Saturday, January 30, 2010

Poll: Should we use more or less nuclear power?

Jeffrey Miron had an interesting post on this topic on his blog today:
The Obama administration moved vigorously on two fronts Friday to promote nuclear power, proposing to triple federal loan guarantees for new projects and appointing a high-level panel to study what to do with nuclear waste.
One more example of picking winners and losers among industries; hardly government's strong suit.

Plus, the U.S. already subsidizes nuclear energy via the
Price-Anderson Act of 1957, which limits the liability of the nuclear power industry in the case of accidents.

This subsidy means the true costs of nuclear power are much higher than they appear. Although nuclear produces fewer greenhouse emissions than burning fossil fuel, it is probably not efficient even assuming a large negative effct [sic] from emissions.
On the other side of this, I recently heard Robert Fogel's thoughts on this issue in lecture form. From what I can tell, Fogel thinks that nuclear energy is much cleaner than the alternatives, and that the change in public opinion (and, subsequently, public policy) toward nuclear energy had much to do with the word "nuclear."

I'm not sure how far to take that, but he had some interesting points on other fronts. He reported the results of several polls, asking (in some way or another) "Do you oppose nuclear energy?" In 1956, the number opposed was 20 percent. In 1977, 33 percent. In 1979, 56 percent of the U.S. population were opposed to using nuclear energy. The incident at Three Mile Island -- Fogel says -- contributed to the decline of public opinion. I can't imagine that Chernobyl helped the public opinion on nuclear energy.

Even so, Fogel told us that scientists favor nuclear energy 9 to 1. There's some tension here. There's obvious pollution in almost any form of energy production: nuclear energy produces waste that needs to be stored, coal plants spew that waste into the air, hydroelectric plants destroy river ecosystems.

In my view, we are faced with a tradeoff, but I think that makes for a good poll.

Should we use more or less nuclear power?

a. Much more
b. Some more
c. A little less
d. Significantly less
e. About the same

The poll is open for a week, so vote early and often (and on the sidebar --->). Tell your friends to vote. I'm interested in hearing what you have to say.

Thursday, January 28, 2010

Classic

If you have not heard or read this story, you should. If you have only read it, have a listen to the audio. The narrator is very good.

Wednesday, January 27, 2010

Learning Economics on a Budget: Part IV

Over the past month, I posted to my YouTube Channel a unit on short run production, firm cost in the short run, firm supply decisions, and industry competition. Here are some of my most recent videos:

First, start off with a discussion of the equimarginal principle (For you readers who love calculus, this is how you maximize profit without using calculus).



Second in this unit, I motivate why production curves in the short run look the way they do.



Third in the queue, I demonstrate how to convert the previous production curves into cost curves. That is, functions that relate the quantity produced to the per unit cost of producing. This will be useful for supply.



For the fourth video in the unit, I demonstrate how the previous tools allow us to understand the firm's supply decision in the short run.



Finally, I use the firm's supply curve to demonstrate how to obtain an industry supply curve. I also discuss -- in a limited way -- the role of entry and exit in the industry.



I plan to do more on long run production in the coming videos. I also plan to add some more advanced material (i.e., some firm and industry economics with calculus). But, these videos provide a basic sense for how economists think (or, at least how this economist thinks) about firm and industry supply.

Enjoy!

Saturday, January 23, 2010

What is your favorite normative criterion?

This poll was motivated by a discussion in the comments on the previous poll, and my reading of Chapter 1 of the book Ethical Theory and Its Application to Business.

A big reason we disagree on policies is because we disagree on what we value. In technical lingo, people tend to use different normative criteria for making decisions (Theories of value are called normative; theories of fact or consequence are called positive).

But, that brings me to the poll question of the week:

What is your favorite normative criterion?

Utilitarianism. This criterion preaches that we should value the policies that promote the greatest good for the greatest number of people. In other words, if we could measure each person's happiness, utilitarianism would favor the policy that produces the maximum total happiness. There are modifications of this rule, but that description works for this poll (more info at Wikipedia).

Deontologism. This fancy word means that we should value duties in our interactions with each other, independent of the consequences of those actions. The favorite example is that if Billy meant to murder Jane, but he missed when he fired the gun, it's still wrong (even if Jane never finds out, and is never threatened by Billy again). If you like this criterion, you think that motives -- not consequences -- matter. Again, Wikipedia is a great resource.

Justice. This one is a bit tricky and convoluted because there are many theories of justice. Basically, someone who favors justice is someone who fairness. People who believe in justice often fall on opposite sides of the debate because there are many notions of justice. For example, people who believe in justice value one of the following (1) equality, (2) satisfying needs, (3) upholding individual rights, (4) rewarding individual effort, (5) rewording social contribution, and/or (6) rewarding on the basis of another sort of merit.

The Ethical Theory book has a prolonged discussion of moral rights at the end of that chapter, but it does not seem to me to be distinct from rights-based justice.

Please vote on the sidebar, vote early and often, and vote ethically. If this interests you, tell your friends too. The poll is open for a week. I'm interested in hearing what you have to say.

Thursday, January 21, 2010

Great Awakenings make for a great book

From Robert Fogel's The Fourth Great Awakening and the Future of Egalitarianism:
Everything seems inadequate when measured against perfection. So even technology has become a symbol of failure because it is incapable of delivering perfection. Moreover, the notion of balancing the benefits against the costs or of balancing one set of risks against another, so common to the thinking of physicists, chemists, engineers, and economists, does little to quell the foreboding of those who seek assurance.
I am through the first two chapters, but I would already recommend reading the book. It is a fascinating history of political and religious movements in the United States.

Wednesday, January 20, 2010

Diamonds and Water

For the sake of economic literacy, here's a classic paradox in economics (I borrowed the phrasing from here)

Adam Smith presented the diamonds and water paradox in The Wealth of Nations in 1776:
Nothing is more useful than water: but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.
Just like Smith, ordinary people still puzzle over why goods we could do without fetch high prices, but some goods with high “value in use” sell for much less than they are worth. We can resolve this paradox by recognizing that price is independent of value. To see why this is the case, consider an example. If you value a red trenchcoat at $50, that means that the maximum you were willing to pay for the trenchcoat is $50 by our definition of value.

• If the price of the coat is $60, the maximum you are willing to pay for the coat is still $50, so you don't buy the coat.

• If the price of the coat is $40, the maximum you are willing to pay for the coat is still $50, even though you actually paid less.

• Taken further, if someone gives you the coat, the maximum amount you were willing to pay for the coat remains at $50. You're just really happy because you got a coat worth $50 for nothing.

Given this backdrop, the only thing we know that relates price of a good to its value is that, in voluntary markets, consumers willingly decide to pay the market price for the good. In this case, the equilibrium price of a product reflects the maximum amount that some marginal consumer would willingly pay for the last traded unit of the good. The price tells us nothing about the value of the other units traded in the market except that their value exceeds the price. Importantly, the price tells us very little about the total value of the good to consumers of that good.

Much more water is traded than diamonds because water is abundant, but diamonds are scarce. Diamonds command a higher price because they are rare, but the total value of water likely exceeds the total value of diamonds -- just think of which you would rather do without for a week.

The paradox applies to more than just diamonds and water. For example, some propose that people in some professions don't get paid enough, whereas others get paid a lot for putting a ball in a hole or basket. My answer is that the former are like water (valuable and abundant), and the latter are like diamonds (their skills are rare).

Saturday, January 16, 2010

Poll: What role should equality play?

A book I am reading -- The Fourth Great Awakening and the Future of Egalitarianism by Robert Fogel -- raises an interesting question about the role of equality in the United States. Over the 1900s, there was a tendency for Americans to support equality of condition as the centerpiece of American egalitarianism. That is, popular culture endorsed redistribution of riches from the top half of the income distribution to the bottom half. Fogel argues that the entitlement programs spanning from The New Deal to The Great Society represented this trend of American support for equality of condition.

Since The Great Society, there has been a political/religious movement (which Fogel calls The Fourth Great Awakening) that pushes equality of opportunity as the means of attaining a more egalitarian American society. Equality of opportunity presupposes that everyone should have the same opportunities to succeed, but that the resulting economic conditions reflect the choices people made (and can be as unequal as people choose). In fact, inequality of condition can give people appropriate incentives to put more effort in where society needs more effort.

That brings me to the poll question of the week.

What role should equality play in America?

(a) We should support equality of condition
(b) We should support equality of opportunity
(c) We should support both
(d) Neither is feasible

Obviously, this is a normative question, so let your values be your guide. The poll is on the sidebar, and it is open for a week. Please vote early and often. Tell your friends to vote. I'm interested in seeing what you have to say.

Wednesday, January 13, 2010

Why watch previews at the movies?

Jeff Ely at Cheap Talk had an interesting discussion of this question today.
[...] Each of us decides at home how early to arrive trading off the cost of our time versus the probability of getting stuck in the front row. The “winner” of the auction is the person who arrives earliest, the prize is the best seat in the theater, and your bid is how early to arrive. It is “all pay” because even the loser pays his bid (if you come early but not early enough you get a bad seat and waste your time.)

In an all pay auction bidders have to randomize their bids. Because if you knew how everyone else was bidding you would arrive just before them and win. But then they would want to come earlier too, etc. The randomizations are calibrated so that you cannot know for sure when to arrive if you want to get a good seat and the tradeoffs between coming earlier and later are exactly balanced.

As a result most people arrive early, sit and wait. Now the previews come in. Since we are all going to be there anyway, the theater might as well show us previews. Indeed, even people like me would rather watch previews than sit in an empty theater, so the theater is doing us a favor.

And this even explains why theater tickets are always general admission. Let’s compare the alternative. The theater knows we are “buying” our seats with our time. The theater could try to monetize that by charging higher prices for better seats. But it’s a basic principle of advertising that the amount we are willing to pay to avoid being advertised at is smaller than the amount advertisers are willing to pay to advertise to us. (That is why pay TV is practically non-existent.) So there is less money to be made selling us preferred seats than having us pay with our time and eyeballs.
To me, it's interesting that the movie theater is taking advantage of an inopportune situation. If the theater chose to not show pre-movie advertising, there will always be a moment where there's a theater full of people who are staring at a blank screen. It would be crazy to not advertise to a willing audience. Moreover, in the absence of advertising, it's unavoidable to have people sitting there with nothing to do. It reminds me of the line at the grocery store: an unavoidable advertising opportunity.

From this perspective, some advertising seems desirable for everyone involved. For most people, advertising is a complementary good to watching the movie. Even for those people who consider advertising a bad thing, it is probably a necessary evil to fill the awkward silence before the movie showing. Indeed, to borrow Jeff Ely's line, the theater is doing us a favor, but then they continue to do us this favor, and show another 20 minutes of previews.

In a world where everyone thinks that the pre-movie advertising is a nuisance, why show any advertising after the lights dim? In 1993, Gary Becker and Kevin Murphy wrote a paper that answers this question. From their analysis, it turns out that advertising can be a good or a bad from the perspective of the consumer, but it can work in either case. Take two examples of advertising that works:

1. Beer advertisements on television usually work by giving us a good laugh that causes us to remember the product the next time we show up at the store. In fact, one of the reasons that people watch the Super Bowl is to see the new advertisements. This is an example of advertising as a good. To most people, it isn't surprising that this works.

2. The beggar on the street with the cardboard sign makes you feel terrible (it enters negatively into your utility function to walk past him), so you put money in his box. People will cross the street (or change their walking route) to avoid beggars. They'll rarely cross the street to happen across the beggar to give him money. This is an example of advertising that is a bad, but works nonetheless.

So, let's return to the question of why the movie theater annoys us by showing 20 minutes of previews. I'm inclined to think that the advertising works, but I am not sure how much the advertiser benefits from showing the ads. That's a difficult question to sort out. I wouldn't be surprised if the people who pay for the ads pay much more to air the ads than they are worth.

As to the question of why people show up for the ads: Maybe people don't want the worst seat (as Ely suggests), but it is also likely that people don't want to show up to a dark movie theater. And, we can't rule out the possibility that people just like seeing those silly previews.

Saturday, January 9, 2010

Poll: What should be the role of business ethics?

This quarter, I am taking a course entitled A Guide to Business Ethics. The course is equal parts (1) how technological change brings up unresolved ethical questions in the business environment, (2) how religion, politics, and business have evolved over the last 100 years, and (3) how should business leaders and politicians respond to the changing ethical environment.

As I am spending the day doing some reading for the course, I thought it would be an interesting poll to pose the question to you:

What role should business ethics play? And, why?

(a) Central. There is a "right" way to conduct business.
(b) Central. Conducting business ethically is a profit-maximizing move.
(c) Secondary. Profit-maximization and returns to shareholders are more important.
(d) Non-existent. As soon as you give up your ethics, the rest is easy.

I'm interested in hearing what you have to say about this question. So, please vote early and often (on the sidebar --->). Tell your friends and CEOs to vote. I'm looking forward to seeing the response.

Wednesday, January 6, 2010

Why does coffee at a coffee shop cost so much?

My favorite popular economics writer-- Tim Harford -- discusses this topic in Chapter 1 of his book The Undercover Economist.* I have to admit that I do not own The Undercover Economist, but I read most of it in a Barnes and Noble coffee shop (a strategy I suggest if you like reading hardcover books, but find them more expensive than a cup of coffee).

Back to coffee: Coffee is not that expensive to make on your own. For example, we buy the Costco brand of coffee in the three-pound can. The can costs about $10, and it lasts about 2 months. That's for 60, strong 20-24 ounce cups of coffee. Or, about $0.16 per cup. Of course, there are other costs: milk, cream, the electricity to heat it up, and the time it takes to make the cup of coffee.

But, the cost of the other ingredients is negligible, and if you make coffee as part of a routine in the morning, the time cost is also negligible (or close to it if the alternative use of time is finding the coffee shop and waiting in line). Let's double our previous price to account for these other costs. Therefore, the cup of coffee costs around $0.32.

You would be hard pressed to find a coffee shop that will charge close to $0.32. For a regular cup of Joe, most coffee shops will charge at least five times that. Harford's point in Chapter 1 is that coffee shops are usually placed at very convenient locations, and most of what they charge is a convenience fee (Harford goes on to pinpoint who really gains from the coffee shops presence -- the owners of the location).

In my case, if I pay $1.50 for a cup of coffee at my favorite place (the actual price), I am paying the coffee shop $1.18 for the convenience of not having to walk home (or pack a thermos). That makes sense... and I am glad there is a coffee shop to cater to my convenience. I pay the price happily.

Moreover, the coffee cost story tells a general point about the food industry. That is, most of what we pay for food in the United States is a convenience fee. That's obviously true at McDonalds or Subway, but there's a significant convenience fee even when you shop at the grocery store.

That convenience is in the price even for my $0.32 cup of coffee. Before the advent of sealed coffee cans, ground coffee was not feasible in 3 pound containers (most would lose its flavor). Indeed, the convenience of making my coffee at home is because of this innovation, and I am willing to pay for my coffee to come in a sealed can. I imagine that others feel the same way. Accordingly, it becomes part of the price I pay. At the grocery store, you could tell the story for spinach, milk, ground beef, Lean Pockets, or any product you like (though it is easier to tell the story for Lean Pockets). They all come bundled with some convenience.

That's just something to think about the next time you head to the coffee shop (or grocery store). It's also something to be thankful for. If you're not thankful for this convenience, just consider the alternative (walking home to brew some coffee). In an era where some Americans complain about high prices, we have a saving grace: convenience is cheap.

*The Undercover Economist is not to be confused with Dear Undercover Economist, one of my Christmas gifts this year.

Saturday, January 2, 2010

Poll: How much do you spend on groceries per month?

Today, we went grocery shopping... from 10 until 4 pm. Prior to our Christmas vacation, we had depleted our stock of food to nearly nothing. As a result, we had a huge car full of groceries by the time we arrived home. I counted 10 trips up and down the stairs (which was good for me... I have some extra weight from the holidays).

Aside from spending the day on groceries and getting my exercise, we also spent quite a bit of money. That leads me to my poll question of the week.

How much do you spend on groceries in a month?

(a) 0 - 100
(b) 101 - 200
(c) 200 - 400
(d) 400 +

I'm interested in hearing what you have to say, so vote early, often and on the sidebar. Tell your friends to vote, and even your friendly grocer. The poll is open until next Saturday. I look forward to seeing the results.