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    Another Unregulated Market

    Apr 22 • Environment, Regulation, Thinking Economically • 208 Views

    Carbon offset markets are about thinking at the margin. Hoping to become the first carbon neutral state in the world, the Vatican bought carbon offsets. The U.S. House of Representatives funded an $89,000 purchase of carbon offsets. Before boarding, you can buy a carbon offset to compensate for emissions during a plane flight. In each example, someone was paying to create an “extra” environmental benefit (a forest that “inhales carbon dioxide”) in order to compensate for the marginal cost of environmental harm (airplane emissions). 



    The market in which carbon offsets are sold is unregulated. Consequently, government is not directly checking whether sellers are actually creating the offsets that are purchased nor whether cost and benefit are connected. For example, in a recent Christian Science Monitor article, investigative reporter Phillip Martin found major deficiencies in the carbon offset market. Essentially he discovered that certain offsets never were created. 

    The Economic Life

    A market is a process through which demand and supply determine price and quantity of a good or a service. A recent paper from the Pew Center on Global Climate Change suggests that oversight of carbon markets should accompany current financial reform.


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    A (Mind Boggling) Entitlement

    Apr 21 • Government • 192 Views

    I guess we can all agree that citizens have basic rights. But vacations? “Traveling for tourism today is a right. The way we spend our holidays is a formidable indicator of our quality of life,” according to Antonio Tajani, the European Union commissioner for enterprise and industry. 

    During a recent meeting in Brussels, the EU proclaimed that government should subsidize tourism and travel for those who cannot afford it. Available “to pensioners and anyone over 65, young people between 18 and 25, families facing ‘difficult social, financial or personal’ circumstances and disabled people,” the program will be piloted until 2013.

    You might want to look at this WSJ.com article for a reality check about the tough fiscal choices facing EU members.

    Your opinion? Please comment.

    The Economic Life

    An entitlement is a government program that citizens believe government should provide.  In the U.S. Medicare and Social Security are our largest entitlement programs. If we return to our government involvement scale, with more government to the left and less to the right, where do you believe the U.S. should be? With a travel subsidy mandate, where have the EU nations moved? 


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    (Fictitious) Billionaire Facts

    Apr 20 • Macroeconomic Measurement • 222 Views

    Did you ever wonder how rich Jed Clampett (the Beverly Billbillies) would be? According to Forbes Fictional 15, because of oil, gas, and banking investments, Clampett, worth $7.2 billion, is #5 on the list.

    C. Montgomery Burns, hometown Springfield, U.S.A., and graduate of Yale, is #12 because of the money he made as owner of the Springfield Power Plant and Jay Gatsby is #14 with $1 billion. #1 was Carlisle Cullen from Twilight’s Billionaire Vampire.

    The Economic Life

    A very real issue that concerns economists is income distribution.  In the U.S., our national income comes from wages and salaries, rent, interest, dividends and profits from businesses that are not incorporated. To picture our income distribution, please think of a pie as the total national income and then individual slices as the proportion that different groups receive. That would mean that if total national income were $1,000 and a society had only five households (people living together), then if every household earned $200, distribution was equal. By contrast, if one family earned $800, then, because $200 remained for everyone else, there would be considerable inequality. Recently, the top quintile of households in the U.S. earned close to 50% of all income. This quintile approach for representing income distribution was developed by statistician Max Lorenz. 

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    A $5,000.00 Taxi Ride

    Apr 19 • Environment • 217 Views

    Hearing that actor John Cleese took a Mercedes taxi from Oslo to Brussels for about $5,000 because the Icelandic volcano eruption prevented him from flying, an economist would say, “That is a positive externality.”

    Economists see positive externalities wherever a transaction between two parties affects a third individual or group in some beneficial way. For Mr. Cleese, the transaction was between him and his airline while the taxi service experienced the positive externality.

    Primarily, though, news articles are emphasizing the negative externalities where unrelated third parties are harmed by airline cancellations. Because cyclists destined for the Amstel Gold race in the Netherlands, runners in the Boston Marathon, and wrestlers who were supposed to be in Rutherford , N.J., are stranded, those events will lose some of their stars. Similarly, audiences are disappointed by musicians who missed a concert and businesses are compensating for absent workers. 

    Other positive externalities are being felt by: ferries, NYC hotels, German trains.

    Other negative externalities include: the money lost by merchants awaiting food and pharmaceutical shipments, vacation cancellations, missed FedEx shipments, delayed military supplies to Afghanistan.

    Your additions?

    The Economic Life

    Traditionally, pollution is cited as a negative externality because the “cost” is experienced by anyone breathing nearby air. Some say that the recent recession was the negative externality created by the banking sector’s transactions (and again, Iceland?).

    For a positive externality, a vaccine is a good example. Here, the transaction is between the physician and the patient. Then, though we all benefit when fewer people become ill. 

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    A VAT For Pretzels?

    Apr 18 • Government • 246 Views

    The Senate just said “No” to a VAT. Disagreeing, Paul Volcker sort of said “Yes” when he observed that a VAT is “not as toxic an idea” as we once believed. Suddenly everyone seems to be talking about a VAT.

    Here are some basic VAT facts:

    1. What is it?

    Most fundamentally, the VAT is a consumption tax, sort of a distant relative of the sales tax. Please think about a pretzel. A sales tax on a pretzel would be paid at the cash register. (Federal sales taxes now provide only 3% of federal tax revenue.) 

    The VAT, a value added tax, is also a consumption tax. If we levied a VAT, as with the sales tax, our pretzel would have a higher price.  However, the consumer does not pay the entire tax at the cash register. Instead, at each production stage, the value that is added to the product is taxed.

    With a 10% VAT, when $100 of wheat for pretzels leaves the farm, the flour maker who buys the wheat pays $100 for the wheat and a $10 tax. Then, when the pretzel factory buys the flour, it pays (very hypothetically) $1000 for the flour plus $100 VAT minus a credit for the taxes that were already paid. At each stage, the VAT is levied on buyers of the unfinished product; the consumer covers the final VAT payment. Piecemeal, through a sequence of tax forms, the federal government identifies and charges for “value added”. 

    2. Who uses the VAT?

    Close to 100 countries generate revenue through a VAT. In France, for example, more revenue is raised through their VAT than through income taxes. I checked the OECD website and saw that VAT rates vary. Denmark: 25%; Spain: 16%; Thailand 7%.

    But then I discovered that reality can be a lot more complex. In the U.K., for example, where food is tax free, they decided to exclude frozen yogurt that needs to be thawed. They faced similar dilemmas about children’s clothing, having to decide the whether small adult sizes are for children and even if flotation devices are clothing.

    3. Why is a VAT desirable?

    Many economists believe that a VAT can generate “a ton of revenue“. Also, as a consumption tax that elevates prices, a VAT can encourage saving. 

    4. What is wrong with a VAT?

    It is regressive. That is why the UK VAT, for example, excludes food. Also, a VAT can be complex.

    5. When was the VAT created?

    The VAT was invented in 1954 by Maurice Laure, a French tax official.

    You can see where all of this is heading. It’s complicated. The basic issue, though, is if we spend more, we need more revenue.

    The Economic Life 

    In the U.S., the personal income tax generates 44% of all tax revenue while social insurance taxes account for 42%. Corporate income taxes are a distant third at 7%.



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