Month: February 2007

More fun than chess

Let’s consider a power supplier with market power and zero marginal cost.  Capacity suffices for ten units but five units are sold at p = 10; selling more would lower profits.  Now, using carbon offsets, bribe the fifth buyer to stay out of the market, say by walking to work rather than flying his jetpack.  Even better, just shoot him. 

The company has two options.  It can stick with selling four units and raise price.  Or it could drop price a bit and pick up a fifth buyer again.  Hard to say what will happen.  Alternatively, if buyers stand along a continuum, is there a general proof one way or the other? 

Rather than bribing the fifth buyer to walk, invest the "carbon offsets" money in building a nice comfy sidewalk.  In principle all buyers could walk on this new path.

It is then easy to see how the power company might lower price and expand to six units or more.  Otherwise they might lose all their customers.

A key question is the cost structure of the alternative clean technology.  Non-scalable technologies, with little potential for expansion, are the least likely to backfire and least likely to lead to more dirty power.  Scalable technologies, such as the sidewalk, are most likely to backfire and make the world dirtier.  They require a bigger competitive response on the part of the dirty power supplier.  (At least in the short run this is true, in the longer run the scalable technology might eliminate dirty power altogether.)

This counterintuitive conclusion is one reason why we have economic models.

The Paris School of Economics

French Prime Minister Dominique de Villepin presided over the inauguration last week of the Paris School of Economics, a new institution that its founders hope will eventually rival economics powerhouses like the Massachusetts Institute of Technology and the London School of Economics and Political Science.

Here is much more, and note that the institution will be unencumbered by many French civil service restrictions.  This is a noble idea, and it has some serious people behind it.  It is often underestimated how much the quality of American higher education drives superior American economic performance, so of course Europe should make moves in this direction.  But can this graduate school succeed?  Until the European job market offers comparable opportunities to the United States (also known as systematic higher education reform), why pursue this Ph.d., only to be yanked away from the glorious land of non-pasteurized cheeses and sent to toil in Berkeley, Austin, or Princeton?

Did I mention this is an object lesson in why economic growth is so hard to manage and stimulate?  Thanks to Jacob Levy and Scott Cunningham for pointers.

Why do people own things?

A loyal MR reader asks:

This is related to a recent post and something I’ve been thinking about a lot as I pack up my house to move: Why do we buy books and videos?  Doesn’t it make much more sense to outsource their storage to libraries and video stores or services like Netflix?

I have an intrinsic desire to collect and flood my house with nuggets of joy (not Natasha’s phrase), but that doesn’t explain everyone.  Often people own books and DVDs for reasons of identity and self-expression; that is why iTunes outcompeted Rhapsody, even though the latter in some ways offered a better deal.  Ownership, especially of the non-digital kind, also allows you to lend out, to send to friends, and to show off.  The ownership puzzle is related to the "why do we buy mostly new music" puzzle.

It makes the most sense to own songs and CDs, if only because the desire to hear them is more spontaneous, and renting them is harder.  The costs of renting are falling, but the costs of personal storage are falling too, as houses become larger.  The mail isn’t getting much quicker, but the demand for immediacy is growing.  Ownership remains robust.

#3 in a series of 50.

Why are Latin American politicians so bad?

A loyal MR reader asks:

[Please discuss] Latin American politics. Why do our politicians ****?

A few points:

1. I’m not convinced they are worse than average, once you adjust for per capita income.  If East Asia looks better, perhaps the quality of the bureaucracy is more important than the relative quality of the elites.

2. Combining parliamentary, proportional, and presidential systems, as much of Latin America has done, is a recipe for disaster.  Read Ljiphart and others on this topic.  It is too easy to block reforms, there is too little accountability, and there is no coherent ruling coalition.  If you are going to have a strong presidential role, try to restrict the number of major parties to two.  Or if you want many parties, make the president directly accountable to a coalition. 

3. The charismatic traditions in these cultures do not make for responsible politicians.  Visit Eva Peron’s grave in Buenos Aires if you need to be convinced.

4. It is difficult to rule a country with significant ethnic divisions.  This covers many Latin countries, though not Argentina or Chile or Uruguay.

5. Latin tax systems are underdeveloped, so distortionary policies are needed to collect sufficient revenue.  Citizens then become cynical about government, and consider it illegitimate.  Tax evasion is rampant.  The spiral worsens and again no one can govern well.

The bottom line: If they put me in charge of a Latin country, I don’t think I could deliver superior growth performance.  At best I would avoid some of the really stupid mistakes, but I couldn’t turn the country around.

This post is #02 in a series of 50 (?).

Addendum: Bryan Caplan adds comment, but I think he is just proving my point.

Do carbon offsets work?

Maybe-Megan-McArdle writes:

When you donate money to build a new windfarm, you don’t take any of
the old, polluting power offline; you increase the supply of power,
reducing the price until others are encouraged to buy more
carbon-emitting power.

In other words, these carbon offsets shift back the demand curve for dirty power but they also shift out the supply curve for power as a whole.  (The persnickety might argue the demand curve doesn’t even shift back, but if you have to buy all those offsets you will think twice about your next plane trip.)  Competition from wind power forces down the price of the monopolistic dirty power company (electricity?), which means that other people buy more of it.  The quantity of dirty power consumed might well go up rather than down.

A better approach for carbon offsets might involve buying up a power plant and taking it off the market, thereby raising price and discouraging consumption.

Or it might be better if that "wind farm" is a failure and a fraud.

Furthermore if you simply buy less of a non-storable good such as electricity,
price to other demanders will go back down and social quantity consumed will
not change.  The boycott matters only if general
capacity shrinks over time, and that of course requires a large boycott.

If the dirty power source is from a broadly competitive sector (is there one? gasoline? cars?), the carbon offset is more likely to work.  If a non-dirty competitor comes on-line, the dirty power source has no option of lowering price and expanding quantity sold; the price of the dirty power source can’t fall below marginal cost.  Instead the supply of the dirty power source falls and the offset works.   

The bottom line: Unless you can put them under, don’t try to compete on price with your local power company.

Smoked and steamed

Cook some fatty bacon just enough to be slightly done, then chop it a bit and mix it with equal parts smoked trout, chopped into comparably sized pieces, in a bowl.  Mix in three tablespoons Chinese wine.  Mix in two tablespoons of chili flakes or chili oil with flakes.  Mix in two tablespoons black bean sauce.  Steam for at least forty minutes, or until the stock market drops, more is better, in a heatproof bowl, at relatively high heat.  Mix in a little bit of sesame oil at the end.  Serve with rice and a green vegetable.

Fearing the Lucas critique

Thank you for all the blogging suggestions.  I am going to try an experiment, namely to satisfy the first 50, not counting the ones I’ve already done and yes the archives go way way back.  Let’s see how far I can get without flipping out in the middle, running for blogging liberty and charging that corporate America was infringing upon my sacred freedom of speech.  It would be fun if some other blogger picked up the same topics (though I won’t do them in order), if so let us know in the comments.  And if you’re not in the first fifty, I’ll still consider your suggestion, so don’t stop leaving ideas.

Progressive taxation as price discimination

That’s a request from the comments, sometimes the customer is king after all.

The point of price discrimination is to sell more goods and services while taking in more profit; the low demanders can pay a lower price, yet the company still sells for a higher price to the high demanders.  If output goes up, social welfare usually does too. 

So ideally we might levy higher taxes on those people who especially enjoy working, or people who especially enjoy living in the country.  Current tax rates are conditioned mostly on income plus a blizzard of confusing factors listed in the tax code, such as depreciation allowances and legislated tax breaks.  Why not — either directly or indirectly — condition tax payments on proxies for enjoying one’s job and country?  After all, those are the people least likely to leave or least likely to stop working.

Tax flags, guns, churches, and other correlates with patriotism.

Tax fun jobs.  Like being a professor.

Next idea?

More generally, I’m not always keen on taxing inelastic factors, if only because it leads to excess revenue collection, a’la Brennan and Buchanan.

Choosing an Inferior Alternative

It’s well known that people suffer from confirmatory bias, so after they buy a new car they eagerly read the advertisements for that car  – the ads, of course, confirm that their purchase was a good one.

Many people also have a predecisional bias, they interpret new information in a way that is biased towards the leading candidate – a confirmation bias in expectation.  In Choosing an Inferior Alternative (also here) Russo, Carlson and Meloy show that careful manipulation to take advantage of predecisional bias can actually cause people to choose inferior alternatives.

The authors ask people to rate restaurants, nominally named A,B,C etc., on a series of attributes (atmosphere, hours, parking, dishes and so forth) thus creating a ranking.   Two weeks later they ask the same people to rate the same (but renamed) restaurants in a series of pairs.  But this time they put the attribute that most favored the inferior restaurant first – thus the inferior restaurant would win the first comparision and further attributes would suffer from predecisional bias.  They also put the attribute that had the second strongest favorable rating for the inferior restaurant last to take advantage of any recency effect.  The least favored attributes were buried in the middle. 

Compared to a control group, twenty percent more of the treatment group chose an alternative that according to their own preferences was inferior.  In fact, in the treatment group a majority chose the inferior alternative.

Department of Uh-oh

Ceteris paribus, well-being reaches a minimum, on both sides of the Atlantic, in people’s mid to late 40s.

Here is the paper.  It’s a good thing I don’t believe in that nasty happiness research…although here is a good defense of it

Addendum: Speaking of the limits of economics, here is an excellent piece (excerpts only, buy today’s WSJ) on whether economists should study autism.

The Beauty Function

Three Israeli computer scientists from Tel Aviv University (TAU) have
developed the ultimate enhancement tool for retouching digital images.
Called the Beauty Function, their program scans an image of your face,
studies it and produces a slightly more beautiful you.

Photoshop artists, make up artists and cosmetic surgeons have been doing this for years, of course, but it’s quite interesting that a computer can identify beauty in a photograph and make the requisite changes.  Here’s the story and here’s a page of results.

See also my previous post Beautiful People are Mean and thanks to Macneil for the link.

Don’t smile too much

Here are two excerpted quotations, cited by John Tierney in his sadly gated blog:

“While we typically think of a smile as displaying our emotional state (happiness), it also appears that smiles convey information about the signaler’s status.  Specifically, lower status individuals appear to smile more than higher status individuals.  I suspect that this is due, in part, to the fact that there are several different types of smiles, including a true happiness smile and a true embarrassment smile.  The latter smile, the embarrassment display, is often seen as an appeasement display in primates.  Jimmy Carter smiled a lot, George Bush smiles much less.  Jimmy Carter is generally perceived to be warm and friendly, but not very dominant and strong.  George Bush is perceived be be somewhat less warm and friendly, but is seen as quite dominant and strong.”


“I believe that the smiling faces of the models for the lower priced brands are simply conveying information regarding the social status of the brand image, rather than attempting to make customers feel better.  Sometimes the advertiser must make a trade-off between advertising high status and presenting an emotionally positive image.  Thus, the non-smiling faces of the higher status brands are not trying to make the consumer feel bad; they are simply attempting to display the signals that are associated with higher status.  We liked Elvis even when he sneered at us from the stage because the contemptuous sneer is typically produced by individuals with higher status.  Although we don’t generally like contemptuous individuals, most folks admire higher status individuals and want to be around them.  Thus, the irony is that higher status brands are creating a positive image -– high status–by using a negative signal (lack of a smile).”