• 16506_7.22_000004859317XSmall

    Vaccine Dilemmas

    Jul 22 • Businesses, Demand, Supply, and Markets, Economic Debates, Government, Households, Macroeconomic Measurement, Thinking Economically • 527 Views

    Let’s try to make one federal budget decision. Who should receive the meningococcal vaccine?

    Debating the issue, we should be sure to remember pharmaceutical companies, the vaccine’s recipients, the cost of each shot, who gets the disease, the federal budget.

    Pharmaceutical companies need profits. Then they have more money for R&D for new drugs that can save lives, they can pay dividends to elderly shareholders who need the money and to younger families for their college savings. The research for the vaccine might have been very expensive. So, they might decide to charge $189 per dose.

    Through programs such as Medicaid and Medicare, government pays for vaccinations. Stockholder owned insurance companies also pay for vaccinations. With millions of people getting the vaccine, it could cost $1 billion. Consequently, people might say the $189 for the meningococcal vaccine is too expensive.

    Statisticians tell us that several thousand people get the disease annually. However, a headline about a meningitis outbreak generates considerable fear.

    Finally, the national debt is soaring. More spent in one area means less elsewhere. Or it could eventually mean bond defaults that would place the U.S. financial system in disarray.

    So, how to decide?

    In the Department of Health and Human Services, at the US Centers for Disease Control and Prevention, the ACIP (Advisory Committee on Immunization Practices) decides. Typically, whatever they recommend, the government and private insurers pay for.

    In 2005, the ACIP placed the meningococcal vaccine on their recommended list for adolescents. They knew, though, that the cost was $189 a shot, and the yearly government expense, $387 million. The benefit? Preventing 23 deaths and illness for several thousand. Then, during 2010, when they concluded a booster shot, doubling cost, would also be needed for most recipients, they decided again to recommend it. They said it was a tough decision.

    Looking at the ACIP website, you will see all of the vaccines they recommend for every age group.

    The Economic Lesson

    A positive externality is the benefit enjoyed by a third party who has not participated in a contract or agreement between others. It could be called a spillover.

    Vaccines create positive externalities because their recipients do not spread the disease against which they have immunized.

    An Economic Question: If you were a member of the ACIP, explain why you would have been for or against recommending the meningococcal vaccine.


    No Comments on Vaccine Dilemmas

    Read More
  • 16504_7.21_000001667224XSmall

    Chinese Basketball and Adam Smith

    Jul 21 • Behavioral Economics, Developing Economies, Economic Thinkers, Labor • 591 Views

    It is called the “womb to tomb model.” Selected as young children because of their exceptional height, future Chinese basketball players are educated separately. Whereas traditional Chinese schools have few, if any, extracurricular activities, their sports schools focus on athletics. Run by a government commission with programs that echo the former Soviet Union’s 5-year plans, their goal is world-class teams.

    It has not worked out that way. Yes, Yao Ming, the #1 draft pick of the Houston Rockets in 2002, is Chinese. However now, the China State General Sports Administration is looking for lots of Yao Mings. And that is the problem. Not only has the Chinese government been unable to predict who will be a great player but also, they have not figured out how to create viable teams.  Explained by the NY Times, the Chinese authorities did not realize that they also needed smaller faster talent, and, even if they had known, the system precludes them from selecting the right people and optimally developing their skills.

    By contrast, U.S. basketball has been described as Darwinian. It is a recreational activity, it is a school sport, it is a profession. Self-selected, coach-selected, team-selected, informal and professional, no government tells people who should and should not play. Maybe like Adam Smith?

    This Wharton Knowledge article describes the history of Chinese basketball and its contemporary relationships with the NBA and Nike.

    The Economic Lesson

    Seemingly chaotic because government does not exert central control, there is an underlying order within a market system that was described by Adam Smith. Although consumers and producers are motivated by their own self-interested incentives, people’s wants and needs are satisfied. In a similar way, perhaps, the U.S. basketball system successfully develops talent.

    An Economic Question: Might we credit the success of basketball in the U.S. to a system that resembles the apparent haphazard character of the market but actually has its own inherent order? Explain.



    No Comments on Chinese Basketball and Adam Smith

    Read More
  • 16502_7.20_000016323114XSmall

    Venezuela’s Economic Problems

    Jul 20 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic History, International Trade and Finance, Macroeconomic Measurement, Regulation, Thinking Economically • 1121 Views

    Venezuela has 2 basic economic problems:

    1. The law of supply: Because price and quantity move in the same direction, if price goes down, then producers provide less. This takes us to Venezuela’s 27.1% inflation rate. President Hugo Chavez responded by controlling the prices of many consumer goods and services. One result? Importers pay the soaring world price for corn, they receive the Venezuelan government’s controlled price for corn oil, and supermarkets have shortages.
    2. The law of demand: Because price and quantity have an inverse relationship, consumers want to buy more when price goes down. Here, Marketwatch tells us that government subsidized gas prices are so low in Venezuela that President Chavez chastised Venezuelans for excessive driving. At $.12 a gallon, it costs $2.40 to fill a 20-gallon tank! Complementary products? Venezuela had unusually high Hummer sales.

    So, when, Transparency.org says that Venezuela ranks near the bottom on world corruption scores and the Index of Economic Freedom indicates business activity is limited by multiple government constraints, the results can be explained by supply and demand.

    The Economic Lesson

    This takes us to the three basic economic questions that every country needs to answer:

    1. What will be produced?
    2. How will goods and services be produced?
    3. Who will receive income?

    When government distorts supply and demand decisions by controlling prices, it changes the answers to the 3 economic questions.

    An Economic Question: How could price controls change the answers to the 3 economic questions?

    No Comments on Venezuela’s Economic Problems

    Read More
  • 16500_3.9_000008354384XSmall

    Mixed Euro Zone Metaphors

    Jul 19 • Economic Debates, Economic History, Financial Markets, International Trade and Finance, Thinking Economically • 536 Views

    In this Economist podcast, journalists describe the euro zone debt crisis with a wonderful array of metaphors. (Directly and indirectly, I quote what they said.)

    • Minnows: The smaller peripheral nations in the euro zone, Greece, Ireland and Portugal are minnows.
    • The Big Fish: With the third largest economy in the euro zone, Italy is a big fish.
    • An Infected Core: The debt “illness” that has struck the euro zone has moved from the minnows on the periphery to a big fish at the core. Described as “too big to save; too big to let fail,” Italy has been a “stealth debtor” with sovereign debt close to 120% of its GDP.  Still though, like a family that has managed massive credit card debt for many years, Italy has successfully handled its obligations. However, if the Italian bond market has been “infected,” then the cost of borrowing could soar. The result? Italy will lose control of her fiscal responsibilities.
    • A Badly Dented Can: Thus far, euro zone leaders. coping with the tension between “political and economic imperatives,” have opted for short-term solutions. By “kicking the can down the road” they have badly dented it. Now, before it breaks, as the contagion spreads, they need a long-term resolution.
    • Fewer Days at the Beach: As a result, euro zone leaders will need to spend considerable time this summer developing a solution.

    The Economic Lesson

    Monetary policy involves the supply of money and credit. Fiscal policy takes us to spending, taxing, and borrowing. The euro zone oversees the monetary policy of its 17 member nations but not their fiscal policy. And therein lies the problem. Monetary policy and fiscal policy are closely related. Banks buy sovereign debt.

    An Economic Question: How are U.S. fiscal and monetary policy in the U.S. related and yet also separate?

    No Comments on Mixed Euro Zone Metaphors

    Read More
  • 16498_7.18_000016755891XSmall

    Finding Food Deserts

    Jul 18 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Environment, Government, Households, Macroeconomic Measurement, Regulation • 547 Views

    Having just learned that the US Department of Agriculture (USDA) has a food desert website, I am not sure how we should respond.

    The USDA tells us that in a food desert most low-income households have limited access to a supermarket or grocery store. In the U.S. 13.5 million people live in food deserts. The USDA states that by knowing more about food deserts, we can facilitate private-public action to eliminate them. This map shows where we can find the food deserts in the U.S.

    Describing the food desert initiative, The Economist tells us that the USDA admits that they and other experts have uncovered no causal link between dietary habits and food deserts. Furthermore, a food desert might be home to healthy food stores but no supermarkets. In a food desert located close to Seattle, Washington, residents have easy access to organic food, grains, and fruits and vegetables at a roadside farm stand, a health food shop, and a “superstore.” Finally, based on obesity studies, we should ask whether people buy nutritious food when given the opportunity to purchase inexpensive processed foods and sodas.

    Although the food desert concept is flawed, it does return us to the problem of how Americans eat. With two-thirds of all adults in the U.S. overweight, medical care, productivity, transportation, and human capital suffer. Discussed in a recent Brookings Institution paper, whether looking at extra sick days, extra fuel costs, or less education, the cost of obesity affects our economy.

    The Economic Lesson

    An externality is the impact of a behavior or contract that is experienced by a third uninvolved party. When the impact on third parties is undesirable, as with obesity, we call the result a negative externality. A benevolent impact on an uninvolved third party is called a positive externality. A community experiences the negative externality of individual obesity.

    How to diminish a negative externality? Increase its source’s cost. Might food desert information assist us here?

    An Economic Question: Have you experienced a negative externality that relates to obesity? Explain.

    No Comments on Finding Food Deserts

    Read More