Matt Nolan

Gift or investment: Lil Wayne edition

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Over at the excellent intersection between anthropology and economics blog, there is a discussion about the Lil Wayne, his latest album, and how this fits into the idea of a gift economy.

[Disclaimer: I haven’t listened to Lil Wayne, so my knowledge on the marginal benefit of his music is severely limited.]

Here the question is asked:

Specifically: who’s going to buy this album when they have been so generously gifted with Carter’s work for free?

But it has been popular – very popular. This raises the next query:

It may be that Lil Wayne has succeeded here because he is, in the opinion of Rolling Stone, the “best rapper alive.” If you are this good, ubiquity and generosity have no penalty. Free for all or fee for all, it doesn’t matter. We have to listen. But intuitively this seems wrong. Surely the incentive for “giveaways” should be more pressing for lesser talents.

This is what I would like to discuss more, in context of a “gift economy”.

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Matt Nolan

Womanomics and sunk costs

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Cactus Kate states that men should pay the bill when taking a woman out – because of the substantial expenses associated with being a woman.

As an economist, I’m not so sure if this does it – after all, aren’t these all sunk costs, which implies that they shouldn’t have any impact on the final negotiation at the end of the night that determines who should pay the bill for the date.

As a result, the demands that Ms Kate place on men to pay the entire bill, based on these costs, may seem somewhat “irrational” (I hate that word).
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Matt Nolan

Why has the price of oil fallen so sharply?

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Over the last three days the price of oil has fallen by nearly 10%. Given the sudden nature of this change it seems impractical to state that it is fundamental supply and demand factors driving the shift in prices.

Tyler Cowen at Marginal Revolution states two reasons why we might get such significant changes to the current price, even if contemporaneous supply and demand conditions have not changed – both explanations avoid implying that there has been a “speculative bubble” in oil (where a speculative bubble would occur when traders have been holding inventories, which they have not been – however this does not rule out a general bubble, where future price expectations are out of whack). These reasons are: Read more

Matt Nolan

Diminishing marginal utility of income and “big ticket” items

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One of the main justifications for redistribution policies is “diminishing marginal utility”. We have already discussed that this doesn’t really make sense as we can’t compare peoples “utility”. For example, people that receive higher utility from consumption will work more and thereby will earn a higher income – from here we cannot tell whether the change in welfare from taking a dollar off them and giving it to someone who earns less will be positive or negative.

Furthermore we have the fact that two people with the same lifetime income level the person with a more variable annual income will be taxed more than people who do not have a variable income – implying that DMU does not work as a defense here!

However, there is a further complication to the DMU story. Even if everyone has the same “utility function” we cannot necessarily assume that marginal utility will be diminishing in income.

Why? Well because of the cost of “big ticket” items and the increased use of services like Clever Shop List to pay for them. Read more

Matt Nolan

The individual rationality of buying small cokes/chippies

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One of the most vexing questions in economics has to be why the price of a 330ml coke is often only slightly less than the price of a 1.5l coke. This issue generalises to other products such as chippies.

Now there are a number of good responses, namely:

  1. Strongly diminishing marginal utility for fresh coke and a very low value on saved coke (or a relatively high cost of storage),
  2. A 330ml bottle is easier to consume than a 1.5l bottle – as a result the value of the 330ml bottle may be higher for people on the move, and so they are priced to service different markets.
  3. The cost of producing a 330ml coke is far more than a 33/150th of the cost of producing a 1.5l coke

These answers seem to satisfy me when I think of coke. However, when I think of chippies I find this explanation sadly lacking.

Downstairs I can buy a little bag of chippies for $1.50 or a far bigger bag of chippies (x3) for $3.00. I always buy the little bag.

Now I will do this each day, and don’t get any less value from 3 day old chippies than I do fresh chippies. Furthermore, I am eating them at work – implying that there is no storage cost and no convenience benefit.

No-one steals my chippies if I get a big packet so its not that. Am I passing up a free lunch here (and thereby not being a utility maximiser as my shirt says) – or is there a reason I buy the small bag instead of the big bag.

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Matt Nolan

Welfare and time inconsistency

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Hi all. Good to see people commenting on re-thinking interest rate policy here, I am going to give it another day for people to make comments (as I am waiting for some specific people) and then I’ll start writing things up on the weekend – so if there is anything you want to add, go there are add it!

Today I’m going to ask a couple of questions to Rauparaha (or anyone else that knows some stuff) about time inconsistency (using smoking as an example), an issue that Rauparaha covered here. Now I know close to nothing about this stuff – but hopefully a discussion on it will enlight me, and potential other readers 🙂

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