Matt Nolan

Externalities: A bridge too far

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CPW sent me a link to the following blog post on Econlog. In the post Bryan Caplan mentions an economist from Princeton (Roland Benabou), who argues that externalities provide a bridge between an economists conception of the world, and non-economists concepts. Although this may be a tad over the top (as non-economists place more value in normative statements than economists would ideally), I believe this is an important point insofar as it allows us to generalise our models, to take into account more possible states of the world.

Bryan Caplan puts forward four points of difference that he believes will still exist between economists and non-economists, however I think they were a touch over-cooked, here’s why:
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jamesz

Showing you what you want to hear

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The Washington Post (via Overcoming Bias) reports that

…when volunteers heard about the risks of nanotechnology from different experts, they gravitated toward the views of experts who seemed to share their personal values… When people clash on hot-button issues, their disagreements may have more to do with clashing values than facts.

The finding has strong implications for government awareness campaigns: it essentially says that, in order to persuade someone, you just need to present an expert they identify with. Campaigns aimed at Asians that feature Asian presenters aren’t just using someone that the audience feels a kinship with for warm fuzzies – they’re taking advantage of a bias in human decision-making to implement mind-control 😉 More seriously, they’re using the most effective techniques they can to ensure that people are fully informed when they make decisions; and we all know that full information is important if we want to achieve efficiency, social harmony and a better standard of living for everyone.

Matt Nolan

Cigarette cases: Are they ‘too tempting’

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More research out of Massey has recommended increasing government regulation. In this case, researchers found that the display case for cigarettes makes them too tempting for those trying to quit and for rebellious teenagers. As it is election year, politicians are interested in this ‘issue’ and are thinking about tightening the regulation surrounding these cigarette cases.

Externality taxes and regulation are two of our favorite topics on this blog (see here, here, here, and here), and as a result we have to talk about it.

In order to start to analyse this problem, I’m going to use one of our old posts on porn and manipulation.
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jamesz

The truth about happiness

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Vox report a recent study on adaptation to life-changing events. I don’t want to venture into a discussison of happiness research — a topic fraught with controversy — but the results are always fun to read!

Apparently marriage really isn’t all that exciting and most people get progressively less happy as it drags on. Unsurprisingly, ending an unhappy marriage by divorcing one’s partner is a fantastic thing for most people; however, I’m surprised to see a strong increase in happiness in the lead up to the divorce with no drop immediately around it. Providing more evidence that marriage is a happiness wrecker is the plot for widowhood: while the death of a spouse is devastating, people are happier 3-4 years later than they were during the marriage!

Matt Nolan

Petrol taxes and inflation

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At Kiwiblog there is mention of Don Brash stating that we should think about allowing the Reserve Bank to increase and reduce the petrol tax. This is something that the Reserve Bank has actually suggested itself (at the same time they suggested a floating GST rate).

As far as I can tell they want to do it as during a boom asset prices drive consumption, so if you tax petrol you introduce a negative income effect which lowers consumption – opposite for a recession. This works because demand for petrol is inelastic (as there are few substitutes for driving your car), and as a result the amount a person spends on fuel will increase with the price – leaving them less to spend on other stuff. This will reduce demand-pull inflation, and allows the RBNZ to keep a fund of money that they can inject into the economy when a recession is threatening. A benefit is the fact that the administration costs of the tax are low, as the institutions are already in place.

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Matt Nolan

RBA lifts rates to 7.0%

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The Reserve Bank of Australia lifted its cash rate to 7.0%, on the back of higher than expected inflation outcomes.  In the statement, Governor Stevens stuck firmly to the uncertainty line while admitting that even this lift in rates may not be sufficient to tame inflation.  Continued strength in domestic demand is likely to push them to increase rates again.

For New Zealand this implies a narrowing of the yield gap between Aussie and NZ.  As a result, the relative value of the NZ$ should ease, helping exporters.  A lower cross-rate with Australia then gives the RBNZ one less reason not to increase rates, increase the probability that the Bank will lift rates to 8.5% over the coming months.