The visible hand in economics

Archive for the ‘Microeconomics’ Category

I see there is some talk of compulsory redundancy payments after this sad story.

Now even though it would be nice if those people hadn’t been left high and dry after all their years of commitment, it is important that we try to get an objective idea about the costs associated with the scheme.
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The Commerce Commission appears to have found an unusual source of anti-competitive behaviour: schools forcing parents to use a monopoly supplier of school uniforms. Apparently schools often accept payments from clothing manufacturers in exchange for exclusive rights to sell the school’s uniform. Then the manufacturers extract large rents from their monopoly position by charging high prices to parents.

The Commerce Commission is concerned about the monopoly position that the manufacturers have but, recognising the convenience of a single contractor, recommends that the schools use a tender process to ensure value for the parents. Read the rest of this entry »

I’ve been looking at air fares for overseas travel recently and somethign stood out. When you stop over in a city it costs a whole lot more to stop over for a few days than it does to just transfer flights and pass through. I would have thought that getting to your final destination faster was something people would pay for. Yet, the longer you’re happy to take over your trip, the more you end up paying! Read the rest of this entry »

The Standard has been stating that tax cuts should be “fairer”. Now in principle I have no problem with things being “fairer” – however, defining what is fair very is subjective, and what the Standard sees as fair and what I see as fair might be different.

Still, both the Standard and No Right Turn go on to quantify what they feel is an injustice – the fact that a greater proportion of the tax cut will go to the wealthy. However, for what they are saying to be true, the wage everyone is paid following a tax cut must not change (or must change by the same lump sum) regardless of their current income – yet this is not the case.

Many moons ago we discussed tax incidence – I think it is time to run with this again, taking for granted some of the assumptions about the labour market that the Standard has provided us with over time.

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The DomPost contained an article on the potential for metering Wellington’s water supply. The question is asked: should Wellingtonians pay for their water? This issue is a hot topic, having been discussed at Kiwiblog, Infometrics and TVHE earlier this year.

Historically, water has been provided for by the various Wellington councils out of rates. Water is not currently metered, which implies that regardless of how much water each household takes, their rates do not vary. This arrangement has led many to believe water is in some way ‘free’, as they are not forced to pay for their specific usage and the cost is embodied in rates which cover many council services across many households. With water use of 400 litres per person per day in Wellington, relative to the national average of 160 litres, it appears water users here are not internalising the cost of their water usage.

Current arrangements do not allow for the pricing of scarcity. Read the rest of this entry »

The previous Labour government bestowed a legacy upon NZ that included the first ever review of broadcasting regulations.

Essentially the question being asked in this review is: does the current market situation warrant government intervention?

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The world price of oil has now declined to under $50US a barrel, a third of it’s peak value (live prices here).

This takes me back to a post we did at the end of May – when fuel costs were pushing up at a rate of knots. The topic was covered in the name: Collusion, multiple equilibrium, and petrol prices.

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In its eternal quest to “not be evil” Google has decided to take on one of the banes of man – himself, and his time-inconsistency.

It is doing this by introducing a new service to gmail.  You can set up this service to significantly increase the transaction cost associated with sending an email when you are drunk!

In the “drunk” state you may think it is a good idea to email your ex girlfriend/boyfriend and say strange things – however, prior to being drunk you may decide that any benefit associated with emailing someone in your drunk state is more than canceled out by the embarrassing phone call the next day.

This feature allows you to increase the cost to writing the email in your drunk state – allowing you to “pre-commit” to not sending embarrassing emails.

With classy features like this you can tell that a genius like Hal Varian is working for them 😉

So in National’s tax package they have dumped the R&D tax credit. Businesses seem disappointed – but this isn’t enough information in of itself to tell me whether getting rid of the credit is socially optimal or not.

In order to analyse this we have to think about why an R&D tax credit could be socially optimal and then see whether that scheme actually worked in the appropriate way to increase social welfare.

Let’s give this a go 😉

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A raging debate is going on over at Colin Espiner’s blog on National’s new law and order policy. Given that people are making lots of arguments on both sides, I thought it might be worthwhile laying out an analytical framework for how an Economist might view the justice system. I’m not going to go into whether or not I think National’s policy is good or bad, that’s for you to decide.

Before we go any further I need to understand the concept of a sunk cost, as this will be crucial to my discussion. I’ll let you read the wikipedia definition, but put simply a sunk cost is one which cannot be recovered after it has been incurred. Therefore economic theory states that ex ante you should take into account the sunk portion of the cost of an action but that ex post the sunk portion should be ignored.

I’m going to use the term cost quite loosely here, it can refer to someone being impaired financially as the result of a robbery or suffering emotional harm as the result of a crime. This is not a discussion about the financial cost of running a prison system or anything like that (although I acknowledge that is an important issue).

Now, Let’s talk Justice

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A large debate in economics stems from the idea that there is a price asymmetry in the economy. What this implies is that prices are more flexible in one direction (up or down) then they are in the other direction.

The commonly provided example is petrol prices. People feel that when crude oil rises in price it is passed on immediately, but when it falls in price it takes time for the firm to react and lower petrol prices. This implies that prices are “stickier” downwards, and so the adjustment to two shocks opposite shocks is asymmetric.

Another example is housing. People find it psychologically difficult to accept that the nominal value of their house has fallen, so it tends to be harder for the nominal price to fall than for it to rise.

Now there are a large number of economists that don’t believe these asymmetries exist (I’m in the camp that I think the downward asymmetries are exaggerated). Overall studies have been inconclusive.

Now I think sticky prices exist, but I think we’ve also got an inherent bias to look at cases where they appear to be sticky downwards compared to stick upwards. I was reminded of this when I brought my Gold Pass for the bus in September.

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ISCR have just launched New Zealand’s first prediction market.

From iPredict:

Who’s going to be the next Prime Minister – Helen or John? Will the price of petrol be $3 a litre by Christmas? Will Winston be sacked before election day?

These are some of the questions Kiwis may find themselves backing their opinions on with iPredict – – New Zealand’s first real money online prediction market, which launches tomorrow (9 September).

The online marketplace enables users to trade on their predictions on a broad range of future political and business events that pay real money if their prediction comes true.

Established as a research tool by Victoria University of Wellington and think tank ISCR, iPredict harnesses the wisdom of crowds via the Internet to predict future outcomes and has a strong focus on helping companies, government agencies and academics with research. …

Mr Burgess says that iPredict is like a simple stock exchange, trading real money.

“How it works is that contracts pay $1 if an event comes true – nothing otherwise – and the price these contracts trade for is the prediction. For example, you could have a contract that pays $1 if Helen Clark is the next Prime Minister, and pays nothing otherwise. If that contract trades for 60 cents, then the market’s prediction is a 60% probability that Helen Clark will stay on as Prime Minister.”

Mr Burgess says that prediction markets are the gold standard for forecasting.

“Traders on prediction markets combine information from polls, expert commentary and any other source to produce a prediction that is more accurate than any available alternative,” Mr Burgess says.

“Prediction markets work because they ask traders to put their money where their mouths are, so it pays to be honest, objective, and even do a little homework.” …

Anybody can browse iPredict and see the predictions for free by going to but traders have to be 18 years and older to set up an account. Accounts are free to set up and people can start trading with as little as $5.

Get some money on your account and get predicting.


When I drink on Friday I suffer from a commitment problem (likely stemming from my own time inconsistency *). Fundamentally, before drinking I don’t want to go into town and drink too much (as I have work to do on Saturday), the next day I would prefer it if I hadn’t drunk a lot, but once I start drinking I find it hard to stop 😉

One way to pre-commit to not drinking too much is to not drink. However, I don’t like this solution at all. I want to have a few drinks with my work mates, and with my friends later on – but I would like to avoid drinking too much. Now, the “too much” bit actually occurs when I go out into town after work drinks – as a result if there was some way I could commit to not going out, I would be able to pre-commit to not drinking too much!

That is what I have done today – by taking casual Friday to the extreme I have ensured that most bars in Wellington will not let me in, removing the temptation to go into town by taking away my ability to. However, I will still be able to have a couple of beers at work and then head around to my friends house for a few beverages – thereby ensuring that I reach a superior outcome to the “don’t drink” scenario.

The recent Sonny Bill Williams saga has brought into light the issue of salary caps in competitive sport. After fleeing the Australian NRL for French Rugby Union, SBW made the claim, among many other bizarre excuses, that the NRL’s salary cap was anti-competitive, in that it prevented players from earning their full-potential.

Does SBW have a valid point?

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Yesterday I was talking to my partner about the lack of videos available for her iPod. I was prattling on about how there probably isn’t many videos because the penetration of the video iPod is probably quite low. The reason I believed that the penetration was quite low, was because I couldn’t see lots of people forking out for a new iPod with video – when the old iPod would still do the main bit of playing music.

My partner then said they should do trade-ins for the old iPod, so you can get the new one more cheaply. At first I was dismissive of this idea, stating that, unless you could get money back for the parts what was the point. However, I soon realised that I was completely wrong – there are a large number of circumstances where my partner was right and a trade-in deal made sense.

Now, I haven’t actually seen any trade-in deals for iPods, but I certainly have for the xbox and playstation. As a result, I’m going to discuss why firms that sell durable goods may want to have trade-in deals.

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