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

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).

Intro Blog

Hello, my name is Jethro Perez, this is my first post. As you can see I am currently studying Economics at GW. I am blogging for a variety of reasons. Fist and foremost I love economics, I love applying it to any situation I see and I love to analyze policies from an economic perspective. Second I want to enhance my writing skills which are a bit lackluster. Lastly I wish to apply my knowledge of economics to real world problems and offer my insight on the daily events that occur in this fast pace world. Hopefully any future readers can correct me on any mistakes I have made or draw some knowledge from my perspective. Thanks again to any future readers and followers