TV Time!
Lots of Economics on TV this weekend:
read more...»Presentation on Informational Failures
This PDF here offers a teaching guide for the topic of Informational Failures, that may be useful:
It covers:
- Imperfect information
- Asymmetric information
- Examples of these in free markets, with links out to various sources
- The issue of adverse selection and moral hazard
- Examples of these in action, from credit markets in developing countries to the Northern Rock bail out
- Extension of the topic to shown an accessible algebraic analysis of Akerlof’s Lemons, perhaps more suited to the Oxbridge economists
- Articles from the Economist and Slate on asymmetric information
Information_failures_2010_MT.pdf
Decision Time (Radio 4) - Government intervention and binge drinking
A hat tip to Anne Logan from Methodist College Belfast for spotting this topical and highly relevant Radio 4 discussion - How would controversial proposals to tackle binge drinking fare in Whitehall? Anne recommends the first half of the programme as an excellent basis for discussion of government intervention and failure. The programme archive is here.
Bangernomics and asymmetric information
Another item from the Today programme relating to information was about MOT failure rates for cars and small vans, which have been published for the first time following a Freedom of Information (FoI) request by the BBC. Martin Rosenbaum, the BBC’s Freedom of Information expert, and James Ruppert, special correspondent for Autocar magazine and author of ‘Bangernomics’ discussed the data reluctantly published by the Vehicle and Operator Services Agency (VOSA). The agency had previously resisted publishing the data, saying it might be misleading – and I should think that it is likely to have an effect on the second-hand values of those models appearing at the top and bottom of the list. It may go some way toward balancing out asymmetric information in the market for second-hand vehicles, where the seller has more information than the buyer, thus distorting the price that they might arrive at between them for the vehicle.
read more...»Alcohol information failure
Shadow Health Secretary Andrew Lansley was interviewed on radio 4’s Today Programme about the Conservative Party’s call for changes to labelling on alcoholic drinks. They say the current approach of using alcohol units is widely misunderstood, and want it replaced with centilitres. Mr Lansley identified the negative externalities associated with abuse of alcohol as costing £20bn to society, and said that the current system of information, printing the number of units contained in a bottle or can of alcoholic drink, did not allow the public to make decisions about how much to drink, as the implication is that one ‘serving’ of the drink is the equivalent one unit.
However this is often not the case – a typical glass of wine is between 1.5 and 2 units, and a pint of beer or lager can be more than two units, depending on the alcohol content of the brew. Instead the Tories would like to see the number of centilitres of pure alcohol shown on the label, suggesting that this would be easier for consumers to relate to the total amount they are drinking, rather like showing the amount of saturated fats in foods as grams, which are easier to assess as a proportion of the total food weight rather than showing the amount in calories.
read more...»Google turns to mobile phones
Following on from Geoff’s entry last week on the Nexus One, Google’s foray into the mobile business is due to a desire to dominate the market for Internet searches, just like it does on laptops and desktop computers. But as this article discusses here, it is not clear whether Google’s strategic decision is a sure-fire winner.
read more...»Externalities of effective road safety schemes
Sometimes the simplest interventions have the greatest effects. Cutting average road speeds for vehicles in built up areas is the surest way to reduce the number of deaths and serious injuries for pedestrians and this latest report highlights the impact that 20mph limits in London have had on the number of fatalities.
Price comparison sites…
An interesting discussion out of a random statement at the dinner table last night…
There’s a firm called BetGenius which provides real-time odds comparison services.
Lots of discussion ensued on the effect of perfect information vs imperfect information. Given the surge in price comparison websites in recent years, one would expect the price of bets (or insurance, electricity) to converge to similar levels, as perfect competition predicts.
read more...»NHS: Govt failure?
The NHS is back at the centre of hot debate again this weekend, as the Dr Foster report findings generate differences of opinions.
read more...»Pump down the volume
We have all suffered the inconvenience of sitting on a train or bus or in the library and being distracted by the whirring sound of someone’s pop favourites blasting out of their earpieces. Quite apart form the potential long term damage to their own health, the externalities of inconsiderate people oblivious to those around them are not inconsiderable! The EU is considering intervening to set a maximum noise default setting on new portable music players.
They want manufacturers of digital music players to introduce these standards voluntarily before legislation is prompted - this is an interesting example not just of externalities but also information failure among predomianantly younger people about the long term impact of playing loud music through ear pieces for hours at a stretch.
According to EU Consumer Affairs Commissioner Meglena Kuneva.
“The evidence is that particularly young people - who are listening to music at high volumes sometimes for hours each week - have no idea they can be putting their hearing at risk. It can take years for the hearing damage to show, and then it is simply too late.”
What other interventions might be possible as alternatives? Beware the law of unintended consequences - how would consumers who want to max the volume get around such limits?
Information and Consumer Choices - Two Stories
Two stories on the role that information can play in influencing our choices caught my eye today.
The first is a new report from the Food Standards Agency that claims that there is little difference in nutritional value and no evidence of any extra health benefits from eating organic produce. Given that organic food in most of the major supermarkets carries a price premium, will more people decide that, leaving aside ethical and environmental considerations, the supposed health benefits from organic produce has been exaggerated? The recession has made life tough for organic farmers; this report will do little to help them, no surprise that one of the leading stakeholders, the Soil Organisation has laid into the report!
The second is a damming report on the health effects of tanning machines from the International Agency for Research on Cancer - reported here by the BBC - that claims that sunbed use is on a par with smoking or exposure to asbestos. Again an industry stakeholder the Sunbed Association has been quick in putting forward a defence.
Information failure is a key cause of market failure. I suspect that consumers who enjoy flaunting their organic credentials and who swan around with a fake tan have both been conned for many years and spent a small fortune in the process!
Unintended consequences of painkiller innovation
The retail price of over-the-counter painkillers fell sharply a few years back when one of the last legal price-fixing agreements covering pharmaceutical products came to an end. Within days the cost of a packet of soluble aspirins had halved as supermarkets rushed to bring their own-label products to the market space. Cheaper pain-killers have been a benefit to millions of people who paid over the odds to chemists and Big Pharma for cold remedies and relief from the pain of toothache and other ailments. But one of the unintended consequences of tough competition in the market has been the emergence of yet more powerful tablets.
How many of us when faced with an array of cold-remedies now opt by default for the ‘extra strength’ variety? The manufacturers know that putting simple phrases such as “new improved”, “maximum strength” and “fast acting, dual action” on the packets are often enough for consumers to trade up to strong pain-killing products and pay a premium price.
But one of the consequences of research and development in the over-the-counter market for pain remedies has been growing evidence of consumer addiction. John Gapper writes about this in this blog.
Codeine present in many products such as Nurofen Plus and Solpadeine Plus in particular is causing great concern. A House of Commons report published earlier on this year recommended that painkillers containing codeine should be sold in smaller packets and available only after consultation.
Credit card cheques as a demerit good
The government has announced a move to ban credit card cheques addressing the issue of the soaring value of UK consumer debt. The move is part of a broader range of measures that attempts to partly bridge the informational failures (and resultant market failure) that lead to consumers inadvertently taking on debt that is beyond their means; and this recent measure highlights the government’s view on it as a demerit good.
Related blogs on information failure
Information failure occurs when people have inaccurate, incomplete, uncertain or misunderstood data and so make potentially ‘wrong’ choices. From pensions to computer games consoles, from investing in the stock market to ignorance about the consequences of borrowing and debt, all of us suffer from one or more information failures.
read more...»Q&A: Demerit Goods and Negative Production Externalities
Question: I was wondering what the difference between a demerit good and a good that has negative externalities in production was?
read more...»Finding affordable food
This short BBC article reports on a new study from the World Cancer Research Fund which claims that it is possible to eat a healthy diet even when family budgets are stretched close to breaking point.
“Increases in food prices, and pressures on the family budget because of continuing economic problems, may prompt people to buy less fruit and vegetables because they think they are too expensive and are worried about wastage.”
Canny consumers can save money by buying fruits and vegetables in season, making good use of price offers and searching for cheaper frozen vegetables and canned fruit.
The article links to some important AS micro issues:
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World cocaine market ‘in retreat’?
According to this BBC report, years of government intervention by the Serious Organised Crime Agency to cut supplies of cocaine has been successful in reducing supply and so raising the price of the drug.
SOCA have followed a strategy of working in South America, the Caribbean, across the Atlantic and with European partners to intercept the suppliers. Wholesale prices have risen from £39,000 per kilo at the end of last year to £45,000, which would indicate a shortage of supply causing the equilibrium price for a demerit good to rise, reflecting some of the negative externalities and moving closer to the social cost.
However, unfortunately there may also be a case of government failure in the form of unintended consequences: data collected by the Forensic Science Service suggests that almost a third of police seizures are now less than 9% pure, the lowest recorded purity level.
The implication is that drug gangs are maintaining their supernormal profit by using increasing amounts of chemicals - so-called cutting agents - to dilute cocaine powder sold on the streets of Britain. They include the cancer-causing drug phenacetin, cockroach insecticide and pet worming powder. As a result, street prices are remaining fairly stable says Drugscope director Martin Barnes. “What is happening is that dealers are maximising their profits by selling a product that is potentially more harmful and much less pure and a lot of people buying it probably don’t realise that’s what’s going on.”
Cash Incentives for Healthy Options
I often use Stephen Landsburg’s famous quote which claims that the whole of Economics can be summed up in four words “people respond to incentives” - so it was interesting to read in my morning newspaper that the Department of Health is considering rolling out a wider programme of cash incentives for people who can demonstrably show that they are making progress towards a healthier lifestyle.
Nicholas Timmins writes in the Financial Times that
“In Dundee, smokers are being offered £12.50 a week by the NHS if carbon monoxide testing shows they have quit. In Essex, pregnant women can claim a £20 food voucher from the NHS after stopping smoking for one week, £40 after four weeks and another £40 at the end of a year if they have still quit. Brighton offers children £15 for quitting smoking for 28 days, while overweight patients in Kent are also being offered incentives for losing weight.”
This short paragraph could form the basis of an excellent discussion about different forms of government intervention designed to affect health outcomes. I try to focus on three key words when teaching the impact of government intervention. Policies tend to work best when they are EFFECTIVE, EFFICIENT and EQUITABLE.
So what roles can direct financial incentives from the taxpayer for people to quit smoking, lose weight or eat better have both in the short term and over a longer time horizon?
If such incentives work what will be the longer term benefits for the health service and for the tax payer?
Are they better than regulations, taxation and attempts to improve information?
Is it fair to appear to reward unhealthy behaviour? What of those tax payers who do not smoke, maintain a healthy diet and weight and who make few if any claims on the health and welfare system?
Can the law of unintended consequences come into play? If you pay teenagers to stop smoking, will more of them start in the first place?
How will the cash payments be used?
Binge Tanning and Information Failure
Tanning salons on the high street, in leisure centres and in hotels may be contributing to an alarming rise in the potentially deadly malignant melanoma in the UK. Cancer Research UK has launched a new campaign “SunSmart” citing evidence that the deadliest form of skin cancer has now become the most common kind of cancer for women in their 20s. The risks are greatest among younger girls whose skin offers least protection to time spent under the rays of a tanning machine.
Cancer Research argues that sunbeds don’t offer a safe way to tan. The intensity of UV rays in some sunbeds can be more than 10 times stronger than the midday sun. “Excessive exposure to UV damages the DNA in skin cells which increases the risk of skin cancer and makes skin age faster.
The lack of awareness of the risks of using tanning machines is a clear case of information failure. In Scotland the government is using regulation to attack the problem. Legislation (yet to be enforced) has been passed to ban under 18s from using sunbeds and for all sunbed salons to be supervised and proper information provided to customers.
Recession provides boost to vitamin demand
A cyclical hat tip to Chris Freeman for spotting this excellent article in the New York Times which looks at the rising demand for vitamin pills and other health products as recession bites. “Sales of vitamins and nutritional supplements, which have grown consistently for years, have surged in recent months, rising as the stock market has fallen. People are clearly cutting back on many items, from bread and milk to designer jeans and flat-screen televisions, but they are stocking up on pills that they think can spare them expensive doctor visits.”
Lots of interesting economics here:
1/ The power of emotion in driving demand - are sales of fish oil tablets linked to how many times people read stories about the growing incidence of early dementia?
2/ Utility and price - is the utility that people say they get from nutritional tablets linked to the price they pay? Some behavioural economists have pointed to studies about the impact on perceived benefit that consumers report when they are told the price of a product - including placebos!
3/ Sales of vitamins are up but sales of pain-killers are down - what might this say about consumer preferences?
4/ Cross price elasticity of demand - the price of health care goes up - causing some consumers to look for supplements to reduce the risk of needing health treatments later on in life
Calories you can believe in
On first glance it seems like a neat way of giving consumers helpful information on the calorific consequences of their meal choices. By the end of April, 18 national food chains, including Burger King, Prêt A Manger, Pizza Hut , Subway, Sainsbury and Tesco cafes, Wimpey, Marks & Spencer cafes, KFC, Harvester pubs and a number of workplace canteens will print on menus and/or menu-boards the calories contained in many of their most popular dishes.
read more...»A nudge towards a lecture?
A heads up on a lecture by the co-author of one of the most talked about books in behavioural economics, at the LSE on Monday 23rd March.
read more...»Apprenticeships, skills gaps, information failure and training opportunities
Earlier this month the Prime Minister announced a £140m plan to create 35,000 additional apprenticeship places, of which 20,000 would be in the public sector (and 6,000 with McDonalds, making it the biggest apprenticeship provider in the UK). Lord Young, the minister responsible for apprenticeships in England, promised that those who won apprenticeships in the public sector would be able to complete their training, come what may. This article highlights the plight of a young man who has just lost his engineering workplace experience while studying with one of the largest private apprenticeship training firms in the South West of England.
read more...»Louis Theroux - Crime and Economics in Action
The Louis Theroux documentary on law and disorder in Johannesberg is a fantastic documentary to demonstrate just a few economic concepts to students as a christmas treat.
Before the lesson lead a discussion - ‘to what extent is policing a public good?’
Then another discussion leading from,‘to what extent do you think policing should be a public good, i.e. provided by governments?’
Then introduce or perhaps revise the concept of government failure and how governments may fail to provide policing to a desired quantity.
The programme demonstrates how there may be a demand for private police agencies run by the free market in South Africa, because the government fails to provide adequate policing to a desired quantity.
Other points for discussion included in the programme may include; income inequality, the costs of unemployment, external costs associated with slum housing. Also note other government failures the S.A. government are guilty of e.g. failure of information provision for AIDS HIV Virus.
A discussion on the paternal role of governments may also be considered.
The show also raises all sorts of other ethical debates which Louis questions. Try to avoid getting bogged down in these those, keep it to economics!
Marcus
Get me to pay day - ok - but it will cost you 1500%
Quick cash, cash rush, same-day-money, get me to pay-day, pay-day express - the brand names of the pay-day loan market which claims to provide an essential service for cash-strapped people who need an injection of liquidity to cover unforessen spending and avoid high charges on unauthorised overdrafts. Whatever the social value of providing such cash funds to those in desperation the rates of interest charged on the loans are incendiary to say the least and it is little wonder that the Office of Fair Trading is expected to investigate this segment of the home finance industry.
read more...»Information failure down the market
A neat story here of possible information failure for consumers who frequent the ever-growing number of farmers markets around the country. Some of the farmers markets I have been dragged to in the past have resembled nothing more than glorified car boot sales - presumably the same rules of thumb apply for anyone risking buying what purports to be ‘locally grown food’ at premium prices!
Waist Check
I am on the threshold of a new attempt to get fitter and slimmer this summer. I have pre-committed to a two month gym membership close to my holiday home and signed up for a couple of long distance walks .... it ought to make a difference .... but I might still struggle to make the cut in Japan where a new law has come in place stipulating maximum waist sizes for men and women.
read more...»But she ain’t messin’ wit no broke…
This Wednesday the Law Commission announced that pre-nuptial agreements could become legally binding with a few years. This is a landmark decision that could change the face of British society as we know it. Currently, “prenups” have no legal standing in the United Kingdom while they are quite common in the United States and Canada. Today I am going to examine the prenup as a merit good, and offer a policy imperative which may be rather brow-raising.
Billboard Balderdash
It is so easy and so tempting. The first night has been savaged by a theatre critic whose pen is renowned for being mightier than the sword. Your audiences are set to dwindle and that bill board outside the theatre needs to have a selective quote to pull in the passing trade. For years, desperate impresarios have been guilty of misleading potential theatre-goers by incredibly selective quotation of choice phrases from damning reviews. But now the European Union looks set to intervene in a classic case of information failure. If misquoted reviews are shown to have had an impact on audience members’ decisions to buy tickets then theatre-owners may be open to financial penalties. The Independent had some cracking examples in their edition today:
read more...»
Myopia and alcoholism
This BBC news video reports that the number of hospital admissions linked to alcohol has more than doubled in the last 12 years.
read more...»
