Matt Nolan

Why is the NZ government buying the rail network?

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So its official – our government has repurchased the rail network (blog commentary here, here, and here). Now such a purchase only makes sense if there are positive externalities from rail that the market was not accounting for (or if the horizon of the company was too short-term, but I don’t get that feeling). These externalities all stem from rail being a substitute to other forms of transport, namely road transport. This is covered in detail in this article by Andrew Gawith.

A list of the potential positive impacts are:

  1. Rail has lower carbon emissions,
  2. Industry has already sunk infrastructure around rail lines (namely dairy) so it allows them to increase capacity,
  3. Rail is less congested than the roads,
  4. Network effects.

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Matt Nolan

Discount factors and death

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What is a discount factor? A discount factor tells us the rate of time preferences between periods of time – in other words it gives us a measure for how much “stuff” we are willing to sacrifice in the future in order to consumer now.

Economists often use “exponential discounting“. Furthermore Rauparaha has discussed how hyperbolic discounting more accurately reflecting peoples true time preference at a given point in time. However, there are other issues that influence the way people discount. The one I want to focus on today is death.

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Matt Nolan

What was that about tacit collusion?

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Yesterday when discussing why supermarkets may discount Nurofen during cold season I put to the side the possibility that it was the result of a collapse in tacit collusion between Nurofen providers. My reason for ignoring this explanation was purely selfish – I was tired and that explanation required more thought than I had capacity for 🙂 . However, today I will attempt to shed some light on the tacit collusion explanation, even though my capacity is still extremely limited 😉 .

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Matt Nolan

Why do supermarkets cut the price of medicine when people are getting ill?

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When I was at the supermarket I grabbed some Nurofen for my partner who has a head cold. I seemed to be in luck when I was at the supermarket as there was a half-price special on Nurofen – how convenient.

Then I realised that almost everyone I knew had a cold, and most of these people were likely to take Nurofen so they could keep working through the cold. In this case the demand for Nurofen would increase, and the demand curve is likely to be inelastic at the previous price – as a result, why were they slashing the price of Nurofen?

Here are a couple of possible explanations:

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Matt Nolan

April 08 US economy: Rate cuts finished?

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Today the US Federal Reserve cut their cash rate by 25 basis points to 2%.  At the same time data was released stating that GDP growth in the US was 0.6% (annualised, seasonally adjusted) in March – a weak number to be sure, but positive and higher than market expectations.

The first thing to take from today’s announcements is that, given the balance of probabilities, rate hikes are finished (see Calculated Risk for a comparison of statements).  Now with inflation running at over 4%, the real interest rate is currently negative – implying that the Federal Reserve is now in a position where it has to be extremely careful.

For New Zealand, negative real interest rates in the US imply that investor interest in commodities (as a store of value) is higher – so this is a good thing.  However, the end of interest rate cuts in the US may see our dollar loss a touch of traction against the US.  This would probably be a good thing for exporters, except that the US is cutting back on its import of NZ goods (see the 27% tumble in the value of NZ exports to the US in March).

On the GDP side, the (relatively) strong performance of the industrial production index and the weak performance in retail did indicate that either exports or inventories were going to have a hell of a quarter.  Instead we got a mix – exports did well, inventories rose.

Looking at the numbers, inventory accumulation appears to be partially payback for the huge rundown in the December quarter.  However, given that none of the analysts I’ve looked at said anything about it, it is likely that inventories were bloated before the December quarter anyways.

What does this mean for NZ – nothing.  Our dollar hardly moved, there is still a feeling we are sitting on a knife-edge with the world economy.

Matt Nolan

Emissions trading scheme: The NZIER model

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NZIER has released a very interesting report on the ETS (emissions trading scheme) in New Zealand (see their reports page – April). In this report they find that the economic cost of the emissions trading scheme will be eight times the cost of the “government paying” for the scheme. Although this eases to 4-5 times the cost in the long-run (which is the cost we should be interested in if we believe climate change policy will continue indefinitely) this is still a significant cost.

Although I think this is an interesting and important point to raise, and that it will add greatly to the debate to climate change policies – I get the feeling the result is slightly exaggerated by some of the underlying assumptions. Here’s the areas that I think are important to revist:

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