Revealed Preference during the Blizzard of 09

I used to think that drawing conclusions about people before meeting them was taboo. A persons actions do not really present an accurate picture without knowing of their initial intentions. My view was challenged after I read Blink by Malcolm Gladwell which analyzes the art of thinking fast. My view was also challenged when learning about the free rider problem and revealed preference. These phenomena can be seen on a daily basis within ourselves, our community, and the global economy.

Recently I encountered both these phenomena during the largest snowstorm that DC has seen in over ten years. After the storm passed there was a massive effort to dig the city out from this record snowfall. On the municipal level the DC government has been the epitome of inefficiency when it comes to inclement weather. Residents view this with disdain but it is in the cities best interest on the grounds of efficiency. DC doesn't accumulate the amount of snow on a yearly basis that warrants more equipment. But my interests do not lie there, they reside on the micro-level (i.e the individual and collective communities).

My own neighborhood did a satisfactory job in cleaning the sidewalks in a coordinated fashion while other neighborhoods such as the Foggy Bottom area and Georgetown were markedly slow at cleaning their sidewalks. Does this say anything about the residents of my neighborhood compared to those in Foggy Bottom? Its hard to say. Looking at the individual level does it say anything about a person who does not dig out side walk or car for days on end? There could be a variety of reasons from not investing in a snow shovel, having back problems, or even being plain lazy. Economics is the science of incentives and peoples behavior in the face of these incentives and it is through revealed preference that we can theorize peoples demand for certain goods. Can you conclude that a person who shovels his driveway during or right after the storm values the ability to leave his home more than someone who waits two days after? Probably, by clearing his sidewalk he is signaling to other that he prefers the continuation of his daily routines (e.g going to work or going out for any other activities) as opposed to delaying his routine schedule.

Does that mean that we can conclude that the residents in my neighborhood prefer to return to the status quo more than the residents of Foggy Bottom? Of course not, there are other factors at play but they may be signaling their preferences to some extent. Its hard to put a quantitative measure on this but it is in my belief that someone who doesn't dig out their car or driveway for over three days prefers to either stay at home or not use his car.

Another interesting phenomena that I saw on was that of the free rider problem. Their where blocks that had people that did a less than satisfactory job of cleaning their sidewalks as opposed to their neighbors. There where chains of residents whose uncleaned sidewalks divided clear paths. This stems from a unique Nash Equilibrium in which the presence of a free rider precludes neighbors from cleaning their yards. A simple example of the free rider problem is the group of peers who collaborate on their homework assignment, knowing that it needs to be done there will be someone who will not do their fair share knowing that everyone has an incentive to get it finished. That person receives a benefit without incurring any of the cost. This problem has two obvious solutions, allow it or have this person kicked out. But it is obvious that you cannot kick someone out their home for that reason.

Are we then doomed to suffer this equilibrium? No, a third solution to this market failure has both a public and private sector solution. You can use the Pigouvian method of taxing or subsidizing behavior or through private sector companies that draft contracts. The latter method solved this same free rider problem in New York's Times Square which was once the center of massive street pollution from weary street vendors stuck in the aforementioned equilibrium. Should we use one of these methods to solve this problem? Probably not, the costs in this case do not outweigh the benefits, and in a society that does not take kindly to tax hikes or unnecessary government spending it is not likely to be plausible.

A New Way of looking at GDP

When looking at a countries well being macro-economists use gross domestic product (GDP), a widely used measurement of economic activity. GDP has been staple of macroeconomic policies geared towards prosperity. Since the period of Keynes there has been a broad consensus that there is a strong positive correlation between high GDP and the well being of a population.

But recently there has been a shift in thought with the uprising of a field known as "Happiness Economics" that has challenged this economic dogma. Countries have begun to challenge the notion that monetary wealth is the sole variable that indicates well being. Bhutan for example now measures its GDP in happiness (called Gross National Happiness) . At first glance this would not seem to really hamper traditional economic thought because Bhutan does not have a large GDP. But now there is reason for archaic macroeconomics to cringe because France, the fifth largest economic has undertaken a study to revamp GDP to include index's that measure happiness. The Commission on the Measurement of Economic Performance and Social Progress, under the initiative of the French government has determined that the traditional measure of GDP is an insufficient measure of well being. The commission was carried out by the help of Joseph Stiglitz a noble laureate and well respected economist at Columbia University. The new measure includes index's such as the human development index (HDI) and positive externalities created by government expenditures.

I myself have not read the entire commission but it is an interesting movement in macroeconomic thought. Just looking at the levels of poverty in the US you can see that GDP does not fully capture well being and there is more to life than how much wealth there is per capita. My only gripe is that this needs to be done by an independent agency and not under the guise of a potentially biased government.

A Good Article about Health Care Reform

This article written by Jonathan Gruber gives a good look at how we can finance health care. Gruber is a renowned economist from MIT whose area of concentration is public finance (i.e public sector economics). I used his textbook last semester, it was thorough and easy to read. The chapter on health care (written before these reforms) proposed changes in the tax structure of employer provided health insurance is basically restated in the article

The aura of Facebook

Looking at the aspects and behavior towards Facebook puts me at a quagmire. This seems to be one of the only objects that shows little to no signs of diminishing marginal returns (DMR). Aside from oxygen and water just about every activity displays aspects of diminishing returns. The classic example of DMR is a pizza. The first slice is always the best but as you eat more and more slices you receive smaller amounts of utility.

When applying this simple concept to Facebook I do not see the same behavioral characteristics. People browse this site for extended periods of time on a daily basis and have maintained it for years. At some point you would figure that people would grow weary and stop using it, but that does not seem to be the case (for the most part). It is in my belief that this characteristic is what allows Facebook to thrive and have continued success in the future. Delving deeper into this analysis I ultimately believe that Facebook does show signs of DMR but at an infinitesimally slow pace.

The Externalities of Social Networking

Over the past couple of years the world has witnessed the advent of social networking. Facebook, Myspace, and Twitter have essentially created a network externality whose growth (and benefits) has reached a point were private and social costs are beginning to emerge The added benefits of a social networking interface are endless. Firms are able to their business models, maximize per dollar marketing expenditures, and have access the the most competitive labor market the world has seen. Users on the other hand wirelessly are able to obtain news from any part of the world in the blink of an eye. Both parties are essentially able to interact in this highly complex global economy with the smallest of efforts.

But we all know what economists have to say about this, there is no free lunch. The costs of this are bourn on some while the benefits are distributed to all. Social networking sites have essentially created a free rider problem, a negative externality that occurs when people receive the benefit without bearing any of the cost. The classic example of this is the firm that pollutes the river that kills the fish and thus hurts the fishermen. In this case the burden falls on news companies who pay writers and reports to receive and send news which are in turn paid for by consumers. What social networking has done is allowed information to be passed on to consumers who do not pay for it. News networks such as the Wall Street Journal, The Economist, and The New York Times have curbed this problem (only slightly) by charging users to see their content. Companies are aware that this is not the optimal solution and need a way to raise their revenues.

We have seen that the advent of the internet itself has destroyed the newspaper industry and companies are just beginning to adjust (albeit with downsizing being a major factor). Firms understand that charging fees and advertising revenue cannot combat their operating costs so they need a helping hand from the social networking industry. To eliminate this problem its in the best interests of news companies that the Pigovian approach be taken. By taxing behavior you establish the people who value the content (news) and weed out most of the free rides who would not have paid for it. So it is in my opinion that the future of social networking will come at a price, mainly in the form service charges in the form of monthly fees, two-part tariffs, or per use fees. The types of pricing models are endless and I certainly have no idea which will be pursued.

The Principle-Agent Problem of Hollywood

It seems as though the movie industry is hitting an all time low. The traditional movie seasons (i.e the summer months and Christmas) which used to be filled with blockbuster films are now witness to sequels, prequels, and remakes. A once proud staple of original and innovate films Hollywood is on the path to becoming the next GM (and there will be no bailouts for this failing franchise).

I recently came to an understanding of why this is happening when I finished watching Terminator Salvation. It was a seemingly monotone film with several flaws but what irritated me the most was the ending which left the possibility of a sequel up in the air. It seems as though consumers are stuck with hollywood prodcuers in a Principle-Agent problem, our interests of watching entertaining works of art are conflicted with a hollywood executives view of the next franchise of movies that can be marketed for years or the revival of an old franchise that experienced past success (The Terminator Series).

This problem does not seem to be ending any time soon because of our continued willingness to watch this rubbish. By continuing to consume this product we are exasperating the problem of moral hazard which will only ensure that we continue to be served this filth.

A Very Loose Case of 1st Degree Price Discrimination

I have always been very interested in the ways in which firms try to determine market demand curves. When we study economics we use simplified models such as supply-demand graphs to determine market price and quantity. We all know that in the real world its not that simple. I recently stumbled upon a method to determine individual demand curves, its used by a company that developed an iPhone game titled EliminatePro. I believe that this game uses a loose form of 1st Degree Price Discrimination. A precise definition of it is located here for those of you who don't know what it is. You can assume that the game developer possesses the characteristics of a monopolist mainly because its only accessible on the iPhone which is only accessible by having AT&T. The game is free to download put when you play you only have a limited amount of "energy" which is a function of how long you play and how many kills you get. Once your energy has drained then you must pay for more, you can also purchase more equipment (e.g guns and armor). As you can see gameplay as a function of time is determined by the individuals value with those who place a higher value playing longer and having better equipment. You are not necessarily getting a better experience but getting more of it immediately, you are essentially paying not to wait. Its interesting to see what kind of reviews this game has because of its pricing model, from what I have seen its largely negative (i.e those who do not place a high value on it).