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Tag Archives: cost/benefit analysis

Frittata with spinach and onion

I just finished an omelette with eggs and spinach from a nearby farm. It tasted good, I supported local business and I helped the environment. You could say that I had my cake (but it was spinach) and ate it too.

But, here is the surprise.

If you care about your carbon footprint, then eating local is not the answer. Yes, food miles do create greenhouse gases. But a Carnegie Mellon study has concluded that the environmental impact of transporting food is relatively minimal. Instead, it’s all about dietary shift. For less than one day a week, we just have to switch from meat and dairy to chicken, fish, eggs, or a vegetable-based diet to achieve the environmental benefit of buying 100% local.

In addition, economist Steve Landsburg says that even if we wanted to use cost/benefit analysis to prove the total impact of local sourcing, it would be impossible. How can we judge whether land should have been used for tomatoes or grapes, or if local farmers would have been better off transporting their produce elsewhere or even if it was best to buy Chilean grapes because Chile is the most efficient place to grow them? Then also, there are workers, a ripple of energy use, equipment and countless other considerations.

Instead he says just to look at price.

Using a tomato as an example, Landsburg explains that the price conveys all we need to know. Assume, for example, that the local tomato laborers would have been more efficient growing grapes. As a result, the tomato supply curve would shift up and to the left because of lower yielding fields, and the price of tomatoes would increase. You don’t have to ask specifically about cost and benefit because a high or low price provides the answer.

So, did my omelette help the planet more than steak? I am not so sure.

A thanks to the Freakonomics people who suggested that “We Eat What We Are” and reminded me of locavore dilemmas. And here, economist Steven Landsburg disagrees with environmental locavores while this paper and this paper provide more information about the carbon footprint of our diet.

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PNC Wealth Management Measures Inflation With Its Christmas Price Index

Have you ever been delighted that you got something for free? I was until I read “the cost of zero cost” in Dan Ariely’s book, Predictably Irrational.

My story begins at a Papyrus store in NYC. About to pay for several birthday cards, the salesperson told me I would get one free if I just added another card to my purchase. Unfortunately, I did. I spent another 5 minutes that I could have used elsewhere to choose 2 cards that I did not need.

To explain our emotional response to “free,” Ariely asks the reader to quickly decide between a $10 Amazon gift certificate or a $20 Amazon gift certificate for which you pay $7. Most people in his experiment at a Boston mall selected the “Free” option. But, as you probably realize, the second one is better.

We can’t leave this discussion about “free” without a look at “free shipping.” Do you remember when Amazon told customers they would get free shipping on all orders above a certain amount? Like me, you might have bought 2 books instead of one to get the deal. In France, at the same time, Amazon charged the equivalent of 20 cents-a miniscule amount- for shipping and received no extra orders. Then, when they eliminated the charge, French orders climbed.

Ariely does not mention, though what happens when everyone offers free shipping. Do we perceive it as free anymore? He does say though, that free is a great incentive when government wants us to buy electric cars. Just give free inspections or registration. Preventive health care? Just make it free.

But, is it really free?

Maybe my greeting card was cheaper but the extra time I spent, the 2 unused cards still sitting in my drawer, and the money I could have saved or spent elsewhere made that “free” card rather expensive. I guess our bottom line is, “There is no such thing as a free lunch.”

Here is an excellent discussion of Ariely’s book in the New Yorker.

 

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Industries afflicted with Baumol's Disease have slower productivity growth.

Perhaps it all began when President Lyndon Johnson called Wilbur Mills, chairman of the House Ways and Means Committee. “Wilbur, I’ve just been looking through the polls here, and I’ve only got a few weaknesses, and the worst of them is that I’m not doing anything for the old folks. I need some help from you.”

The result? During 1965 Congress passes Medicare. Two years later they project the program will cost about $12 billion in 1990. The actual cost was $110 billion.

Looking at Medicare now, I discovered several ways to consider its cost realities. Through a study from the Urban Institute, we can compare a typical couple’s lifetime taxes to their probable benefits that would have started during 2010:

Taxes Benefits
Low to average wages $84,000 $351,000
Average to high wages $149,000 $351,000

 

Next, we can see where some of the money is being spent through this chart from 3 Harvard health policy researchers. Posted by journalist Sarah Kliff in Ezra Klein’s Washington Post Wonkbook, the chart displays how several medical specialties are driving Medicare cost increases.

Finally, the 2012 Medicare Trustees Report tells us that during 2024, the system will no longer be able to afford full benefit payments.

Our Bottom Line: Perhaps reigning in Medicare’s soaring costs returns us to the huge cost benefit disparity for individuals and the nation. For recipients and politicians, supporting cost cuts represents a massive sacrifice. For the entire country, though, the benefit would be considerable.

The entire Urban Institute report comparing entitlement benefits and taxes is here and you can read the Wonkbook graph and discussion here.

 

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airlines industry...airplanes.16825_3.15a_000002547262XSmall

Spirit Airlines is doing everything it can to charge us less for a seat on one of its planes. One gentleman paid $77 for a round trip seat between Chicago and Fort Lauderdale.

Just the seat.

How much more could he have paid? You might want to try matching each of the following Spirit Airlines fees to one of the items listed below.

The fees:

  • 1. $100
  • 2. $4
  • 3. $28-$38
  • 4. $3
  • 5. $30-$45
  • 6. $5
  • 7. $75
  • 8. $6
  • 9. Free

 

The items:

  • a. check bicycle
  • b. buy water
  • c. first checked bag
  • d. get boarding pass a airport
  • e. transport dog
  • f. carry-on bag for overhead bin
  • g. buy bag of nuts
  • h. tuck items under the seat
  • i. buy a beer

(Answers at the bottom)

On the surface, it just looks like passengers pay a fee and the airline generates more revenue. But there is more. Because of the carry-on and checked luggage charges, passengers pack less. Less luggage means lighter planes. Lighter planes need less fuel–a huge cost saving for airlines.

Spirit also eliminated reclining seats on their Airbus 320s so that they could fit approximately 40 more fliers onto the plane. Think about it. Whether flights are full or empty, they still need the plane, the fuel, the pilot. And they charge for almost everything else.  An extra passenger costs them very little.

An economist would say that Spirit was really good at thinking at the margin. Defined as the “extras,” the margin is where Spirit adds to revenue and saves on costs.

Thinking at the margin, Spirit probably even made money on the gentleman who paid $77 for his Chicago/Ft. Lauderdale round trip.

While my Spirit facts and the matching idea came from a WSJ.com article, I especially recommend this very clever interactive graphic that displays the shifting position of the major airlines since deregulation in 1978.

1e; 2g; 3c; 4b; 5f; 6d; 7a; 8i; 9h

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19th Century Urban Transport Was An Environmental Problem

Think about life in the city. A one-bedroom apartment might have 1000 square feet located next to several other similar dwellings and all are heated and cooled by the same source. You walk nearby to get your groceries and take the subway or bus to work or school. Rather than a hybrid car, the energy efficient passenger vehicle that you use most frequently is the elevator.

The result? According to New Yorker writer David Owen, being green in Manhattan is very simple. You just have to live there.

But then, you move to the suburbs and transform your carbon footprint. You buy one car and then two. You have a house to heat and cool. You even have an extra refrigerator in your garage or basement. Everywhere, to school, to dine, to shop, you have to drive.

Our bottom line: Sometimes it takes counterintuitive reasoning to assess environmental impact.

Or, as Kermit said, “It’s not easy being green.”

The Economic Lesson

High density urban areas have much less of an environmental impact than low density municipalities.  Harvard economist Edward Glaesar points out that “a single family detached house uses on average 83% more electricity than urban apartments within the United States.” Correspondingly, in his New Yorker article, David Owen talks about the high density environmental benefits of skyscrapers.

I recommend this Econtalk podcast with David Owen on the “conundrums” of being green and this econlife post on the unintended impact of wind farms and locovores.

An Economic Question: Should national leaders tilt environmental policy toward urban favoritism?

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