Originally posted on December 4, 2009.   In The Price System we show how even a product as simple as a rose requires the international coordination of flower growers, truck drivers, airlines, Dutch auctioneers and many thousands of others.  In our chapter on Price Ceilings we show what happens when a price ceiling prevents the necessary coordination from occurring.  You can find lots of interesting stories in the chapter of shortages, shrinking quality, misallocation and production chaos. The second half of the except, The Specter of Stagflation, from The Commanding Heights has a short introduction to the politics and economics of wage and price controls under Nixon.  Students may be amused that it features Ben Stein talking about his father Herb Stein and also has many figures from later administrations such as Dick Cheney and George Schultz.   The video makes several important points.  First, wage and price controls were initially popular with the public.  Second, the law created shortages and ultimately did not solve the problem of inflation.  Most interesting, there is a rather horrifying section showing farmers drowning baby chicks.  In fact, farmers gassed, drowned, or suffocated a million baby chicks at this time.   The video, however, is not clear on exactly why the farmers behaved in this way and this is a good opportunity to see if your class can figure out the answer.  The answer is that the price of chickens was controlled but the price of grain used to feed chicks was not.  A rising feed price and a fixed chicken price meant that feeding chicks to sell chickens was no longer profitable.  Thus, farmers drowned their chicks and shortages of chicken become common.   An article from 1973 in Time magazine notes the same process worked in other areas, “Other farmers sent pregnant sows to the slaughterhouse and dispatched old milk cows to hamburger heaven.” The article from Time also illustrates how one intervention in the price system often snowballs into further interventions.  In this case, “To buck up the supply and bring down the price of feed, the Administration clamped a temporary embargo on exports of soybeans and cottonseed.” ... 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 January 30, 2012.   Can hunting save an endangered species? Yes. In Africa hunting has been critical to the conservation of a number of species, despite the sometimes opposition of the United States which can prohibit US citizens from hunting even in foreign countries.   I was surprised to discover, however, that “some exotic animal species that are endangered in Africa are thriving on ranches in Texas, where a limited number are hunted for a high price.” Texas hunters have saved several endangered African species, unfortunately for the animals, the story does not end happily. The video from 60 Minutes contains some excellent material on incentives, ethics and conservation for classroom discussion. ... 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 November 30, 2009.   The rigidity of employment index used in our chapter on Unemployment and Labor Force Participation comes fromDoing Business, the World Bank’s massive database on business regulations across 183 economies.  Using field teams the World Bank measures things such as the time and expense it takes to start a new business, the time and trouble to resolve a commercial dispute in the courts, the difficulty of hiring workers and the rigidity of employment.  Data on these characteristics across surveys can be easily downloaded here.   The Doing Business reports are excellent.  Scrolling through these reports it’s easy to find many useful graphs which can be quickly cut and pasted into a presentation.  Here, for example, is a figure on rigidity of employment and the share of women in employment and the youth unemployment rate (from Doing Business 2006).  Right click “View on Image” to open full size.   ... View more

Originally posted on April 7, 2010.   In our chapter on Getting Incentives Right we wrote: A tournament removes risks from outside factors that are common to all the players but it adds another type of risk called ability risk. Imagine that you had to compete in a golf game against Tiger Woods. Would you put in more effort if you were paid based on the number of strokes or if you were paid based on who wins the game? The probability that you could beat Tiger Woods at golf is so low that if all you cared about was money, it would make sense to give up right away –— why exert effort in a hopeless cause? Of course, for the same reason, Tiger Woods won’t much need to try hard either!   An excellent article in the WSJ reports on academic research that shows that the effect of “ability risk” is very real. According to a paper by Jennifer Brown, an applied macroeconomist at the Kellogg School of Management at Northwestern University, Mr. Woods is such a dominating golfer that his presence in a tournament can make everyone else play significantly worse. Because his competitors expect him to win, they end up losing; success becomes a self-fulfilling prophecy. Ms. Brown argues that the superstar effect is not just relevant on the golf course. Instead, she suggests that the presence of superstars can be “de-motivating” in a wide variety of competitions, from the sales office to the law firm. “Most people assume that competing against an elite performer makes everyone else step up their game and perform better,” Ms. Brown says. “But the Tiger Woods data demonstrate that the opposite can also occur. It doesn’t matter if the superstar is an athlete or a corporate vice president. After all, why should we invest a lot of energy in a tournament that we’re probably going to lose?” …Whenever Mr. Woods entered a tournament, every other golfer took, on average, 0.8 more strokes. This effect was even observable in the first round, with the presence of Mr. Woods leading to an additional 0.3 strokes among all golfers over the initial 18 holes. While this might sound like an insignificant difference, the average margin between first and second place in PGA Tour events is frequently just a single stroke.   Tournaments work best when the players are of similar ability because this minimizes ability risk.  Another way of countering ability risk is to handicap the stronger players.  If we added a stroke or two to Tiger Woods’ score, for example, this would encourage all the other players not to give up and if we don’t set the handicap too high it can also encourage Tiger to work harder! ... View more

Originally posted on January 20, 2012.   In our first chapter on growth Tyler and I illustrate the importance of property rights with the incentive effects of collective farming and the secret agreement of Xiaogang village. We write:   Farmers of households from Xiaogang signed a secret life-and-death agreement with their thumprints. (From Cowen and Tabarrok, Modern Principles: Macroeconomics) The Great Leap Forward was a great leap backward – agricultural land was less productive in 1978 than it had been in 1949 when the communists took over.  In 1978, however, farmers in the village of Xiaogang held a secret meeting.  The farmers agreed to divide the communal land and assign it to individuals – each farmer had to produce a quota for the government but anything he or she produced in excess of the quota they would keep.  The agreement violated government policy and as a result the farmers also pledged that if any of them were to be killed or jailed the others would raise his or her children until the age of 18. The change from collective property rights to something closer to private property rights had an immediate effect, investment, work effort and productivity increased.  “You can’t be lazy when you work for your family and yourself,” said one of the farmers. Word of the secret agreement leaked out and local bureaucrats cut off Xiaogang from fertilizer, seeds and pesticides.  But amazingly, before Xiaogang could be stopped, farmers in other villages also began to abandon collective property. In Beijing, Mao Zedong was dead and a new set of rulers, seeing the productivity improvements, decided to let the experiment proceed.   For more background, NPR’s Planet Money has a great story on this secret agreement including this: “Back then, even one straw belonged to the group,” says Yen Jingchang, who was a farmer in Xiaogang in 1978. “No one owned anything.” At one meeting with communist party officials, a farmer asked: “What about the teeth in my head? Do I own those?” Answer: No. Your teeth belong to the collective. In theory, the government would take what the collective grew, and would also distribute food to each family. There was no incentive to work hard — to go out to the fields early, to put in extra effort, Yen Jingchang says. “Work hard, don’t work hard — everyone gets the same,” he says. “So people don’t want to work.” …Before the contract, the farmers would drag themselves out into the field only when the village whistle blew, marking the start of the work day. After the contract, the families went out before dawn.   “We all secretly competed,” says Yen Jingchang. “Everyone wanted to produce more than the next person.” It was the same land, the same tools and the same people. Yet just by changing the economic rules — by saying, you get to keep some of what you grow — everything changed. ... View more

Originally posted on December 10, 2009.   When customers call Cingular threatening to switch to another firm or asking for discounts, operators see a handy thermometer that tells them the life time value (LTV) of the customer to the company. The higher the meter reading the more discounts the operator is allowed to offer the customer. The Consumerist has the details including excerpts from company documents explaining the system.   ... View more

Originally posted on May 16, 2011.   Students love it when we show them how economics explains their world. In our chapter on monopoly we pose the following puzzle: In December of 2006, American Airlines was selling a flight from Washington (D.C.) to Dallas for $733.30.  On the same day, it was selling a flight from Washington to San Francisco for $556.60.  That’s a little puzzling. You would expect the shorter flight to have lower costs, and Washington is much closer to Dallas than to San Francisco.  The puzzle, however, is even deeper.  The flight from Washington to San Francisco stopped in Dallas.  In fact, the Washington-to-Dallas leg of the journey was on exactly the same flight! Thus, a traveler going from Washington to Dallas was being charged nearly $200 more than a traveler going from Washington to Dallas and then on to San Francisco even though both were flying to Dallas on the same plane.  Why?   We then explain the Hub and Spoke system and how this gives each airline monopoly power over certain interior destinations, concluding: Eighty-four percent of the flights into the Dallas-Forth Worth airport are on American Airlines, so if you want to fly from Washington to Dallas at a convenient time, you have few choices of airline. But if you want to fly from Washington to San Francisco, you have many choices. In addition to flying on American Airlines you can fly Delta, United, or Northwest. Since travelers flying from Washington to Dallas have few substitutes their demand curve is inelastic…since travelers flying from Washington to San Francisco have many substitutes, their demand curve is more elastic…As a result, travelers flying from Washington to Dallas (inelastic demand) are charged more than those flying from Washington to San Francisco (elastic demand).   Recently, Nate Silver, had a piece in the New York Times Magazine explaining how a savvy traveler can avoid these monopoly prices by booking a one-way Washington to San Francisco flight and then exiting in Dallas.  Silver also had a nice graphic, which could be usefully added to a powerpoint, showing a number of these types of fares.  If you or you students make use of these methods, however, be careful to note Silver’s tips for avoiding problems!   ... View more

Originally posted on November 9, 2012.   In our chapter on monopoly in Modern Principles, Tyler and I give an intuitive account of the double marginalization problem. Monopolies are especially harmful when the goods which are monopolized are used to produce other goods.  In Algeria, for example, a dozen or so army generals each control a key good.  Indeed, the public ironically refers to each general by the major commodity that they monopolize—General Steel, General Wheat, General Tire, and so forth. Steel is an input into automobiles, so when General Steel tries to take advantage of his market power by raising the price of steel, this increases costs for General Auto.  General Auto responds by raising the price of automobiles even more than he would if steel were competitively produced.  Similarly, General Steel raises the price of steel even more than he would if automobiles were competitively produced.  Throw in a General Tire, a General Computer and, let’s say, a General Electric and we have a recipe for economic disaster.  Each general tries to grab a larger share of the pie, but the combined result is that the pie gets much, much smaller.   In our course on Development Economics at MRUniversity we provide a more detailed explanation using graphs. This material is a bit advanced for a typical principles class but it would be useful in a course on industrial organization or for advanced students interested in more detail. Fell free to use the video in any way that you find useful. ... View more

Originally posted on August 16, 2009.   Here is the abstract of a new paper in Infectious Disease Modelling Research Progress. Zombies are a popular figure in pop culture/entertainment and they are usually portrayed as being brought about through an outbreak or epidemic. Consequently, we model a zombie attack, using biological assumptions based on popular zombie movies. We introduce a basic model for zombie infection, determine equilibria and their stability, and illustrate the outcome with numerical solutions. We then refine the model to introduce a latent period of zombification, whereby humans are infected, but not infectious, before becoming undead. We then modify the model to include the effects of possible quarantine or a cure. Finally, we examine the impact of regular, impulsive reductions in the number of zombies and derive conditions under which eradication can occur. We show that only quick, aggressive attacks can stave off the doomsday scenario: the collapse of society as zombies overtake us all.   Hat tip to Cory Doctorow at Boing Boing. ... View more

Originally posted on October 30, 2009. Nobel prize winner James Meade argued that the production of honey by beekeepers produced a positive externality for farmers in the form of pollination and thus pollination would be underprovided in a free market.  It turns out, however, that pollination is a $15 billion industry in the United States and beekeepers regularly truck their colonies around the country to sell pollination services to farmers.  Chapter 9, Externalities: When Prices Send the Wrong Signals, tells this story to illustrate the Coase theorem, i.e. how an externality can be internalized by bargaining when transactions costs are low and property rights are well defined.  Instructors wanting more background on the pollination industry can turn to an excellent article from the Federal Reserve Bank of Richmond’s Region Focus. The video below titled, Bees and Almonds: Productive Business Partners, is also excellent at describing the industry and illustrating some of the economics.  Note around the two minute mark the beekeeper who talks about how beekeepers and farmers are in a two sided relationship. Video Link : 1553 ... View more

Originally posted on June 14, 2011.   The E coli strain that is killing people in Europe is both new and resistant to at least a dozen antibiotics in eight classes. It’s clear, therefore, that this strain picked up resistance via gene transfer from previous strains that evolved resistance over a longer time frame. Thus, antibiotic resistance can spread very quickly, probably more quickly than we can develop new antibiotics. One of the places that resistance develops is in farm animals where antibiotics are used as growth promoters, not just as therapeutics. Since there is a significant externality from antibiotic use, there is a good case to be made for regulating antibiotic use. As Glenn Reynolds once put it: I think you can make a better case for regulating antibiotics than heroin: Misusing antibiotics can endanger countless others, while misusing heroin mostly endangers oneself.   (FYI, Tyler and I use antibiotic use as an important example of externalities in Modern Principles). Denmark progressively regulated and reduced antibiotics for sub-therapeutic use in pigs, poultry and other livestock beginning around 1995. After some experimentation, pig production was not adversely affected and resistance in the wild declined. It’s less clear whether human health increased due to the regulation of antibiotics in farm animals (although there is less resistance in countries that use fewer antibiotics). It may be that Denmark is simply too small and connected with the rest of the world to see a large effect. Nevertheless, Denmark shows us that the costs of reducing antibiotic use in farm animals is not excessive, especially if phased-in, and the benefits of maintaining the effectiveness of our stock of antibiotics is so high that I see more intelligent but reduced use as an important goal. See also Megan McArdle’s very good talk on this topic. ... View more

Originally posted on September 11, 2010. It’s a little dated but this John Stossel video is useful for generating discussion about international trade, wages and exploitation.  See also the section in our International Trade chapter on child labor and in our chapter on Ethics about exploitation.  Also related are material in the labor chapter on why janitors in India and American earn different wages despite performing similar jobs.                                          Video Link : 1546 ... View more