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    More Taxing Decisions

    May 21 • Demand, Supply, and Markets, Economic Thinkers, Government • 361 Views

    Would you support a penny an ounce tax on sugar sweetened beverages? According to the NY Times and The New England Journal of Medicine, the idea is becoming increasingly attractive to many municipalities. By putting on our economic glasses, we can better decide whether to support it.

    First, we can ask whether society should be compensated for the cost it experiences from unhealthy behavior. Any cost absorbed by an “innocent” third party because of someone else’s behavior is called an externality. The tax would then be a payback. 

    To make up our minds, we can also assess the cost and benefit of the decision to tax sugary beverages. Diminishing obesity, increased intake of healthier foods, and decreased risk for diabetes, are several of the benefits associated with the impact of a soda tax. As suggested by one study, a 10% tax would decrease consumption by 7.8%. Meanwhile, on the cost side, we have the impact on manufacturers, on jobs, and the expense of implementing the tax. Some people believe the biggest cost, though, is the freedom we lose.

    Finally, we can focus on the tax itself. Opponents point out that the tax is regressive because when everyone pays the same amount, the less affluent feel a larger burden. By contrast, supporters ask us to focus on the revenue’s destination. If the soda tax becomes a “benefits received” levy, then the money would be destined for treatment of sugary drink related maladies.

    The Economic Lesson

    Named after economist Arthur Pigou (1877-1959), Pigovian taxes are levied on undesirable activities called negative externalities. At best, they eliminate the activity. But even when less successful, the revenue that is generated can be used productively.

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    Lessons for a Rainy Day

    May 20 • Businesses, Demand, Supply, and Markets, International Trade and Finance • 301 Views

    Last Tuesday was a bad day for most umbrellas. In New York City, it poured, it was windy, and most umbrellas were flipping out, blowing sidewards, and doing everything except what they were supposed to do.  It makes sense that someone should have invented a better umbrella. As economists, we have some answers about why no one has.

    On the demand side of umbrella markets, consumers are behaving rationally. Most of us easily lose umbrellas, they are not very durable, and they rarely provide a fashion statement. In fact, according to a recent WSJ article, 794 umbrellas were reported lost in New York’s Grand Central terminal and its Metro North line. The result? We want cheap umbrellas. With an average umbrella selling for $6, most consumers care more about price than progress.

    Knowing that umbrellas have to be inexpensive, sellers keep production costs low. Consequently, most umbrellas are made in countries such as China with lower labor costs. Innovate? There is little financial incentive to innovate if price and profit margins are low.

    Still though, several manufacturers are considering the high end. For the aspirational shopper and tech savvy individuals, umbrellas have countless possibilities. With additional wind tunnel research and experimentation with steel, fiber glass, aluminum, and other metals, a “souped-up” umbrella could develop a following. The 11% jump in umbrella sales during 2009 was on the high end of the market. Sellers of pricey umbrellas are even thinking of loss insurance to generate more interest.

    The Economic Lesson

    In order to understand the umbrella market, we need to look beyond demand and supply basics. Also, resource costs, the aspirational shopper, international trade and tariffs, research and development, and risk relate to buy and sell decisions. The umbrella is even reminiscent of the Model-T and its low price, high volume profile. Indeed, an umbrella is not just an umbrella.

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    Airplane Crashes and Financial Crashes

    May 19 • Economic Thinkers, Regulation • 292 Views

    When an airplane crashes, investigators rush to the scene, gather evidence, and ultimately hope to emerge with updated safety suggestions. It would be wonderful if we, when assessing the “flash crash” or slower stock market dives, could also diagnose the problems, identify the faulty mechanisms, and repair or redesign them. 

    George Mason economist Russell Roberts tells us, though, that financial crashes are very different from the world of aviation. He suggests that the financial world reflects the interaction of “investors, regulators, and politicians” in which the behavior of one group sets the other two in motion. Consequently, the permutations are infinite.

    His advice? He provides a short list from which I especially liked his reminder that “Capitalism is a profit and loss system.” He also says that “Policymakers who make creditors and lenders whole should be excoriated, condemned and called to account rather than praised and honored.”

    Your opinion?

    The Economic Lesson

    Perhaps economist Friedrich Hayek (1899-1992, the Austrian school) summed up our problem when he said “The curious task of economics is to demonstrate to men how iittle they really know about what they imagine they can design.” 

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    Public and Private Incentive

    May 18 • Businesses, Demand, Supply, and Markets, Government, Innovation • 307 Views

    For centuries, the US Postal Service delivered most of the mail. The job it did was satisfactory but not optimal. Yes, through sleet and snow, etc., we received our letters and packages but employees rarely focused on cutting costs and innovating. Two results? The USPS loses money each year and entrepreneurs create FedEx and UPS.

    Concerned about government’s inefficiencies, economic historian, John Steel Gordon, provided some history. The problem, we soon see, is the wrong incentives. Save money? Your budget decreases. Innovate? People might lose jobs. However, the 19th century British Navy had a solution. Seamen who captured enemy vessels shared the loot. A 21st century version could let bureaucrats share contemporary plunder. According to Gordon, any public employee who devised a cost saving initiative would receive some of the money saved or a financial regulator who uncovered massive fraud could receive a reward.

    My concern takes me back to incentives. In the former Soviet Union, no one ever figured out how to stimulate efficiency and productivity through government selected incentives. When people knew they would be rewarded for increasing production in a lamp factory, they produced lighter lamps. When the quota was weight, each lamp became heavier. All too frequently, bureaucratic incentives become perverse incentives that have unexpected consequences.

    The Economic lesson

    Adam Smith, in 1776, suggested that we are such a diverse population that no government individual could possibly know what is best for each of us. For that reason, he preferred the market and individual initiative as the source of a just and fair society. With 21st century government burgeoning, is it possible to create the incentives that would optimize its performance?

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  • Marijuana legalization is about demand, supply, market structure and cost benefit analysis.

    A Demand and Supply Lesson

    May 17 • Businesses, Demand, Supply, and Markets • 367 Views

    A recent NPR report on the changing status of marijuana in California is also a supply and demand story.

    The story begins in 1983 when the Reagan administration sought to decimate pot production in California. As a result, supply would have decreased because growers were willing and able to produce less. With diminished supply, price soared to as much as $5,000 per pound. Recently, with legalized medical marijuana, a more tolerant law enforcement environment, and the competition between indoor and outdoor marijuana cultivation, supply and demand changes have resulted in a $2000 per pound price. Next November, if the vote is yes to legalize pot in California, how would you predict that supply and demand will shift?

    Some analysts believe that if pot is legalized and its market expands, then marijuana will be controlled by large growers just like strawberries and lettuce. With strawberries and lettuce, growers sought to differentiate their produce through packaging. Does that mean that marijuana could be next? 

    The Economic Lesson

    A demand and supply graph can be drawn as an “X” in which the Y-axis represents all of the prices buyers and sellers are willing to select and the X-axis shows the different quantities. With demand sloping downward and supply sloping upward, the point at which they meet, the market price, is called equilibrium. By moving along each line and also by shifting them when conditions change, we can illustrate the sources of price changes.  

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