When does competition lead to higher prices?

When firms compete on quality:

Law school tuition has been rising since 1994, reaching as much as $50,000 per year when combined with fees at law schools such as Yale and the University of California at Hastings.

A new report (PDF) by the Government Accountability Office ... says the key reasons for higher costs are competition for higher rankings and "the move to a more hands-on, resource-intensive approach to legal education,” according to Inside Higher Ed and TaxProf Blog.

I suspect that competition would lead to lower prices if students paid their own way. But education is an industry like healthcare and academic journals where the people who consume the product do not pay for it.

Equity versus Efficiency – Climate Edition

As part of President Obama’s trip to China next month, he will try to reach an agreement on reducing global carbon emissions. China, understandably, is reluctant to do so and poses the argument that:

Countries should be held responsible not only for their current emissions but also for their cumulative historical emissions, given that greenhouse gases accumulate in the atmosphere over many decades.

They are probably right that the burden should be lighter for developing countries who have not contributed as much carbon in the past, but this is not the reason. I empathize that it is likely not fair that we got to release so much carbon as we developed while they may not be able to. But looking at what was done in the past is a retrospective view of what are essentially sunk costs that cannot be undone.

The point of a change in policy is to change our future lives for the better - a decidedly prospective view. If we agree that global emissions should fall* then it is efficient to reduce them where the burden is lightest. There are two reasons why the burden may be heavier in China. First, because China is growing so fast, the marginal effect of a given carbon emission reduction on GDP could be very well be higher in China. Second, if one believes in diminishing marginal utility, the utility loss from a dollar reduction in GDP in China is likely much greater than the utility loss from the same dollar reduction in GDP in the US. If I give up $5 a week, I buy fewer iTunes and Starbucks coffee whereas a Chinese peasant might miss meals. Either effect would argue for more of the burden to be shouldered by developed countries.

*I am skeptical of a carbon emission mitigation only strategy. Best estimates are that mitigation is very expensive, yielding small effects decades into the future. Alternative temperature reducing “geo-engineering” possibilities, while controversial, hold promise too.

Moral Hazard and Yuppie 911

What happens when you make it easier for hikers to be rescued if they get into trouble? Risky behavior increases, like more inexperienced hikers venturing into the wilderness - a clear example of moral hazard. This MSNBC article notes how inexperienced hikers abuse the use of personal locator beacons citing the case of two men and their teenage sons hiking the Grand Canyon's Royal Arch Loop. Over three days, they hit their panic button three times resulting in the mobilization of search and rescue personnel via helicopter (one of the "emergencies" was that their water tasted "too salty")

After being forced to evacuate after the third call, one of them noted that they would have never attempted the hike without the use of personal locator beacons. The abuse of these beacons has become common enough to have received its own descriptor: Yuppie 911.

Refugees from New York

Those damned incentives:

The average Manhattan taxpayer who left the state earned $93,264 a year. The average newcomer to Manhattan earned only $72,726. ...

It all adds up to staggering loss in taxable income. During 2006-2007, the "migration flow" out of New York to other states amounted to a loss of $4.3 billion.

McDonalds cannot compete in Iceland

After the credit bubble burst, and the Icelandic krona collapsed, McDonald's has decided to go out of business.

McDonald’s in Iceland, which imports most of the ingredients it uses in its meals, will shut after costs doubled over the past year, Lyst said in an e-mailed statement today. The franchise holder said it doesn’t expect the situation to change in the short term. ...

“Our competitors all use domestic meat and lettuce and so on, while we are flying in these materials, which is extremely expensive,” Ogmundsson said.

Should Apple be charging $0.99 per song?

New research by Joel Waldfogel suggests that the optimal price for a song is about $2.30, and that charging higher prices for more popular songs would raise revenue only by 3%:

One alternative is song-specific pricing, much favoured by record companies. (Apple has already moved a bit in this direction with its multi-tier system.) But the research suggested that this would increase profits by a mere 3%. Part of the problem was that people who valued one song highly also tended to place a high value on others. This implies that person-specific, rather than song-specific, pricing would be more efficient. But sellers’ data are not refined enough to set different prices for different people. People may resent such pricing anyway, so it could harm sellers’ brands. Crude profiling—by race or sex, say—would be illegal. In any case, the authors found that basic demographic information did not tell them much about musical tastes.

It's the Form of the Incentives, Stupid

I think that some of the more interesting work in economics looks at how people respond differently to monetary and non-monetary incentives. For example, one might initially think that if you offered people money to donate blood, they would donate more blood; however, the offering of money tends to somehow de-value the altruistic motives people have for donating blood, leading to less willingness to donate.

Here's a study that indicates the form of the payment is what really matters. When people are offered money for donation, they are less interested in donation; however, an offer of a voucher of similar value doesn't have the same negative effect. In a survey of 467 donors:

A substantial share of respondents declared they would stop being donors if paid a small amount of cash, but we do not find such effects when a voucher of the same nominal value is offered instead. The aversion to direct cash payments is particularly marked among women and older respondents, while there are neither gender nor age differences in the response to the voucher.

Defending the undefendable: insider trading

Before there was Freakonomics and the Armchair Economist, there was Walter Block Defending the Undefendable. These arguments force students to think instead of simply regurgitating knowledge. 

Don Boudreaux channels Block (and Henry Manne) with his defense of insider trading:

Suppose that unscrupulous management drives Acme Inc. to the verge of bankruptcy. Being unscrupulous, Acme's managers succeed for a time in hiding its perilous financial condition from the public. During this lying time, Acme's share price will be too high. Investors will buy Acme shares at prices that conceal the company's imminent doom. Creditors will extend financing to Acme on terms that do not compensate those creditors for the true risks that they are unknowingly undertaking. Perhaps some of Acme's employees will turn down good job offers at other firms in order to remain at what they are misled to believe is a financially solid Acme Inc.

Insider trading would force the stock price closer to its true value, and prevent all of these mistakes.

...when prices lie, market participants are misled into behaving in ways that harm not only themselves but also the economy writ large.

What is the cost of a Snickers bar?

It depends on what you have to give up to get one.

Why are kids in continental Europe so feckless?

Its the incentives, stupid:

In continental Europe a big part of an estate (often around half) is reserved for the surviving children of the deceased and must be equally divided between them. This “forced heirship” makes it impossible to disinherit feckless children (though several countries exclude bequests to “unworthy” children, who have for example murdered a parent or two). ...

Europe’s inheritance laws pit the Anglo-Saxon emphasis on freedom and markets against a continental focus on social “solidarity”, meaning the belief that shielding people from the vagaries of fate is an overriding public interest (even if that sometimes rewards the feckless). It is no coincidence that Europe is equally divided over labour laws that favour competition, versus those that protect workers from the whims of markets and bosses alike.

HT: Claire