Month: August 2005

In January Alex wrote: "My own pick for undervalued nation was Germany…"

This week’s (August 20-26) cover in The Economist: Germany’s Surprising Economy 

Here is just one bit:

Thanks to the intense pressure that they have been under in the past few years,  Germany’s big companies have restructured and cut their bloated cost base. This process has for once been helped by the trade unions, which had been a stubborn obstacle to change. German workers have belatedly recognised that change has become essential, which is why they have been ready over the past year or so to accept such innovations as more decentralised pay bargaining, longer hours and even wage cuts. Thanks in part to this new flexibility, unit labour costs, a benchmark of competitiveness, have fallen sharply relative to other countries. In the past five years, Germany, long the most costly place in Europe in which to do business, has won a new competitive edge over France, Italy, the Netherlands and even Britain. That is a big reason why, last year, it regained its position as the world’s biggest exporter.

So what today looks like the most undervalued economy?  Can the lovely Croatia go so wrong?  Has everyone capitalized the commodities-driven recovery of Argentina?  Is it well understood how prepared Singapore is to complement the growth of China?  Aren’t Arab stock markets booming?  Comments are open…

Concerning yesterday’s post, Beware Free Apples, a number of people wrote to me along the following lines, "some people have a low value of time, these people will be the ones who will be attracted to the giveaway so the time spent waiting in line is not as wasteful as you suggest."  Surprisingly, this plausible analysis is not correct or at least seriously incomplete.

To see why suppose that the giveaway were held in a poor country.  Would the waste be any less?  No.  Everyone in line would have a low value of time but for precisely this reason the waiting time would increase and the total waste would not change.

So long as there are more people with a low value of time than there are iBooks the waste will be complete.  What does make a difference is diversity.  If there are a few low value people and lots of high value people then the low value people can earn a rent.  A direct analogy is to gold mines.  If there are a lot of low cost gold mines then the price of gold is low and none earn a rent.  If there are just a few low cost gold mines and many high cost gold mines then the price of gold will be high; the marginal mine will just break even and the low cost mines will earn a rent.  To earn a rent there must be a scarcity – scarce land, scarce mines, or scarce low time-value people.

Suppose that we have a continuum of high to low-value types.  We can say immediately that "The total price for the marginal consumer will tend to rise so that it equals the marginal value of the good."  In other words, the marginal consumer will do only slightly better than if he were to buy the good at the market price (if he were to do much better then by continuity there is another consumer willing to outbid him by waiting in line a bit longer.)  Thus on the margin dissipation is complete.  What about the infra-marginal consumers?

The infra-marginal consumers will earn a rent but given some plausible assumptions about the distribution of types it’s surprising how little difference this makes to total dissipation.  I did some very basic calculations in Mathematica assuming that the value of time is Normally distributed with mean $15 and sd $4.  Under these assumptions the "first" person in line has a value of time of only $.84 per hour.  Nevertheless, the total rent dissipation is 80 percent of what it would be if everyone had a value of time of $11.63, the value of time of the marginal consumer.  Some brief experiments suggest that this sort of result if quite robust.  Specifics will depend on the exact distribution assumed.  Here is a pdf
and here is the Mathematica Notebook if anyone wants to generalize. 

A site called Gasbuddy.com, where volunteer spotters post the latest prices from gas stations around the country, has grown so fast that there are now 350,000 postings a week, triple the figure from a year ago. A similar site, gaspricewatch.com, plans to launch a service this month that will allow users to tap into its database from the road with a mobile phone.

Credit-card companies also are rushing out new offers. Citibank is offering its cardholders in the New York City area and Miami double American Airlines frequent-flier miles for gas purchases until Oct. 31. Other cards, such as the Citi Dividend Platinum Select MasterCard and the Discover Platinum Gas Card let you earn a 5% rebate on gas purchases — Citi’s card gives 5% back at drugstores and grocery stores as well. (That has led many people to use it as part of a two-card strategy along with the plastic that earns the most travel rewards.)

Here is the link.  But this economist is puzzled.  Surely these are signs of a less competitive gas market — in the sense of moving away from uniform prices set at or near marginal cost — than they are signs of high gas prices per se.  Do higher and more volatile gas prices mean greater dispersion of prices (the first paragraph)?  Does this create greater scope for price discrimination (the second paragraph)?  Apparently so.

Addendum: Eric Johnson points my attention to pre-paid gas cards, which limit your exposure to price risk.

You can get rid of the market but you can never get rid of competition.  Goods not allocated by market prices have to be allocated somehow and so long as goods are scarce there will be competition to obtain them, if not by outbidding competing buyers with money then by outbidding them in time spent waiting in line, doing political favors or some other method.

What happened in Henrico county is the same type of thing that happens when there is a price control.  The diagram below explains.

At the controlled price the quantity demanded exceeds the quantity supplied so buyers compete to obtain the good by, for example, arriving early and standing in line (or stomping on their competitors!).  Waiting in line is costly so the total price rises above the money price by the time price.  The total price for the marginal consumer will tend to rise so that it equals the marginal value of the good – only when the total price is equal to the marginal value (at the controlled quantity) is there no excess demand. 

It’s very important to notice that that the shop owner gets your money but does not get your time.  Thus, money expenditures are a transfer but time expenditures are a waste.  Money expenditures = controlled price times*controlled quantity.  Time expenditures = time price*controlled quantity so the shaded area indicates the waste.

It’s also important to notice that the total price is higher than the market price!  A price control, therefore, doesn’t even necessarily reduce prices! 

The website, meanwhile, has had millions of visitors who can download free accountability software called X3. When installed on a computer, X3 sends an e-mail every 14 days to a chosen friend or friends with a list of the websites visited by that computer. The site also features testimonials from porn addicts, prayer and Bible study resources, and an open forum called "The Prayer Wall," with hundreds of thousands of posts from addicts, spouses of addicts, and more recently, porn stars themselves.

This article (courtesy of www.politicaltheory.info) has many good bits:

Lately, XXXChurch.com has moved into helping those within the porn industry. The ministry has received letters from porn stars wanting to get out. One said she was trying to decide whether to e-mail them or Jerry Springer.