Among my most memorable trips in recent years include visiting remote towns in the Arctic, where there are no roads connecting to other towns, and limited access to waterways due to the sea being frozen for much of the year. In two towns that I visited, Barrow, Alaska, and Iqaluit, Nunavut, the only viable means of transport for passengers and goods is by air. For most of us urban-dwellers and rural residents who live in towns connected to one another, we are accustomed to seeing prices of everyday consumption goods based on the cost of raw materials and other inputs that contribute to their wholesale price. The difference in retail prices between a department store in Akron and a convenience store in Los Angeles is based on factors such as competition, economies of scale, and taxes. But one input we often take for granted is the transportation cost, given the efficiencies of the shipping industry that allow goods to be transported quickly and efficiently throughout the country. However, in the Arctic north, prices are largely dependent on transportation costs, because everything other than the few locally-made items is delivered by air. Therefore, retail markups are largely calculated based on the wholesale price plus a large premium for the air freight. Consequently, prices for heavy household items such as laundry detergent and cat litter that typically sell for less than $10 at a Walmart or Target can be five to ten times that cost in Iqaluit. Moreover, heavy items that are also perishable such as orange juice and milk can have an even higher markup. Meanwhile, goods that are relatively light and have a longer shelf life, such as microwave popcorn, have prices that are much closer to what we are used to. Visiting towns that are largely cut off from the rest of the world provides a unique perspective to market pricing, which subsequently influences the goods that residents in these faraway places consume. ... View more

Zero hour. Eric Chiang and I are now on board our Jet Blue flight from Fort Lauderdale to Bogota, Colombia. Incredibly, although the rest of the flight is full, there's an entire row across from us in extra legroom. Jet Blue competes against Spirit airlines for this route (duopoly). As Spirit's business model is based on carriers in largely less developed countries, Jet Blue has to drop their prices extremely low to compete against their single rival. Base fare for this flight was less than the cost to take a shuttle from NYC to Boston. Only $47... ... View more

Originally posted on March 22, 2011.   With streams and rivers drying up because of over-usage, Rob Harmon has implemented a market mechanism to bring back the water. Farmers and beer companies find their fates intertwined in the intriguing century-old tale of Prickly Pear Creek.   Inevitably, students’ ears will perk up at the mention of beer and brewers…   Check out the video below for a great application of the importance of markets aligning self-interest with social interest.                                                                                                                                                   Thanks to Chuck Sicotte for the pointer. ... View more

Originally posted on September 28, 2009.   Adam Smith, a loyal MR reader (yes that is his name), writes to me: I had a very MResque thought today I wanted to share with you.  Why are the typical lengths of albums across different music genres so different?  In particular, I was thinking most of my rap albums are at least over the hour mark and many run all the way up to the 80-minute maximum.  They're usually packed with intros, skits, and lots of 5 minute tracks that have extended intro and outro instrumental beat only sequences.  My metal albums, on the other hand, have an average run length of  no more than 40 mins.  Most albums are between 8 and 10 tracks with little in the way of tangential material.  These different run-times show up in other places too.  For example, my older jazz albums (i.e. Kind of Blue, Time Out, Blue Train) typically run around 45 mins with a half dozen or so tracks yet my newer jazz albums like MMW's The Dropper run almost the whole 80 mins.  Also, prog. rock bands tend to produce much longer albums than garage rock bands.  Even adjusting for the fact that prog bands emphasize longer musical passages, they could compensate by just having fewer songs or garage rock bands could just have twice as many (like the White Stripes did on their first album).   Is there a relative price argument for these differences?  Or even signaling?  Perhaps there is a rat race among rappers to signal they're capable of coming up with enough material to fill out the maximum length, even if it includes lots of filler.  Perhaps the recording costs are lower as instrumentation relies so heavily on sampling.  Maybe metal runs into diminishing returns after 30 mins or so where the listener becomes numb to the intensity.   I'll offer a few points:   1. The average career of a rapper is short.  A long CD increases the chance that something will "stick" and the rapper won't get too many other chances to try.   2. Some metal bands develop great loyalty among their followers and achieve durable franchises.  That gives them a lower discount rate and they are more inclined to save up material for the future.  Plus they are marketing an overall sound -- rather than clever particular innovations -- and if the first forty (five?) minutes don't convince you nothing will.  Rap songs probably have a higher individual variance.   3. Many older albums are short for technological reasons, plus the albums were due in relatively rapid succession for contractual reasons.  In the 1960s there was lots of technological advance in music, so if you sat on the sidelines for a few years you could become obsolete.   4. It is relatively easy for a contemporary jazz artist to tack on additional improvisations and he can choose standard compositions if necessary.  Other forms of popular music cannot expand quantity so easily without hitting a wall in terms of quality.  One prediction here is that "compositional jazz" albums should be shorter in average length than albums of jazz improvisation, contemporary that is.   5. If you wanted a somewhat strained explanation, you could argue that the longer CD is a more bundled product andit will make economic sense as a form of price discrimination, the more varied the valuations of the audience.  This would require that rap CD buyers have a higher variance of marginal valuation. ... View more

Originally posted on October 14, 2009.   Here are some recent results: In the first study of its kind, Chhatre and Arun Agrawal of the University of Michigan in Ann Arbor compared forest ownership with data on carbon sequestration, which is estimated from the size and number of trees in a forest. Hectare-for-hectare, they found that tropical forest under local management stored more carbon than government-owned forests. There are exceptions, says Chhatre, "but our findings show that we can increase carbon sequestration simply by transferring ownership of forests from governments to communities". One reason may be that locals protect forests best if they own them, because they have a long-term interest in ensuring the forests' survival. While governments, whatever their intentions, usually license destructive logging, or preside over a free-for-all in which everyone grabs what they can because nobody believes the forest will last (Proceedings of the National Academy of Sciences, DOI: 10.1073/pnas.0905308106). The authors suggest that locals would also make a better job of managing common pastures, coastal fisheries and water supplies. They argue that their findings contradict a long-standing environmental idea, called the "tragedy of the commons", which says that natural resources left to communal control get trashed. In fact, says Agrawal, "communities are perfectly capable of managing their resources sustainably". If you turn to the first page of the paper itself, the header reads: Edited by Elinor Ostrom, Indiana University, Bloomington, IN, and approved September 4, 2009 (received for review July 22, 2009) Of course this sort of result is inspired by her work as well.  For the pointer I thank Andrew Grant. ... View more

Originally posted on December 11, 2009.   In our chapter, Public Goods and the Tragedy of the Commons, we discussed  the 75% decline in the catch of southern bluefish tuna, which is highly prized as sushi.  60 Minutes has a great episode on this issue which covers the fascinating Tsukiji fish market in Tokyo, the biggest wholesale fish and seafood market in the world, the Mediterranean fishermen who are losing their livelihood as fish stocks decline, the industrialization of fishing (including tuna ranches!) and finally the decline of the tuna stock.   The whole video is fascinating but if you want to shorten it I suggest covering the first 4 minutes on the Tsukiji fish market then jumping to around the 8 minute mark when the purse seiners are discussed. An interesting puzzle is that tuna is relatively inexpensive.  Ask students whether this can be reconciled with an impending collapse of the tuna stock.  After all, isn’t a low price a sign of plentiful supply?  The answer points directly to the tragedy of the commons – the low price is possible because the purse seiners are scooping up enormous quantities of tuna which pushes today’s price down but too few fish are left to breed so future stocks are imperiled.  An entrepreneur who owned the stock of tuna–like Frank Purdue owns his chickens–would not do this but tuna are not owned until they are caught.  In other words, the current tuna boom is like “eating the capital stock,” you get a big party today but a tragedy tomorrow.   FYI, the tragedy of the commons is driving many other fish stocks into collapse. ... View more

Originally posted on June 6, 2010.   The stock of fish is declining worldwide at a rapid and accelerating pace.  In Can Catch Shares Prevent Fisheries Collapse? the authors survey fish stocks and find that individual transferable quotas (ITQs) do appear to work in stabilizing and even increasing stocks: Although bioeconomic theory suggests that assigning secure rights to fishermen may align incentives and lead to significantly enhanced biological and economic performance, evidence to date has been only case- or region-specific. By examining 11,135 global fisheries, we found a strong link: By 2003, the fraction of ITQ-managed fisheries that were collapsed was about half that of non-ITQ fisheries. This result probably underestimates ITQ benefits, because most ITQ fisheries are young. The results of this analysis suggest that well designed catch shares may prevent fishery collapse across diverse taxa and ecosystems.   One of the authors of the paper, Christopher Costello, is featured in the video below from Reason TV which covers the world wide decline in fish stocks, “capital stuffing,” and the use of ITQs to solve the tragedy of the commons (FYI, all these concepts are discussed in Modern Principles).   The video mentions but does not investigate further the problem of fish and whales that travel long distances making property rights more difficult to enforce–a good subject for classroom discussion. Catch-shares have recently (2009) been introduced in Cape Cod.  Here’s a good primer on the costs, benefits and difficulties of implementation.  One interesting observation: Doing away with season restrictions reduces ‘derby’ conditions, in which fishermen race out, even in dangerous weather, to catch as much as possible. It also eliminates seasonal market gluts, potentially increasing the prices fishermen can command for their catch.   See also this 60 Minutes video on tuna.                                                                                   ... View more

Originally posted on August 19, 2010.   According to an interesting article in the NYTimes the Sahel, once thought to be a unreclaimable wasteland, has begun to bloom: Recent studies of vegetation patterns, based on detailed satellite images and on-the-ground inventories of trees, have found that Niger, a place of persistent hunger and deprivation, has recently added millions of new trees and is now far greener than it was 30 years ago. These gains, moreover, have come at a time when the population of Niger has exploded, confounding the conventional wisdom that population growth leads to the loss of trees and accelerates land degradation, scientists studying Niger say.   And the key to this growth?   Property rights. Another change was the way trees were regarded by law. From colonial times, all trees in Niger had been regarded as the property of the state, which gave farmers little incentive to protect them. Trees were chopped for firewood or construction without regard to the environmental costs. Government foresters were supposed to make sure the trees were properly managed, but there were not enough of them to police a country nearly twice the size of Texas. But over time, farmers began to regard the trees in their fields as their property, and in recent years the government has recognized the benefits of that outlook by allowing individuals to own trees. Farmers make money from the trees by selling branches, pods, fruit and bark. Because those sales are more lucrative over time than simply chopping down the tree for firewood, the farmers preserve them.   There is a video at the link which is good for showing the way of life in Niger but which unfortunately does not make the connection to property rights made in the article. ... View more

Originally posted on June 18, 2013.   Here is a post from Marginal Revolution on Canada’s ban on payments to sperm or egg donors and the predictable results. The example may be considered a bit risque but for those Canadians who are unable to bear children without donors the issue is serious. The example, along with the material on the Oocyte Cartel, linked below, can also be used to discuss the issue of repugnance and why there is a feeling that money should not be used to buy some types of goods (often revolving around the body such as organs, sperm, sex and some foods, e.g. horsemeat.)   As I was researching yesterday’s post on The Oocyte Cartel I came across an old MR post from 2003 on plans in Canada to restrict the import of American sperm: The US is a world leader in sperm exports primarily because sperm banks in the U.S. are run on a for-profit basis. As a result, US sperm is reckoned to be of high quality particularly because the US version comes with a background on the vitals of the donor. Denmark also exports a lot of sperm because of high standards and demand for that blond, blue-eyed look. Exports to Canada have increased in recent years because of a scandal involving poorly screened Canadian sperm. Canadians also import a lot of US eggs. The Canadian government, however, is apparently miffed as a new law is being readied that would forbid donations involving a paid donor. The law would not only make paid donation illegal in Canada it would make it illegal to use any paid-for sperm. Canadian couples seeking fertility options will suffer and who will benefit? I cannot think that this law is anything but spiteful and ridiculous. Is paying for sperm an original sin?   So what happened? In 2004, Canada made it a criminal offense to compensate sperm and egg donors. Loyal readers will not be surprised by the results (as of 2011) …currently, in the entire country, there are only 35 active sperm donors. Over the last decade, our government has made its donation system so thoroughly unappealing that this ubiquitous fluid is almost impossible to obtain through official channels. There is a single operating sperm bank in all of Canada. …If 35 national donors is an ugly statistic for the most removed observer, it’s especially devastating for the women and couples who have come to rely on our lone sperm bank in order to have a child.   Ironically, it’s been easier to prevent payments to Canadian donors than it has been to police sperm and egg imports because it is still technically legal to use paid-for sperm just not to buy sperm. As a result, the importation of US sperm has increased: Patients here obtain more than 90% of semen from the United States, and the federal government appears to turn a blind eye to the fact they buy it from mostly for-profit sperm banks — a criminal offence in this country. ... View more

Originally posted on November 7, 2013. In this short talk Google’s chief economist, Hal Varian, does some back of the envelope calculations of the value of Google search. Varian touches on auctions, the MR=MC condition, and consumer surplus calculations, all at a low-tech level suitable for advanced principles or intermediate micro students. Video Link : 1548 ... View more