• Inelastic demand is one reason that sugary drink taxes might not be effective.

    Problems With Sugary Drink Taxes

    Oct 10 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Economic History, Government, Health Care, Households, Lifestyle, Regulation, Thinking Economically • 141 Views

    A sugary drink tax is on the ballot in Berkeley, CA. Called Measure D, the proposal mandates a one-cent per ounce tax. The goal is to diminish obesity and encourage healthy eating.

    Sadly, it is not quite that simple.

    Municipalities debating a tax on sugary drinks have to decide whether they want to raise revenue or diminish obesity. If the tax is not very high, people will continue buying sugary drinks and generate revenue. On the other hand, if the tax is high enough and people buy fewer sugary drinks, then obesity diminishes.


    But, we also have to think about substitution. If the tax discourages sugary beverages, drinkers might switch to some equally caloric alternative. However, when all junk food is covered, researchers have observed that consumers absorb the higher prices.

    And still it gets more complicated.

    One study indicated that only households in middle income quintiles will respond to a sugary drink tax. For the most affluent, the tax is relatively small and easy to ignore. For the lowest earners, consumption continues while other spending decreases.

    And finally, we might not even know we are being taxed. When a two-liter bottle of Coca-Cola is marked an untaxed $2.50 in the supermarket aisle, most of us do not even recognize the taxes we pay at the register. (Interestingly, the Berkeley tax would be paid by distributors, not consumers.)

    State Sugary Drink Taxes

    According to a 2014 paper looking at a 5.5 percent tax in Maine during the 1990s and a 5 percent tax in Ohio in 2003, the impact was insignificant. Most researchers suspect that municipalities need a much heftier tax to get us to respond.

    Soda tax facts:

    Inelastic demand might make soda taxes ineffective.

    From: Robert Wood Johnson Foundation/Bridging the Gap

    To see your own state, here is a sugary tax list.

    Our Bottom Line: Inelastic Demand

    Price increases can always take us to demand elasticity. As with medication, if price changes a lot and the quantity we buy remains pretty constant, then our demand is inelastic. By contrast, if price swings have a big impact, then our response is elastic. For soda, within a certain price range our demand is inelastic. Maybe a 35% tax (or more) would nudge us into elastic territory.

    No Comments

    Read More
  • Everyday economics and trademark law

    How to Own the Word How

    Oct 9 • Businesses, Economic Debates, Economic History, Fashion, Government, Innovation, Regulation • 109 Views

    A war is raging between two culture makers. One side is into yogurt culture and the other’s business is ethical culture.  The war is over a trademark. Each side says it has the right to the word, “how.”

    Chobani, the largest Greek yogurt maker in the U.S., is using “How Matters” in an ad campaign. Chobani wants us to remember that “How We Make Our Yogurt Matters.”

    Chobani’s How Matters was one of the best Super Bowl commercials:

    Meanwhile, a business/life guru, Dov Seidman, claiming he has the exclusive right to use HOW as a trademark, has taken Chobani to court. On his webpage, we see “HOW moments, HOW matters. HOW at work. HOW metrics. The Journey of HOW. The HOW course, Act HOW, Behind HOW” and finally, “Learn HOW.”

    From Dov Seidman’s website:

    Can Dov Seidmark trademar how as intellectual property?


    The Louboutin Decision

    A trademark for a name is all about having an intellectual property monopoly. The problem though is where to draw the line.  And that takes us to a red-soled shoe.

    In a 2012 decision, a federal court of appeals decided that except for a monochromatic red shoe, Louboutin and only Louboutin has the right to a red sole. Saying that, “We hold that the lacquered red outsole, as applied to a shoe with an ‘upper’ of a different color, has ‘come to identify and distinguish’ the Louboutin brand and…qualifies for trademark protection.”

    If you can call the sole your intellectual property, what about the shoe?

    Probably not. Like jackets and pants and shirts, shoes are too utilitarian to be protected by intellectual property laws. We all have the right to copy their design. In fact, for fashion, experts like Johanna Blakley believe a copycat culture is good:

    Our Bottom Line: Intellectual Property

    So yes, just like tangible goods, we can own the right to intellectual property. However, isn’t how sufficiently ubiquitous that no one should own the right to use it exclusively? But then again, what about Apple?



    Read More
  • everyday economic of subsidized gas

    The Expensive Side of (Venezuela’s) Cheap Gas

    Oct 8 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Growth, Environment, Government, Health Care, Households, International Trade and Finance, Macroeconomic Measurement, Regulation, Thinking Economically • 138 Views

    In Venezuela, you could buy a gallon of gasoline or 12 packs of cigarettes. One half liter bottle of water would get you three tanks of gas. Per gallon, we are talking about less than five cents.

    The problem, though, is that cheap gas is astoundingly expensive.

    On the fiscal side, the subsidy costs the Venezuelan government close to $12 billion annually. And yes, we could say their oil is really cheap so they can afford it. But, think of the tradeoffs. With $12 billion more than three percent of their GDP, that $12 billion might have been allocated to health care or education. Meanwhile, more gas use internally could mean less export revenue.

    The subsidy also has a distributional impact. Cheap gas benefits the wealthy households that use it more. Correspondingly, cities, with more drivers, wind up taking advantage of the subsidy more than rural areas. The main way that the poor benefit is through public transportation.

    Finally, consider what it means to have the incentive to drive more. You create higher CO2 emissions and Venezuela’s are indeed tops in South America. You have more traffic, more noise, and more people who drive gas guzzling vehicles. Consequently, the lines at gas stations tend to be long and, with gas selling at $4.42/gallon in Colombia, you can see why smuggling is a problem.

    So why do it? Sometimes we get used to our entitlements.

    For the economics…

    Below you can see that the subsidy increases supply, shifts the supply curve to the right, and moves equilibrium price down.

    Subsidies lower price.

    Worldwide Gasoline Prices

    As we would expect, for gas prices, Venezuela is the outlier. Even in Saudi Arabia, another gas rich country, the average price of gas is 60 cents a gallon. With Norway at the other end of the scale, the spread in gas prices is more than $9.00 a gallon. On the low side, you have governments providing the subsidies that make it cheap. On the other end, taxes make it expensive. On both sides, we create incentives, tradeoffs and unintended consequences.

    Here are several specific per U.S. gallon and U.S. dollar examples.

    world gas prices

    Below, you can see the differences are somewhat regional:

    Subsidies and taxes affect gas prices.

    From: The Washington Post


    Our Bottom Line: Fiscal Policy

    Whether looking within the U.S. or around the world, subsidies and taxes affect the price of gasoline and the tradeoffs that result.


    No Comments

    Read More
  • Because of price controls, Venezuela has perverse incentives that create shortages, inflation and underutilized resources.

    Venezuela’s Biggest Economic Problem

    Oct 7 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Developing Economies, Economic History, Financial Markets, Government, Health Care, International Trade and Finance, Macroeconomic Measurement, Money and Monetary Policy, Regulation, Thinking Economically • 155 Views

    Last year, saying that a shortage of toilet paper was the reason, the Venezuelan government announced that troops would temporarily occupy a toilet paper factory and 50 million rolls would be imported “to calm the people.”

    Several weeks ago, Clorox said it would no longer produce bleach and other household products in its three Venezuelan factories. With the Venezuelan government mandating rock-bottom prices, they were leaving because of three years of losses.

    Meanwhile, Venezuela’s air travel problems are getting worse. In 2003, Hugo Chavez, (President/1999-2013), said airline tickets had to be purchased with Venezuelan money that the government would later exchange for an international carrier’s home currency. The plan though has not quite worked out. Owed approximately $3.5 billion dollars for their increasingly worthless bolivars, most airlines are now clamoring to get their money. Predictably, until then, Air Canada, Alitalia, American, Delta, United, Lufthansa and Iberia have either cut the number of flights or left Venezuela altogether. For Venezuelans, fewer flights mean another shortage and much higher fares. You can imagine also the convoluted itineraries that take people by bus to a neighboring country out of which they can fly.

    We could go on and on with tales of Venezuela’s economic woes. The one common thread is the huge cost created by artificially lower prices. There are shortages caused by more quantity demanded as prices drop, shortages from hoarding by sellers who hope the price will rise, and still more shortages because of buyers who then sell their wares on the black market and in nearby countries. Correspondingly, time is wasted as people try to locate goods and stand in line. It all adds up to a massive underutilization of resources and an annual inflation rate that is close to 60%. (It even adds up to a coffin shortage.)

    Our Bottom Line: Incentives

    Artificial prices create perverse incentives.

    No Comments

    Read More
  • Everyday economics, game theory and next day delivery

    Next Day Delivery and the Prisoner’s Dilemma

    Oct 6 • Behavioral Economics, Businesses, Economic History, Economic Thinkers, Households, Lifestyle, Thinking Economically • 182 Views

    Combine bad weather, shopper procrastination, and free overnight delivery guarantees and you get a UPS nightmare.

    Our story starts last December. Hoping to maximize volume and sneak in another sale day, stores like Macy’s promised overnight delivery on December 23rd. With 70 other retailers offering the same deal (for free sometimes), the results were calamitous. Approximately two million packages wound up in trucks rather than homes on Christmas Day.

    Retailers' prisoners' dilemma from delivery overload

    Consequently, UPS and FedEx are asking retailers to avoid the last day squeeze. Responding, Nordstrom moved its December 23rd order deadline for overnight shipping back three hours to noon. Already, Macy’s had a noon deadline and stuck with it.

    Not too much of a response? The reason is the prisoner’s dilemma.

    The Prisoner’s Dilemma

    Categorized as game theory, the prisoner’s dilemma could apply to two recently arrested home burglars. Separated when they reached the police station, each one knew the punishment for the crime would depend on who did or did not confess.

    Based on the diagram (below) of the prisoner’s dilemma, to minimize jail time, each has the incentive not to confess. However, denial could bring the longest jail time if the other person spills the beans. On the other hand, confessing could be a ticket out the door if the other burglar denies the crime. Psychological studies of the prisoner’s dilemma indicate the length of the sentence shapes the response. The longer the sentence for keeping quiet when one’s accomplice talks, the greater the tendency to confess.

    Retailers face the prisoner's dilemma


    So, isn’t Macy’s trying to predict what Nordstrom and other retailers will do? After all, one retailer cannot eliminate next day delivery just before Christmas unless everyone else does also. And, whether considering an arms race between nations or a host of other decisions that depend on what someone else does, you can see how the prisoner’s dilemma extends far beyond the marketplace.

    Our Bottom Line: How Firms Compete

    Next day delivery is a competitive strategy. With small firms and large ones, whether the market is oligopoly or monopolistic competition, what you think another firm will do shapes your behavior.

    No Comments

    Read More