Wednesday, April 26, 2006

"If We Start with Sheep, Then Next It's the Cows and Horses."



Recent visitors to the New York Times website saw a very odd picture: sheep wearing blankets sporting the logo of hotels.nl, a Dutch hotel web site. Since they've been advertising on livestock, visits to the hotel's site have gone up 15%. (Imagine the increased visitorship from the cover photo on nytimes.com!) You can read the article here; there are lots of semi-clever puns about things like drivers making "ewe-turns" to read the advertisements, so prepare to groan.

Beyond the humor value of the article, there's actually a serious economic point to consider. We learn in economics that the invisible hand of the market will guide competitive companies to seek out any chance to make profit. We also learn, when we study externalities, that one person's economic activity can have an adverse effect on others, and that such activity should be regulated. Indeed, some towns are already banning the practice of advertising on sheep; according to the article, the mayor of the town quipped, "My first reaction was a smile; it is very creative. My second reaction is that we have to stop this. If we start with sheep, then next it's the cows and horses."

It's not exactly clear what the externality is in this case, though. Let's assume (we're economists, after all) that the sheep don't care whether the blanket they wear has a logo on it. Who suffers? The farmers make a few euros without any effort. The website attracts more traffic. The advertising agency which thought up the concept, Easy Green Promotions, already has goals of expanding to 25,000 branded sheep. Who is the mayor of Skarsterlan to stand in the way of economic progress?

Perhaps the best way to consider the question is to think about the tradeoff that any society faces between its own cultural traditions and economic efficiency. Perhaps there is some utility to be gained by thinking that a drive through the Dutch countryside might yield some bucolic views of sheep still unadorned with advertising.

1. Missing markets cause economic inefficiency, but sometimes the non-existence of markets is a good in and of itself. For example, would the world be a better place if one purchased a spouse, rather than finding one through courtship and dating? What are other examples of missing markets that should perhaps remain missing?

2. What are the benefits and costs of preventing trade in goods and services that society deems unpleasant? Sheep with logo blankets are an innocuous example; child pornography (or worse, the child sex trade) is anything but innocuous. Where should society draw the line, and how?

3. In the case of the sheep, it seems likely that there is, in fact, a very small negative externality felt by hundreds of drivers, but a concentrated profit for a few small individuals. Does the Coase Theorem apply in this case? Are transactions costs low enough for ranchers and advertisers to negotiate compensation for all of those people who prefer an advert-free countryside? How does the existence of a town mayor who represents the desires of the populace at large change your answer?

Topics: Microeconomics, Efficiency, Invisible hand

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