• Decisions Have An Opportunity Cost That Require Tradeoffs

    A Conservation Dilemma

    Sep 21 • Businesses, Economic Debates, Environment, Regulation, Thinking Economically • 499 Views

    Should the Dunes Sagebrush Lizard (aka the Sand Dune Lizard), a 3-inch striped reptile, be listed under the Endangered Species Act?

    Here is the problem. The home of the Sand Dune Lizard is also the home of the Permian Basin which, according to Forbes, provides close to one-fifth of U.S. oil production. To survive, the lizard needs the shinnery oak. Pipelines, road building, and drilling destroy the shinnery oak. So, if this lizard is added to the endangered species list, then oil drilling will be affected, the US oil supply would be impacted, and the price of domestic oil could rise.

    How to make a decision? For cost/benefit analysis, knowing the money that is involved would help. We probably could estimate how much the oil loss would cost us. But what about a lizard?

    After the oil spill, BP faced a similar question. To assess its dollar damages, a value had to be placed on wildlife. USA Today told us that 2263 “visibly oiled dead birds” were counted. An NPR Planet Money podcast suggested that the $500 price tag for rehabilitating a pelican after the spill could indicate the price of a bird or maybe regulators could use the rate sheet for animal actors. Flying birds command $4500 a day (non-flying $1500).

    The Economic Lesson

    The lesson here is not to take prices for granted. Market prices provide crucial information. They tell us about value and efficiency and affordability. They let consumers and businesses and government decide what to do, what not to do, and what we can do better. Yes, “Absence makes the heart grow fonder.” Maybe we care more about prices when we cannot have them.

    Here is a past econlife post about pricing the “unpriceable.”

    An Economic Question: The oil or the lizard? How would you decide?

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    Environmental “Nudges”

    Sep 20 • Behavioral Economics, Environment, Government, Households, Regulation, Thinking Economically • 574 Views

    Sometimes a nudge is not enough.

    According to science writer Jonah Lehrer, society has to do more than “nudge” us when it wants to change our behavior. When Sacramento, California wanted to diminish energy usage by showing customers what their neighbors consumed, they hoped competition would spur results. Close to 1.5%, the decrease was slight.

    Suggesting more persuasive alternatives, Carnegie Mellon behavioral economist George Loewenstein and Daniel Schwartz further discuss the “shove” we need to diminish carbon emissions. They say that the problem is the short-term/long-term trade off. Whether dealing with an attractive mortgage deal, a pastry vs. cottage cheese, or saving for retirement, many of us favor the short-term benefit.

    Loewenstein and Schwartz believe that we have a “fear deficit” for climate change because our evolutionary fear system is a short-term device. We see the predator, the adrenaline surges and we run…fast. For long-term fear, we might be physiologically inadequate.

    How then to get results? Loewenstein and Schwartz suggest a “shove” rather than a nudge through taxes and regulation. And then, to make the “shove” politically palatable, society could use the revenue stream appealingly.

    The Economic Lesson

    While psychologists cite a “fear deficit” as a cause of climate change inaction, for economists, the problem is the “free rider.” Let’s assume that Sue never turns her lights or her air conditioning off. Although her energy usage is astronomical, she assumes that her decisions will have little impact. Then, if everyone else is more environmentally disciplined, she can enjoy the benefits of their behavior. An economist would call Sue a free rider.

    An Economic Question: Which “free rider” situations could you identify?

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    Oil Worries?

    Sep 19 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, International Trade and Finance, Macroeconomic Measurement, Thinking Economically • 525 Views

    Have you ever heard of Hubbert’s Peak?  No, it is not a mountain. Hubbert’s Peak refers to our oil supply. In 1956, Marion King Hubbert warned us that U.S. oil production would peak within 15 years. And, the only direction after the peak is straight down.

    In a WSJ article, oil analyst and historian Daniel Yergin explains why he believes Hubbert and his contemporary followers have been wrong. As far back as the 1880s, when the experts said Pennsylvania would soon run out, the end seemed imminent. During both World Wars and the 1970s, again, oil worries resurfaced. Repeatedly though, new reserves and new technology have nudged the “peak” further into the future.

    In this 2009 NY Times article, you can read more about both sides of the debate. You also might look at this “Remember the Pistachios” blog post.

    The Economic Lesson

    Marion Hubbert’s problem was ignoring the role of price. Every time price increased, the incentive to find new reserves and develop new technology soared. The result? More oil and price again declined.

    Correspondingly, when the price of oil increases, the incentive to use alternative energy sources also rises. The result? More wind turbines, natural gas and other energy providers.

    So, whereas Hubbard envisioned catastrophe, economists saw the market saving the world.

    An Economic Question: How might you use opportunity cost to explain why the price of oil moves up and down?

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  • China’s High Speed

    Sep 18 • Developing Economies, International Trade and Finance • 577 Views

    China Railways: “organ” of the state; source of tickets

    820 miles JingHu Line (Beijing Shanghai)


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  • The Per Capital Dog Population Is An Economic Indicator

    Pooches and Prosperity

    Sep 18 • Demand, Supply, and Markets, Developing Economies, Households, International Trade and Finance, Macroeconomic Measurement, Thinking Economically • 533 Views

    In Latin America, with Brazil #1, being middle class means owning a dog.

    According to the Economist, more dogs mean more pet food, “knick-knacks,” and veterinary care. Based on pet food sales, the Latin American dog to cat ratio is 6 to 1. (In Europe, cats and dogs are equally popular.) Called a “star market,” Latin American spending represents 10.2% of global pet care sales.

    Broader implications? Perhaps this is not a dog story at all. Instead, we are considering the impact of higher income, increasing world trade, and economic growth on what we consume.

    Thinking of past econlife posts, we can add dogs to beer, Coach purses, and pecans as economic indicators of ascending affluence.

    The Economic Lesson

    After we subtract taxes from personal income, the result is our disposable income. Disposable income can either be spent or saved.

    In the U.S., per capita personal income in 2010 ranged from a high of $56,001 for Connecticut to the country’s low of $31,186 in Mississippi. 30.1% of all Brazilian households and 44.8% of Argentina’s households have the U.S spending power of $25,000.

    An Economic Question: Using this Bureau of Economic Analysis map, explain how personal income varies in the U.S.

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