We think it's time to start a Rent Seekers Club.
Our first inductee has to be Heather Reisman for her fight to keep Amazon out of Canada thus ensuring that her company, Indigo Books and Music Inc. can continue to charge premium prices for books in Canada. See our previous blog.
Today's inductee; Dr. Antoinette Dumalo, President of the B.C. Association of Optometrists.
It seem Dr. Dumalo is upset with the B.C. Government's new legislation that would allow generally healthy adults to order prescription lenses over the internet without consultation with an optometrist. Opticians will now be able to use an automated machine to test vision. Last time I had my eyes tested, I paid $75 for an optometrist to use an automated machine to determine my prescription. A fee that is not covered by B.C. Medical. That exam took roughly 10 minutes. No wonder the optometrists are upset. Now the opticians will be able to use the same machine and charge me much less. Somehow that has to be bad for consumers. Or is it just another case of rent-seeking?
Read the article from the Vancouver Province.
Tuesday, April 27, 2010
Friday, April 23, 2010
More on the Demise of Bricks and Mortar
An update from the Sacramento Bee on our previous comment on the demise of Blockbuster. See "Amazon Comes to Canada".
Wednesday, April 21, 2010
Women in Construction
Someone needs to help out us dumb economists on this one.
In a presentation before the Standing Committee on the Status of Women, the union that represents a large number of construction workers argued that the government needed to impose minimum quotas on the number of women hired on government financed projects. (See the article)
Getting more women to work in the construction industry may or may not be a good thing - we'll leave that to the philosophers and sociologists. Our concern is with the logic used by the president of the Communications, Energy and Paperworkers Union, Dave Coles, when justifying the proposed implementation of a quota. Mr. Coles is quoted as saying "Not only would this address the chronic worker shortage ..."
When we checked our vast library of Economic Principles textbooks, we found that a shortage occurs when the price is below the equilibrium price. In the labour market, when that occurs the number of people willing to work is less than the number of jobs available. Mr. Coles recommendation is to reduce the number of people available to work by restricting the number of male construction workers. If there is a shortage of workers and you further restrict the number of workers available, how does this make the shortage disappear? Our thinking is it makes the shortage worse.
The story does bring up a couple of interesting questions though. First, why is the wage rate below the equilibrium? Shouldn't a shortage cause wage rates to rise? Perhaps the cyclical nature of the construction industry increases the economic risk of working in this industry and the supply of labour is very inelastic. Changes in demand increase the equilibrium wage, but a union contract at a fixed wage may prevent wages from rising ... the union contract causes the shortage when demand rises. (We may or may not believe this argument). A second possibility is that workers require a wage premium due to the risk of layoff, a wage rate higher than their marginal product. Profit maximizing developers are not concerned with what happens to resources after their project is completed and thus are willing to hire up to the point where marginal labour costs equal the value of the marginal product. There may be an asymmetry in the construction labour market. A third possibility is that construction labour is, for some reason, immobile. That would explain a shortage of construction workers in BC when there is a surplus in New Brunswick.
A second question is why women are not drawn to construction in the first place. If wages in the construction industry are higher than those in the service industry, why don't women gravitate to construction? We could tell you that women are, on average, weaker than men and thus are not suited to construction work. Except that we don't actually believe that. Any doubts? Watch those women that ran the Boston Marathon on Monday. An alternate explanation. Perhaps women are more risk averse than men. In that case the wage rate would have to be higher to compensate for the risk of layoffs. Or perhaps women are just smarter than men and understand what happens when a construction project is completed.
In a presentation before the Standing Committee on the Status of Women, the union that represents a large number of construction workers argued that the government needed to impose minimum quotas on the number of women hired on government financed projects. (See the article)
Getting more women to work in the construction industry may or may not be a good thing - we'll leave that to the philosophers and sociologists. Our concern is with the logic used by the president of the Communications, Energy and Paperworkers Union, Dave Coles, when justifying the proposed implementation of a quota. Mr. Coles is quoted as saying "Not only would this address the chronic worker shortage ..."
When we checked our vast library of Economic Principles textbooks, we found that a shortage occurs when the price is below the equilibrium price. In the labour market, when that occurs the number of people willing to work is less than the number of jobs available. Mr. Coles recommendation is to reduce the number of people available to work by restricting the number of male construction workers. If there is a shortage of workers and you further restrict the number of workers available, how does this make the shortage disappear? Our thinking is it makes the shortage worse.
The story does bring up a couple of interesting questions though. First, why is the wage rate below the equilibrium? Shouldn't a shortage cause wage rates to rise? Perhaps the cyclical nature of the construction industry increases the economic risk of working in this industry and the supply of labour is very inelastic. Changes in demand increase the equilibrium wage, but a union contract at a fixed wage may prevent wages from rising ... the union contract causes the shortage when demand rises. (We may or may not believe this argument). A second possibility is that workers require a wage premium due to the risk of layoff, a wage rate higher than their marginal product. Profit maximizing developers are not concerned with what happens to resources after their project is completed and thus are willing to hire up to the point where marginal labour costs equal the value of the marginal product. There may be an asymmetry in the construction labour market. A third possibility is that construction labour is, for some reason, immobile. That would explain a shortage of construction workers in BC when there is a surplus in New Brunswick.
A second question is why women are not drawn to construction in the first place. If wages in the construction industry are higher than those in the service industry, why don't women gravitate to construction? We could tell you that women are, on average, weaker than men and thus are not suited to construction work. Except that we don't actually believe that. Any doubts? Watch those women that ran the Boston Marathon on Monday. An alternate explanation. Perhaps women are more risk averse than men. In that case the wage rate would have to be higher to compensate for the risk of layoffs. Or perhaps women are just smarter than men and understand what happens when a construction project is completed.
Monday, April 19, 2010
Fiscal and Monetary Policy or Doomsday Scenario?
An article in last Friday's Globe and Mail tries to put the fear of high interest rates and high debt into us. Currently, Canadians owe about $1.47 for every dollar of disposable income. The argument is that as interest rates rise servicing this debt will cause undue hardship. Canadians took on more debt during the economic slump because interest rates were low. As interest rates rise consumer spending will fall and this will slow the economic recovery.
We all know that a car today is worth more to us than a car in the future. The ratio of the marginal utilities is determined by our personal intertemporal discount rates. Economic theory tells us that when the interest rate is below our discount rate our utility increases by borrowing against future incomes. When the interest rate is above are discount rates we reduce consumption now, increase our savings and increase consumption in the future. There should be no surprise then, that when the bank of Canada reduced interest rates we borrowed against future earnings.
The basic idea behind monetary policy is that we can reduce interest rates during a recession to stimulate spending by way of borrowing and we reduce inflationary pressures by increasing interest rates during both periods. That causes spending to increase in recession and decrease during inflationary boom. This is exactly what the article is talking about. Why did they seem so surprised?
We all know that a car today is worth more to us than a car in the future. The ratio of the marginal utilities is determined by our personal intertemporal discount rates. Economic theory tells us that when the interest rate is below our discount rate our utility increases by borrowing against future incomes. When the interest rate is above are discount rates we reduce consumption now, increase our savings and increase consumption in the future. There should be no surprise then, that when the bank of Canada reduced interest rates we borrowed against future earnings.
The basic idea behind monetary policy is that we can reduce interest rates during a recession to stimulate spending by way of borrowing and we reduce inflationary pressures by increasing interest rates during both periods. That causes spending to increase in recession and decrease during inflationary boom. This is exactly what the article is talking about. Why did they seem so surprised?
Thursday, April 15, 2010
Carbon permits and taxation
In the 1990s cap-and-trade, the idea of reducing carbon dioxide emissions by auctioning off a set number of pollution permits, which could then lead be traded in a market, was the beginning of the green policy. A similar approach to sulphur dioxide emissions, introduced under the 1990 Clean Air Act, was credited with having helped solve acid-rain problems fast and cheaply. It's great advantage was that it hardly looked like a tax at all, though it would bring in a lot of money.
Welcome to the world of today, global warming concerns and too much GHG emissions. Yet the ability to raise money from industry is not so attractive in a downturn. Market mechanisms have lost their appeal as a result of the financial crisis. More generally, climate is not something the public seems to feel strongly about at the moment, partly because of the recessions and partly because they have worries about the science.
We however, still have hope for the carbon credit market and carbon taxation.
April 13, 2010, Bloomberg reported that the U.S. Northeast's cap-and-trade program for power plants will offer 42.8 million carbon dioxide permits for sale at it's eighth auction, to be help June 9, 2010. The minimum bid for each permit will be $1.86, unchanged from earlier auctions, stated by the Greenhouse Gas Initiative. Each permit gives a plant the right to emit 1 ton of carbon dioxide. Permits for December delivery fell 3 cents today, or 1.4 %, to $2.10 each on the Chicago Climate Futures Exchange.
The June auction will offer 40.7 million permits for the program's first phase which began in 2009 and goes to 2011. There will be a separate offering of 2.14 million permits from the program's 2012-2014 period. The regional trading program which aims to limit the carbon dioxide produced by power plants from Maryland to Maine, has raised $582 million from quarterly permit auctions since Sept 2008.
This is exactly the kind of thing negative externalities need: a market for pollution. If a cap-and-trade system for carbon is to be maximally effective, the permits should be sold rather than handed out, and fluctuations in the permit price over time should be limited. Basically, the cap-and-trade system should be designed to resemble a carbon tax. For those interested I would suggest you read up on B.C's Climate Action Plan. Specifically, what we find exciting is the revenue-neutral aspect of B.C's carbon tax.
From an economic efficiency perspective, the price of carbon emissions should be passed on to consumers in the form of higher energy prices, so that consumers can make optimal decisions about energy consumption. Consumers should be compensated for these higher prices by way of cuts in income or payroll taxes. Those tax cuts would be financed by the revenue generated from auctions of carbon rights (or, carbon taxation). None of the carbon revenue would be used for expenditure programs.
Welcome to the world of today, global warming concerns and too much GHG emissions. Yet the ability to raise money from industry is not so attractive in a downturn. Market mechanisms have lost their appeal as a result of the financial crisis. More generally, climate is not something the public seems to feel strongly about at the moment, partly because of the recessions and partly because they have worries about the science.
We however, still have hope for the carbon credit market and carbon taxation.
April 13, 2010, Bloomberg reported that the U.S. Northeast's cap-and-trade program for power plants will offer 42.8 million carbon dioxide permits for sale at it's eighth auction, to be help June 9, 2010. The minimum bid for each permit will be $1.86, unchanged from earlier auctions, stated by the Greenhouse Gas Initiative. Each permit gives a plant the right to emit 1 ton of carbon dioxide. Permits for December delivery fell 3 cents today, or 1.4 %, to $2.10 each on the Chicago Climate Futures Exchange.
The June auction will offer 40.7 million permits for the program's first phase which began in 2009 and goes to 2011. There will be a separate offering of 2.14 million permits from the program's 2012-2014 period. The regional trading program which aims to limit the carbon dioxide produced by power plants from Maryland to Maine, has raised $582 million from quarterly permit auctions since Sept 2008.
This is exactly the kind of thing negative externalities need: a market for pollution. If a cap-and-trade system for carbon is to be maximally effective, the permits should be sold rather than handed out, and fluctuations in the permit price over time should be limited. Basically, the cap-and-trade system should be designed to resemble a carbon tax. For those interested I would suggest you read up on B.C's Climate Action Plan. Specifically, what we find exciting is the revenue-neutral aspect of B.C's carbon tax.
From an economic efficiency perspective, the price of carbon emissions should be passed on to consumers in the form of higher energy prices, so that consumers can make optimal decisions about energy consumption. Consumers should be compensated for these higher prices by way of cuts in income or payroll taxes. Those tax cuts would be financed by the revenue generated from auctions of carbon rights (or, carbon taxation). None of the carbon revenue would be used for expenditure programs.
The Law of One Price
With the Canadian dollar now trading at parity with the U.S. dollar, we begin to question the premium that Canadians pay for some items. This is particularly aggravating for books sold in Canada and all things sold at our favourite coffee outlet (We would tell you that it was Starbucks but then we might be accused of product placement).
The Law of One Price (the strict form of the purchasing power parity theorem) suggests that, absent of transaction and transportation costs, identical goods in different countries should sell for the same price once an adjustment is made for the exchange rate. With the dollar at parity, prices in Canada and the U.S. should be the same. They're not ... yet.
Porsche Canada announced in a news release dated April 5, 2010 that they are instituting "Canadian Currency Credits" reducing all Porsche prices in Canada. The term "credits" suggests that the price reduction is only temporary and will last as long as the Canadian dollar remains strong. Judging from sentiments in the currency markets, this could be a long "temporary".
The full article can be found in the Globe and Mail.
Official Canadian dollar exchange rates can be found on the Bank of Canada website.
The Law of One Price (the strict form of the purchasing power parity theorem) suggests that, absent of transaction and transportation costs, identical goods in different countries should sell for the same price once an adjustment is made for the exchange rate. With the dollar at parity, prices in Canada and the U.S. should be the same. They're not ... yet.
Porsche Canada announced in a news release dated April 5, 2010 that they are instituting "Canadian Currency Credits" reducing all Porsche prices in Canada. The term "credits" suggests that the price reduction is only temporary and will last as long as the Canadian dollar remains strong. Judging from sentiments in the currency markets, this could be a long "temporary".
The full article can be found in the Globe and Mail.
Official Canadian dollar exchange rates can be found on the Bank of Canada website.
Wednesday, April 14, 2010
A line of admissions...
An interesting article today in the New York Times reports that enrollment waiting lists at Universities in the United States are getting longer. Duke had a record 27,000 undergraduate applicants with its waiting list at 3,382. Reasons consist of uncertainties in the economy, which makes it difficult for Duke to estimate how many of those accepted will actually say yes. Most Ivy League schools are also hedging their bets… but so are students. In some instances they are applying to 15 or more schools. We definitely see an imperfect information problem here. Education is an example of a positive externality: acquiring more education benefits the individual student and having a more highly educated work force is good for the economy as a whole. Excess demand for education? Raise the price.
April 01, 2010, Harvard announced they had made the decision to auction off 100 seats in next year's freshman class to the highest bidders. I think this may solve some of the Universities problems with their budget shortfall. The people who value the seats the most, or have the highest willingness to pay will win. We think collusion is likely out of the question. Backward induction of game theory 101: if someone has an incentive to cheat, everyone will.
http://www.nytimes.com/2010/04/14/education/14waitlist.html?ref=todayspaper
April 01, 2010, Harvard announced they had made the decision to auction off 100 seats in next year's freshman class to the highest bidders. I think this may solve some of the Universities problems with their budget shortfall. The people who value the seats the most, or have the highest willingness to pay will win. We think collusion is likely out of the question. Backward induction of game theory 101: if someone has an incentive to cheat, everyone will.
http://www.nytimes.com/2010/04/14/education/14waitlist.html?ref=todayspaper
Tuesday, April 13, 2010
Amazon comes to Canada
Kudos to the Canadian government for allowing U.S. bookseller Amazon.com to set up a distribution centre in Canada. We should expect to see Amazon's shipping costs fall as a result of this decision. Since shipping costs are marginal costs, we can hope that the price premium on books in Canada disappears.
No one should be surprised at Heather Reisman's response. Ms. Reisman is the CEO of Indigo Books Music Inc., operators of the Indigo, Chapters, Coles and World's Biggest Bookstore. Allowing competition will reduce prices and thus the monopoly profits earned by Indigo. With the advent of the Kindle, Sony Bookreader and iPad, more books will be delivered electronically at a lower marginal cost. Firms that concentrate on brick and mortar delivery are not likely to survive. Borders and Blockbuster are excellent examples of this.
We have to disagree with the assertion that this restructuring of the bookselling industry will hurt Canadian authors. If anything it will likely help them. Currently a Canadian author must pursuade a publisher to print their manuscript and sell it to Indigo. Under the emerging system, an author need only produce the book in a format compatible with one of the readers, advertise it by Facebook, Twitter or some other social media site and deliver it directly to a willing purchaser. The market will decide which books get read and which ones don't. What a novel concept (pun intended).
Links:
The Globe and Mail article on the government's decision.
Brand Channel's article on Borders (and Blockbuster)
No one should be surprised at Heather Reisman's response. Ms. Reisman is the CEO of Indigo Books Music Inc., operators of the Indigo, Chapters, Coles and World's Biggest Bookstore. Allowing competition will reduce prices and thus the monopoly profits earned by Indigo. With the advent of the Kindle, Sony Bookreader and iPad, more books will be delivered electronically at a lower marginal cost. Firms that concentrate on brick and mortar delivery are not likely to survive. Borders and Blockbuster are excellent examples of this.
We have to disagree with the assertion that this restructuring of the bookselling industry will hurt Canadian authors. If anything it will likely help them. Currently a Canadian author must pursuade a publisher to print their manuscript and sell it to Indigo. Under the emerging system, an author need only produce the book in a format compatible with one of the readers, advertise it by Facebook, Twitter or some other social media site and deliver it directly to a willing purchaser. The market will decide which books get read and which ones don't. What a novel concept (pun intended).
Links:
The Globe and Mail article on the government's decision.
Brand Channel's article on Borders (and Blockbuster)
Subscribe to:
Posts (Atom)