Ethanol and Food Prices

In this opinion the WSJ that describes the size and impact of the requirement by the Federal government for the US to use ethanol as a fuel. Summary: the program is diverting approximately 40% of corn crop to ethanol and increasing food prices.

Search for "A Mandate to Raise Food Prices" to find the entire opinion.

http://mruniversity.com/double-marginalization-problem is a nice lesson on monopoly welfare loss and double marginalization.

Network Effects

Business Insider has a nice article on network effects and why Apple should worry about Google and Android.

Cash v. In-Kind Transfers in India

Three articles in the recent issue of The Economist caught my eye.

One article reports about India giving money to poor people instead of food or in-kind transfers. Standard economic theory has taught for years that a cash transfer is equivalent to or  better than an in-kind transfer of the same value for the recipient. The article is also noteworthy for highlighting the use of technology in helping create a way for banks to identify people, making deposits to bank accounts possible. 

The second article reports a law suit against Standard and Poor's for its rating of constant proportion debt obligations issued by ABN AMRO. The article begins, "PROTESTING that only fools would rely on your product to make investment decisions may seem a dangerous argument to make. Yet it is one that has served credit-ratings agencies well over the years, allowing them to sell ratings to debt issuers while abjuring legal responsibility for the quality of their work." Economists have known for years that ratings tend to be biased. Two factors lead to bias. The issuer pays the rating agency and the ratings have the legal standing of an editorial - they are opinions. I find humor when reading that Standard and Poor's used the formula provided by the bank to determine the value of the asset. One mystery to me is why anyone pays much attention to ratings.

The third article discusses why people vote when voting is not compulsory. Economics teaches that the expected cost of voting typically exceeds the expected benefit. The chance that your vote matters is small. The only time it matters is if all other voters are tied and yours decides the election. The cost is real; you will spend at least 30 minutes going to a poll and waiting in line. We discussed the logic of voting in the first economics course I took. Thank you Dr. Hendley.

Gasoline Rationing

The quality of reporting on economic events is low. For example, I cannot learn easily what role, if any, restrictions on price increases play in creating gasoline lines in New York City and Long Island. CNN just posted an article discussing recent requirement there that drivers buy gasoline on odd or even days depending the last digit on their license plate. (Letters are considered to be odd.) 

A quick scan of the internet shows that most accounts blame the lines on the inability of many stations to obtain gasoline or to operate because power shortages; jobbers cannot pump gasoline out of storage tanks and retailers' pump do not operate. A reduction in the number of stations open would increase the lines at the stations that remain open. However, I suspect that something more is going on. I wonder why firms do not increase price in the face of such long lines. Price increases would reduce the quantity demanded and increase the quantity supplied, thereby reducing the lines. If price increased sufficiently, the gas lines would disappear.

I cannot confirm that restrictions on increasing price are in place in New York and Long Island. New Jersey does have restrictions: "... stations cannot raise their prices by more than 10 percent above pre-Sandy prices under state law due to the current state of emergency" (http://www.cnbc.com/id/49642174). The CNN article contains some evidence that similar restrictions are in place in the city and Long Island. It states that the rationing will "help gas stations stay open longer." I don't think stations close early if they have gas to sell and a line of waiting customers. I do think they close early if they run out of gas because the price is artificially low.

What can we learn from the responses to Hurricane Sandy?

I like much of what Nick Gillespie writes in Reason.com in a recent article about what NOT to say after Hurricane Sandy. First, don't say the damage will stimulate the economy. He references Frederic Bastiat's broken window fallacy. Second, don't say that a big problem requires intervention by the Federal government. I agree with the premise that local governments solve problems better than the Federal government when the problem is local. Finally, don't say that the storm proves anything about climate change. I like that he points that careful examination of data is a more reliable guide to trends than recollections.

How to reduce our carbon footprint?

The Wall Street Journal has a nice set of interviews with economists who discuss the advantages and disadvantages of taxing carbon emissions and a cap and trade market.  Read more if you are interested in my opinion.

I favor using an auction to allocate permits to emit carbon and then letting firms trade. Using the auction gives the government funds to use to compensate people hurt by carbon emissions. The cap and trade market gives a price that measures the marginal cost of reducing emissions. The government can easily relax or tighten the emission quota by selling or buying permits if analysts conclude that the optimal amount of emissions changes.