• Because of monopolistic competition, gasoline retailers has some control over price.

    Up Like a Rocket, Down Like a Feather

    Oct 24 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic History, Economic Thinkers, International Trade and Finance, Thinking Economically • 189 Views

    At your local gas station, you might be seeing some sticky prices.

    Although barrels of West Texas Intermediate (WTI) and Brent Crude have steadily gotten cheaper, the price at the pump has had a less steep downward trajectory. One economic study observed that it took four weeks to reflect a crude price increase but eight weeks to respond when price dropped. In other words, many gas stations take twice as long to react to a declining wholesale price.

    Sticky Gasoline Prices

    Below, you can see that retail gasoline had a 13% price drop from $3.53 to $3.07. Meanwhile, for WTI, decreasing from $100.29 to $82.76 a barrel, and for Brent, $104.88 to $84.42, the fall was close to 20%.

    The U.S. national average price per gallon of regular gasoline in dollars from April 7, 2014 to October 20, 2014:

    Monopolistic competition and gas prices

    From: U.S. Energy Information Administration

    Meanwhile, looking at Cushing, OK WTI Spot Price in dollars per barrel from April 3, 2014 to October 20, 2014, you can see a bigger decline:

    Supply and demand for WTI crude

    From: U.S. Energy Information Administration

     

    And, for the Europe Brent Spot Price in dollars per barrel from April 3, 2014 to October 20, 2014, the decrease resembled WTI’s:

    Supply and demand for Brent price decline

    From: U.S. Energy Information Administration

     

    Why is the retail gas price falling so slowly??

    On the demand side, a possibility is reference pricing. When the price of gas is rising, consumers, used to spending less, have a lower “reference price,” like $3.50, and actively try to adhere to it. By contrast, when prices fall, the reference price is higher, maybe $4.00. Consequently, we are delighted that the price is below that level and do less comparison shopping.

    On the supply side, some stations might have relatively small competitive pressure. If no other nearby station is lowering prices, then everyone can delay. And, if that delay is supported by customer loyalty, then the retailer’s market power becomes even stronger. Sometimes, though, it’s not even cost effective to drive onward and search for cheap gas.

    And finally, gas prices are not alone. Looking at 77 consumer items, University of Chicago economist Samuel Peltzman concluded that sticky prices are a common phenomenon.

    Our Bottom Line: Monopolistic Competition

    A market in which there are many firms that sell goods and services that they can distinguish from others, monopolistic competition gives retailers like gasoline stations some price control. The result? Gas prices go up like a rocket but drift down like a feather.

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  • Dynamic Toll Prices

    Dynamic Toll Prices

    Oct 23 • Perspectives • 186 Views

    By Astha Puri with Elaine Schwartz

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  • Everyday economics and The issue of occupational licenses is really a market or government debate.

    You’ll Need a License for That

    Oct 23 • Businesses, Demand, Supply, and Markets, Economic Debates, Economic History, Economic Thinkers, Government, Innovation, Labor, Regulation, Thinking Economically • 268 Views

    In North Carolina, a licensing board composed mostly of dentists decided that spas, salons, and kiosks in malls could not legally whiten teeth. While the board says it is preserving quality, others say the reason is price. Charging far less, the mall kiosk is taking away business from dentists.

    Here, the story gets complicated because antitrust law kicked in when the Federal Trade Commission took the North Carolina Board of Dental Examiners to Court. The question was whether a group composed of dentists is illegally barring others’ market entry. The Supreme Court just heard the case.

    Rather than antitrust law, though, I wonder whether the real economic issue is occupational licenses.

    Licensed Occupations

    In Texas, becoming a “shampoo specialist” includes 150 hours of classes while to renew your license, Cosmetology to Go will charge a $25 fee and provide four hours of continuing education in sanitation, skin, hair and nails, and OSHA regulations. In Alabama, 140 occupations require licenses. The list includes aircraft pilots, eyebrow threaders, massage therapists, natural hair stylists, medical doctors, shampoo assistants and sign language interpreters and transliterators.

    A type of occupational regulation, licensing impacts the jobs market. Licensed occupations can have greater prestige, protect consumers, pay higher wages (estimated at 18% more) and raise state revenue. On the other hand they charge higher prices, preserve the status quo and discriminate against low income consumers and entrepreneurs.

    You can see below how the number of licensed workers has skyrocketed. During the past 50 years, licensed occupations have multiplied from 5% of U.S. workers to 33 percent in 2014.

    From: "Kleiner and Kreuger

    From: Kleiner and Kreuger

     

    Our Bottom Line: Market vs. Government

    We could say occupational licensing is a market vs. the government issue. Some say less demand from the market will do the job while others depend on government.

    For shampoo specialists, would you choose the market or government?  School bus drivers? Veterinarians? Florists (required in Louisiana)?

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  • Everyday economics and Norway's EV Subsidies

    There Is No Such Thing as a Free Charge

    Oct 22 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Economic History, Government, Households, Labor, Lifestyle, Regulation, Thinking Economically • 181 Views

    During morning rush hour, a 51 minute drive to Oslo will take you 19 minutes if you drive in the bus lane. To save more than 30 minutes each weekday, you just need to buy an electric car (EV).

    Irresistible Incentives

    Norwegian legislators created an irresistible list of incentives to maximize electric vehicle purchases. The list has been so attractive that a 50,000 vehicle goal for 2018 will probably be met in 2015. The allure of the bus lane was sufficient motivation for 12 percent of all electric car buyers. Another 48 percent liked the tax savings. Through taxes alone, someone buying a Tesla S model could pay $135,000 less. Then, if you commute into Oslo, annually, you can save $1400 in road tolls and $5000 on parking. The environment? It ranked lower than the dollar incentives.

    Here is the whole list of perks from the Norwegian Centre for Transport Research.

    Norway's incentives to buy an electric vehicle will have trade-offs

    From: “Electric Vehicles: environmental, economic and practical aspects”

     

    And these are the reasons current owners would again purchase an EV.

    Looking at trade-offs for EVs, buyers cite many benefits.

    From: Norwegian Centre for Transport Research

     

    Tradeoffs

    Needless to say, there is no such thing as a free charge.

    Norway estimates it receives $650 million less revenue because of its EV policy. People driving conventional cars complain that they have access to fewer parking spaces. Others say the demand for pubic transport has declined because a subsidy has made the substitute–a second car–so much cheaper. Meanwhile, ferryboat operators get paid the normal passenger fare, but get nothing for the electric cars they transport. On one route, that meant 9226 cars generated no revenue during a seven-month period except for the people they carried.

    Also, you can imagine the response to a study that concluded 85 percent of bus lane traffic is the EVs. Comments ranged from indignation over affluent Tesla S Model drivers having the benefit to bus drivers who are angry over delays. One concerned bus driver said, “The delays have a cost for society. Time lost by thousands of our passengers in traffic is far greater than that gained by a few dozen electric car drivers.”

    On the benefit side, carbon emissions, noise and space have been the focus. For the general environmental impact, citing battery production, I unearthed no definitive conclusion. Locally though, researchers expect less noise and fewer pollutants while space use would remain the same. Also, we should note that because of its oil wealth, Norway has a lower opportunity cost from the krone cost of the subsidy than a less affluent nation would experience.

    Our Bottom Line: Subsidies

    While we can debate whether the trade-offs are worth the cost or not, we can all agree that the electric vehicle subsidies changed a slew of incentives that ranged from car purchases to commuting and parking decisions.

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  • Because of new attitudes and economics, there is less supply of "marriageable" men and more valuable women in marriage markets.

    Why There is Less Marriage

    Oct 21 • Behavioral Economics, Demand, Supply, and Markets, Economic History, Economic Thinkers, Education, Gender Issues, Households, Labor, Lifestyle, Thinking Economically • 132 Views

    According to a recent Pew Research report, more of us are not married. In 2012 close to 20 percent of people 25 and older were not married. In 1960, the number was nine percent.

    Where are we going? New attitudes and economics have changed marriage markets.

    Attitudes

    More of us believe that it is okay not to be married.

    Pew asked survey participants whether they believed that society is better off with marriage. While the response was almost evenly divided, the age split was not. Younger adults tended to say that marriage was not crucial for society while those who were older disagreed. All though did agree that people who were planning to share an entire life together should tie that knot.

    Marriages markets are changing because of attitudes.

    Economics

    So, not only do we have less pressure from society to get married but also economic changes have transformed the incentives. Because of more education, higher wages and birth control, women can get married when they are older. Consequently, they are waiting longer and expecting more from the men they meet.

    The problem, as you can see below, is that fewer men have what women want.

    Marriages markets are changing because of economics.

    But it does depend on the city:

    Marriage markets in different cities

    From: Pew Research

     

    Supply, Demand and Marginal Utility

    This takes us to supply and demand.

    Considering that we have a lower supply of qualified men and we have women who have become “more valuable” because of higher pay and more education, supply decreases, demand increases and the equilibrium price for marriage rises.

    Explained by Nobel economics prize winner, Gary Becker (1930-2014), forget love and marriage. Instead think utility functions. People marry because they expect to “raise their utility level above what it would be were they to remain single.” Defining utility as welfare, economists could say that the marginal utility of marriage (each extra unit of welfare) has decreased.

    Our Bottom Line: Behavioral Economics

    Extending far beyond money and finance, economics uses tradeoffs, cost, utility and incentives to explain behavior.

     

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