Wednesday, February 27, 2008

Resource Management, Post-Apocalypse Style

So suppose—and I’m not trying to get you down here—that an asteroid were to hit the earth, wiping out 90% of known species. (Or, if you prefer, that a combination of deforestation and our fascination with only growing a few key crops achieves the same outcome.) How could we regain our current biodiversity?

In case these kinds of things keep you up at night, you can rest easier thanks to the Svalbard Global Seed Vault that opened yesterday in Arctic Norway. There’s a great blog post about it on the New York Times website. The vault is a step up from existing seed banks, which are threatened by political instability or a lack of funding.

The post points out, though, that a group called has criticized the seed vault. Read their criticism here.

Discussion Questions

1. The post asks, “How much of this intergovernmental work help[s] sustain farming diversity, as opposed to museum-style genetic diversity?” Another way of asking this is as follows: producing food requires land, labor, and capital. The seeds themselves are just part of the equation. What happens if farmers, after hundreds of years of not farming these crops, lose the skills associated with their use? What can be done to preserve knowledge of how to maintain a species that is no longer actively farmed?

2. The seed vault acts as a centralized mechanism, much like a kidney donor list, that describes who is entitled to the seeds in the vault and under what circumstances. How does that mechanism compare to a market mechanism? Is it true, as argues, that the wrong stakeholders are given priority in this system? What rights do (and should) farmers have, as opposed to governments?

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Thursday, February 14, 2008

Ireland's Plastic Bag Tax

In an important scene from the 1999 movie American Beauty, two characters—Jane and Ricky—watch footage of a plastic bag dancing in the wind. That there's beauty all over the place, even in garbage, seems to overwhelm Ricky: "Sometimes there's so much beauty in the world, I feel like I can't take it, like my heart's going to cave in."

Unlike Ricky, Dubliners have to live without the heartbreaking splendor of airborne garbage. Plastic bags nearly disappeared from Ireland's cities after the government began taxing them in 2002. The tax, 33 cents per bag, was enough motivation for most shoppers to replace plastic bags with reusable cloth bags. Ireland's experience illustrates a basic principle of taxation: if you want less of something--like the not-so-biodegradable, sewer-clogging plastic bag--tax it. Read Elisabeth Rosenthal's New York Times article to learn more about Ireland's bag tax.

Discussion Questions

1. There's nothing like a green tax to bring out our inner-environmentalists. As Rosenthal points out, after the tax passed, plastic bag use became socially unacceptable in Ireland. In what way does the tax lower the barrier to adopting a disapproving attitude toward plastic bag use?

2. Ohio issues yellow and red license plates to drivers convicted of drunk driving (apparently, Ohio officials didn't give much thought to tourists from the great state of New Mexico). Can you think of other situations or even laws that are governed largely by the threat of disapproval from others?

3. How is the Irish government's campaign against plastic bags similar to government campaigns against tobacco? In what ways do cigarette and plastic bag taxes increase efficiency for society as a whole?

4. Taxing bad behavior can be good, but implementation and enforcement are issues. It'd be relatively easy to cut down on paper waste from ATM receipts because the fee can be collected electronically at the site of the transaction. Why does a plastic bag tax that works remarkably well in the digitized supermarkets of Ireland run into implementation problems among the vendors and mom and pop shops in China?

Labels: Taxes, Incentives, Market Failure, Externalities, Environment

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The Economics of Love

Those who know me well know I’m not often at a loss for words. Yet, here I find myself truly stupefied.

I thought that, for Valentine’s Day, I’d write a blog post on the economics of love. So I Googled “economics of love” and got Solve Dating. It’s one of the more interesting, if bizarre, applications of cost-benefit analysis I’ve ever seen.

Now don’t get me wrong—I wrote my Ph.D. dissertation on search-based marriage matching models, so I’m not against applying economic principles to questions of matrimony. But I wonder: how useful is it to try to get into the nitty-gritty of quantifying the costs and benefits of love? Is the equation “rejection cost = – (your self-esteem + frequency of past rejections)” a valid one? What units could you possibly use?

On the other hand, some of the conclusions on the site are fairly decent applications of basic economic analysis. For example, just below that equation is the insight “People who are sensitive to rejection are less likely to find their soulmates.” They suggest, “Build up your self-esteem. Convince yourself that it was their loss.”

Now there’s cost minimization for you! Happy Valentine’s Day.

Discussion Questions

1. We use a lot of math and graphs in economics, but some questions are better answered with equations than others. What lends a phenomenon to mathematical analysis? Do the good folks at Solve Dating go too far?

2. What kinds of questions of the heart can you answer with economic principles? Do you apply your knowledge of economics to your own love life?

3. My favorite title of a search-based marriage model paper was “Transplants and Implants: The Economics of Self-Improvement.” This paper discusses the fact that people rationally improve themselves when trying to attract a mate, and then optimally “let themselves go” once they get married. Is that an argument that makes sense to you? How could you test that hypothesis?


Friday, February 01, 2008

Will the FTC Allow Microsoft to Buy Yahoo?

The big news this morning is that Microsoft has made a nearly $45 billion bid to buy Yahoo.

In general, regulators might frown on such a deal: after all, wasn’t Microsoft the behemoth that was going to take over the entire technology world in the late 1990s? And yet, as the Associated Press reports, most analysts believe that regulators in the U.S. and Europe are unlikely to stop the deal. Why?

In a word: Google.

What could Google possibly have to do with a proposed Microsoft–Yahoo merger? To answer this question, you need to stop and consider the current state of the Internet search-engine industry.

It’s difficult to use a single yardstick to measure how competitive an industry is. For much of the last century, regulators would use the four-firm concentration ratio, which measured the total market share of the top four firms in an industry. Unfortunately, that didn’t give a measure of the precise extent to which one of those firms might dominate the industry. For example, suppose that in two different industries, the top four firms each have a total of 80% of the market. However, in Industry A, each of the four firms has a 20% market share, while in Industry B, one firm has a market share of 50% and the others each have a 10% market share. The four-firm concentration ratio would treat these two industries equally.

Nowadays, the usual method used by the FTC is to examine the Herfindahl index, which is calculated as the sum of the squared market shares of each firm in an industry. By squaring the market shares, the HI rises when market power is concentrated in one or two companies. For example, in Industry A (described above), the HI would be equal to 202 + 202 + 202 + 202 = 1,600; but in Industry B, the HI would be equal to 502 + 102 + 102 + 102 = 2,800.

According to comScore, which tracks Internet usage patterns, there were approximately 9.6 billion “core” searches performed in 2007. Of those, Google accounted for about 58%, Yahoo for 23%, Microsoft for 10%, Time Warner for 5%, and Ask for 4%. This is clearly a very concentrated industry already; but since Google’s position is so dominant, it might actually help consumers if Google had a larger adversary within the industry.

Discussion Questions

1. Calculate the HI of the search industry before and after a potential merger between Microsoft and Yahoo. By how much does the HI of the industry increase?

2. Google and Yahoo get their search-based revenue from advertisers who place ads based on what people are searching for. However, using Google or Yahoo is free to Internet surfers. If you were a regulator, how would that fact impact your decision to support or oppose a merger between Microsoft and Yahoo?

3. Microsoft’s core business is selling operating system software. How might the acquisition of Yahoo affect that aspect of its business? Might regulators be concerned that having Yahoo become a part of Microsoft could increase Microsoft’s market share in its main market as well?