by Ayers, Collinge
"Let's explore that mountain pass!" shouts the hiker. "Let's explore the financing options," suggests the car dealer to the customer. "Let's explore the possibility of sending astronauts to Mars," argues the scientist. Like these three, everyone is an explorer. We think through our possibilities in life, and that is exploration.
Exploring can involve web surfing, visiting a bookstore, or mingling with one another. It expands our knowledge and experience, which we can then apply in order to make better choices. For example, our explorations can lead to writing a better term paper, finding a good book, making new friends, or other applications.
Students of economics are most assuredly explorers. As a student, you explore the principles and issues of economics, then apply what you learned from your explorations. You apply economics to choosing a career, a mate, a senator, and what to eat for breakfast. The exploration of economics and its application to life's choices are found throughout this book. The Explore & Apply section that precedes each chapter summary offers the opportunity to dig deeper into an issue. Like Daniel Boone, Ponce de León, and John Glenn, you are now a pioneer on a journey of discovery.
Bigger or smaller government? An economic stimulus package? Lower taxes? More money for homeland defense? These questions are all answered in the political process. Yet their content is most decidedly economics!
During the eighteenth and nineteenth centuries, economics was called political economy. The term political economy makes clear that politics and economics intertwine. Even today, some refer to economics as political economy when they want to emphasize the close ties between economics and public policy.
The renowned physicist Albert Einstein (1879–1955) was in the business of modeling. The most famous model to come from his mind, summarized in the equation e = mc2, provided key insights that led scientists to the ability to split the atom. It is not only economists and physicists that model, however. Psychologists tell us that all of us walk around with models of life in mind.
Take your model of learning. How do you perceive the learning process? A simple model holds that the job of the instructor is to fill your mind with knowledge. In this model you are a passive recipient of facts, figures, and principles. Students whose internal learning model is similar to this one often fail to prosper academically because some important elements of the learning process have been omitted. Remember, Occam's razor tells us to omit only the nonessential elements from models. As Einstein told us, "Everything should be made as simple as possible, but not simpler."
A more sophisticated learning model allows for the student to interact with the instructor, the material, and other students. Key elements of this model involve setting aside time to reflect on the material, to ask questions, and to work with others. Which model is yours?
… on the other side of the fence," the saying goes. Take marriage, for example. How many married men and women do not catch themselves envying the freedom of their single friends—freedom to meet new people and do what they want, when they want to do it? How many of those single friends do not look back with envy of their own, seeing the warmth and security of sharing one's life with someone special? Oh, those opportunity costs! We cannot have it all!
Was it a test missile or a satellite launch vehicle that North Korea fired in the direction of Japan? Either way, the Japanese were not amused by this unexpected projectile hurtling their way late in the summer of 1998. In response, Japan was quick to cut off its food aid to North Korea. After all, it was the food aid that allowed North Korea the luxury of devoting resources to developing its expertise in rocketry. Food aid from Japan was meant to help the North Koreans survive, not to allow them to reallocate their resources toward financing investment in new, threatening capabilities, now thought to include nuclear weapons.
Many great athletes are multitalented, possessing strength, speed, and muscle coordination that dwarf that of the general population. These qualities are needed for success in a variety of sports, yet few athletes play more than one sport professionally, even though they might be able to do so. Simply look at the sports pages. Venus Williams makes headlines by swinging a tennis racket, while Tiger Woods swings a golf club and Barry Bonds swings a bat. Their choices tell the rest of us about their comparative advantages.
The best teams exploit the comparative advantages of their players. Each player has a job to do and specializes in doing it well. Whatever the sport, owners and fans expect this principle of comparative advantage to be followed and demand coaches who will best exploit the talents of their players. But even the best coaches can err, as when Cleveland Indians' baseball coach Tris Speaker said in 1921, "Babe Ruth made a great mistake when he gave up pitching. Working once a week, he might have lasted a long time and become a great star."
Whether it be a hurricane's pounding surf that washes away expensive beachfront homes, a swollen river that engulfs entire communities along its course, or sliding mud that obliterates whatever stands in its way, the effects of wind and rain cost U.S. citizens billions of dollars annually. Much of this loss is a direct result of expensive structures being built in harm's way. For example, huge amounts of real estate development occur in some of the most at-risk areas, including California hillsides, property fronting the beaches of Florida, and in the flood plains of scenic West Virginia rivers.
Is the large amount of building in risky areas proof of people's shortsighted irrationality? More likely, it is evidence of the law of demand in response to government low-interest loans for rebuilding and other assistance that reduce the cost of disasters to their victims. Specifically, disaster assistance lowers the price of taking the risk to build in disaster-prone locations. The lower price leads people to do more building there. Thus, by the law of demand, the unintended consequence of compensating disaster victims for property losses is that there will be a larger amount of property lost when the next disaster strikes.
To reduce the amount of risk-taking, it is increasingly common for government aid to be contingent upon the recipients rebuilding in safer spots. Even so, disaster aid lowers the expected price of risk-taking for the rest of us. We respond to this lower price by daring to live closer to our country's scenic but dangerous places.
It was either a stroke of marketing genius or just dumb luck. But what it did for demand is one for the record books. The year was 1985 when, losing market share to its arch-rival Pepsi, the Coca-Cola Company tossed aside its secret recipe and ceased making "the real thing." Instead, Coke drinkers were presented with a reformulated New Coke that tasted oh-so-syrupy sweet. It seems that taste tests found consumers favoring the sweeter taste of Pepsi over traditional Coke, but found New Coke beating all. Market research notwithstanding, New Coke was a huge flop.
"Bring back the real thing!" cried Coke customers, and back it came under the name Coca-Cola Classic. Curiously, even though the formula is the same as that of traditional Coke, Coke Classic has proven more popular. Was it the publicity? The near loss of something millions of Coke drinkers took for granted? Was it nostalgia? Whatever the reasons, the demand for Coke shifted to the right and has stayed shifted ever since. In the back of their minds, it's what Coke's owners were hoping to find.
While humans huddle by their air conditioners to escape the sweltering summer sun, life is good for some Iowa pigs and cattle—they enjoy a gourmet feast of tasty wet corn feed. On particularly hot days, farmers in the vicinity of the Cargill corn processing plant in Eddyville, Iowa, can buy this high-quality feed for a very low price. It's not that Cargill pities overheated animals. Rather, it is the availability of electricity that shifts out Cargill's supply of wet feed.
The many air conditioners that run on exceptionally hot days stress the ability of the local electric company to provide power. The ensuing power shortage leads to electricity cutbacks and leaves Cargill with huge piles of perishable wet feed, because there isn't enough electricity to dry and store it. The result is that, although power curtailment is not one of the more common things that shift supply, it's one that leaves some cows very contented.
Some necessities that have a great deal of intrinsic worth are priced lower than luxuries we could easily do without. For example, people pay much more for a diamond than for a glass of water, which seems paradoxical. If we were stranded in Death Valley with neither water nor diamonds, which would seem the better bargain—diamond for a nickel or a glass of water for a one-hundred-dollar bill?
The paradox disappears when we realize that price merely tells the value of a good at the margin. The last bit of water is not worth much when water is plentiful. It is the scarcity of diamonds that keeps that price high. To understand the total value of a good, though, we must look beyond price to consumer surplus. As shown in Figure 4-6, the consumer surplus from water purchases is vastly greater than the consumer surplus from diamond purchases. It is consumer surplus that truly measures the total value consumers receive from the things they buy.
With four decades of touring under their belts, the Rolling Stones know all about how to please a crowd. And their fans know all about the crowd of scalpers that snatch up all the best tickets! Their techniques? One ticket reseller paid $20 each to the brothers of a college fraternity just for standing in the ticket line. That reseller hired over 150 stand-ins for a single Rolling Stones concert. Who could blame Stones' fans for crying that they "can't get no satisfaction"?
Some fans—those willing to spend extra money to avoid the time in line—were glad for the choice and convenience offered by the scalpers, who these days usually put their tickets up for auction at eBay, uBid, or other on-line auction sites. Others cried that it wasn't fair to fans or promoters, who want to generate excitement with below-market ticket prices. Which should it be? During their 2002–2003 World Tour, the Rolling Stones played in stadiums, arenas, and clubs in cities including Boston, Chicago, and Los Angeles. Concert tickets sold out quickly, leaving many fans with two choices: wait for another tour or pay an above-market price. The price of some tickets on eBay reached $3,000. The fans who didn't pay got to know all too well the words of Mick Jagger, "You can't always get what you want." If you have the money, though, "you can get what you need!"
The homeless often carry a disturbing sign— "Will Work for Food." Although the offers are often a sham, advocates for the homeless are quick to point out that many of the homeless are indeed eager to find steady work. More often than not, however, there are no steady jobs offered to them.
Lack of a home is itself an impediment to finding a job. For example, employers may worry about the employee's personal health and hygiene, and about whether or not the employee is a drifter. For these reasons, potential employers are usually unwilling to pay the minimum wage to the homeless. There are too many other applicants with fewer problems. While employers would be willing to offer jobs at lower wages, such job offers are prohibited.
The homeless are thus caught in the grips of a political vise. Minimum wages are one side of this vise while so-called flophouses that offer cheap nightly lodging are on the other side. Many flophouses have closed down, however, because the residents could not afford rent increases that would be needed to pay the expense of renovation. The law demands such renovation to provide accessibility for the physically challenged. It also requires security from hazards such as fires, lead in pipes and paint, and asbestos. Such government policies are intended to add fairness to what is sold in the marketplace. Together with minimum wages, however, those policies block access to those markets for the very people who need it most, the homeless.
In the summer of 2002, Amazon.com took a chance. For orders over $49, customers would not be charged for shipping. Jeff Bezos, the founder and CEO of the company, wanted to make sure his customers knew about the change in policy, so he sent previous customers an e-mail with the news, adding: "The hope is we'll generate enough new business to offset the cost."
Jeff Bezos did not use the word elasticity in his e-mail—most of his customers would not know what it meant. But the concept of elasticity is well known to Jeff Bezos and the rest of the business world. Lower prices can bring in more revenue if demand is elastic. But is it? Not knowing for sure, Jeff Bezos said the free shipping would be a test, lasting from three to six months. After that time, if the policy proved successful, it would continue. Was it? Just check the current shipping fees at Amazon.com to find out.
It is quite common for the ordinary tourist vacationing in Las Vegas to set aside a certain amount of money to spend on the slot machines and gaming tables. The tourists keep playing, up and down, until that budget is used up. Of course, some will break the rule and spend over their budgets, but those are usually the ones that lose their money too quickly. Casino owners don't mind that behavior at all.
Indeed, Vegas casino owners count on the "Vegas-style" budgeting for a hefty share of their profits. By choosing a unit elastic demand, the tourists in effect resolve to give their entire budget to the casino owners. It's a peculiar plan. The vacationers do not quit while they're ahead. No, they keep playing until they're in the hole to exactly the tune of their preset budget. Most of them have lots of fun losing their money this way, and the casino owners have lots of fun watching them do it!
Cigarettes and alcohol are taxed at much higher rates than virtually any other good. The reason is partly because these "goods" are seen as bad. Just as important, it is because the elasticity of demand is low relative to that of other goods.
If the elasticity were high, people could more easily switch to other goods with lower tax rates. That would cut into tax revenues, which is exactly what happened after Congress passed five luxury taxes in 1990. Higher tax rates on yachts and other luxuries actually brought in less revenue, because so many people refused to buy these items at the higher prices the tax implied. Four of the five luxury taxes were repealed for this reason—demand was too elastic. Because elasticity is higher at higher prices, the amount of extra revenue the government could collect by raising alcohol and tobacco taxes is also limited. Proposals to finance healthcare through taxes on alcohol and tobacco overlook this fact of economic life.
Cigarettes and alcoholic beverages are not the only goods with low elasticities of demand. Milk has a low elasticity of demand, and yet milk is not taxed at all in most places. It seems that the so-called sin aspect of smoking and drinking means that the public, even smokers and drinkers, are less willing to fight higher taxes on those items. Moreover, smoking and drinking can have some harmful effects on others. In contrast, what could be more wholesome than milk?
A caution is in order about taxing sin. If goods are singled out for high taxes because they are bad, it is important to figure out just how bad, and let the punishment fit the crime.
The Big Mac attacks come fast and furious when McDonald's puts its signature feature on sale. Customers gobble down those two all-beef patties, special sauce and all! But when the Big Mac returns to its regular price, sales taper off. What happens to all those burger-hungry customers? Do they all go on a diet together?
A higher price for Big Macs would cause some customers to switch to other menu items at McDonald's. Others turn elsewhere, perhaps to have it their way with flame-broiled Whoppers at Burger King. It is not the income effect that drives these choices, either—when it comes to how many other goods people can afford, changes in the price of Big Macs makes no discernible difference. However, the substitution effect is strong, with lots of people willing to choose ever-so-tasty alternatives. By turning to the likes of the Whopper when the price of the Big Mac goes up, people reduce the quantity of Big Macs demanded. In substituting a Whopper for a Big Mac, the hungry burger hoppers maintain the law of demand.
A baby's smile, the purring of a cat, the wag of a puppy's tail, or a rainbow in the sky after a storm are always welcome, or so it might seem. And our contentment has cost us not a thin dime. "The best things in life are free," the old saying goes. Yet who wants to watch rainbows ALL day? We go on to other things, not because we like them better in total, but because we like them better at the margin. Enough is enough—when the marginal utility of rainbow watching decreases until it reaches zero, we then turn our attention to something that offers positive marginal utility.
You've seen the names of Tommy Hilfiger, Bill Blass, and Perry Ellis on luggage, clothing, and many other consumer goods. They are just a few of the designers whose names on products ensure a premium price. When status is sold as part of a purchase, the effect is to increase the marginal utility of the purchase. With a greater amount of utility, the demand increases.
Such an increase in demand can convert a $10 t-shirt into a $60 t-shirt when it's a Tommy Hilfiger. That's why the designer's name or trademark is so prominently displayed on designer goods. When consumers buy status, they show it off. Whether it's their impeccable taste or their ability to throw around their money, designer goods send others a message about the buyer.
You see them everywhere. The names include McDonald's, Best Western, Pizza Hut, Radio Shack, and many others. They are franchises, arrangements that let a person or group start a business that uses the name and standards of a parent corporation. The advantage to becoming a franchisee, the holder of a franchise, is the chance to achieve success by putting a well-known name on your business, taking advantage of brand-name advertizing, and selling a product mix with a proven track record. Franchise holders also receive training in how to operate their businesses. In return, franchisees pay fees and a percentage of their income or profit to the parent corporation.
Franchising thus pairs the advantages of the corporation with those of the sole proprietor or partnership in the hope of forming a winning team. This teamwork is sometimes contentious, however, as evidenced by the complaints of Subway franchisees, who claimed the parent corporation was franchising so much that franchisees wound up taking each other's customers and profits.
Little square hamburgers with five holes, onions, and soft buns are the unlikely hero of a classic American success story. The first White Castle opened in Wichita, Kansas, in 1921 with the help of a $700 loan. Selling for a nickel each, the little White Castle hamburger sandwich was popular enough to prompt partners Walter Anderson and "Billy" Ingram to open a second restaurant in
White Castle pioneered fast food. The first fast-food newspaper coupons, in 1932, offered five White Castles for 10 cents! Over the next 70 years, many other innovations followed. One of the most recent was the popular frozen White Castles sold in supermarkets. Today, White Castle has a cult following around the world, often in places far from the chain's few hundred restaurants, which are mostly found in the American Midwest. The firm has never gone public, remaining in the hands of the Ingram family all these years later. The company long ago repaid its $700 loan and today steadfastly avoids the perils of debt.
Whether it be to fund public broadcasting or the local cultural museum, firms are often sought out for charitable contributions. Firms, in turn, look for good publicity in making such donations. Should they be charitable when it detracts from profits?
Remember that management is the agent of the owners and is employed to follow the wishes of owners. The owners usually prefer to make their own charitable decisions based on their personal preferences and financial circumstances. Witness Bill and Melinda Gates decision to set up their own family-controlled foundation for charitable giving, a foundation that started with a net worth of about $24 billion. One of the foundation's objectives has been to vaccinate children in the world's poorest countries, a cause toward which it has already contributed about $850 million. Through this charity, Bill Gates gave away his own money, not the money of shareholders in Microsoft Corporation. Corporate officers must think twice before giving away that which is not theirs to give! For this reason, firms encourage employees to give to the United Way campaign or to make other individual charitable donations out of the employees' own money.
Some people mistakenly believe that the market value of capital is equal to the cost of producing it. In truth, the value depends upon the capital's ability to generate future profits. No one learned that lesson any harder way than Motorola and other investors in the Iridium satellite network, which spent over $5 billion dollars to place sixty-six satellites into orbit.
The idea was grand—to have a global cellular phone network accessible from any place at any time. Unfortunately for Iridium, by the time the satellite network was ready to go live, the competitive landscape had changed. The cell phones necessary to link to these satellites weighed too much and cost too much for a mass market to develop. Iridium Corporation went bankrupt and its assets were sold.
The winning bidder, a company that named itself Iridium Satellite LLC, bought the whole satellite network for a mere $25 million. The bid was accepted because the original $5 billion investment was irrelevant—it was a sunk cost. Although the satellites kept spinning in orbit, their costs were sunk, never to be recovered.
"Crime doesn't pay!" Law enforcement officials everywhere seek to drill that message into the heads of potential criminals. Yes, criminals do think about such things. For example, like businesses in search of profit, thieves plan to keep on stealing only so long as their expected marginal revenue exceeds their expected marginal cost. If punishment becomes more certain or more severe, the expected marginal cost of burglary rises and fewer burglaries are likely to occur.
The difference between legitimate business and thievery is quite simply that businesses do not rob you (some popular complaints notwithstanding). Businesses can only get your money if you offer it voluntarily in exchange for something of value to you. Thieves ignore that nicety.
If being big was all that was needed to attain economies of scale, General Motors should have been the lowest-cost producer in the U.S. automobile industry in the 1990s. GM was the biggest auto producer, but its costs were reportedly the highest of the big three automakers. Did GM reach the region of diseconomies of scale, being just too big to manage, or was it merely sluggish about capturing cost savings?
GM management spent much of the decade working to implement the efficiencies that should come with GM's size. One management initiative was outsourcing, the practice of buying parts from other companies when it is cheaper to do so. Because outsourcing reduces the number of union jobs in GM plants, GM workers went on strike in 1998 to protest it. That strike cost GM about $2.2 billion before it was settled. The settlement was a victory for GM, allowing it a free hand to eliminate hundreds of jobs and speed up production. G's decision to hold its ground was motivated by the huge amounts of cost savings it envisioned. Today, the company is among the lowest-cost of the major automakers.
The Internet has brought buyers and sellers together like never before. Consider the purchase of hard-to-find old books. Well, maybe not so hard to find . . . not any more! Where once the local shopkeeper would do the searching and set the price, now book collectors themselves search the World Wide Web. Booksellers have a huge new market. They also have huge new competition. It is this competition, and not individual sellers, that sets the prices today.
Yes, there are many Mark Twain first editions, and you can find their prices with ease. Those priced too high will not sell. Those priced too low will be sold quickly. The result is that there will tend to be a single market price for any book. Booksellers in the modern world have little ability to control price in what has become a single global market. For as technology changes, so too does market structure!
Trying to figure out where market prices are headed has consumed countless hours of effort. For Mexican growers of the blue agave crop, it is about predicting market prices several years down the road when the crop matures enough to be harvested and distilled into tequila. For investors in the stock market, it is about whether prices of the stocks they own will rise or fall.
Yet who can anticipate the ways of purely competitive markets? While many warned of a stock market decline after its phenomenal rise in the 1990s, few could fathom the depths to which prices would tumble. Likewise, the recent surge in popularity of tequila and margaritas was not foreseen by blue agave growers in the mid-1990s. Therefore, as market prices for stocks plunged in 2002, owners of stocks saw their finances crumble. The blue agave growers, in contrast, were greeted with unexpected prosperity as the value of their crops soared higher in response to an unexpected surge in demand. As you can see, life as a price taker is a gamble and the market spins the wheel.
Old McDonald had a farm, but losses drove him out of business. Exit was painful and distressing. Still, it was also easy, given the well-developed markets for land and farm equipment. Now he wants to give it a second try. Fortunately for McDonald, entry is also easy. Entry merely takes land, equipment, and skill. Although the inputs are expensive, this is not much of a barrier to entry in today's world. Farmers have access to loans or other financial aid, including funds for education. They are also able to lease land and equipment. So, with the easy entry and exit of pure competition, Old McDonald might once more start ahollerin' "Ee-yi-ee-yi-oh!"
The American Medical Association (AMA) is not a government agency. Nevertheless, this professional association has much to say about the availability of healthcare. Not only does it have power over the standards for licensing physicians, but it also has considerable input into setting standards for medical schools. For better or for worse, these standards form barriers to entry.
Some critics of the current U.S. healthcare system accuse the AMA of setting unnecessarily high standards, which serve to heighten market power within the medical profession. Critics contend that the motivation is more income for physicians—physician self-interest would point that way. The AMA responds that there is merely a coincidence of self-interest and public interest, and that it is the public interest that guides their actions. They point out that medicine is a life or death proposition, and that the public is best served by allowing only the best physicians to do the serving.
Imagine America's wealthiest man and his company pitted against government attorneys. The setting was the courtroom of Judge Thomas Penfield Jackson. The verdict? Microsoft Corporation was found to have a monopoly with its Windows personal-computer operating system. Few computer users could realistically avoid using that operating system. Moreover, Microsoft had abused its monopoly power to thwart potential rivals to its other products, thereby violating the antitrust laws. For example, Microsoft's Internet Explorer was so tied in to Windows that rival Netscape, with its Netscape Navigator and Communicator, could not profitably compete. There was just no good substitute for the Windows operating system, which Microsoft was using as leverage to muscle out competitors to its other software products. So ruled Judge Jackson in 2000. His remedy? Break Microsoft into two companies. That draconian punishment was later overturned by a federal appeals court, with Microsoft being allowed to remain a single company, but one agreeing to curb its monopoly ways.
The government does not always win its antitrust cases. For example, it lost its 1956 case against DuPont, producer of nearly all cellophane, a clear packaging material. In this case, the court reasoned that cellophane was one of many packaging materials produced by a number of firms. The availability of plastic wrap, wax paper, and other substitutes meant that cellophane had a relatively low market share in the market for packaging materials. Since the court reasoned that the market was for packaging materials, not just cellophane, Dupont was found by the Supreme Court to have no monopoly.
Gambling, once the purview of organized crime, is now promoted wholeheartedly by numerous state governments. While the path from the criminal underworld to state-advertised lotteries might seem odd, it is really not surprising. Both outlaws and lawmakers are drawn into the gambling business by the same age-old attraction—the allure of big money. Legislating a government monopoly provides a highly effective barrier to entry. It keeps pay-outs low and profits high.
Is government aiming for efficiency, the idea behind the regulation of other monopolies? Of course not. It's the allure of big profit to keep down the need for tax revenue. Taxpayers don't complain and, if the alternative is no gambling at all, even the gamblers are for it. It's the others in the gamblers' households that wonder just where the money goes.
Where once stood miles of orange groves whose bountiful crops helped satisfy the world's thirst for juice, today stand theme parks that satisfy the thirst for fun and adventure. The place is Orlando, Florida, home to Sea World, Universal Studios, and Disney's Magic Kingdom, Animal Kingdom, Epcot Center, and Disney MGM Studios. To attract additional dollars from their visitors, both Disney and Universal offer their own hotels, restaurants, and shops. The strategy is to tie other profit-making activities to the operation of the theme parks. And if one park adds features, its competitors have to add features just to keep up. Such is the nature of designing differentiated products in the head-to-head competition among oligopolists.
Over $30 billion in debt, mostly from acquisitions—that and some multi-billion dollar accounting misstatements is what did in WorldCom. Once known for its long-distance service through its acquired MCI subsidiary, today it is just one more example of a company that expanded itself into the bankruptcy courts. The trend started with Enron, whose numerous partnerships made it a complex company to understand and a financial mess when it became the largest bankruptcy ever in the United States.
After a series of corporate debacles, starting with Enron's in late 2001, investors became leery of companies with too much corporate wheeling and dealing—the plummeting stock prices of such companies showed that uncertainty. The razzle-dazzle of mergers and acquisitions gave way to a realization that, sometimes, they just fundamentally don't make sense.
On a hot summer day, an ice-cold Coke might sound oh-so-good. But on a cold winter day? The Coca-Cola Company pondered that situation in the fall of 1999 and came up with a solution: Coke machines that set their price in response to the weather and expected demand. Instead of having delivery van drivers twiddling their thumbs while listening to the winter winds, wouldn't it be better to cut the price at Coke vending machines until sales in cold weather rival those when the summer sun sears? And what about those blazing hot days when the delivery people cannot keep the vending machines from running out? Shouldn't price rise to avoid a shortage and give the Cokes to those who value them the most?
With this logic in mind, the Coca-Cola Company made plans to develop smart vending machines that would charge more when demand is high and less when it is low. The strategy of price discrimination seemed efficient and would have involved both price increases some times and decreases other times. But the idea of being charged more when you are the most thirsty just didn't sit well with the Coke-drinking public. In fact, the press coverage was so intensely negative that Coca-Cola was forced to publicly renounce this latest form of price discrimination.
Like all good mysteries it happened with little warning. One day prospects for employment in the dot-com world of Internet businesses looked good. The next day job seekers in that industry saw their hopes for employment dashed. What "killed" labor demand at one dot-com firm after another in 2001?
This is one mystery that is easy to solve. The projections of strong revenue growth in Internet-related businesses proved wildly optimistic. Expected online purchases from so-called e-tailers failed to materialize. Many dot-coms were losing money. In response to all the bad news, these firms quickly slashed their hiring of new workers.
The lesson is that labor demand can change quickly along with the fortunes of business. The response? Some eager job seekers tried to land one of the relatively few job openings that remained among the dot-coms. Others offered their services to employers in old-line industries that were still hiring. Most found jobs in one industry or another, but few in an industry as glamorous as the dot-coms.
What are the "hot" jobs of the future—jobs with plentiful openings and high pay—and how do you get one? The Occupational Outlook Handbook projects future labor demand and supply for numerous occupations. Recent projections show that most hot jobs, such as those in medicine or computers, require advanced education or training. Unfortunately, projections of labor demand and supply in specific fields can easily become as dated as yesterday's newspaper.
When "everybody" agrees on what is hot, it may be best to bet on something else. By the time you acquire the needed skills, so have a host of others. Labor supply increases, and lucrative job opportunities become relatively scarce. Instead, the secret to success may lie in being one of the first to identify hot job prospects of the future. There is a risk in taking this initiative: You might be wrong. However, if you follow that lonesome road, you may rightfully dub yourself a "job entrepreneur."
. . . for mighty Casey had struck out," wrote San Francisco Examiner sports reporter Ernest Thayer in 1888. When the newspaper published "Casey at the Bat," little could it know the greater sorrow to hit baseball fans just over a century later. On August 13, 1994, baseball's mighty Caseys all struck out at once! Major League Baseball quit for the year, abandoning the late-season pennant race, post-season cheering, and World Series heroics. Instead, there was a players' strike for higher wages and, in response, a lockout by the owners.
This odd situation, one that was very nearly repeated in August 2002, was a natural outgrowth of bilateral monopoly. There was big money to be made by players in driving wages up. To make that happen, their union needed to exhibit bargaining power. Keeping players at home demonstrated just such power. But owners wanted to keep wages down. Their determination to terminate the 1994 season rather than give in to the demands of the players' union demonstrated bargaining power on the owners' part. The result of all this huffing and puffing was a baseball season that brought in far less than the usual amount of revenue. The following spring saw the eventual signing of a new contract and a late start to the season. The result of this bargaining process under bilateral monopoly is that the players, owners, and fans all struck out.
In the easy money days of the late 1990s, many workers saw their accumulated wealth double and double again. They asked themselves, "Why work?" and commenced with planning for early retirement. Then, in the face of an estimated $7.8 trillion worth of stock market declines in the early 2000s, some of these same people were forced to ask themselves the opposite question. Could they afford to retire?
The riches they had amassed had vanished just as quickly as they had appeared. Lavish spending patterns based on that transitory wealth led many to take on debt. Whether it be to credit card companies or home mortgage lenders, that debt must be repaid. To do so takes an income, and an income once more means work. After being teased with thoughts of early retirement, the cold reality for many people is that they cannot reach that life of leisure even as soon as they originally planned. It all goes to show that labor supply is not just about how many hours of work to offer at any given wage. It's also about whether to work at all!
Incentives are changed by the existence of government transfer programs. It is not always easy to predict how people will respond to such incentives. For example, some years ago a professor asked his university's administrators to lower his annual salary by a few hundred dollars. His request was not frivolous. Its purpose was to make his children eligible for subsidized school lunches. The savings from subsidized lunches would have more than made up for his salary reduction. The moral is, those whose earnings are low may have an incentive to reduce their work effort in order to further lower their incomes and qualify for government assistance.
Is working at home right for you? You can earn an income, be your own boss, eliminate commuting and daycare expenses, and spend time with your children. There is one problem, however: legal barriers. The Fair Labor Standards Act of 1938 outlaws commercial piecework sale of women's garments sewn at home. Who would know if child labor laws were violated? What if your hourly earnings fell below the minimum wage? Society has an interest in preventing the abuse of labor, but it also has an interest in promoting family cohesiveness. Sometimes laws promote some values over others.
Every year or two, a blizzard will paralyze Washington, D.C., yet work goes on in Buffalo, New York. As one of the snowiest spots in the United States, the people of Buffalo are used to the white stuff. "So what's another foot or two?" they ask as they slog to their jobs, listening to the news reports of prolonged federal government shutdowns and other snow emergencies elsewhere.
True, Buffalonians are battle-hardened veterans of many a' winter campaign. But there is more to the story. What's missing is the part about the efficient choice of a local public good—snow removal. Officials in Buffalo know it's going to snow hard, nearly every year. It is thus efficient for them to spend heavily on snow plows and other capital equipment. With snowfalls much less frequent in other parts of the country, officials there find it more efficient to devote that money to other needs. The result is that when the infrequent blizzard does strike, the Buffalonians drive to work while the Washingtonians wait for a warm, sunny day.
The big news? It's about how you get to hear the news, or read the news, or message the news. The news is that government regulation of communication bandwidths now lets the market decide the details of which bandwidths are used for Internet access, cellular phones, paging, instant messaging, personal communication devices, or other modes of service. The Federal Communications Commission used to assign airwave frequencies to potential broadcasters, with all details spelled out. Now, in conformance with the specificity principle, the FCC tries to avoid regulating when the market does not fail. The result is that bandwidth rights are now sold at auction to the highest bidder in the free market. Let the invisible hand rule!
As the airwaves grow increasingly congested with cellular and wireless applications, the FCC has found further market-based avenues toward the public interest. To ensure that the available frequencies are used to their fullest and most valuable extent, the FCC no longer requires each bandwidth owner to obtain a government license for its use. Instead, the FCC now allows bandwidth owners to lease that bandwidth to others. Such efficient exchanges are ho-hum, everyday events in the marketplace. But ensuring that public policy does not tread on market efficiency? That's news!
Often they are nearly invisible. Other times, they are intentionally obvious. Sometimes they're even phony, just there to make us think twice about breaking the law. Increasingly, they are banned, made illegal by an exasperated public. They are the watchful cameras of the highways, carefully positioned to take our pictures as we speed, run red lights, or merely drive along a toll road. We might get those pictures in the mail, along with a bill for the toll or traffic fine we owe. The totals can be staggering. By the start of 2002, for example, Washington, D.C.'s forty-four traffic cameras had caused D.C. drivers to fork over $23 million in fines.
Traffic cameras merely enforce the law, so why would anyone be upset? Perhaps it's the impersonality of it all. Perhaps we don't want to be watched so much. Perhaps it is that the penalties for our traffic violations were set with the idea that we usually don't get caught. In contrast, the modern technology of the traffic cam is coming to mean that we usually cannot escape.
Wouldn't you sometimes like to do away with those stinking internal combustion engines and return to the pristine past of horses and carriages? You wouldn't have to deal with smog and ozone alerts.
Dream on, for the reality of life prior to the horseless carriage was anything but pollution free. Witness nineteenth-century London in the days of Sherlock Holmes. Well before the invention of motor cars, the streets of London were beset with acid rain and choking air pollution.
The skies over London were black with smoke from the many coal- and wood-burning fireplaces throughout the city. Now, more than a century later and several million people larger, London offers more breathable air and clearer skies.
Yes, London still has pollution: it is a by-product of generating goods and services ranging from heat to transportation. The difference today is better pollution-control technology spurred on by public policy. Compared with the good old days, then, population and production are up and pollution is down.
Anti-smoking laws have cropped up all around the country. Bans on talking on the phone while driving a car are likewise becoming increasingly prevalent. Since both activities are taxed, could not those taxes be set to internalize any externalities so that no heavy-handed prohibitions are needed?
The problem with this proposal is that externalities vary by time and place. A flat tax on cigarettes does not adjust for whether the smoking occurs in a crowded restaurant or in the privacy of one's home. Likewise, talking on a cell phone is not dangerous to other motorists when the talker is not driving on the highway. Since taxes cannot know where the smoking or talking will occur, an alternative is to just ban the activity in situations where the potential for externality is highest.
Bans are not without their costs, however. Smokers value their after-dinner cigarettes just as car callers value the time they save. Therefore, policymakers must weigh the costs and benefits of alternative policies. Sometimes, in fact, the most efficient policy is no policy at all. For example, with no bans on smoking in restaurants some restaurants will differentiate themselves by being smoke-free, some by allowing smoking everywhere, and probably most by having separate sections for smokers and nonsmokers. In the case of smoking while you eat, therefore, the market has a solution. In the case of phoning while you drive, with everyone sharing the same public highways, no market solution is apparent.
Never underestimate the ability of humans to inflict environmental disaster. Take the case of Australia's rabbits, which do significant damage to crops on the island continent. Rabbits are not native to the country, but were introduced when an immigrant youngster's pregnant pet rabbit escaped into the wilds where no natural predators existed. Then there are the fire ants and "killer bees"spreading throughout the United States, threatening people, pets, crops, and the relatively gentle native ants and bees. The ants arrived on boats from South America and found a hospitable climate free of predators. The immigrant bees are the result of a scientific experiment in breeding that went awry when thousands of the pesky critters escaped into the wilds of Brazil and then decided to move north.
Most recently, it is the voracious appetites of the Chinese snakehead "walking"fish that has residents of several states worried. Set free in a Crofton, Maryland, pond when they outgrew their owner's aquarium, these fish found the American environment to be to their liking, free from the predators they had learned to fear in China. Growing up to three feet long and able to travel out of water for three days, these fearsome "Frankenfish"quickly became the predators of frogs, birds, small mammals, and other fish. The situation has prompted the poisoning of ponds and a massive fishhunt to keep them from spreading further. On the bright side, the ugly snakehead fish are reportedly quite tasty!
It was deep into the night of the presidential election of 2000. The world watched with humor and amazement as bleary-eyed poll workers stared intently at machine-readable ballots, trying to determine voter intent. The world got to learn the meaning of chad, those little pieces intended to be punched out of computer-readable cards. The problem was that sometimes the chad was not fully punched—resulting in a dimpled chad. Alas that we would need to learn about such things!
The true lesson is one of federalism, in which different states and even different localities conduct elections in different manners. In hindsight, some states and localities obviously used better methods than others. It was a learning process. But why even have the election determined on a state-by-state basis? Wouldn't it be enough to tally the popular votes across the country and just see who wins the majority?
The answers again revolve around federalism. Tallying votes according to each state and then having the states elect the president through an electoral college makes sure that candidates do not ignore portions of the country altogether. It certainly does influence where time and money will be spent on the campaign trail.
Sometimes government spending can be financed without a tax, or at least without anything labeled as a tax. A favorite in the political recipe book is to use unfunded mandates, which means that the government requires businesses to implement government programs, but to do so at their own expense. For example, if the government thinks that workers should have better healthcare, it has only to mandate that businesses provide better healthcare coverage to their employees. If the government wants to assist the handicapped in getting about, it has only to mandate handicapped parking places, curb cuts, wheelchair ramps, wide doors, and anything else it thinks would help.
In effect, requirements that businesses spend their own money to accomplish public objectives is equivalent to the government assessing a tax of whatever these requirements cost and then undertaking the actions itself. However, there is some question as to whether unfunded mandates lead to proper government decision making. When the government does not have to pay the costs itself, it is much easier to say yes to projects than if those projects must be financed explicitly out of tax revenue. With unfunded mandates, the tax is effectively hidden in the higher costs to firms and higher prices to their customers.
There is a big difference between competition in the marketplace and competition for favors from government. In the marketplace, the winner is the one that builds the better mousetrap and thereby increases the well-being of all concerned. Lobbying for political favors is not productive in this way. It is more akin to fighting over a prize. The time and money wasted in fighting over who gets the prize is a form of rent seeking and serves little constructive purpose from the point of view of society at large. The value of government policies is often counteracted by the money that interest groups spend in trying to come out among the winners.
Most of us engage in rent seeking, too. You have done so yourself if you have ever returned a sweepstakes entry, such as in the Publishers Clearing House or American Family Publishers multimillion dollar sweepstakes. At the time, you probably wondered if it was worth the time and postage to apply, because you knew that millions of other people would be sending in their entries. That illustrates the problem of rent seeking—the value of the prize is offset by the cost of seeking it, which in this case is the millions of dollars worth of time and postage spent by all the entrants.