• The econlife.com Weekly Roundup

    Our Weekly Roundup: From Bank Regulation to Water Taxation

    Nov 15 • Behavioral Economics, Developing Economies, Economic Debates, Economic Growth, Economic History, Economic Thinkers, Environment, Financial Markets, Government, Labor, Macroeconomic Measurement, Money and Monetary Policy, Regulation, Thinking Economically • 240 Views

    Our Posts Roundup

    Everyday economics and the minimum wageSunday 11.09.14 Why we can’t agree on the minimum wage…more


    More people vote when they believe it is a social norm.Monday 11.10.14 The big impact of a small voting sticker…more


    Everyday economics: China's tragedy of the commons.Tuesday 11.11.14 How China’s air pollution is a tragedy of the commons…more


    Everyday Economics of Dodd-FrankWednesday 11.12.14 What happened to Dodd-Frank…more


    Everyday Economics: Because water is not a public good, neither Ireland nor Detroit need provide it without charging.Thursday 11.13.14 Deciding whether we deserve free water…more


    Cost benefit analysis of our behavior when we negotiate at home and at work would reveal inaccurate self-awareness.Friday 11.14.14 The cost of mistaken self-awareness…more



    Ideas Roundup

    • confirmation bias
    • minimum wage
    • price floor
    • cost-benefit analysis
    • social norms
    • negative externalities
    • tragedy of the commons
    • financial regulation
    • unintended consequences
    • public goods

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  • Cost benefit analysis of our behavior when we negotiate at home and at work would reveal inaccurate self-awareness.

    In negotiations, better to be Goldilocks or a bear?

    Nov 14 • Behavioral Economics, Businesses, Labor, Lifestyle, Thinking Economically • 142 Views

    Assertiveness is sort of like Goldilocks. Too much or too little and you do not get what you want. Only just right really works.

    In a new study from Columbia, researchers asked us to imagine a bell-shaped curve with success as the vertical y-axis and pushiness as the x-axis. As you move up the curve success and pushiness both increase. Then though, the curve heads south on the success scale as “pushiness” continues to rise.

    How to know when you have reached an optimal amount of assertiveness that brings success in negotiations? That is the problem.

    Self-Awareness Problems

    The study from Columbia was about our lack of self-awareness. In laboratory simulations and through questionnaires researchers found that relatively frequently, people inaccurately perceived their own assertiveness.

    The misjudgment takes place in two ways. Thinking our negotiating has been too pushy, not pushy enough, or just right, we incorrectly assess the way we act. Also though, we incorrectly perceive how our adversaries judge our behavior. For example, in one experiment, 19 percent of the participants said they were over-assertive, but 41 percent believed their “adversary” perceived them as over-assertive. Even more interesting, the people who behaved appropriately (according to their counterparts) thought they were perceived as too pushy. Or, as the authors of the paper said, “… we may live in a world of oblivious jerks and unwitting pushovers, with many people assuming their assertiveness, like Goldilocks’ porridge, is just right.”

    This diagram displays the results of one of their experiments:

    Cost-benefit analysis reveals the cost of inaccurate self-awareness.

    From: “Pushing in the Dark: Causes and Consequences of Limited Self-Awareness for Interpersonal Assertiveness” by D.R. Ames and A.S. Wazlawek. (Circle size indicates number of participants.)

    Our Bottom Line: Costly Negotiations

    Mistaken self-awareness can be costly. Not knowing when we should tone down our assertiveness, move it up a notch, or maintain it, we behave inappropriately. The result? When we negotiate suboptimally, we diminish whatever we will take home from that salary meeting, divorce settlement, takeover bid or those climate change talks.

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  • Everyday Economics: Because water is not a public good, neither Ireland nor Detroit need provide it without charging.

    Should Water Be Free?

    Nov 13 • Behavioral Economics, Demand, Supply, and Markets, Economic Debates, Economic History, Environment, Government, Regulation, Thinking Economically • 232 Views

    Chanting, “Fight, fight; water is a human right,” hundreds marched in Detroit during July.

    If you had not paid your water bill, Detroit was going to turn it off. One resident explained to Planet Money that she had to choose between the gas she needed to drive to work and her water. Gas won, the water was shut down, and she even tried collecting rain water to flush a toilet.

    Meanwhile, protesting Ireland’s decision to start charging for water on October 1, 2015, a leader of Right2Water said, “We believe water is a human right.”

    Where are we going? To whether water is a public good for which government should pay.

    The Free Water Debate

    By privately paying for water, households help the environment and add to government revenue. When your water costs more, you use less. A perfect example of the law of demand, Ireland uses two or three times more water than her EU neighbors because Irish water is free. They don’t even have water meters. In addition, a revenue stream for water frees other money for use elsewhere.

    By contrast, when taxes are used for water provision, our treatment and distribution facilities become a social resource. Consequently, we wind up transferring wealth from the haves who paid the tax dollars to the have-nots if government pays our water bill. Also, if water is a human right, then we would be creating a valid entitlement.

    Our Bottom Line: Is Water a Public Good?

    Economists like to say that a lighthouse is a public good because it can simultaneously be used by everyone, depleted by no one, and is a necessity. Perhaps though because lighthouses have been privately owned, a municipal tornado alarm is the quintessential public good. Everyone hears it, use does not deplete it, and we need it.

    With water we could use the same criteria. Getting an “A” only for “necessity,” water does not pass the public good test.

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  • Everyday Economics of Dodd-Frank

    Dodd-Frank: When Is A Law Too Long To Obey?

    Nov 12 • Economic History, Financial Markets, Government, Macroeconomic Measurement, Money and Monetary Policy, Regulation, Thinking Economically • 232 Views

    It’s been more than four years since Dodd-Frank was passed. Composed of 2,300 pages, the Act is supposed to prevent a repeat of the 2007-2009 financial crisis by increasing financial stability. The problem, though, is that Dodd-Frank describes 398 rule making requirements. The next step was to make those rules.

    So, how are we doing?

    Let’s start with two words and four categories that can describe the over all purpose of the legislation:

    The Words:

    1. Risk: Lawmakers wanted to manage the impact of the risks taken by financial institutions.
    2. Protection: Lawmakers hoped to protect consumers from making unwise financial decisions.

    The Categories:

    1. Government: Its powers are multiplying.
    2. Banks: Financial firms are experiencing new trading restrictions and capital requirements.
    3. Consumers: A new bureau to protect consumers has been established.
    4. Investors: Different investing groups such as hedge funds, people who give investment advice, insurance companies, and those who create securities packages have new constraints.

    Dodd-Frank Rule-Making Progress

    Next, we can go to (law firm) Davis Polk’s monthly Dodd-Frank progress report. Looking at rule making in selected areas, you could say that banking regulators have made the most headway:

    Financial regulation progress through Dodd-Frank

    From: Davis Polk


    Dodd-Frank Economic Impact

    Switching our perspective to Dodd-Frank’s success, we can refer to a Brooking Institution analysis that conveys a mixed review. Their “wins” primarily involve banks and consumers.

    Financial regulation update on Dodd-Frank

    Financial Regulation update on Dodd-Frank from Brookings

    From: Brookings Institution

    A Mayor Michael Bloomberg Opinion

    And finally, the last word from Mayor Bloomberg. Summarizing his opinion of Dodd-Frank with one word–dysfunctional–former Mayor Michael Bloomberg added, “What happens is every little group in Congress has to add something to that bill in return for their votes, and a lot of those things are just mutually exclusive. Years later now we don’t have the regulations that are required and complying with it is just really impossible.”

    Our Bottom Line: Unintended Consequences

    Compared to other financial regulation, Dodd-Frank is long. When you have a 2300 page law that, a year ago, had almost 14,000 pages of rules and they were below the halfway mark, I become concerned with unintended consequences. Faced with higher costs when they comply with legislation, they have already begun to charge us more.

    Length of Financial Regulation laws

    From: Carpe Diem, Mark Perry Blog



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  • Everyday economics: China's tragedy of the commons.

    A Rarely Mentioned Cause of China’s Air Pollution

    Nov 11 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Growth, Environment, Government, Households, Labor, Lifestyle, Regulation, Thinking Economically • 201 Views

    With world leaders gathered this week for the Asia-Pacific Economic Cooperation Forum, China wants to temporarily cut Beijing’s air pollution by 40 percent. Looking at the list of prohibitions, you can see why people are irritated.

    Pollution Prohibtions

    The stone beds (called kangs) in Fangezhuang, a chilly mountainous village north of Beijing, cannot be warmed because of a wood and charcoal briquettes ban. At cemeteries, mourners have to forego the floral wreathe burning that honors their dead ancestors. During weddings, the traditional use of firecrackers has to stop. Meanwhile, the number of cars on the road in 17 nearby cities is limited by odd/even license plate driving days and in Beijing, delivery trucks carrying goods ranging from milk to furniture can enter for just three hours in the middle of the night.

    Responding to the cutbacks, one resident said, it was an “overreaction.“ Another complained that, “Commuting to work will be such a pain without my car…” And of course, individual business people were angry because of fewer customers and less to sell as they absorb a hit on the demand and supply sides.

    Where are we going? To how tough it is to cut individual pollution.

    When you look at news articles, China’s growing electricity generation, her massive use of coal, and her heavy industry are cited as air pollution causes. Yes, the highest emissions come from industry—but individuals contribute. Above, we refer to kangs, burnt offerings, wedding fireworks and commuting. If you look at the graph below, Beijing’s small particulate spike in February was because of Lunar New Year fireworks.

    China's air pollution is a tragedy of the commons.

    With the World Health Organization citing 25 as a healthy level, Beijing’s lowest small particulate numbers are not close.

    Our Bottom Line: A Tragedy of the Commons

    This is where the tragedy of the commons enters the picture. Pollution from each of us is tough to reduce because we share the air. Whether looking at an overgrazed pasture, a messy office refrigerator or air pollution, people have the incentive to abuse publicly shared resources. Privately benefiting from our behavior, we tend to ignore the impact of everyone using the resource together. The result is a tragedy of the commons.

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