toothpaste, food preservatives, vanilla ice cream with artificial flavoring, rose-scented perfume, plastic bags, Excedrin and golf balls all contain petrochemicals.

    That means not only might gas prices drop but also golf balls could be cheaper.

    The Economic Lesson

    Sometimes policy decisions have unintended consequences. Better unemployment insurance can lead to more unemployment. Seat belts can encourage unsafe driving. Diet snacks could make us fatter. And, will having more oil mean we will consume even more oil and soon return to higher prices?

    When price goes up, we have to sacrifice more for every barrel that we consume. Then, substitutes become increasingly attractive. (You might want to look at this pistachios econlife post.)

    Will attractive oil substitutes have a more long-lasting impact on oil prices?

    An Economic Question: How might you illustrate the IEA decision on a supply and demand graph?

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    Changing Times

    Jun 26 • Businesses, Demand, Supply, and Markets, Economic History, Innovation, Thinking Economically • 546 Views

    Not so long ago, the NY Times depended on ads, help wanted, real estate revenue. Now we have craigslist and monster.com. An Op-Ed Column could be read only on the Op-Ed page. Now, anyone can copy and share an article. And, in those multiple newspaper holders that open after you deposit your money, you would only take one and slam it shut. Now, we have our computers and iPads and Twitter.

    A new documentary film “Page One: Inside the New York Times,” is actually more than a story about one newspaper. The movie describes the obliteration of an industry. Reflected by bankruptcy crises for Chicago, Denver, New York, San Francisco, Philadelphia, and other big city newspapers, the old fashioned way of reporting the news just is not working. On the revenue side, traditional sources of money have gone while on the news side, they no longer have an exclusive product.

    So, what will happen?

    Described in 2009 by NYU media professor Clay Shirky, the revolution is rather similar to the impact of the printing press in 1500. Shirky tells us that most narratives focus on life before and after the printing press. One book, though, The Printing Press As An Agent of Change, answers, “How did we get from the world before the printing press to the world after it?” Summarizing, Shirky says the transition was “wrenching” because “old stuff gets broken faster than the new stuff is put in its place.”

    According to Shirky, we do not know how we will replace the old newspaper model of doing business. We don’t know who will go to city council meetings and war zones. We do know, though, that the old time economics of print journalism no longer exists. And, for that reason, I recommend “Page One: Inside the New York Times.” It presents fascinating questions that have not yet been answered.

    The Economic Lesson

    In Capitalism, Socialism, and Democracy (1942), Joseph Schumpeter (1883-1950) explained what propelled capitalism and what would destroy it. Entrepreneurs sparked capitalism’s ability to grow and provide better standards of living. Calling the process creative destruction, he predicted new firms with new ideas would replace old businesses. Ultimately though, Schumpeter believed that capitalism would die because an affluent intellectual class would emerge that challenged its existence.

    An Economic Question: How might you apply the concept of creative destruction to the newspaper industry?

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    Airline Fees

    Jun 25 • Businesses, Demand, Supply, and Markets, Financial Markets, Government, Households, Labor, Money and Monetary Policy • 1497 Views

    Weigh baggage, tag it, and place it on the conveyor belt. No you are not an airline employee. You are flying the Australian Airline, Jetstar. Any human interaction will cost you. A question about your baggage? $10.

    Soon, all U.S. air carriers will be required to list their fees. On its website, Ryanair tells us that it charges for lap babies, baggage, name changes, sports equipment, priority boarding. They also charge for printing a boarding pass. Other airlines have us pay extra for legroom, snacks, and booking by phone.

    The Economic Lesson

    The airline industry can tell us a lot about how competitive market structure shapes a firm’s behavior. Before 1978 deregulation, airlines enjoyed government oversight that gave fliers high fares, labor high wages, firms were profitable and competition on interstate routes was minimal.

    The incentives changed after deregulation. Less government and more competition meant lower fares. How then to generate more profits? Fees are the current answer. Up by $22 billion, fees represent a huge source of airline revenue.

    An Economic Question: Picture a market structure continuum. Perfectly competitive small firms selling similar products are on one end, then monopolistically competitive firms, next oligopolies, and finally, monopoly. On this scale, where would you place the airline industry before deregulation in 1978? After?


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    Saudi Women

    Jun 24 • Developing Economies, Gender Issues, Macroeconomic Measurement • 561 Views

    It is tough for a Saudi Arabian woman to get a driver’s license. Only in rural areas might you see women behind the wheel. Even with recent protests, imagine, to get to work, to pick up groceries, to take a child to the doctor, you need a man. And, if that man is not a relative, you have to pay him.

    A 2009 Time article tells about a female deputy minister of education who uses video conferencing to communicate with male colleagues. Among the lowest in the world, the labor force participation rate for Saudi women is 17%. And yet, literacy among Saudi women is high.

    The Economic Lesson

    For us, the key here is human capital. For an economy to grow and thrive optimally, the factors of production, land, labor, and capital, need to be appropriately allocated. When there is gender bias, women’s talents are underutilized. Consequently, economic growth is less than it might be.

    An Economic Question: To illustrate underutilization, economists can use production possibilities graphs. On production possibilities graphs, with the X-axis labeled consumer goods and the Y-axis, capital goods, a bowed out curve is drawn which illustrates a country’s maximum production capability. How would you display current production in a nation that constrains female performance?

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