Game of Theories: Real Business Cycle Theory

by on November 22, 2017 at 7:25 am in Economics | Permalink

Here’s the third chapter of our mini-series on business cycle theories: The Real Business Cycle.

1 rayward November 22, 2017 at 8:36 am

Would the end of net neutrality be a potential supply shock?

2 RPLong November 22, 2017 at 11:04 am

Think of net neutrality as being a price ceiling. Then, we’d expect the end of net neutrality to potentially return supply to its pre-policy levels. Certainly not a “shock,” and definitely not a shock to macroeconomic aggregate supply.

3 Ray Lopez November 22, 2017 at 12:06 pm

But if the internet is like a natural monopoly, where all fixed costs are already accounted for, arguably rayward’s right and allowing telecoms to raise prices (“ending net neutrality”) would create a real shock. I realize that this scenario is far-fetched (since fixed costs are not already all accounted for, and the internet is not a natural monopoly) but in theory it could be. Analogy: a dam is built and stores water for a society, enough for all and then some (“the internet as it exists today”), and water is nearly ‘free’ to use, but along comes a dam(n) operator who cuts off the supply of water (“ends net neutrality”) and raises prices (the telecoms) which causes a drought, a real business cycle supply side failure.

Bonus trivia: we own $100k of AT&T. Actually we as 1%-ers buy most of our stock in $100k increments.

4 RPLong November 22, 2017 at 12:26 pm

No.

Status quo conditions are when water is provided by whoever builds the infrastructure, subject to their own pricing and supply schemes, and coupled with consumer demand.

Net neutrality conditions are when society decides that rich people and bulk consumers of water shouldn’t be allowed to pay extra for water to be delivered at higher pressure levels, more appropriate for industrial use, and so the government passes a law saying that water service providers are not allowed to price different water pressure delivery infrastructure differently. Advocates cheer, since poor people will now be able to buy industrial-strength water pressure for the same price as other water delivery systems. Economists shake their heads because now the only way to meet the legal requirements is to raise everyone’s water prices and pressure or limit everyone’s water infrastructure to the same low pressure at a now-higher price, and pass the expense of less-convenient pressure tanks on to the industrial consumers.

5 Benji York November 22, 2017 at 1:13 pm

> Net neutrality conditions are when society decides that rich people and bulk
> consumers of water shouldn’t be allowed to pay extra for water to be delivered
> at higher pressure levels,

This is the reverse of what net neutrality means. Net neutrality means that those who transport between producers and consumers can’t charge different rates or cut deals that favor one producer over others.

Without net neutrality we can have a situation analogous to your phone company telling you that calling your spouse will cost more than calling your boss (or vice-versa).

6 JWatts November 22, 2017 at 2:08 pm

“Without net neutrality we can have a situation analogous to your phone company telling you that calling your spouse will cost more than calling your boss (or vice-versa).”

A much better analogy is the post office charging a higher price for 1st class mail versus 3rd class mail.

7 Benji York November 22, 2017 at 2:41 pm

> A much better analogy is the post office charging a higher price for 1st class mail versus 3rd class mail.

One of the primary fears of a non-net-neutrality world is blocking more than throttling. I.e., it’s not that Netflix is slower unless you pay more (or they pay more), but you don’t even get Netflix unless you pay more. This is currently the situation in Mexico where, for example, you can’t use the Uber app on an AT&T mobile device without paying for a higher tier of service (see https://imgur.com/yYobj7x).

8 Ray Lopez November 22, 2017 at 9:15 pm

@RPLong- I appreciate your reply, but you are shifting the goal posts (which is fine but not what I was taking about). Assuming the internet is a natural monopoly, then privatizing it via net neutrality will simply raise costs, just like I say and as hinted by rayward’s question. For the record, and as a AT&T shareholder, I don’t think the internet is a natural monopoly so I agree with your analogy.

9 Benji York November 22, 2017 at 9:54 am

I really like these videos. The content and production value is great. One thing bothers me though: the framing on the close ups makes feels crowded. It seems to me that more headroom would be nicer.

10 Warren Platts November 22, 2017 at 11:38 am

A good argument for avoiding import dependency.

11 shrikanthk November 22, 2017 at 5:06 pm

Talking of sticky prices, which the video touches upon right at the end –

What is the economic profession’s view on why prices are sticky? Is it purely a cultural thing? Or is there more to it than just culture?

12 shrikanthk November 22, 2017 at 5:08 pm

By prices, I specifically meant wages. I guess most prices besides wages are not really sticky.

Comments on this entry are closed.

Previous post:

Next post: