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    Environmental “Nudges”

    Sep 20 • Behavioral Economics, Environment, Government, Households, Regulation, Thinking Economically • 582 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 • 533 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 • 584 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 • 539 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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    “Deficit Bias”

    Sep 17 • Behavioral Economics, Economic Debates, Economic History, Government, Households, International Trade and Finance, Thinking Economically • 728 Views

    If anyone asks you about the “fiscal woes” facing the U.S., Japan and the EU, just say, “deficit bias.”

    The 13th Geneva Report on the World Economy explains “deficit bias.” In the U.S., think about voting constituencies and how the political system has been unable to deal with an inefficient health care system and inadequate revenue. In Japan, an aging, less affluent, rural segment of the population has a disproportionate amount of voting power. And, as for Europe, you have a tradition of government spending and of bailouts that created moral hazard.

    You can see where this is going. There is a tension between democracy and financial discipline. Although the political dynamic is varied, still, the results have been similar.

    Here is the full report or you might want to read a summary in this article. In addition to “deficit bias,” the report extensively discusses solutions that they believe have to be nation-specific.

    The Economic Lesson

    Thinking economically about “fiscal woes” takes us to the margin. The problem is that one group enjoys the marginal benefit of spending while another experiences its cost. In the long run, though, all lose as society pays the cost through less growth and more unemployment.

    An Economic Question: Select a specific group and then, using cost/benefit analysis, explain the impact of more government spending.

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