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Friday, December 14, 2007

Kyoto protocol, worth the cost?

A Tokyo company in Thailand seeks a carbon credit for a new method that will cut carbon emissions by 1800 tons a year.

It costs $26.72 million. It makes one wonder. The factory produces for a market that demands 330 million cans per year and has a capacity for 500 million cans a year. The factory, however, only produces 260 cans a year. It makes one wonder, why don't they just produce the entire need for the market in this one factory, unless there is some on-going cost to produce at this cleaner factory?

If there was not, then why not produce all the cans there, if there is then is this really an efficient way to produce? if a government credit can make it affordable to produce only some of the cans in the "cleaner" fashion, is it really cleaner? or more cost effective.

It seems to me like a government credit is creating false incentives, to produce something that is not sustainable, but rather just pleasing to those who are in charge of disbursing the environmental credits. Good job, Kyoto protocol.

Farm Program Pays $1.3 Billion to People Who Don't Farm*

*Farm Program Pays $1.3 Billion to People Who Don't Farm*


This article, found on *www.washingtonpost.com*<http://www.washingtonpost.com/>,
talks about a federal government subsidy program that has taken on a life of
it's own. A republican bill, passed in 1995, was meant to reduce the
complexity of the existing farm subsidies, and to eventually wean farms off
Rooselvelt era provisions that were enacted to protect farmers during the
depression. The 1995 republican bill was called the Freedom to Farm, and
the bill provided a cash subsidy based on acreage and past productivity.

The problem is, the payments were unrestrictive. Farmers and land
owners received the subsidy whether they grew the subsidized crop or not.
Not only could farmers switch to less expensive crops and still receive rice
crop money, but they didn't even have to grow anything at all. Real estate
in certain farmland areas was being marketed to potential buyers with a
promise of these subsidies, even for purely residential buyers. While they
were supposed to be transitional, the republicans in congress, bowing into
the pressure of the farm lobby, eventually made them a cyclical recurring
subsidy. The bill has had unintended consequences, such as effectively
killing off the rice farming in Texas, since there was little incentive to
grow the crop, due to subsidies coming regardless of productivity.

*Symptoms of an economic depression*

Wednesday, December 12, 2007

Public Roads As A Public Good?

Downtown Colorado Springs ain't so bad! The traffic moves along at a pretty good rate, if you ask me. However, I've lived in some pretty big cities and I think that something can be done about the congestion of traffic!

In London, there are little devices that go onto ones car that will calculate how long one is in the city of London and at what time of day! This is a particularly great example of government actually doing something to correct an externality. Well, considering that the roadways were made public access by the government, perhaps it is an example of government correcting a government-caused negative externality. But for argument's sake, the public roadways in the city of London have gotten so congested that there is an externality of polution for the passers-by and if an emergency were to occur in the city, emergency vehicles wouldn't be able to get through to help because there would be nowhere for the traffic to go once gridlocked! Those not driving in the congested streets, thus not in the market of the excludable and rival access of the public roads, would be negatively affected by the dirty air and the lack of emergency help.


At this site (above), tourists, motorists, residents, and business-folk may determine the best times to travel through the city, budget their travel through the city, and even make decisions thatthey otherwise may not have been able to had they simply assumed the city was comprised of free-access roadways!


At this site (above), the same people previously mentioned can learn about "congestion charging" and all the details about how London has addressed the problem of traffic congestion within the city of London.

Assuming that there is an efficient allocation of pollution and congestion, AND that government was able to measure it, there can now be a unit-price applied to those who cause the pollution and congestion! This process/policy is a perfect example of how government CAN, with the help of technology, correct a negative externality (assuming that there is one, and it isn't a form of government-caused market failure).

The fact that something like this can be captured in a market leads me to believe that government expenditures on things like roadways can be minimized because they can simply be applied to those who use them. In a sense, adverse selection will allow those who use the roadways to be responsible for the costs of the roadways. Who knows, with moral hazard, perhaps those who do use the roadways will associate more value to safe driving and roadway usage and there will be fewer accidents and deaths on the roads...

This will also be an example of how roads can be excludable AND rival. Excludable in that those who don't use roadways won't benefit from the roads being there, as well, won't have to pay for them being there if they don't use them! Rival in that those who contribute towards consumption in excess, will also be the ones contributing towards the maintanence and upkeep!

Now, back to The Springs... I don't earn very good money here, and I feel that I am taxed too much for the little benefit I receive from the city. If things like congestion charging and other methods to 'capture' otherwise argued public goods in a/the market, perhaps taxes would lower and I could enjoy more time of leisure and perhaps spend some of it on education! Now, I wonder if education as a public good can be captured in a/the market...

Blockbuster's answer to Netflix

So, I considered getting netflix because as movie-afficionado, I can't stand the selection of movies available at most blockbusters, ESPECIALLY in Colorado Springs! I did the math of how many movies I could have out at a time and how often I'd receive new ones in the mail, etc. It came out to not be worth it to me simply because I liked having the availability to simply just go to the movie rental place and pick something up!

Because Netflix seemed to be doing so well, and they were only firm in the industry offering online rentals, Blockbuster would enter the industry. But more on that in a minute.

Netflix, essentially with monopolistic power in the industry of online movie rentals, was able to charge a price higher than equilibrium price, and they'd make money... in fact, profits! Blockbuster, seeing the profits to be made in the online movie rental industry, entered the industry. Eventhough netflix had monopolistic power, there was nothing actually preventing blockbuster from entering the market. This entrance created a duopoly, specifically something similar to Cournot scenerio. But, Blockbuster, wanting to edge the competition out, thus working to be the stronger of the two firms, instead of trying to undercut the prices offered by Netflix creating a Bertrand market, decided to implement a strategy of allowing movies that otherwise would have been mailed back in, to be turned in at the store and exchanged for a free in-store acquisition of a movie.

I liked this, as a consumer, so I decided to sign up with Blockbuster online! I got my needs met as for selection and receiving movies in the mail, AND I was able to satiate my taste for being able to just pop in to the store and grab a movie (as a selection exchanged in person instead of via mail).

In the conceptual diagram, not only did Blockbuster take some of the business away from Netflix by entering the market, they also modified the market by implementing a new policy that would allow them to become the dominant firm. This, a stackelberg model of Nash economics, meant that Blockbuster would simply charge a price for their product WHILE taking into consideration what their competitions, Netflix, reaction function would be. And in so doing, they would control the majority share of the online movie rental industry.

I, as a consumer, took full advantage of the process in the early stages of Blockbuster's entrance into the market. I was able to get 3 movies at a time via mail for only 20 dollars a month. Exchanging these movies immediately after I watched them allowed for me to consume as much as 9-12 movies per week! To me, the unit price of the movies was about 40 cents a movie. I was in hog heaven!

Once Blockbuster was in a Stackelberg position, they turned inward and considered their own profit-maximizing dynamics. Because customers, like me, were establishing a demand curve of some pretty high consumption at a low rate of unit cost, Blockbuster changed their prices. The demand curve was an outgrowth of the market and so the numbers chosen by Blockbuster became something along the lines of fewer movies allowed out at a time and at higher rates! I opted with the 18 dollars a month for 1 movie via mail at a time. I still consumed about 4 movies a week (16/month) and at a rate of about 90 cents per movie. To me, I am still getting a dynamite deal! Plus, Blockbuster is making more money, AND there is no way for Netflix to compete because they have no stores to appeal to customers like me.

In theory, since Blockbuster is now a monopoly in the industry, I can expect prices to go up even further. But until it gets to a point that I'm not willing to do business with them, OR until a rival business enters the market (which would be difficult considering the already established locations of stores), I will continue to enjoy many movies and Blockbuster will continue to enjoy my money!

Monday, December 10, 2007

Ethanol is NOT the Answer

Virtually every day I watch television I see a Chevrolet commercial that advertises their flex fuel technology. Recently, my car was in for repairs and I was given an Impala as a loaner car. I have heard rumors that ethanol does not yield as much miles per gallon as regular gasoline. When it was time to fill up I used regular gas for the first tank, and ethanol the second time. Not to my surprise, I got about 20 percent less miles out of ten gallons of ethanol than I did with regular gas.

Currently, the House is considering passing an energy bill that requires a major increase in the amount of ethanol and other biofuels. “The move is supported by environmentalists, who say biofuels generate about 20 percent less greenhouse gasses than fossil-based fuels like gasoline. Corn farmers and the ethanol industry are obviously on board” (Hargreaves). I found this particularly interesting being that my fuel economy suffered by about 20 percent when using ethanol (I drove fairly conservatively on both tanks, and did little highway driving). If we have to use 20 percent more ethanol to drive the same amount of miles we would with regular gas, doesn’t that negate the alleged 20 percent decrease in harmful emissions?

In addition to the fuel economy and pollution issue, the increased use of ethanol and other biofuels will most certainly affect the prices of relevant food products (chicken, pork, beef, etc.). A department of energy engineer quoted as saying "Up to 15 billion gallons [of ethanol] probably would not impact food prices significantly” (Hargreaves). The problem here is that of a value judgment. How does this guy define significantly?

The problem with ethanol and other biofuels is that they still do not provide a solution to the long term issue of depletion of fossil fuels. Even these biofuels must be mixed with regular gasoline in order to work. Rather than making such a huge deal about short term solutions to the gasoline issue, the government should focus on sources of energy that will lead us away from our dependence on fossil fuels. If Houses passes this bill, there will be no gains. The only thing that will happen is a nice juicy steak at the Texas Roadhouse will cost more.

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