• Ask Alexa Economic Advice from econlife.com

    I Scream for Ice Cream

    Jun 27 • Ask Alexa • 128 Views

    Dear Alexa,

    With the the warm weather, my children and I have developed a sweet tooth for ice cream. My kids always go for the quadruple scoop cone with sprinkles and hot fudge. I am always left with a sticky mess and super-energized little ones. However, their smiling faces make me melt. Should I limit their ice cream intake to fewer scoops or continue to indulge them?

    Sincerely,

    Hungry Harry

     

    Dear Hungry Harry,

    Doesn’t ice cream just taste so good when it’s a hot summer day?! I face the same consumption problem because frozen yogurt has become one of my favorite indulgences. In order to solve our dilemma, I turned to some fellow economists and discovered that our sweet treat trouble revolves around the concept of positive and negative externalities.

    We unconsciously deal with positive and negative externalities everyday. Essentially, this idea states that when someone takes part in an activity, their actions affect the well-being of another person, whether or not they mean to. For example, a child gets a vaccine for the flu and goes to school. The other children who have not already received the vaccine will benefit from his immunity because they are indirectly protected. This is an example of a positive externality since the kids benefit from their classmate’s inoculation and subsequent inability to catch or spread the flu. Alternatively, when companies emit toxic substances into a water source, the public is indirectly impacted. Some are unable to drink clean water while others cannot swim due to the contamination. This is an example of a negative externality because bystanders, the population, are negatively impacted by the companies’ actions.

    How do positive and negative externalities relate to our ice cream conundrum? With every ice cream cone your children consume, you take satisfaction from their happiness. Your happiness and your children’s happiness then makes everyone around you happier, as in a chain reaction. Therefore, the bystanders benefit from someone else’s actions.

    So, what’s our solution? Giving your children four scoops of ice cream disperses their happiness to everyone around and creates an atmosphere of bliss, even though the serving size may seem exorbitant. So yes, live a little and spread the joy- one bite at a time.

    Sincerely,

    alexa-sig

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  • The econlife.com Weekly Roundup

    Weekly Roundup: From Raisin Reserves to Greek Bank Reserves

    Jun 27 • Businesses, Demand, Supply, and Markets, Economic Debates, Economic Growth, Economic History, Economic Humor, Economic Thinkers, Financial Markets, fiscal policy, Government, Innovation, Labor, Macroeconomic Measurement, Money and Monetary Policy, Tech, Thinking Economically • 112 Views

    Our Posts Roundup

    everyday economics and calculating drug prices by value Sunday 6.21.15

    The drug prices that some doctors want to calculate…more

    everyday economics and safety regulation Monday 6.22.15

    Why safety regulation can increase risky behavior…more

    everyday economics and entitlement spending Tuesday 6.23.15

    What the Court’s healthcare decision avoided…more

    everyday economics and safety regulation Wednesday 6.24.15

    How online sales are cutting Gillette’s business…more

    everyday economics and property rights Thursday 6.25.15

    Why raisin growers care about the “Takings Clause”… more

     

    Cash withdrawals from Greek banks constrain economic growth and reflect monetary policy problems. Friday 6.26.15

    Finding the Greek cash stash… more

    Ideas Roundup

    • inelasticity
    • supply
    • market system
    • property rights
    • regulation
    • Peltzman Effect
    • cost
    • entitlements
    • subsidies
    • healthcare
    • creative destruction
    • innovation
    • supply
    • price floor
    • monetary policy
    • bank reserves
    • euro zone
    • money multiplier

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  • Cash withdrawals from Greek banks constrain economic growth and reflect monetary policy problems.

    Greece’s “Cash in the Mattress Indicator”

    Jun 26 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Growth, Economic History, Financial Markets, fiscal policy, Government, Macroeconomic Measurement, Money and Monetary Policy, Regulation, Thinking Economically • 125 Views

    A Greek bank teller recently told a customer who was withdrawing 20,000 euros, “Had you come in last week without warning, I wouldn’t have been able to give you so much cash. We didn’t have the money.”

    Cash Flight

    Greek depositors are withdrawing their savings. Worried that collapsed Greek debt talks could lead to a euro zone departure and a return to the drachma, people in Greece want the security of having their euro cash.

    You can see below that cash is indeed fleeing from Greek banks.

    Greek monetary policy and cash flight

    Where are we going? To the economic impact of cash withdrawals.

    Hiding Places

    Just like good investing advice, people are suggesting hiding place diversification. With robberies on the rise, a victim can hand over the cash from one spot and still have others that remain.

    What are the possibilities?

    In addition to their mattresses, people are wedging money beneath loose bathroom tiles and also burying it in the garden. They have figured out how to place a small box with money in an AC unit or to sew it in the pleats of draperies. And yes, mixing cash with food in the freezer is always an alternative (frozen assets??).

    Our Bottom Line: Monetary Policy

    Once euros flee Greek banks, they move beyond the reach of monetary policy. As banks’ reserves plummet, so too do the loans they can make. As a result, the money creation that feeds economic growth contracts.

    I guess we could say that “cash in the mattress” is an inverse indicator of economic growth.

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  • Using the Takings Clause from the Fifth Amendment, the Supreme Court protected private property rights.

    More on Raisin Freedom

    Jun 25 • Businesses, Demand, Supply, and Markets, Economic Debates, Economic Growth, Economic History, Economic Humor, fiscal policy, Government, Labor, Regulation • 108 Views

    Deciding whether the government can force a farmer to deposit some of her raisins in a reserve, we have to look at the Takings Clause of the Fifth Amendment of the U.S. Constitution.

    First a bit of background…

    The Takings Clause

    Saying, “nor shall private property be taken for public use, without just compensation,” the Takings Clause is all about balancing private property and society’s needs. When he proposed the Takings Clause, James Madison was said to be concerned with military seizures from civilians during the Revolutionary War.

    Whereas Madison was referring to physical property, by the 1920s, the Takings Clause took the leap into property value. The subsequent debate included a case where a federal law prohibited doctors from using malt liquors for medicinal purposes. Citing the Takings Clause, a brewery sued and lost. On the other hand, when a chicken farmer said low flying military planes caused his frightened chickens to injure themselves, the courts agreed it was a “taking.”

    The Raisin Decision

    In Horne v. Department of Agriculture, the relevant facts center on the 1.2 million pounds of raisins that were supposed to be taken from a farmer to a USDA raisin reserve.  Because he refused to participate in the program, the government went after the $480,000 value and a $200,000 fine. Last week, the Supreme Court said it was a “taking” and voided the fines and fees.

    Our Bottom Line: Property Rights

    As always, thinking economically returns us to tradeoffs. With the Agricultural Marketing Act (1937) empowering the government to create a raisin reserve that would limit supply and boost prices, we have been choosing between the public interest and private property rights.

    This Daily Show segment on the raisin reserve is great for huge smiles. (I could not discover a direct youtube link.)

    http://thedailyshow.cc.com/videos/pmrodj/raisin-growers-lawsuit

     

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  • everyday economics and safety regulation

    The Razor Blade’s Creative Destruction

    Jun 24 • Businesses, Demand, Supply, and Markets, Economic Growth, Economic History, Economic Humor, Economic Thinkers, Innovation, Labor, Tech, Thinking Economically • 133 Views

    Gillette controls 60 percent of the retail market for men’s shaving gear. Online, its share is 20 percent.

    Where are we going? To creative destruction that is not cutting edge.

    The Men’s Shaving Gear Market

    During the 12 months preceding May 2015, the men’s online shaving gear market doubled. Totaling eight percent of a $3 billion market, online sales of men’s shaving products is shrinking Gillette’s market dominance. In stores, selling razors and blades is all about shelf space, attractive packaging and a locked display case to thwart shoplifters. Online, the sales pitch is value and simplicity. Using a subscription model, they say you can effortlessly get your blades regularly.

    Online Shopping

    A January 2015 survey of our shopping habits reveals what you would expect. Our online shopping is soaring. Between  2013 and 2014, U.S. shoppers who reported doing the majority of their purchases online increased from 36 percent to 61 percent.

    XKCD does show us the downside:

    Creative destruction from online shopping.

    Our Bottom Line: Creative Destruction

    Explaining “creative destruction,” economist Joseph Schumpeter (1883-1950) said that economic growth depends on the pain of old industries dying and new ones taking their place. Now though we have creative destruction changing how we shop. Whether looking at Parcel’s evening delivery, Amazon’s hour delivery, or robots in the warehouse, we can find supply chain innovation eliminating old businesses and creating new ones.

    Perhaps for razor blades, cutting edge design is not the way to avoid creative destruction.

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