jamesz

Taking unilateral action

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When it comes to climate change the biggest argument against unilateral action is the lack of any tangible benefit. What can a single country really do to mitigate climate change? However, an article by Akira Yakita suggests that there are welfare benefits to action outside of the benefits to the climate.

His central argument is that preferences are not stationary and can be influenced by publicly expressed attitudes. So, if the government subsidises green technologies as part of its climate change policy, then people’s preferences shift towards green products. Because the subsidy increases the production of green products, which are now preferred, total welfare might increase. Obviously the final welfare outcome depends on the coefficients on each effect, but Yakita shows that an increase in welfare is possible.

While that’s all well and good in theory it’d be nice to have some evidence of the effect. After all, it could get awfully close to saying that anything the government does is good because people will grow to love it. Yakita’s evidence for the effect comes from two industries. First, he points to the explosion of interest in hybrid cars, where sales growth has been huge despite the 50% price premium they command. Sales of hybrids in Japan have grown by 19%pa from ’98 to ’06, while the overall growth in car sales is ~1%pa.

Secondly he points to sales of organic food. While there may be dispute over whether organic foods are actually environmentally friendly, there is no doubt about how they are generally perceived. He reports that the organic food market has grown 15%pa over the last decade as the environmental movement has taken hold.

Those two pieces of evidence together do suggest that preference shifts have taken place. However, it’s a bit of a jump from there to suggesting that government action can instigate a preference shift. I’m willing to believe that preference shifts could make it worthwhile for the government to promote green activities to boost welfare, but I’d suggest the causation has to run from preference shift to government action rather than the other way around. Nonetheless it’s a novel way to look at the benefits of unilateral action on climate change.

jamesz

Illegal downloading

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The Herald reports that most music is bought by the very same people who illegally download a lot of tracks. It says

plans … to crack down on illegal downloaders by threatening to cut their internet connections … could harm the music industry by punishing its core customers.

Now that seems like a stretch. The key here is to figure out a plausible counterfactual to the present situation. The Herald seems to be suggesting that, if these people didn’t have access to an internet connection then they’d lose all interest in music. Which is pretty unlikely! Let’s think about what might be a more plausible counterfactual.

Suppose there are two kinds of music: paid for and illegal. If illegal becomes more expensive all of a sudden – because of the risk of your internet being cut off – then two things happen. First, you’ll probably consume less music overall, because it’s more expensive now. Secondly, you’ll switch out some of your illegally obtained music for paid music because the two are substitutes. So a first look suggests that the music industry would probably be better off if the cost of illegal downloads went up, even if everyone who buys also downloads.
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Will Taylor

Ever organised a dinner party?? Then you are an expert in running a two-sided market!

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In my wanderings I found this neat little example using dinner parties to explain two sided markets (source):

The task facing a certain kind of entrepreneur these days is no more unfamiliar than the engineering of a successful dinner party.  The French ambassador would never so much as respond to an invitation — unless you intimated that Rupert Murdoch, say, would be there, in which case he would accept. Murdoch, if he thought that the Attorney General would attend, would show up, too. And if you led the AG to think his dinner partner would be his favorite movie star, who, you let slip, so badly wanted to meet him (while telling her the same thing) …. Well, pretty soon you’d have a famous dinner party. After three or four such successes, your reputation as a host would make your job much easier, with chefs, provisioners, decorators, and florists anxious to work for you.

Interesting analogy, I imagine anyone who has ever oranised a party will  sympathise with this description:)

Matt Nolan

The basic frame of a firm: Cournot

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It seems that the debate about the fundamental “theory of the firm” is going on. Now there are issues with the theory of the firm, things that economists have been busy plugging away on for a long time now – but the critique that Steve Keen has put forward is not one of these issues. In this post I will attempt to discuss his push to change the Cournot model, which I don’t agree with. This will give us scope to discuss perfect competition another time.

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Matt Nolan

In defence of the neg

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Both Tyler Cowen and Andrew Sullivan have turned on the attack against the “dating game”, specifically the “neg“.

Now any attack on moral grounds could be justifiable (as could any defence), it is just about personal value judgments. But both authours mention that they see the neg as a suboptimal strategy. On these theoretical grounds I do not think they are quite right.

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Matt Nolan

Deadweight loss, debunking, and strawman micro

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In a recent post, Paul Walker criticises the idea that “deadweight loss wouldn’t exist if we had a government monopoly”. He is right but in another idealistic sense the idea of no dead-weight loss is also correct right.

If the government acts as a monopoly we will still have dead weight loss, as it comes from the “loss of surplus” relative to the situation where “surplus” is as large as possible (given demand and the monopolies cost structure).

But if government blatantly sets price equal to the marginal cost of the last unit dead weight loss will melt away. This does not imply that profit is dead weight loss in any sense of the word, and it does not tell us that the solution will be “dynamically efficient” (where is the incentive to invest, to develop), but it does tell us that a government that is behaving this way could achieve the “perfectly competitive” price and quantity.

However, this is all 100 level stuff that I don’t particularly care about. My interest lies with the “debunking of microeconomics” that Steve tries to achieve on Paul Walker’s blog.

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