Waste and the Value of Time

by  Alex Tabarrok in

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. 

Responses to higher gasoline prices

by  Tyler Cowen in

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.

Is gossip functional?

by  Tyler Cowen in

Gossip not only helps clarify and enforce the rules that keep people working well together, studies suggest, but it circulates crucial information about the behavior of others that cannot be published in an office manual. As often as it sullies reputations, psychologists say, gossip offers a foothold for newcomers in a group and a safety net for group members who feel in danger of falling out.

Here is the story.  Gossip is also a means of signaling ability.  It is not easy to gossip well and gossip discreetly.  What better way of sorting people by their social and communicative abilities?  So when you gossip, you are the one being tested and evaluated.

Beware Free Apples

by  Alex Tabarrok in

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.

Rentseeking_1 

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! 

Markets in self-constraint

by  Tyler Cowen in

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.

Evil Kelo

by  Alex Tabarrok in

The Kelo v. New London eminent domain case started five years ago when New London condemned a number of buildings, including the lifelong home of one 87 year old resident.  The residents took the case to court and, of course, lost.  Now get this.  The city is claiming that since the original seizure was legal the residents have been living on city property for five years and thus owe back rent.

Namesake Susette Kelo, who owns a single-family house with her husband,
learned she would owe in the ballpark of 57 grand. "I’d leave here
broke," says Kelo. "I wouldn’t have a home or any money to get one. I
could probably get a large-size refrigerator box and live under the
bridge."

Thanks to David Theroux for the pointer.

Outsourcing Blogs

by  Alex Tabarrok in

Our general business model is a two tiered effort to hire Chinese
citizens to write blogs en masse for us at a valued wage. …We estimate that our current blogforce
of 25 can support around 500 unrelated blogs…When a vendor
needs to promote a new product to the internet demographic we will be
able to create a believable buzz across hundreds of ‘reputable’ blogs
and countless message boards. We can offer a legitimacy to advertisers
that doesen’t exist anywhere else.

The second tier of our plan
is a blog vacation service where our employees fill in for established
bloggers who need to take a break from regular posting. As all bloggers
know, an unupdated blog is quickly forgotten. For a nominal fee we can
provide seamless integration of filler.

So far the enterprise is nothing more than a blog about starting the business.  But it does make for some amusing reading. 

Our initial results have been a little bit below what we expected.
To increase our authenticity we are trying to isolate and remedy
problem groups. Our design process centers around 3 general groups.
They are:

1.  Teenage girls
2.  Normal Bloggers (yuppies, moms, average college students)
3.  Super Bloggers (bipolars, cynics, liberals, outcasts, super-hip)

Teenage girls are apparently the easiest for Chinese sweat-shop workers to imitate but Super Bloggers are tough.  The entrepreneurs, however, have uncovered the formula:

To create convincing Group 3 product we need to have extensive
faux-archives (to give the illusion of a faithfully updated blog) and
we need to drop a lot of obscure pop-culture references. The key to
good Group 3 is to spend 80% being negative about certain areas of
culture and 15% excessively positive. The last 5% should be used for
self-loathing because the blogger likes certain ‘un-hip’ culture.

Yup, he got the percentages just about right.

Thanks to Noel Welsh, who claims he blogs at Untyping.

Markets in guilt reduction

by  Tyler Cowen in

If you’re feeling guilty about driving your giant sport utility vehicle (but not so guilty that you’d ever give it up), salvation is at hand. For a yearly fee of around $80, a company called TerraPass will offset the damage your SUV does to the atmosphere by spending your money to reduce industrial carbon emissions and to promote the spread of clean energy. They’ll also send you a decal and a bumper sticker, so everyone in the neighborhood will know that your gas guzzler has been sanctified.

Here is the full story, which details other options as well.  Of course we need not stop with SUVs.  Have your life taped and recorded, and submit the results to certified third-party arbitrators (who, by the way, will safeguard your confidentiality).  They will tell you how much of a cancer you have been to the body politic, and suggest offsetting charitable contributions.

Addendum: Read this also, thanks to Graham Lawlor.

Epigenomes

by  Tyler Cowen in

As scientists discover more about the "epigenome," a layer of biochemical reactions that turns genes on and off, they’re finding that it plays a big part in health and heredity…

The epigenome can change according to an individual’s environment, and is passed from generation to generation. It’s part of the reason why "identical" twins can be so different, and it’s also why not only the children but the grandchildren of women who suffered malnutrition during pregnancy are likely to weigh less at birth.

"Now we’re even talking about how to see if socioeconomic status has an impact on the epigenome," Szyf said.

The link is mine, but read more here.  Here is further explanation.

Do consumers prefer ambiguous names?

by  Tyler Cowen in

Today we have crayons called "Inch Worm," "Jazzberry Jam," "Tropical Rain Forest," "Manatee," "Bittersweet" and "Razzmatazz."  Or have you noticed you can’t understand half of the ice cream flavors these days?

Miller and Kahn discovered that there’s method — and perhaps even profit — to this maddening name game. In one test, 100 students taking part in an unrelated study were told that after they had finished the research task they should select jelly beans from six containers as a reward for their participation. They were told that each container held a different flavor of jelly bean. Half the students saw containers labeled with ambiguous names ("white Ireland," "moody blue"), while the other half saw those same containers with more specific descriptive names ("marshmallow white," "blueberry blue"). As the researchers had hypothesized, students took nearly three times as many jelly beans on average from a container that bore a vague name as from one that carried a specific name. In another study involving 60 students, participants were told to pretend they were ordering sweaters from a catalogue. The sweaters in question came in various colors, and these shades were described either ambiguously or using common descriptive names. Again, the students clearly preferred the vague names when making their buying choices. A third test turned up similar results.

Why does ambiguity seem to sell? Miller and Kahn theorize that, without real information, consumers try to understand why the product has such a jazzy name and fill in the blanks with imagined desirable qualities.

Here is the full story.  Here is another summary.  Here is the paper.  Here is one researcher’s home page.

Will New Zealand reform any further?

by  Tyler Cowen in

The core outlines of the New Zealand story are well-known: in 1980 the country was arguably the most socialized OECD country and stood on the verge of bankruptcy.  By the early 1990s New Zealand was one of the freest economies and had produced a solid if not spectacular economic performance.  The reforms included near free trade, substantial privatization, elimination of agricultural subsidies, free labor markets based on contract, free capital markets, 0-2 percent inflation as a formal regime, a relatively flat tax, and greater transparency in policymaking.  But the New Zealand economy has not seen major reforms in over a decade and in a few areas, such as labor markets, there has been backsliding.  Will reforms return?  I see a few hypotheses:

1. New Zealand reformed everything short of social welfare spending, education, and health care, which few voters wish or wished to reform.  In fact the point of previous reforms was to preserve (and perhaps extend) previous levels of social welfare spending.

2. Further reforms were thwarted by a move to proportional representation in the early 1990s, which gave minority parties undue influence and weakened threads of accountability.

3. Asset privatizations in particular were oversold — remember the Auckland blackout? — and New Zealanders lost their appetite for further changes.

4. New Zealand policymakers were well ahead of public attitudes, and managed so many reforms only because the country’s (previous) Parliamentary system had few checks and balances.  It is taking public opinion an entire generation to catch up to where policy stands.  Only then might current reforms continue.

5. New Zealanders can once again sit content, since they are no longer in danger of being blown out of the water by Australia.  If they start falling behind again, reforms will resume.

6. Donald Brash will be elected Prime Minister in September, and reforms will resume then.

I’ll give the greatest weight to #1 and #4, and say no to #6, comments are open, Kiwi commentators are especially welcome.