Originally posted on January 17, 2011. Leonard Read famously explained that no one knows how to build a pencil. Well no one knows how to build a toaster either as demonstrated in this entertaining TED video. Compare how much Thomas Thwaites spent buying a toaster, about 4 pounds ($6), with how much labor time he spent trying to build a toaster and reflect on the power of trade, the division of knowledge and the division of labor. Video Link : 1552 ... View more

Originally posted on November 21, 2012. Here are three videos drawn from my course on development economics with Tyler at MRUniversity.com. The first video steps through the theory of comparative advantage as presented in Modern Principles. A question in the video is left for “homework” and the second video gives the answer. Students watching these videos will be able to learn how to find opportunity costs, discover which country has a comparative advantage in what good and propose trades that make both countries better off. The third video presents some sources of comparative advantage. Video Link : 1551 Video Link : 1549 Video Link : 1550 ... View more

Originally posted on November 21, 2012.   Only in economics are floors above ceilings!  It might be better to say "a minimum allowed price above the market price" and "a maximum allowed price below the market price," although that is a bit of a mouthful.  I find that the floors and ceilings language does work, however, if the instructor explicitly points out the oddity of floors above ceilings!  In that case, students find the distinction memorable.   ... View more

Originally posted on January 9, 2010. Millions of people suffer from kidney disease, but in 2007 there were just 64,606 kidney-transplant operations in the entire world.   Today in the WSJ I discuss innovative solutions to the worldwide shortage of transplant organs from places like  Iran, India, Singapore, Israel and elsewhere.  One interesting bit I haven’t blogged about before is routine removal of organs without the donor’s or their families consent.  China?  No.  America.  It’s been legal here for decades. In a number of U.S. states, medical examiners conducting autopsies may and do harvest corneas with little or no family notification. (By the time of autopsy, it is too late to harvest organs such as kidneys.) Few people know about routine removal statutes and perhaps because of this, these laws have effectively increased cornea transplants.   Here is another bit on the shadowy definition of death: Organs can be taken from deceased donors only after they have been declared dead, but where is the line between life and death? Philosophers have been debating the dividing line between baldness and nonbaldness for over 2,000 years, so there is little hope that the dividing line between life and death will ever be agreed upon. Indeed, the great paradox of deceased donation is that we must draw the line between life and death precisely where we cannot be sure of the answer, because the line must lie where the donor is dead but the donor’s organs are not. In 1968 the Journal of the American Medical Association published its criteria for brain death. But reduced crime and better automobile safety have led to fewer potential brain-dead donors than in the past. Now, greater attention is being given to donation after cardiac death: no heart beat for two to five minutes (protocols differ) after the heart stops beating spontaneously. Both standards are controversial—the surgeon who performed the first heart transplant from a brain-dead donor in 1968 was threatened with prosecution, as have been some surgeons using donation after cardiac death. Despite the controversy, donation after cardiac death more than tripled between 2002 and 2006, when it accounted for about 8% of all deceased donors nationwide. In some regions, that figure is up to 20%.   More on markets for organs, presumed consent, and point systems at the WSJ. ... View more

Originally posted on May 3, 2010.   The shortage of transplant organs raises many issues that can be usefully discussed in a principles of economics class.  Most obviously, the prohibition on compensating organ donors can be thought of as a price control. Thus, one potential solution is lifting the price control and compensating deceased donation or live donors.   There are other potential solutions with economic content, such as giving people who sign their organ donor card priority should they one day need an organ or presumed consent.  Clearly, compensating organ donors also brings to the fore many ethical issues–see our chapter on Economics, Ethics and Public Policy for a discussion of some of these issues. In addition, the ethical issues are not necessarily separable from the economic ones. It is possible, for example, that payment for donors could “crowd out” altruistic donation.   My powerpoint slides, Using Incentives to Increase Kidney Donation, have some useful background information on the shortage of organs and also discuss some of the innovative programs that have begun elsewhere in the world that may help to alleviate the shortage.  Also excellent for promoting discussion is the video below from Drew Carey and Reason TV.  Matt Holian suggests some ways of using this and other Reason TV videos in the classroom. ... 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 July 30, 2014.   Here is an excellent use of the concept of price elasticity by Amazon’s Jeff Bezos. Good opportunity for discussion and even some data to calculate! Many e-books are being released at $14.99 and even $19.99. That is unjustifiably high for an e-book. With an e-book, there’s no printing, no over-printing, no need to forecast, no returns, no lost sales due to out-of-stock, no warehousing costs, no transportation costs, and there is no secondary market — e-books cannot be resold as used books. E-books can be and should be less expensive. It’s also important to understand that e-books are highly price-elastic. This means that when the price goes up, customers buy much less. We’ve quantified the price elasticity of e-books from repeated measurements across many titles. For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99. So, for example, if customers would buy 100,000 copies of a particular e-book at $14.99, then customers would buy 174,000 copies of that same e-book at $9.99. Total revenue at $14.99 would be $1,499,000. Total revenue at $9.99 is $1,738,000. The important thing to note here is that at the lower price, total revenue increases 16%. ... View more

Originally posted on December 14, 2009.   To illustrate the importance of economics for the study of law I begin with a simple example due to David Friedman. There is in the law what is called “a nonwaivable warranty of habitability,” which is a fancy way of saying that a dwelling must have certain features such as heating, hot water, sometimes even air conditioning, whether or not such terms are in the lease and even if the lease explicitly excludes such terms. I ask my students who is made better off and who is made worse off by a legal doctrine that says tenants must have hot water? Invariably, the students answer that the doctrine makes tenants better off and landlords worse off. But is this so? Think about it and then read the extension for more.   If tenants benefit from a law that says apartments must have hot water then surely a law that says tenants must have hot water and a dishwasher benefits them even more, right? What about a law that says tenants must have hot water, a dishwasher and cable tv? By now the students have cottoned on to the idea that the rent will increase. Once you realize that the law causes the rent to increase it’s no longer obvious if tenants benefit or if landlords are harmed.   We can work out what happens with sone numbers. Let’s suppose that after much bargaining the tenant and landlord have agreed upon the rent and the amenities – each party to the contract is profit maximizing, doing as well as they can given market conditions and the interests of the other. Now suppose that tenants value the hot water benefit at $100 and that it costs the landlord $150 to provide the hot water. At these prices the tenant does not buy the hot water. The law is passed; by how much does the rent increase? By at least $100 but no more than $150. The landlord knows for certain that he can increase the rent by $100 because this will make the tenant just as well off as he was before, which by assumption was an equilibrium price. Similarly, if the landlord could profitably raise the rent by more than his cost he would have done so already – the fact that he did not indicates that an increase of more than $150 would not be profitable.   Thus the rent rises somewhere between $100 and $150, the precise amount to be determined by bargaining power. Suppose that the rent increases by $120. Then the tenant gets a benefit worth $100 at a price of $120 and is worse off by $20 and the landlord gets a benefit of $120 at a cost of $150 and so is worse off by $30. The law makes both the landlord and tenant worse off!   The lesson here is that a contract is multi-dimensional so if the government changes one dimension of a contract the other dimensions will adjust towards offsetting that change. Bonus points: a) Suppose the tenant values the hot water at $150 and it cost the landlord $100. Does the regulation benefit the tenant and landlord now? If so, what is odd about this example? b) Explain why the loss to the tenant and the loss to the landlord must add up to $50. How does this further illustrate the principle?   The virtue of this thought experiment is that it brings home to students the importance of equilibrium.  To understand the effect of a law we have to think through what happens after all the economic actors have responded.   Although the thought experiment is the first step to clear thinking, it is not the last step.  Fire codes, to give just one example, may be justified on the basis of externalities even when they make both the apartment owner and the tenant worse off. ... 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

Originally posted by Alex Tabarrok on November 24, 2009.   Here is a fun, easy and effective experiment that instructors can use to illustrate the gains from trade.  The instructor puts chocolate bars ("fun-size") or other candy in bags, one bag for each student. (Alternatively, you can use the type of small items that you can find at a dollar store.  Filling the bags is where the most work comes in especially if you have a large class). Students open the bag and are then asked to write down how much they would be willing to pay for the bag's contents.  But before snacking, students are allowed to trade.  After a few minutes of trade, ask the students to write down their valuation again.  Voila!  Gains from trade.  With a few numbers pulled at random from the students you can do a back of the envelope calculation for the total increase in value.  The experiment doesn't take long and the students will appreciate the candy!   A hat tip to Randy Simmons who first introduced this experiment to me.   More classroom experiments can be found here and here. ... View more

Originally posted on January 25, 2013. In this short video, Jonathan Sacks, the Chief Rabbi for the British Orthodox synagogues, explains how the “beautiful idea” of comparative advantage promotes peace, cooperation and tolerance among all people. This is a good video to stimulate classroom discussion.                                                                                Video Link : 1557 ... View more

Originally posted on September 12, 2012.   Via The Globe and Mail Tyler Cowen answers a varierty of questions.  Here is an excerpt: What sectors will lead the next great boom?   Artificial intelligence [AI] will be a significant breakthrough. There are new developments almost every day. Cheaper fossil fuels, particularly natural gas, will spur short-run growth. And an increasing share of national income will go to capital and high productivity. It may not feel like an end to stagnation for many workers, but in terms of aggregate output, the U.S., Canada and Mexico are poised to do extremely well. Mexico will find its way around the drug problems and become more integrated into the U.S. economy. It’s the great underrated nation in the world right now.   Can advances in AI create great numbers of jobs?   No. A lot of people will be hurt by it. Owners of intellectual property, and capital and manufacturing plants will do very well. Output will go up a lot. But in many areas, wages will fall and jobs will disappear. So the U.S. trend – falling labour force participating rates – will continue. But people who get quality education will be better off.   ... View more