REPOST: Truckers are stockpiling dirty diesel engines

In 2007, new EPA regulations that mandate cleaner diesel enginestook effect. The new engines reduce particle emissions by up to 98% over the previous generation and cut Nitrogen-oxide emissions in half.

But they increase the cost of trucks by $12,000, or about 10%. In addition, truckers (consumers of the new engines) expect higher maintenance costs and worse fuel mileage.

Predictably, the new regulations caused a big increase in demand for 2006 engines and trucks,

Truckers seeking to beat the price increases made 2006 a record year for truck makers. More than 373,000 big-rig trucks were built in North America, says Ken Vieth of A.C.T. Research, which follows truck sales trends. The tally easily topped the previous record of 330,000 trucks in 1999.

But next year, Vieth predicts "a production drought," with sales falling by more than 40% to 220,000 as trucking firms hold off buying to see how the new clean-diesel trucks perform. ...

The cost to truckers goes beyond new big-rig purchases, according to Moskowitz. The new fuel costs 5 cents to 10 cents more per gallon to refine and may produce lower fuel mileage. The new engines weigh more, further cutting mileage. "Over the long run, their increased costs will be passed on to the shippers and ultimately, the consumers," Moskowitz says.

Both the 2006 boom, and the 2007 bust were predictable with simple supply-demand analysis, especially since a similar regulatory change occurred in 2002.

For policy makers, this points out yet another disadvantage of a command-and-control approach to clean air. Mandates from Washington have to be phased in, and this gives consumers an incentive to stockpile old, cheap, but dirty engines so they can use them in the future. Instead of telling producers what to produce, or consumers what to consume (by picking technologies, like ethanol, to subsidize), tax what you don't want (pollution) and let the market decide how best to reduce it.

Bottom line: How many economists does it take to screw in a light bulb? None--the market will do it.

REPOST: Uber's surge pricing is efficient, but deeply unpopular

So much so that places like Dehli has banned the practice.  In response to these political threats Uber has started trying to educate the public about the benefits of surge pricing.  Here is a "natural experiment" in Manhattan.

In the left panel, on New Year's eve 2014, there was no surge pricing (the algorithm broke down), and wait times tripled while the completion rate was cut to 25%.  The right panel shows the same area of Manhattan following a Ariana Grande concert in 2015.  After the concert let out, fares increased, but there was no change in wait times nor completion rates.

BOTTOM LINE:  surge pricing is needed to bring in supply and allocate rides to those who want them the most.  Without it, supply is too small, and rides are not allocated to their highest valued use.
(Economist article)

Heckman on Empirical Economics

Jim Heckman was awarded the Nobel Memorial Prize in Economics mainly for his contributions to the development of empirical methods. He applied these to social policy issues but they are also being applied to managerial decisions. Here he is talking about the value of empirical economics to go beyond ideology.

Markets Reveal Value

A recent article in the WSJ reports that:

Four mutual-fund companies have marked down their investments in Uber Technologies Inc. by as much as 15%, the first such price cuts that suggest these investors are souring on the ride-hailing giant following a scandal-ridden year.

A 15% swing in price in one day is huge. This happens because Uber is privately held and there isn't an organized market for the shares. They do not have to announce write downs of their shares in, say, GM or Merck. They simply check their favorite financial news site. But they likely had a team gathering information and poring over the numbers in order to come up with the new Uber price point. This is costly. One of the great virtues of markets (described beautifully by Hayek) is that they reveal value to the uninformed nearly costlessly. Yet another reason economists are so infatuated with markets.

Reduce Prices When you Acquire a Complementary Good

Minjae Song, Sean Nicholson, and Claudio Lucarelli examine the pricing of drug "cocktails" in their new paper in the RAND Journal of Economics. Sometimes the preferred treatment regimen is a combination of drugs made by competing firms. Each drugs might deal with issues not treated by the other, or that are exasperated by the other, and so are complement each other. In these cases, there would be two effects from a merger between firms:

• higher prices from increased market power when the drugs are sold stand alone and 
• lower prices from internalizing the complementarity when the drugs are sold in combination. 

In their simulations of hypothetical mergers, Song et al. find that the two effects are practically a wash and often consumers are better off.

The net impact of a merger is a modest price increase, or even a price decrease.

Germany's North-South divide

The latest evidence about the superiority of markets (over government planning) seems to come from Germany, people go to better schools, get jobs more easily, earn more and live longer to enjoy it. Crime is also lower. I say "seems to" because inferring causality from correlation is notoriously difficult.

In 1960 Bavaria was the poorest part of West Germany. Like its neighbours, it lacked natural resources and had to find work for millions of Germans who had fled central Europe from 1945 and settled in rural areas. So successive governments limited bureaucracy and offered incentives for investment not just in big cities but also in smaller-scale production in towns and villages. This suited economic traditions: the hilly south had generally been farmed in small patches by self-sufficient families, while the flatter north lent itself to larger, more class-stratified agri-businesses. ... Bruno Hildenbrand, a sociologist, even suggests that the relative autonomy of the southern farming families gave the region a more entrepreneurial and pragmatic mentality.

HT: MarginalRevolution.com

Fake Eclipse Sunglasses

Like many, I will stop my day to experience the solar eclipse on Monday. Many will regret it. As the WSJ reports, they will have stared up at the sun thinking their eyes were protected by special sunglasses that "can filter out tens of thousands of times as much light from the sun as sunglasses." Instead, they will be exposing their eyes to potential harm from counterfeits.

Mr. Jerit said some dealers on Amazon have created copycat versions of his company's Soluna brand of eclipse glasses, sold by GSM Sales LLC. He says the knockoff Solunas are replicas down to the logo, design and product information printed on the frames, and often are sold at much lower prices. A pack of 10 legitimate Soluna eclipse viewers cost $39.95 on Amazon as of Aug. 4

This is a case of a very large and very temporary expansion in demand. Supply cannot increase fast enough making price rise temporarily. But even more, the new temporary demanders are not as discerning about quality as the traditional customers. These are the characteristics that permit moral hazard. With a higher price, there is room low cost producers to enter temporarily with sub-standard products.

I am predicting that ophthalmologists will be busy over the next few months.

Sheldon Chooses a Console

I use this youtube video in class to get a discussion going of all the instances of opportunity costs. The writers did a good job making it accessible even to non-gamers and in carrying a gag as far as they could.

Game theory applied to extreme view protests

In light of events in Charlottesville over the weekend, I am reposting from a story in the WSJ. Germans pledged money to an anti-nazi group for every meter that nazis marched. You cannot help but smirk when watching the video.


I suggest that the next time an alt-right, nazi, or KKK rally is planned, a similar campaign is launched. I know many would pledge money for every hour that the speeches are made and their protest lasts if donations went to a suitable organization that peacefully counsels these folks back into the mainstream. Then hand out lozenges so they could continue as long as possible. Have a signboard with a running total so they could see how much they have raised.The media would eat it up.

The Dark Side of Incentive Pay?

The Financial Times recently published a thoughtful commentary by Jonathan Ford arguing that performance pay in the financial sector has been bad for financial market consumers. He extolls the virtues of the post-war, pre-liberalization banking system where a particularly industrious bank manager might get rewarded with a letter of commendation from the bank president. Ford notes that there were flaws.

The system was not perfect: it could entrench snooty managers and make credit hard to come by.

In contrast to these halcyon days, today's financial managers face constant competitive pressure and are constantly rewarded for increasing profits. We hope that profits are generated by delivering ever increasing value to customers. But, especially during the financial crisis, there were many examples of bankers fleecing customers. He notes that the bad acts are a result of bad incentives and suggests a remedy for these bad acts.

But there is of course a simpler way to avoid offering bad incentives. That is simply to pay employees a salary based on what the job is worth.

On net, was the move to market liberalization, and incentive pay as a consequence, worth it?

I will note that, over the past four decades, the financial sector has seen nearly as much innovation as the IT sector. Spreads between interest rates to borrowers and savers and in stock market transactions have shrunk dramatically. More consumers have access to more financial instruments than ever before in part because more financial instruments are available at cheaper rates than ever before. Ask your grandparents if they diversified their retirement fund into international equity funds when they were your age and you will probably get a blank stare. This innovation is also a result of market liberalization. Would de-liberalization and a reduction in banker incentive pay also put a halt to further financial market innovation?