Sunday, April 29, 2007

Information and Competitive Equilibrium


Patty at First National Bank owns and operates a business helping severe and profound individuals with physical disabilities. Patty needs special clips that resemble key chains. "I've checked out at Farm and Fleet and they don't have them," she says. "You would think that these would be easy to find at any hardware store." Patty shows me a picture of a big D-shaped metal clip that when pushed on opens like a gate for quick snap to strap connections. "I've looked all over town for a supplier, but can't find anyone," she says. "Today I've spent the whole day searching the internet and found a supplier in New York."


If information was not freely available, Patty's business would not exist. Patty helps young men like Cody LaScala stand up from his wheelchair and enjoy the benefits of physcial exercise. She helps others with rehabilitation necessary to help the body heal. Without her business, many disabled individuals would be confined to a wheelchair. Information allows more wants and needs to be satisfied because more beneficial transactions will be conducted. Information pushes the supply to it's competitive ideal.


Suppose that in the absence of information Q0 units of a good is produced at price $P0. Information moves supply to the right equatin at Q1 and $P1. Note that the price is lower and the quantity is greater. When information is freely available, handicaps are removed and more is produced and a lower price.

Saturday, April 28, 2007

Beware of the Naked Man Offering You His Shirt



The Iowa DOT is planning on building a roundabout in Muscatine to help the flow of traffic along Mississippi Drive. The DOT is footing the bill with state and federal grants. If the round about is free, why do taxpayers like Louise oppose it?

The answer is Louise knows more about her driving habits in Muscatine than the Iowa DOT. She seldom drives along Grandview so she won’t receive any benefit from it. But she will receive benefit from street repair. Louise knows that the roundabout would have some benefit, but the city would benefit more if they did not construct the roundabout.

If you ask a taxpaying citizen if they want a longer bike path, for example, they will say yes. If you ask them how much benefit they will receive from the construction of a new bike path, they will likely understate the benefit for fear of having their taxes raised. Take Louise. If her cost in increased taxes is $1 and she explains to the city council that she’ll receive $2 in benefits from walking along the river, watching the barges, and listening to the ducks, the city will build the bike path and increase her taxes $2. But if Louise says she will only get a little bit of benefit from the path, then maybe the city won’t build the path at all and she’ll see no increase in her taxes. So there’s an incentive to understate the amount of benefit she’ll received from the bike path. There has to be a way to find out exactly how much benefit users of the roundabout will receive.

May I suggest that the city install a counter to find out how much traffic flows along the proposed round about and compare the benefits of fixing the streets to the benefits of a roundabout. This is like getting a poker player to show you her hand so you know how to bet. After you have usage data, then you’ll have a basis for making a policy decision.

Louise also believes that she is paying for the roundabout despite the fact that the funding comes from grants and money previously budgeted in the form of spillover costs. When she drives down Cedar Street there are several manhole covers that she swerves to avoid. Likewise on Sycamore Street, there’s a patch of street that’s been torn up. When she drives to Head First to get her hair styled, her car bears the cost of detours and potholes in the streets. She worries about accidents while avoiding the potholes. Louise is likely to go the roundabout way to get downtown to avoid these streets.

The whole problem as I see it is that citizens know more about how they’ll use the round about than the city council or the DOT. Which ever has the greatest benefits should be the council’s recommendation. Harvey MacKay taught me to beware of the naked man offering you his shirt. Something that is given to you like the roundabout isn’t always free.

Concert and Tutorials--Complementary Goods?

My mijo, Jason, wrote and produced a CD, Kali Yuga Demolition. The CD received many reviews around the country including the LA Times. He plays hip hop and in the trade is known has a rapper who goes by the name Straith Wikid Crew. Jason claims that only 10% of the public listens to music for pure enjoyment. The rest use music as a complementary good. When people go to a bar, the listen to music and drink. When people study, they study and listen to music. Elevators often have music playing in the background. So do ads on the radio. In his view, music is a complement to work, play, and almost any activity.

In economics, when the price of a good increases, the demand for its complement falls. This makes intuitive sense. Suppose that peanut butter and jelly are complementary goods. If the price of peanut butter increases, consumers will buy less of it. Because they buy less peanut butter, they will need less jelly so the demand for jelly decreases.

Let's apply this economic model to Friday's concert. Supppose that teachers raised the price of tutorials. Teachers might have felt the crunch of the end of the six week grading period and felt obligated to give a major exam. Or maybe students most likely to attend the concert had the most missing work so the price of tutorial became more valuable. If this is true, would that explain the weak turnout Friday?

Muscatine High has about 2,000 BEDS enrolled students. 10% of the enrollment is 200. About 170 students attended the concert at $1 per ticket. Using Jason's model, the increase in the price may explain the attendance--ceterius paribus.

Friday, April 27, 2007

The Floppio Concerto


Today we held the tutorial concert. As I write this, all benefits and costs accure at the same time so there's no discounting the future value of the dollar. After all tickets were sold, we sold 200 tickets. My final analysis of the concert is students value their studies more than they value the lesiure of the concert. At a concert price of $1, the value of studying math or English were greater than the concert as can be seen in the graph. I think assignment deadlines, critical tests that were to be counted on this grading period, and attitudes towards the bands playing, all played a part in determining the quantity of concert consumers. Suppose that demand is inelastic for the concert, Dc, since there's no time to adjust buying habits. Also suppose that the demand for study time, Ds, is relatively elastic but is valued more because of the time. Thus, students value the tutorial at $10 but the concert $1. Since students will receive more value from studying, they will not go to the concert. This has to be a positive externality for a society that believes today's youth is indifferent.

Thursday, April 26, 2007

Why did the Concert Flop?

Students at Muscatine High School have a two-hour fourth period. The two hours are divided into a 30-minute lunch, a 30-minute tutorial, and an hour class. Ask any student at MHS if they like their tutorial and they'll say they hate it. Ask any teacher if the tutorial is beneficial, and they are likely to tell you that's a waste of time. So why don't students want to buy their way out of tutorial to attend a concert?

For the last week, students have had the chance to buy their way out of their tutorial for a $1, yet only 40 tickets have been sold in a school with a population of 1,700. I think the answer has to do with the present value of money.

Economists like to say that consumers have to make choices with their money. When they make a choice, they must give something up. What they give up is called opportunity cost. We like to measure that cost as the next best alternative for a choice. Thus, if I watch the Sorpanos, I must give up going to my son's baseball game. In other words, choice involves cost.

Is it possible to measure the cost without knowing the next best alternative? For example, suppose I had a $1. Do I want to spend it now or spend it a week from today? Economists like to say that a dollar today is worth more than a dollar a week from now. The concept of present value supposedly grasphs this idea. If you love math, then you'll love this so hold on.

The present value of money is equal to: PV = A/(1 + R) where A is the amount of money, R is the rate of interest, and PV equals the present value. In this example, the rate of interest is equal to the opportunity cost of having a dollar now. Let's plug in numbers for the variables. Assume that it costs a dollar to go to the concert and students discount the future by 10%. The present value of the dollar is: .9090 = 1/(1+.10). Thus, a student values a dollar about .90 cents now. The .09 cents difference is how much interest the student gives up in opportunity cost.

What this formula shows me is that a student wants the use of the dollar now and is willing to forgo the opportunity to have the dollar later. This is a problem when the costs and benefits arrive at different times as in the case of my concert. Economics is how people behave to satisfy their wants and needs. On Monday, Sheri Swailes was selling cookies and brownies for student council. Her goodies sold for .50 cents and students could eat the treats a second after purchasing. I'm sure each student rationally compared the relative cost of the treats to the concert tickets and found that they could buy two goodies for one ticket. Thus, the goodies were cheaper relatively.

But, how much were the students willing to give up in opportunity cost to eat the treats now? Let's return to present value. Our equation becomes PV = 1/(1+R) or .50 = 1/x. Now, multiply both sides by x and the formula is: .5x = 1. Divide both sides by .5 and you are left with: x = 1/.5 or x = 2. This means that students will discount my concert 200% in order to consume cookies now instead of buying a ticket later. That's a high opportunity cost to bear. For Ms. Swailes that's good.

What a Deal!

The sales clerk at Walgreens said to me, "Today's special is AAA batteries. If you buy one at the regular price, you can buy the next one at half price." What a Deal.

I often see or hear this scheme. The store doesn't have my best interests at heart. The store is just profit maximizing by engaging me in first degree price discrimination. Steven Landsburg, More Sex is Safe Sex, 2007, defines first degree price discrimination as being able to sell the same product to the same customer at different prices. Perhaps the use of a coupon would induce me to buy a second box of cereal at half price. Payless Shoes often has a buy one get one at half price sale. Price discrimination allows the store to make the most money from every customer since the store is able to determine the maximium amount you'd be willing to pay for each item. This eliminates any consumer's surplus you might have by finding a bargain. In the graph below, Alex would pay $10 for one ticket to the opera and $5 for two tickets. If Alex buys one ticket at the regular price and the second one at half, hasn't she just moved along her demand curve? She's not getting a deal, she's just matching the benefits of two tickets with the cost. This is easily seen in the graph below, dude.

Wednesday, April 25, 2007

The $400.00 Haircut

Presidential hopeful, John Edwards, recently spoke at Muscatine High School sporting a $400 haircut. In conservative Iowa, a haircut that costs more than $20 is enough to make your hair stand straight up. A haircut can last a month and can present a favorable appearance for camera. In Iowa, a good showing in the primaries usually is a good sign for a candidate. I think it would be rational for Mr. Edwards to present his best side to the voting public. Mr. Edwards might think that paying $400 is the price he must pay given the time he has to get ready for his tour. He might not have time to go to a barber shop. This is the definition of inelastic demand. Mr. Edwards would still demand a haircut at any price just like any good that is a necessity. I have watched friends pay $1,000 for tickets to the Alamo Bowl to watch Iowa University, 8-6, play. How is a ticket to a football game different that a haircut? In economic terms, Mr. Edwards demand for haircuts resemble the graph below. He demands a haircut at any position of the supply curve.

Tuesday, April 24, 2007

The Moby Dick Theory of Energy


In the classic literary work, Moby Dick, men sign three year contracts to hunt whale for the oil. The oil is used to light lamps. As more and more whales are hunted and killed for their oil, it becomes harder and harder to find whales as dead whales do not procreate. So the sailors have to work harder and longer to obtain the oil. As more and more work is supplied to find the oil, the price of the oil increases as an incentive to produce more.

As China and all of Asia has grown, their demand for oil has increased. Oil companies have to search longer to find the oil that world demands. I believe that this search for oil has moved oil producers along their supply curve in what economists call a change in the quantity of oil supplied. Since consumers have more demand at every possible price their demand has shifted to the right in what economists call achange in the demand for oil. The dynamics of a change in demand coupled with a change in quantity supplied has caused an increase in oil prices. In other workds, oil prices are increasing because of demand and not a shortage of fossil fuel.

I can envision a scene in Moby Dick where someone says, "You know, all of the chasing around of whales is hard work. There's got to be a better way to get oil that's cheaper." As whales hunted more and more whales, the price of whale oil kept increasing. Suddenly, alternate sources of fuel, like fossil fuel, became more profitable and was adpated. This increased the supply of oil keeping the long run supply curve relatively elastic as seen in the next graph. I argue that as the price of oil increases, innovation to find cheaper alternatives will put downward pressure on energy prices. In the long run, prices will remain relatively stable. Drilling for oil in the gulf will become as antiquated as whaling for oil. Call me the Ahab of alternate fuel sources such as fuel cells, Ethanol, solar and wind power, atomic, and hybrid batteries. These alternate fuels will replace fossils just as whale oil was replaced by relatively cheaper fossil fuels.

What's Up with Higher Electric Prices, Doc?


The classical view of government was lassiez-faire or hands off. The classical economists believed that the government would surely mess up anything their hands touch so the government should stay out of the market. Markets would distribute goods and services efficiently to those who want them at a price that would clear the market. The classical economists also believed that government intervention in the form of price ceilings result in market failure because the price would be artificially too low.

The classical economists would love what recently happened in Benton, Illinois, when law makers deregulated the electric market. Prices immediately shot up like the hair on a kid's neck who just stuck a fork into an electric socket. Prices for electric services shot up a shocking 50% according to the April 23, 2007, Muscatine Journal. At these higher prices, economics would predict that the quantity of electricity would decrease. One business owner cited in the article has shut down her freezer for ice cream in her grocery store and closes an hour early to save on electric bills. The classic graph for this situation looks like the one included with this blog. Notice that as the an industry ceiling is removed, prices jump through the roof. In this graph, the amount of energy demanded falls from Q" to Q' as the price climbs to $P.

Other states except Texas, report the same findings of higher prices. Maryland, for example, experienced a 72% increase in energy costs. Economic models are used to predict what will happen so policy makers can implement laws. In this case, the temperature is rising along with the price.

Monday, April 23, 2007

How Come Popcorn is so Expensive at the Movies?



The demand curve for a monopolist slopes down and to the right because the monopolist has to lower the price of the product to sell more. If the monopolist has to lower the price it makes logical sense that the marginal revenue, or the money made on the next unit declines. That is why economists say that MR < P for a monopolist. The demand curve shows the amount consumers are willing to pay for a product at every quantity. The trick with popcorn prices is to capture the consumer's surplus--the difference between what the consumer paid and the highest amount they would have paid. For example, if Juan would pay $10 to see Dawg's Breath at Fridley Theaters but he actually paid $5, then Juan's consumer's surplus is $5. The trick for the theater owner is to then charge $5 for the poporn and capture all of the area under the demand curve. In the graph included with this blog, the purple shaded area represents the amount of consumer's surplus and therefore the amount to charge for popcorn. The astute reader will note that the area of consumer's surplus is a trapazoid. Once in the movie theater, Juan may feel "trapped" into paying the monopoly price for popcorn.

Saturday, April 21, 2007

Why Can Hose Read the Entire Book at Borders?

Sunday's I visit my mom in Davenport, Iowa. I usually stop at Border's books since I'm in the area. My son Jason, likes to go along to keep me awake. While I browse the latest economics books and look for music, Hose usually grabs a book to read from the shelf. He often reads the important parts of books while I shop. He figures he has saved hundreds of dollars reading books in Borders instead of buying them. I can usually find him sitting comfortably on the couch in the United States History section reading a book on advertising or search engine optimization. How come the workers do not stop him and make him buy the book?

The stock economics answer is that people respond to incentives. The workers at Borders have no incentive to stop Hose from reading the book since they still collect their paycheck regardless. I also believe that the incentives of the employees differ from the employer. The employee wants to make sure customers are satisfied while reducing the "costs" of their work. The employer wants to maximize profits. When the objectives are different for the parties involved in a workplace, the market often fails to deliver the optimal outcome. In this case, Hose gets to read How to Close the Sale without paying for it.

Muscatine High School as a Monopoly

Muscatine is a town in southeast Iowa on the Mississippi River. The Muscatine High School is the fourth largest school in the state with 1,700 students. Because of it's location, the town is considered to be a rural community. There are no other high schools of this size within 30 miles. Students who seek an alternative school will have to drive north to Wilton or West Liberty or south to Wapello. Muscatine residents enroll their children in the high school because they have little choice. The Muscatine Community School District, MCSD, has a monopoly for high school education. For a private company to compete against MCSD would need a huge investment in resources. Plus, the private company would have to obtain NCA acceditation. Both represent barriers to competition and MCSD continues to be the sole provider of public education in Muscatine. I argue that the high school is a monopoly.

In economic theory, a monopoly charges a higher price for less output than the same business would under competitive market pressures. A monopoly is considered to be inefficient from the standpoint of society because society could benefit from more of the good being produced. In the graph included in this blog, Pm is the monopoly price and Pc is the competitive and Qm is the monopoly output and Qc is the competitive output.

Is the high school inefficient? Ask many parents and they would say yes. Teachers often do not send make up work home or answer phone calls or reply to email. Administrators are often out of the office for days at a time . Teachers often show a movie in class as a substitute for teaching. These are just a few complaints lodged against the high school. This is not to say that great teachers don't work for the school, but it is to say that these complaints are often heard. In a society that values competition, shouldn't our schools be subject to the same competitive forces are Hy-Vee, WFO, Aldi, and Wal-Mart?

The “Classic” Change in Demand



The Jackson Concert Series brings in some of the best musical talent in the country. The concert series is hosted by United Wesley Methodist Church in Muscatine, Iowa. Last night I heard concert pianist, Steven Marq, play classical compositions on a Steinway with deft, articulate hands. Mr. Marq’s original work was romantic which is why I wanted to buy his Amore CD.

Each of his acoustic CDs for sold for $18.00 each. As I was looking at his display, I suddenly understood the impact of a change in tastes and preferences on my choice of player media. I was repulsed from buying the CD as a sinner would be from going to confession. I now found it awkward to carry around a five and half inch plastic platter in a CD case when I could just carry downloads on my cool iPod.

I remember buying my first LP, the Eagles, “One of These Nights.” I came home and put the album on a turntable and listened to the music delivered through woofers and tweeters on Yamaha speakers. In a dorm room at UNI, I will always remember hearing Steely Dan’s, Aja, and the rich cover perfumed with the scent of vinyl delivered through a component stereo system. The cover of Aja is where I learned that “Home at Last” was about Homer’s Odyssey. I stored my albums on a book shelf prominently displayed like a connoisseur’s wine collection. Today, Hip Hop rappers only use LPs for scratching a beat.

I remember the first time I held a CD in my hands. The CD, I thought, was as advanced over the turntable and stereos as a revolver

Thursday, April 19, 2007

Are Brand Name Products Better?


The Little Giant is a ladder that folds and extends into different positions to help a home owner paint, clean gutters, hang Christmas lights, or just general work around the house. In my opinion, it’s just a ladder. One morning over breakfast, John Each and I were discussing the merits and demerits of the Little Giant. I was adamant that he didn’t need the ladder since any ladder would do. John was so convinced that the Little Giant would meet all of his needs that he would pay a premium price for the ladder--almost two times what an "ordinary" ladder would sell for. Why is it that consumers are willing to pay more for a name brand when a generic brand is just as good?

Some people will argue that advertising influences people to pay more for the ladder. I say people are willing to pay more because they have the most information about the product and it would be too costly to research other ladders and compare. Think about when you want to go for a hamburger in a town you are unfamiliar. Wouldn’t it be faster to go to McDonalds and buy a hamburger with a known quality than to go to McButt’s Burgers and take a chance? Most people would be willing to pay a little more for the brand name since they have the most information about that product. This is why Consumer Reports www.online.consumerreports.org is so valuable to buyers. Consumer Reports is a magazine that is valuable for the information it contains unlike a phone or a car.

Mr. Each saw the info commercial on television and had all of the information needed to make a Little Giant purchase. For John, researching Werner ladders or other brands would entail an investment of time. Since he knew someone with a Little Giant ladder that was happy with it, John was happy to pay the higher price for quality and brand name recognition. The Little Giant is shown in the picture above. See www.littlegiantladder.com for the advertisement.

In the case of ladders, this “extends” the time John can pursue other uses for his time--24 different ways.

Wednesday, April 18, 2007

Thanks

Just a big thanks to Hana Meyer for her proofreading and to Tess Weaver for the nice picture. You girls make my life easy...xoxo.

Tuesday, April 17, 2007

French Fries and Price Supports


The nice cafeteria worker asked me, "Is there something going on today because there's so many fries left over?." "Not to my knowledge," I told her. I looked at the food rack at the 15 servings of fries left unpurchased. The fries were going to be thrown away. She said, "Each order is about 4 ounces and we make 286 pounds of fries every day." I stared at her with my head tilted to the side like a dog who doesn't understand a command. She left me alone.

The everyday economics answer is the price of fries is too high as shown above. A 4 ounce serving costs $1.25. Since there's so many fries left over, the price of the fries must be higher than the price people are willing to pay to clear the market otherwise a surplus occurs. The price must be lower. At McDonalds fresh french fries sell for a buck.

I believe that the equilibrium quantity of Muscatine High School fries is lower, say somewhere around 280 pounds. The problem is the mandatory price that the school must set. The higher price encourages the cafeteria staff to produce more than is socially optimal. The staff has their hands tied as they can't lower the price to match demand and clear the market. The market fails to distribute the fries and a surplus occurs. The surplus is exactly what economics predicts will happen when you have a minimum price or a floor.

I recommend that the cooks shouldn't try to predict how many students will eat fries on a given day, but to make the fries on demand.

Sunday, April 15, 2007

Fallacy of Composition and the Public Defender

In his book, Indefensible, David Feige discusses how following the courthouse house rules wastes the client's time, the attorney's time, family members' time, and even the court's time. He advises a young pup that to be effective, "...you gotta do exactly what they forbid you from doing." (page 90) He explains that if you play by the rules you'll spend hours waiting and you'll burn out. Breaking the rules is a way to help your clients receive a fair trial.

I think this is a prime example of the fallacy of composition. If David breaks the rules, he comes out ahead. But if everyone breaks the rules then the system breaks down. In other words, what's good for the part isn't necessarily good for the whole.

The law doesn't make people do what's right, but the law helps society function efficiently. Maybe it's odd that a defense attorney who defends people who breaks the law has to break the law in order to defend them. Or am I on my way to another bad lawyer joke?

Are Sports Like the Long-Run Supply Curve?

Last year the Portland, Oregon, Lumberjacks were the best arena football team in the nation. Areana football is played on an abbreviated field with a pace faster than a Pentium processor. Sometimes the score is 76-20. A high scoring game played by NFL prospects, athletes living out their childhood dreams, or a breeding ground for developing talent, areana football is fun to watch. The Mark of the Quad Cities, packs 5,000 fans into the place for a game. So how is it that the Lumberjacks have been beaten in every game this year?

Probably the best atheltes of the team have been attracted to other teams with a promise of a higher salary. Some of the talent was competed away by teams like the Steamwheelers who through practice got better. Another reason might be injuries and retirements. But this year's Lumberjacks aren't the ones who played last year. If wins are like profits, then the "profits" of the Lumberjacks have been competed away.

Economics predicts that profits will disappear in the long-run because more competitiors will be attracted to the industry. Is areana football any different?

I welcome your feedback. Please check out my podcast at http://fladdog.libsyn.com .

Saturday, April 14, 2007

How is the Post Office like the Music Industry?

The United States postal service holds a monopoly on mail delivery. A monopoly is a price maker that produces where marginal revenue equals marginal cost. So a monopoly produces less than the socially optimal amount at a price higher than the cost of the last resource used. In the language of economics, a monopoly is inefficient because the benefit of the resources used are higher than the cost. Society could gain by more postal service being produced. For example, maybe mail could be delivered on Sunday.

Recently, the postal service announced that the price of first class postage was going up from $.39 to $.41. The two cent increase in delivery is enough to prompt consumers into substituting Fed Ex and UPS. My son thinks the price hike is a good thing because now less people will use the US Postal Service and his mail will get delivered sooner. I believe that a higher price will induce price sensitive consumers into finding an alternative to using a stamp. Perhaps they will use more email of cell minutes. And, perhaps, they will use illegal methods of sending a message.

When the cost of a good is too high, economics predicts that consumers will find a way to satisfy their unlimited wants even if they must resort to illegal methods like file sharing of music. Consumers break down the traditional barriers of a monopoly by finding substitutes. In the music industry the substitutes are P2P file sharing, Limewire, and Napster. In the postal industry, other subs will be found moving the output closer to the perfect competition ideal. In the music industry copyrights protect the artists. In the delivery of mail, the law protects the government. As the prices rise in both industries, consumers will finds ways to satisfy their wants even if they are illegal. In both cases, eliminating the monopoly is the best way to bring down prices and produce the socially optimal output.

Should Parking Be Free in Downtown Muscatine?



One autumn Saturday I went pheasant hunting with my dad. Where we parked, a sign said “Public Hunting” but we walked right on by it. I asked my dad, “Why don’t we hunt there?” My father replied that there were no birds in a public hunting ground. All of the birds were hunted out. His point was well made. When something is given away for free, it is over-consumed to the point where the good is worthless. He said that this is one reason why hunters are required to have a license so that only those who really want to hunt will hunt. I see this every day in the high school lunch room.

Students find that lunch is cheaper if they buy the “meal” instead of the entrĂ©e. So students add a half pint of milk and a side to their tray. When most are finished eating, there’s still food left on their trays. So by the end of the lunch time, you’ll see students drawing in ketchup, throwing fries, pushing a straw through an uneaten hamburger, and pouring chocolate milk out on the table. The food is excellent. Why do students waste it? Because the food is free and it is over consumed. In other words, after the food satisfies the student’s hunger, the food finds alternate uses to bring satisfaction such as being used in a food fight or modern art.

Whenever something is given away free, there’s a tendency for it to be over consumed.

What would happen if parking becomes free in the downtown area? It’ll be over consumed. The free parking will provide alternate uses and exert a cost on others.

If parking becomes free in the downtown, you’ll find that patrons will park longer than before. You will find that you can’t find a place to park downtown. You’ll find the downtown more congested. You’ll find that there will be unintended consequences exerted on people who are neither a buyer nor seller parking in downtown. Let me elaborate.

Say you want to go to the grocery store to buy a week’s worth of food. How do you find a parking place? I’ve noticed that most people try to park as close to the entrance as possible. This has many advantages. You can get into and out of the store quicker. You have to carry you groceries less distance which might be beneficial if you buy ice cream in August. I have also noticed that parking near the entrance of the store is harder to find and the traffic is heavier around the front door. What I observe is people first looking for a parking place near the door then they circle around the parking lot to looking for the next closest place to park. Sometimes, parking is the hardest part of shopping. Some people will give up and come back later. Parking around the front entrance of the store is free. Yet these coveted places are the first ones taken.

Why would free parking in the downtown be any different?

Dr. David Hakes, professor of economics at the University of Northern Iowa, “Waiting for a parking place increases as the price of parking goes down. The true cost of parking isn’t measured in the price. It’s the driving around looking for one and the walking to the place of business.”

Griffin Hahn, a future student at the University of Florida says, “The parking is free at the university. A license to park is really a license to hunt for a place to park. That’s why most students ride bikes to class or take the bus.”

I think free parking will, pardon the pun, “drive” people away from the downtown because they will not be able to find a place to park and the parking spots they find will be too far away. In the Undercover Economist, Tim Harford explains that most city dwellers would not walk 1,500 feet to save about 50 cents on an item.

Instead of free parking, I propose a parking plan that makes parking very expensive during the peak business hours and relatively cheap or free when businesses are closed. My plan would call for parking meters to be installed that accept a card that automatically debits the amount of the parking fee to the penny for the time used. Thus, if Maggie wants to rent a tux at K and D Clothiers Maggie can park in front of the store, swipe her card in the meter, run into K & D. If the transaction takes 5 minutes, Maggie gets charged ten cents. Under the current method, Maggie would put 25 cents into the meter and linger in the store until the meter expires.

The city council should put peak pricing into effect in the downtown. Peak pricing will provide parking places to those who value them the most at the time they need them without imposing huge transaction costs. And when I come home from work, I won’t park in ACE Hardware parking lot and take a space away from a paying customer.

Friday, April 13, 2007

Postage Stamps and Change in Demand

While standing in line at the post office today, I overheard the friendly worker say to a customer, "Prices for stamps increase in May. A lot of people are buying stamps now in anticipation of higher prices later." This was spoken like a true economist. Postage rates increase by two cents on May 14. Many postal service customers are buying stamps now. In economic theory, this pushes the demand for stamps to the right increasing the quantity demanded at every price.

By the way, in the coolest stamp ever, I bought Sugar Ray Leonard in the old boxing poster tradition. The art gives you the impression of the old banners of upcoming fights. The way prices for stamps are increasing, the stamp will soon be a thing of the past--a rememberance of the good old days.

Thursday, April 12, 2007

Wal-Mart the Bully on the Block?

Muscatine is a town of 28,000. The Department of Education classifies Muscatine as a rural town even though the high school is the fifth largest high school in the state. Rual towns was exactly what Sam Walton had in mind he founded Wal-Mart. Walton wanted to set up his store in small towns so he could monopolize the town. It's no wonder that many people are concerned that Wal-Mart drives the Ma and Pa stores out of business.

When Wal-Mart came to Muscatine and opened a super store, how come KFC, McDonalds, HY-Vee, and Blockbuster didn't go out of business? Wal-Mart sells chicken, hamburgers, and groceries. Plus, Wal-Mart sells more DVDs than Blockbuster. So why didn't those businesses put their tails between their legs and leave town? I suggest that Wal-Mart and all of the firms it competes against have reached the level of output where average total costs are minimized. In the economics trade this is called the Minimum Efficiency Scale. What this means is that the producers have the same costs. That means that regardless of size the costs of making chicken, hamburgers, or renting DVDs are the same. In other words, David can compete with Gollialith.

I believe that if the costs of running a Ma and Pa chicken shop are higher than the costs at Wal-Mart, then the Ma and Pa shop will be run out of business. In other words, the high cost producer is run out of the market while the low cost producer stays. If you want to pay more for your chicken, then shop at the Ma and Pa. Most people will vote with their dollars and shop at Wal-Mart. Sales will decline at the Ma and Pa and drive them out of the market. This is how competition works. Only the efficient survive. Because of this efficiency, shoppers know they can buy more shopping at Wal-Mart.

Efficiency is good for the economy too. The resources that the high cost producer used to make his ware, is now free to make other goods and services. Competition frees up resources that are being inefficiently used and directs them to more optimal uses.

Supppose I go into business to make cheese sandwiches. Do I have to worry about competition from Wal-Mart? I don't think so. The cost of making the sandwich is the same whether I make it or the retail giant makes it. Seems to me that only those business owners who are inefficient in their work should worry when the big blue comes to town.

Monday, April 09, 2007

Cigarette Tax and PPC

My sister Diana has been smoking for over 40 years. Since Iowa has raised the price of a pack of cigarettes a dollar, she now has to pay $35 for a carton. Has the tax stopped her from smoking? My sister says, "NO." Her theory on why she has not cut down on smoking has everything to do with economics and making choices. "I now do not have my hair professionally colored," she said. "And I've given up other things as well so I can afford to smoke." This is the very definition of economics. When you make a choice, you must give up something. Scarcity forces us to make choices.

From a macroeconomic stand point, my sister's choices have a multiplier effect on the economy. "When I don't have my hair colored, then my stylist doesn't have as much money to spend. She in turn doesn't buy something that she wants as she has to make choices too." My sister intuitively understands the multiplier effect. For those who love math, the multiplier is estimated at 2. So when Diana doesn't have her hair colored, the economy suffers $20. In a larger frame, what if there are a million smokers just like Diana?

My friend Dan was vacationing in Missouri this weekend. Dan is a heavy smoker. Since a pack of smokes is cheaper in Missouri, he picked up $100 worth, or 5 cartons, to bring back with him to Iowa. The effect of a tax in Dan's case was to perform illegal activities in order to circumnavigate the higher cigarette price imposed by the sin tax. What if there are a thousand smokers just like Dan?

The cigarette tax was supposed to curtail smoking. According to Diane, "I know of no one who has quit smoking because of the tax." The cigarette tax has unintended consequences. One consequence was a reduction in consumption. the other was an increase in illegal activity. How can any politician agree that the tax is good.

In defense of those politicians who voted for the tax, I offer that the cigarette tax might deter a new smoker from taking up the habit. In my sister's case, the marginal rate for a carton increased by $10. In the case of a new smoker, perhaps influenced by Joe Camel, the margianl rate for a carton is $35. A new smoker has a higher cost. The higher cost could deter a new user from taking up the habit.

The long run effect of the cigarette tax is yet to be seen. Let's hope that the tax deters a new generation from beginning a bad habit.

Sunday, April 08, 2007

What is Economics, Anyway?


The other I thought I would obey every traffic law that I knew. I stopped at a stop sign for the full three seconds. I used my blinker, didn't tail gate, or go over the speed limit. Once while making a left turn, I knew I was by law to stay in the lane closest to the median, then turn on my blinker and move into the slow lane. As I turned into the proper lane, I noticed that a Toyota Celica had made the left turn with me and was already in the slow lane and tail gating me. I was blocked in. I think strict obedience to laws begins to define economics. People will try to get as much as they can as fast as they can even if they break a law. Thus, people will speed, run red lights, and make illegal turns in order to get more faster. That's the definition of economics: how you satisfy your unlimited wants with limited resources.

Here's a joke that is not funny. Two economists are walking down the street and see a $10 bill. They look at each other. "Are you going to pick it up?" asks the first economist. The second economist replies, "No. by the time I bend down to pick it up, someone will beat me to it." So neither one picks up the $10.

The joke shows how fast the market responds to incentives. Just like in my example, I couldn't move into the slow lane since someone had already beat me to it. That's how efficient markets work. People working to satisfy their own wants with what little they have suck all of the resources away in a matter of seconds. In the joke, there was no incentive for the economist to bend down and grab the $10 because the cost of doing so outweighed the benefit. Thus, the market stays in equilibrium.

It's now Easter Sunday. For once, I wasn't going to be in a hurry on my way to workout. I was going to drive at a relaxed pace. The second I slowed down, a car was on my bumper. In my rearview mirrow, I could see the pissed off look on the driver's face. I slowed him down so he can't satisfy his need to get somewhere as fast. I'll bet that if he passed me and arrive at his destination one second faster, he would be more satisfied. And that's ultimately what economics is. How do you maximize your satisfaction variable by going about your everyday activities.

Thursday, April 05, 2007

Adam Smith and Classroom Control

As I walk by her classroom, students are fantically working to make the last-minute homecoming decorations and preparations for the homecoming dance on Saturday. There's little talking and students are moving efficiently around the room to minimize their time on task. A casual observer would think that Mrs. Doe was the best teacher in the world judging by her students' behavior. In fact, she's just average. Out of the five teaching days, Mrs. Doe shows a movie on three days. On the other days, she tries to get the students to learn microbiology and physics. In this class, students often ask for a pass to the restroom as soon as they enter the door for attendance. Often these students roam the halls for 20-minutes before returning to class. So how does this teacher get her students to work so hard on homecoming preparations? Simple. She lets economics do the work.

Adam Smith postulated that people working in their own self interests will produce the socially optimal output and price. When the students were accountable for homecoming decorations, they had high accountability for their actions and thus the incentive to work efficiently and hard. If the students did a poor job on the decorations, they'd hear about from everyone at the dance and for a long time afterwards.

When anyone works in their self interest, society benefits. The problem in education is that what students consider their self interest and what teachers think is self interest are asymmetrical and this leads to failure. Literally, for students.