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    The Story of a Candle Tax

    May 6 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Government, International Trade and Finance, Labor • 989 Views

    Our story begins with one 1986 tax, an “antidumping duty,” on Chinese candles. Responding to very low Chinese candle prices, the U.S. decided to protect domestic candle producers.

    By 2004, the tax was huge. More than 100%.  Also, candle makers received some of the tax revenue. According to one government document, they received almost $52 million during 2004.

    So where are we?

    We have Chinese candle dumping, a U.S. tariff and a U.S. subsidy. But that was only the beginning. In the U.S., candle makers could charge more and make more. Not subject to the tax, Vietnam and India exported additional candles to U.S. In China, candle makers started exporting “blended” candles because the tax targeted petroleum candles.

    And now, during 2011, with transport costs up, and labor more expensive in the developing world, we have come full circle. Some Asian factories want to relocate in the U.S. And here, the story takes a new twist. It is not that easy. According to a WSJ article, local ordinances are delaying and increasing the cost of Chesapeake Bay Candle’s domestic construction project.

    The Economic Lesson

    A tax on imports, tariffs increase domestic prices. By contrast, a subsidy, a payment from the government (usually) to a domestic producer, diminishes price. Each approach, the tariff and the subsidy, enable domestic manufacturers to compete more effectively against foreign producers.

    An Economic Question:  Saying that worldwide efficiency is jeopardized and market decisions are distorted, believers in free trade oppose tariffs and subsidies. Using candles as an example, your opinion?

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    34 Million Different Pizzas

    May 5 • Businesses, Demand, Supply, and Markets, Economic Debates, Regulation, Thinking Economically • 455 Views

    Expressing concern about a proposed FDA calorie-posting rule, Domino’s says it would have to list 34 million different kinds of pizzas. Really.

    This Bloomberg video explains their position. Using Domino’s “Cal-O-Meter” as a source, they show an image of a plain cheese 14″ pizza (2,320 calories) that is accompanied by a yellow “sausage” arrow (480 calories) and a gray Mushroom arrow (40 calories). You get the picture. Peppers? Pineapple? Onions? Veggies? There are a lot of possibilities.

    The Food and Drug Administration’s (FDA) proposed mandate applies to restaurants, bakeries, coffee shops, grocery stores, and convenience stores that are chains. Defining a chain as 20 stores or more, the FDA has not yet implemented its rule. Vending machines are included but not movie theaters and airlines.

    The Economic Lesson

    The menu-labeling rule was mandated by The Affordable Care Act that was passed during March 2010.  Assessing its wisdom, you could use an opportunity cost approach. The opportunity cost of a decision is the alternative that you rejected. (Choosing is refusing.) Just decide what alternative choice you are sacrificing and then list the benefits of that alternative that you would forgo. Is your choice worth the sacrifice?

    An Economic Question: Using cost/benefit analysis as your approach, with which of the following do you agree?

    a. This article in the Sacramento Examiner says the FDA has not gone far enough. They believe ingredients should also be listed.

    b. The FDA has gone too far. The new rule will negatively affect corporate productivity.

    If you would like to submit an opinion to the FDA, go to regulations.gov.


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    Look For the Silver Lining

    May 4 • Businesses, Demand, Supply, and Markets, Households, Thinking Economically • 412 Views

    You might want to decide whether to set the table with Granny’s silver, sell it, or melt it. To see why, you just need to look at a graph of the price of silver. Representing a 162% increase between January and now, the line is almost vertical.

    When silver was $49.845 an ounce on April 25, people recalled its 1980 high of just over $50.00. (Within 4 months, the price dropped 78%.) If we adjust for inflation, silver would need to be $135.00 an ounce today to equal its 1980 high.

    Still though, silver’s current price is making a difference. Silver jewelry has gained  “cachet.” But, on the other hand, jewelers are looking for cheaper metals. Similarly, if the price goes high enough, industrial users will look for substitutes. And predictably, with price soaring, silver is attracting new investors.

    The Economic Lesson

    According to this silver value chart for coins, a Washington Quarter minted from 1932-1962 contains $7.53 of silver (May 3 prices). This takes us to one basic rule. The value of the metal in a coin should not exceed the value of the coin. For that reason, coin can be called nominal money. It has little intrinsic value.

    An Economic Question: If the value of U.S. coins and paper currency are worth no more than whatever they are made of, then why does money have value?

    You can look here for an answer.




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    Yak Herders

    May 3 • Demand, Supply, and Markets, Developing Economies, Innovation, Thinking Economically • 579 Views

    Demand is soaring for yartsa gunbu, a “nutty tasting fungus” from China’s Tibetan Plateau and similar Himalayan regions in Nepal and Bhutan. Reputed to have cancer fighting capability, aging retardants, and libidinal qualities, the fungus invades the dead bodies of caterpillar larvae and then “shoots up like grass out of their heads.”

    The reported benefits of yartsa gunbu remind me of the early days of Coca-Cola in Atlanta. Described in Mark Pendergrast’s excellent For God, Country and Coca-Cola, Coke was originally sold as a “nerve tonic.” This excerpt is from a June, 1887 Coca-Cola label (p. 33):

    “…This Intellectual Beverage and Temperance Drink…makes not only a delicious, exhilarating Beverage, but a valuable Brain Tonic and a cure for all nervous afflictions–Sick Head-Ache, Neuralgia, Hysteria, Melancholy, etc…”

    The Economic Lesson

    On the demand side, according to National Geographic, residents of Beijing and Shanghai are pushing price increasingly higher. One report claims that price rose 900% between 1997 and 2008.

    With more demand creating skyrocketing prices for yartsa gunbu, yak herders are earning record levels of cash income. Perhaps doing less yak herding, more people are gathering the fungus during the 4 weeks of the spring harvesting season. Still though, supply is said to have remained relatively constant.

    An Economic Question: How would you graph the market for yartsa gunbu?

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    Sales Tax Decisions

    May 2 • Businesses, Demand, Supply, and Markets, Economic Debates, Government, Households, Macroeconomic Measurement, Regulation, Thinking Economically • 462 Views

    A buttered bagel is a sandwich but not an unsliced bagel–unless you eat it in the store. Subject to the New York State sandwich tax, so too are burritos, wraps, BLTs and buttered rolls. 

    Plan to buy fudge? You will pay a sales tax in New York. Chocolate for baking? No tax. Potato chips and plain nuts are also tax-free but not honey-roasted nuts.

    Other tax decisions? According to the WSJ, in the U.K., for example, as of April, 2010, “dog food for ‘sheepdog breeds’ is taxed, but dog food for ‘working sheep dogs of any breed’ is not; food for greyhounds is taxed, food for ‘racing greyhounds’ is not.”

    And, in the U.K., sailors’ lifejackets are taxed because they are defined as adult clothing but “buoyancy aids” are not taxed.

    The Economic Lesson

    In the U.S., the personal income tax and social insurance taxes together total close to 85% of all taxes collected by the U.S. government. Corporate income taxes are a distant third at 8% while federal sales taxes are 3%.

    An Economic Question: Who do you think bears the incidence (pays for) the NYS buttered bagel tax? The seller, the buyer or both?

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