Poolonomics

I am heavily perplexed by the payment method of a community pool I visited yesterday. Their pricing system for guest passes consists of a daily pass for five people valued at $20. From a consumers standpoint maximizing consumer surplus is achieved when you have five guests (thus paying only $4 for pool access all day, not that bad). Therefore consumers have an incentive to come when they are in groups instead of individually.

This hurts both consumers and the producer on an ideal summer day when people flock to their nearest pool. Consumers will want to maximize consumer surplus, therefore they will come in parties of 5. On a nice summer day 5 people will invite 4 of their friends which comes to 25 people (or 10 totaling 50, etc.). This pricing methods creates a constant growth pattern among consumers not including those who have memberships. Consumers are left at the mercy of information asymmetries when deciding whether to go to the pool. This system yields several deficiencies for both parties. On a nice day the pool may be too crowded which retards the utility of swimming at a declining rate.

It would be efficient for the pool to model another pricing method which maximizes producer surplus. Individual passes could be sold with their prices varying by day which forces consumers to properly value the utility gained by swimming on a particular day. Then again its a community pool which is not in the business of turning a profit.

Sin Taxes 2.0

The passage of a bill that will introduce universal health care has come as a beacon of hope to low income citizens. Although controversial, the bill stands to improve the lives of millions Americans by providing them with a means to obtain affordable health care. The bill is far from what liberals would consider favorable (i.e universal coverage under the government) and seen as the beginning of the end US by republicans.

Aside from all the political wrestlings the bill now places the burden of health care costs on every citizen. It is now the responsibility of everyone to do their part to reduce the growth of health care inflation. Although it is extremely difficult to effectively place the optimal set of taxes to correct this externality it is necessary to start somewhere.

The method of pigouvian taxation has already taken place in the health care sector in the form of sin taxes (which is what they are popularly referred to). These taxes, which are highly levied on the cigarette and alcohol industries have greatly affected consumption (in the former industry more than the latter).

Now it is time to place a new set of taxes on another industry, mainly fatty foods. This needs to be done in order to correct the externalities associated with obesity and reduce the rate of health care inflation. If conducted correctly these taxes may lead to both Pareto improvement for society and manageable premiums from the health care industry which in turn induce savings in the health care program.

Moral Hazard of Guaranteed Pay

My Senior Thesis and first extensive research paper.

Senior Thesis Final Draft

The "Fair Weather Fan" Phenomena

In sports the bandwagon effect is often seen with disdain, mainly by loyal fans. This bandwagon, composed of "fair weather fans" often grow exponentially when a team is generating success after extended periods of below average performance. Stadium attendance and merchandise revenue grow to a point where one starts to question where this fan base was before. Despite popular thought (from "loyal fan bases") this phenomena is exhibited by every sports franchise in existence. My question is why is this seen as a social pariah.

On a consumer level these fans simply value another good (i.e all other goods on a simple PPF diagram) over watching a mediocre team. Preferences differ from fan to fan, so the main difference between a "loyal fan" and a "bandwagon" is simply how much they value their team. All of this may seem too obvious to most but how can fans look down on someone who may have a higher opportunity cost for time then they do. We exhibit this very same behavior in every facet of our lives and see it in the world around us (e.g the stock market, the food we eat, time spent reading over watching t.v., etc.) and are not nearly as appalled as we would be when applied to sports.

Do Economies of Scale Help Crime?

I was recently walking down the street when I discovered a cell phone store named Cricket that provides incoming customers with plans that provide adequate coverage with no credit checks or start up fees. The store I passed was located in a traditionally poor neighborhood that was slowly in the process of being gentrified.

It was at that point that I realized that I had seen a majority of their stores where located in poorer neighborhoods. This brought me to believe (and its simply conjecture) that this cell phone provider gears its product to low income individuals. Since the cell phone market is already saturated cricket can sell its products at a very low price and capture a large share of their targeted market.

At first glance this seems to be a win-win situation, you are providing low income consumers with a product that is vital to the progress of their lives (e.g the social networking externalities produced by having a cell phone tend to increase your chances of finding higher paying jobs) without the hassle of going through credit checks that they may not pass. The flip side of this is that these products are easily accessible to criminals who try to keep a low profile. It is well known that there is a strong positive correlation between crime and poverty (i.e more criminals are located in low-income neighborhoods) which leads to you to believe that Cricket is inadvertently selling its products to criminals.

This is in no way saying that Cricket is condoning criminal behavior, but they may inadvertently helping them gain access to a product that aids in conducting business in the underground economy. Cell phones in the hands of a criminals allows them to form a vast network to communicate on making the enterprise more efficient. The gains in efficiency translate into higher profits via lower operating costs.

Does this mean Cricket should require tougher standards? No because they will only be harming themselves (through lower clientele) and low income citizens who do not choose to be criminals. Needless to say its very interesting to speculate on the positive and negative externalities associated with technological innovation and economies of scale.

An Experiment in Economic Incentives

This experiment took place in Stockholm as a way of inducing people to take the stairs instead of the escalator to combat the surge in obesity that is plaguing the developed world. Famous for their innovations in reducing traffic congestion Sweden has become a pioneer in implementing economic theory in real world applications.

The purpose of this experiment was to find a way for people to enjoy walking up the stairs as opposed to taking the escalator. Although it seems amusing it is not practical. Mainly because it will obviously become annoying and will not work for people who are listening to music on a portable device. There is another example of this here which shows stairs that indicate how many calories you have burned (estimated) for each stair you have climbed. The latter of the experiments seem to be more feasible because it captures those who are slightly health conscious to take the stairs.

The easiest way of course is to get rid of the escalator altogether but that is detrimental to those who are handicapped because they will be forced to take the elevator that will be congested by those who put little to no premium on their health, are tired, or just lazy.

DC's New Tax

On new years day residents of the District of Columbia became test subjects in Pigouvian tax experiment. Now there is a 5 cent levy per plastic bag induced to minimize the negative externalities produced by plastic bags.

Most residents were aware of the new measure while some where shocked and appalled. Now that we are seven days into the experiment we can begin to analyze some of the results (mainly consumer reactions) which span the spectrum of disgusted to furious.

Talking to friends and neighbors I pretty much got the same feedback, the government is trying to take my hard earned money. My response, not so. The DC government could care less of the revenue generated from this tax, the purpose of it is to curb behavior which in this case is minimizing the number of plastic bags created each year.

Plastic bags unlike paper bags take longer to deteriorate and are very harmful for the environment. They also create negative externalities in the form of pollution in both our rivers and the streets and they are not recycled enough. Up to now the private sector has done little or nothing to fix this problem (although Wholefoods offers a subsidy for reusing their bags) which means that it is up to the public sector to fix this market failure. Their assumption is that plastic bags are very price elastic which means that levying a tax on them will cause consumers to move to alternatives (e.g reusable bags, recycled bags, or no bags at all).

Social welfare advocates heavily oppose this tax because it burdens low income citizens more than anyone else because it takes a larger share of their income (although its a flat tax it can be seen as a regressive tax because it burdens the poor more than the rich). While their observations are correct they fail to see the purpose of the tax. They also fail to recognize that this tax (in my opinion) targets low income citizens who are less prone to recycle and not litter. These same advocates should look up what similar tax's did in India which had terrible pollution problems attributed to plastic bags. Their urban population consists of dense areas of poverty yet the tax's did not make them worse off, it simple changed their behavior.

Only time will tell how successful this tax was but I believe that DC was correct in implementing it. Consumers will initially be angry but as time passes they will switch to alternatives and go on with the rest of their lives. We are simply enduring a short-term hassle for long-term prosperity.

Happiness Economics

One of my previous posts (A New Way of Looking at GDP) delved into the field of happiness economics and talked about adding some happiness index's to GPD. Yesterday I discovered this article from Brookings Institute that is basically a retread of what I wrote.

It's an interesting read that digs into how the human psyche operates. The author elaborates on a theory of how humans synthesize happiness. This theory has been working its way through the scientific community lately, manifesting itself in several studies and literature. I myself have read on this and find it quite fascinating and would recommend looking up Daniel Gilbert or Barry Schwartz for further input on how humans synthesize their happiness