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Thursday, September 30, 2010

British Medical Association critical of plans to change NHS

A recent article carried by the BBC said that the leading British medicinal group, the British Medical association disapproved of proposed changes to the British National Health Service. The article states that in a statement today the BMA claimed that “The forthcoming shake-up of the NHS in England could undermine its "stability and future". While the British government insisted the changes were necessary towards improving the service.

In the Article the doctors of the BMA claimed that some of the changes could expose the NHS to more private competition, thus endangering the patients of the NHS. This is interesting to note because unlike in the United States, where apparently a majority of Americans oppose a national single payer system. In Britain it is seen as a must for good health care. The British government provides the NHS because it is seen as a good or service that the government would best provide and not something that should be left to the open market. SO is the NHS a public good?

I believe it is certainly non-excludible, since all Britons are entitled to care by the service. But is it Non-rivalrous? I believe that it is not simply because one cannot expect that they can get the same level of care as someone else, because they have the same insurance. Some hospitals and doctors are better than others, and once a resource, such as a bed or a liter of blood are used on one patient, they cannot be used on another. So believe that the NHS is not a public good but a common good.


McDonalds' Health Plan: A Public Good?

The Affordable Health Care Act passed by Congress and signed by the President making it a law in March 2010. This law holds insurance companies accountable for their unwillingness to provide the customer with health insurance, lowers health care costs, guarantees more choice, as far as what health care plans the consumer wants, and enhances the quality of health care for all Americans. All Americans. Those who do not have it will be fined.

Today, I read an article called, “White House Pledges Flexibility on McDonald's Health Plan” in the Wall Street Journal. The article is about McDonalds, a well known fast food restaurant, warned federal regulators it could drop health insurance for all 30,000 workers unless they waive a new requirement on the new Health Care Act. The new requirement is called, “minimum medical loss ratio” which “concerns the percentage of revenue received from premiums that must be spent on benefits.” McDonalds and many other retailers and restaurant chains the offers a limited minimum medical benefit. Most of these plans do not meet a 2011 requirement that spend 80% to 85% premiums on medical benefits. “McDonald's last week sent a top official at the Department of Health and Human Services a memo saying "it would be economically prohibitive for our carrier to continue offering" its "mini-med" limited benefit plan unless it got an exemption from the requirement.”

A public good is non-excludable. The new health care law made health care non-excludable. Insurance companies cannot deny anyone from medical coverage that wants it. Also, the government made it affordable so everyone could get it. By McDonalds wanting to drop health coverage to their 30,000 employees says they are willing to cut their employees out of health care and they could be fined due to McDonalds, a world-wide known company, having a dispute with paying 80% to 85% premiums on medical benefits instead of overhead expenses.

Either way, the employees who have health coverage with McDonalds and other companies who offer a limited minimum medical benefit could be at risk of not having a good enough heath plan for the government. This requires waivers that the employees must have to make sure they do not get fined. They will still have health insurance, but the quality of it may be lower than what other Americans have. This is because in December the Department of Health and Human Services will make a decision about this requirement that McDonalds in unhappy with at the moment.

Health Care is a Public Good in America that everyone should have now. Still with this being such a big deal in the news for so long big companies do not recognize that employees depend on the health care plan that is provided to them by their companies, that is if their company does provide it. By a company taking their employees off of the Health Care Plan that is the same as excluding them from getting health care plan they want.

Adamy, Janet. "White House Pledges Flexibility on McDonald's Health Plan." Wall Street Journal (2010).

Postal Service Denied Rate Hike

A gradual decrease in mail volume has resulted in the U.S. Postal Service not being able to fully cover costs. As a result the USPS requested an increase in first class mail stamps by 2 cents; this request was recently denied by the Postal Regulatory Committee.

This article highlights the economic woes of both the USPS and American small businesses. The resulting decision was made in favor of small businesses, in part because of the assumption that the USPS shortcomings are a result of long-term structural problems, not the recent recession. Additionally, another scrutiny of the USPS is “related to an overly ambitious requirement for the Postal Service to pre-fund its future retiree health benefit premiums.”

This is a key decision that has consequently put more strain on the government funded USPS, by not raising marginal postal costs for small businesses by 5.6%. This decision really highlights the need for the USPS to reduce costs, something it did in 2009, by cutting budgets by $6 billion.

But this really raises the question of what restructuring needs to be done in order for the USPS to operate efficiently. The USPS’s financial position is a microcosm of inefficient government spending, and significant reorganization is essential in order for it to run efficiently again. While this may involve cutting many postal jobs, it appears that this may be the only option. This would certainly affect jobless rates in the short-run, and hurt the economy, but something must be done in order to address the short-comings of this government agency.

The question is whether regulatory officials are willing to make these necessary moves? It appears as if this denial in postal rate hiking is a clear sign that government officials are indeed taking the first step.

I believe that this decision is a necessary step in confronting the budget problem with the USPS. Privatized parcel services are not running into the same issues as the USPS and this is a clear sign that changes need to be made, even if it means the loss of substantial jobs and benefits.

I feel that the small business sector’s ability to thrive would be severely compromised if postal rates continued to be hiked, and I am glad that the Postal Regulatory Committee finally put its foot down. In the interest of our economy, small businesses do not need any more unnecessary expenses, and if the current structure of our postal service cannot accommodate this without raising prices then they cannot serve the public in an efficient capacity. With increased use of electronic delivery of documents, this problem is only going to get worse, and it is in the general public’s best interest to that this be addressed and fixed.

Policy Analysis: The Static vs. The Dynamic

Earlier this year a tax credit incentive ended for homebuyer’s. The short version was that homebuyer’s both new and old who entered a contract by the end of April and closed the purchase by the end of June would receive a tax credit between $6,500 and $8,000 for the purchase of their home. This government policy was enacted in 2009 to encourage and stimulate activity in the Real Estate Market which is often attributed to ‘leading recoveries’ in faltering economies.

So let’s breakdown this incentive, First of all should the government have offered this incentive in the first place? Well is there market failure in the real estate market? And more specifically since it was a tax credit, a form of subsidy, was that market failure a positive externality? Clearly it’s a market based transaction and anyone who received a commission from the exchange or is hired to perform a task related to the sale is done so in a competitive market. And any affect that the sale of the subject property would have had on neighboring property values due to a change in supply or demand is a function of market forces. There is little in a real estate transaction that could be construed as an externality and nothing that really is comes to mind. So now knowing that the incentive probably isn’t warranted let’s look at the potential effects of the incentive.

The tax credit was designed to stimulate market activity and revitalize the market by providing incentives for potential homeowners on the margin to buy homes. Which to some extent it did or at least appeared to based on improving sales figures which in turn showed a gain in home prices or a slowed decent as demand and supply forces moved. That is until June ended. July was the worst drop in real estate sales volume for the month of July (typically 1 of the top 3 homes sale months in the year) in over 20 years. So what happened? Although this is an ad hoc analysis it does offer some economic explanation for the change.

At first glance an incentive of up to $8,000 on the purchase of a new home could be seen as a substantial motivator to purchase a home. Similar to relocation incentives utilized by communities to entice new companies to the area, the $8,000 when compared to an increase in regular liabilities such as home upkeep, increased payment, taxes, etc. is a blip on the bigger picture. So what happened? Real Estate sales shifted, but did not necessarily increase; this is the failure of static analysis over dynamic. Policy makers predicted that demand would increase with the incentive and it did, quantity and price went up for the period that incentive was in effect. But the homebuyer’s operated in a dynamic fashion. Homebuyer’s who would have purchased in the 3rd and maybe the 4th quarter of the year purchased in the 1st and 2nd quarters and now with the tax incentives gone sales have dropped and prices are following accordingly in some areas.
The policy didn’t fix a market failure it created one.

Britain is Cautious About Cutting Benefits

There was an article in the New York Times entitled, "Britain is Cautious About Cutting Benefits," released today in regards to Britain's plan to cut subsidies paid to middle and upper class families with children. The government is worried that by cutting these subsidies it will in effect retract the voters of the middle and upper classes. The research provided shows that although the money is intended to support needy mothers and their children, nearly half of the money is going to families in the upper level of the income distribution. Further data reveals that in most cases parents aren't even using the money to provide better living conditions for their children, but rather for their own personal gain, with alcohol and tobacco among the leading purchases. The topic in question is how to eliminate subsidies from those who do not need them, while retaining their voting numbers. Maybe the question we should be asking isn't how to eliminate them, but rather how to ensure that they are being used by those who are trully in need. The problem created by this approach is that now, with no incentive to politically support such programs, the upper and middle classes will vote against them. Based on the theory of collective action, people don't operate or join when there is no direct incentive to do so. It seems to me that rather than completely baaning middle and upper class families from obtaining the subsidy, the British government needs to find some other way to retain the attention of the middle and upper classes when it comes to this issue.

Colorado Sugar Tax

If you bought a soda in the last few months you might have noticed that it cost a bit more than usual. The reason for this is that Colorado has removed the tax break on items with sugar in them.
As we know a government tax is supposed to correct a negative externality and prevent market failure. The sugar tax is not meant to correct or prevent anything and at 2.9% it’s not even enough to correct people’s behavior. This tax is meant to raise revenue for the Colorado state government.
The question is what will it do to the efficiency of the market. This tax is going to change the MSC curve so that it shifts right, away from the MPC curve which of course will cause the market to be less efficient.

Why AARP is Still Going Strong

I recently discovered that my father 0f all people, was a member of AARP. It never occured to me that my father had reached the age where joing such groups was a possibility. In my class, Power and Prosperity, we have been discussing the logic of collective action. The author, Mancur Olson, prescribes a theory dealing with collective action. He believes that people join groups for two reasons. First, people in some way or another gain something in the form of selective incentives. Selective incentives being some benefit that is only obtained through active membership within the group. Second, people join groups through force. I have always assumed that my father, a retired Naval Commander, had no such need for any kind of "senior" group, due to the fact that he has full retirement pay and medical coverage until he passes away. After I discovered that my father was a member of AARP, I had to ask as to why he joined. He told me that he joined for two main reasons: AARP offers great deals on hotels and travel accomodations, and AARP also supplies valuable information pertaining to political decisions regarding social security and health care. I then went to the actual website of AARP and discovered several interesting facts regarding obtaining a membership. First, AARP requires that you pay 16.00 a year to retain membership with the affiliation. AARP also excludes people based on age. In order to join the group one must have reached the age of 50. I found it particularily interesting that besides the benefits mentioned above, AARP also provides roadside assistance, food coupons, discounts on prescriptions, glasses and contacts, some dental care, and financial planning advice. AARP also lobbies in government for the preservation of social security and healthcare. It seems most apparent that AARP membership and the benefits it brings certainly qualify as club goods in the sense that they are exclusive, due to age restrictions and membership fees, as well the their ability to provide non-rival benefits. Although it seems there is no use of force, it appears there are several instances of selective incentives offered to those seeking membership within AARP. AARP was founded in 1958, and it will be interesting to see how much longer its ability to retain and expand membership continues through the next few years, especially as the new healthcare plan rolls out this next year.

Obama's Health Care

Unless you've been living under a rock, I'm sure you already know that we're about to see some major changes coming soon regarding health care. Although I don't know the details as well as I'd like, I get the big picture.

I am not particulary excited for this bill, and I feel like the negatives FAR outweigh the positives. It's one more way the government can have even MORE control of our lives. It coerces people to carry insurance, even if they don't want it -- which is the case for many college students who are young, healthy, active, and broke! It's going to lead to higher premiums for many people, waiting lists for specialists, health care rationing, and most importantly-- higher costs!

The key pro that is discussed regarding the bill is how it is going to reduce the defecit, but so many costs that weren't specifically included in the bill (but that will be necessary) are ignored.

I do think there are quite a few changes that need to made regarding healthcare to make it more feasible for everyone like having the ability to buy across state lines, coverage for high risk individuals, and making health care more affordable via tort reform and other cost cutting measures.

It's definitely going to be fascinating to see what comes now that parts of this reform are now going to start taking place.. I for one think it's going to be an interesting ride...

Or We Could Just Tax Amalgam

The EPA has decided to being regulating dental pollution. It proposes a rule that will take effect in 2012. The EPA estimates that dental offices contribute 50% of mercury pollution to local water treatment plants, about 3.7 tons world wide. Their solution for regulating this water pollution (according to the article) is to require that all dental offices to install amalgam separators. These amalgam separators can catch 95% of all amalgam wasted by dentists.

Sounds like a great plan, right? Well not really. A much better, and cheaper way to regulate this pollution would be to impose a corrective tax. We can always tax pollution. Once we determine a $T (tax) that is greater than the marginal control costs, polluters (dentists) will regulate their pollution on their own, in order to save money. This way, each polluter will only pollute to the point where the cost of the tax of another unit of pollution is more expensive than the cost of controlling that unit.

Using this method will bring in revenue that can be used to manage the program, and will be able to support the cost of the "tax and pollution police" that will be needed to make sure that each business adheres. While the EPA's suggested method of requiring amalgam separators will loose money through paying to police businesses to make sure they have, maintain, and properly use these devices. Clearly the corrective "pollution" tax would be better, easier, and cheaper to impose.

Wednesday, September 29, 2010

"A New Town"

According to an Article by William Evans entitled “BP Scores Stimulus Cash”, the oil company has received 308 million dollars of federal grants over years for a “cutting edge” power plant to be constructed on farmland near Tupman California. The goal of the plant is to foster clean coal technology in the hope to capture carbon dioxide emissions in the fight against global Warming. Taxpayers will be footing additional costs of the projects however citizens of this area are torn between those who are in favor of plant and those who are not.

The first question that must be asked is if there is a Market failure? In this situation the citizens that are in favor of the construction of the plant argue that the construction of the plant will provide approximately 1,500 construction jobs and 100 operating jobs. In this case the construction and maintenance of the plant would fix/help the market failure of unemployment in that area especially since the local stores are closing down. A native of the town argues that the need for the town to “upgrade” (in terms of seeing where his taxpaying dollars are going) is desperate. On the other end of the spectrum he’s skeptical that the containment of the plants carbon dioxide emissions can be contained to a certain percentage that wont cause additional harm to the region’s notoriously polluted air.

Activists opposing the construction of the plant argue that the plant will continue to take a tax on the regions air. So the second question to ask is will the plant generate a negative externality through pollution? According to both some of the supporters of the plant and activists against it, that the plant will generate a certain amount of pollution in which BP’s pollution credits would go toward. So what amount is acceptable? The acceptable amount of pollution would be calculated by the town agreeing upon how much they would be willing to pay for each additional amount of pollution. (Where Marginal Social Benefit= Marginal Social Cost (MSC=MSB).) At this level there would be an efficient amount of pollution in which BP’s plant could produce at.

Should government have given BP this sort of grant? Well exempting the oil crisis that BP was responsible for in the Gulf of Mexico, I would say that they should. The constructions of the power-plant would/could fix the market failure of unemployment for that region. Also if BP’s plant produces and efficient amount of pollution riding the town of a negative externality and fighting against global warming, the grants by the government toward the completion of the plant would be positive especially for a state such as California.


Oil Spills & Market Failure

You might think that because pollution is the classic example of an externality that the recent oil spill from the BP drilling facility was a negative externality. However, I find that there are 2 fundamental reasons to conclude that the BP oil spill was not a source of market failure.

First, recall that in class we discussed a silly illustration of an accident caused by me driving too fast. While that illustration involved harm only to me, I finished the illustration by saying that accidents were not externalities, and of course many accidents involve harm to people who were not responsible for causing the accident. Why shouldn't we think of the harm to others resulting from an accident as a negative externality? In general, a negative externality market failure is associated with circumstances for which liability and property rights are not well defined. When property rights (and therefore liability) is well defined, the cost of an accident will be internalized rather than externalized. After all, if I do something stupid which results in an auto accident that harms myself as well as the driver of another vehicle, I will be well aware of who must pay for the damage and harm caused. Specifically, I will bear the cost of the harm the accident caused to me, and when liability is well defined it is also clear that I will have to compensate for the harm my accident caused to others.

I think the BP oil spill fits this case pretty well. However, the ways in which it doesn't fit this will explain the second fundamental reason the BP oil spill is not a market failure. BP owns the rig and the facilities involved in drilling down to the ocean floor to poke a hole through which oil would flow out and be captured for productive uses. Clearly when the rig blew BP internalized the cost to itself in the lost facilities. In addition, the employees killed by the accident imply a damage or cost that BP must compensate for, just as any one would be required to compensate when the accident they caused killed another. In addition, if it is the case that the law clearly states that BP will be liable for any damage caused by oil released into the ocean, then BP would also have internalized this cost to others in the production decisions it made. But, on this point we move to my second reason why the BP accident was not an externality source of market failure.

I think it is useful to explain this second reason by first asking a few questions:
Who owned the ocean the oil was spilled into?
Who owned the oil under the ocean that BP was "harvesting?"
Who owned the ocean water that BP was going through with it's drilling piping, etc.?
Who owned the ocean floor that BP was poking the hole into?
The first answer to each of these questions is that BP owned none of these things. If there was an owner, it would be the decision maker that leased the "drilling rights" to BP. Who leased the drilling rights to BP? The U.S. Government did. Essentially the U.S. Government owns the oil under the ocean in this location, and it owns the earth and water in this location, and it even essentially owns the ocean into which the oil was spilled. The U.S. Government decided to lease the production rights to it's oil to BP, and this lease came with clearly defined terms and conditions by which BP could harvest the oil under the ocean in that location.

Because the U.S. Government made a contractual arrangement with BP for this lease, I presume the U.S. Government internalized both the benefit of the lease as well as the cost of a potential accident when it agreed to the lease itself. Furthermore, the U.S. Government said to BP that as part of the terms of the lease BP would have to submit to an entire set of regulations and permits coming from various agencies of the U.S. Government. You see the U.S. Government wanted to try to make sure the odds of an accident would be very low by controlling what BP could and couldn't do in terms of many of its production decisions. For example, there are reports that in the last day or two prior to the accident BP asked for at least 3 permit changes, each of which was granted by the appropriate government agency in less than 24 hours of review. It is even the case that Congress and the President created a statute a few years ago to try to encourage very deep drilling in the gulf, and it did this by limiting the potential liability any business such as BP would face should an accident occur. The terms of the liability limit was, essentially, that as long as BP was responsible in following the permits and other regulations the U.S. Government specified for its operations, and as long as BP was not willfully negligent, then there would be limited liability. And, when the Congress and the President created this statute it also created a tax on all U.S. oil production businesses and the revenue from this tax was to be used to create a fund that would be used in cleaning up after an oil spill as well as compensate for harm done beyond the liability limits to the producers themselves.

In summary, then, accidents are not externalities or sources of market failure as long as liability and property rights are well defined. Accidents are accidents and they are not really directly relevant to concerns with respect to the efficient allocation of resources. And, in the specific case of the BP spill, the typical market incentives that would be present to take sufficient precaution against an accident were missing because the exchange in question involved government and a private business, and further because the terms of the lease involved government statutes and regulations to control production as well as to limit liability for damages due to an accident. If you see the accident as an issue of efficiency, then I think you would have to say that the BP accident was not really a market failure, but instead a government failure.

Please add any questions or comments you might have.

Tuesday, September 28, 2010

Subsidizing Renewable Energy

The discussion over renewable energy resources has been at the forefront of our political discourse for what seems like a lifetime now. Specifically, since the Carter Administration's brush with catastrophe in the form of gasoline rationing in the 70's, there has been a concern with the fossil fuel-based necessity to modern life. But how do issues surrounding the many concerns over energy sources play out in a market economy?

In an opinion article tucked away in September 22nd's Wall Street Journal, some concern was expressed over the amount of taxpayer money being funneled towards the "green" energy market by members of Congress. While the ethics concerning any interactions between a congressperson and anyone of special interests (another highlight of this article) may be questionable, that's for another blog and another time. However, this article actually made me think about the economic validity in terms of supporting and funding the renewable energy movement. As we all know by now, the first question: Is there a market failure here?

As the article states, "In a free energy market, companies succeed by producing cheaper, better products than competitors..." If this statement is accepted, would it not prove, according to our current understanding of market failures and justification of government coercion, that there is no need for government involvement with regards to the energy sector? According to this opinion article, the market's working as intended. If those who produce "green" energy can't hang with the competition, then the market will weed them out.

Don't get me wrong, I am all about research and development of new, cleaner, more efficient energy sources, not only due to the relevance of our dependence upon other regions of the world for this good, but also due to the environmental concerns that grow exponentially alongside the modernization and strengthening of other nations like China and India (and I am definitely not naive to the overwhelming power and influence of OPEC and oil in general). However, since as economists we take value judgments and preferences as given, and we should avoid externality abuse, the subsidizing of renewable energy seems to interfere with the essence of the market.

Of course, if I were to interject with an historical account as to progression of and interference towards the "green" energy movement over the past three or four decades, or environmental concerns in terms of both pollution and climate change, an extraordinary case could be made that these taxes are going towards a noble and just cause.

I don't know, just some food for thought/ spark of discussion. What do you guys think?


"Why They Go Green," Wall Street Journal, September 22, 2010, A20.

Efficiency and Liberty as Value Judgements

According to Lord Acton “Liberty is the highest political end of man” if it is true that liberty is a constant goal of all political action then perhaps liberty and not efficiency should be the guiding principle of public finance. After all, economics and politics are intertwined to the point where for years people studied political economy rather than economics. It is impossible to value equally both efficiency and liberty, because where efficiency would promote government involvement liberty would always decry it. For example, in the case of a market failure the government may get involved to correct the inefficiency under an efficiency criterion. However a system with liberty as the foundational principle would avoid any government action preferring inefficiency but a free inefficiency.

Nor can a system be devised that balances liberty and efficiency achieved by government action. As Ludwig Von Mises aptly states, “when the government interferes with the market, it is more and more driven towards socialism.” Once the government begins to regulate a situation or a business more and more regulation will become necessary for the group to operate until only regulation remains in every sector, and freedom is just an ephemeral quality students read about in books. Liberty and Efficiency cannot share the throne; thrones are only designed to hold one whether it is an idea or a king. Furthermore governments cannot achieve efficiency because to do so would require an intimate knowledge of the value every individual places on a certain good.

Perhaps it is the case that times have changed and where liberty was once valued, efficiency now is the premier judgment. After all Lord Acton wrote in the 1800s. However, economics is based on the idea that the basics of human nature are fixed and that even the preferences of an individual do not vary. If human beings changed greatly every 100 years then economics would need to be re-evaluated every 100 years. This is not the case. Every new idea and thought to come from modern economics is based on the work of prior generations of economists. No one discovers everything for him or herself. If Isaac Newton recognized the work of previous scientists when he said, “if I have seen further than others, it is by standing on the shoulders of giants” then surely economists must as well. Furthermore Lord Acton is not the only person to recognize liberty as a foundational principle. Benjamin Franklin said, “those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.” People valued liberty before the writings of the father of economics, Adam Smith. For in 1776 the same year The Wealth of Nations was published the American colonists rebelled against Britain sacrificing short term security for the possibility of long term political liberty.

This is not to say that efficiency should never be used as a value judgment, but to say that there is danger in relying too much on the notion of efficiency. Not everyone is an economist and people value things differently. If everyone placed the same value on goods trade would not occur and economists would have little to study. Economists should be thankful that people do value things differently and should remember that other criterion besides efficiency do exist. The use of other value judgments other than efficiency should be evaluated occasionally to see if a principle such as liberty exists that would serve as a more universal way of studying our world. From looking at history it seems that liberty as the “highest political end of man” is a proper way of looking at the world.

Von Mises, Ludwig. Economic Policy: Thoughts for Today and Tomorrow. Auburn, Alabama: Ludwig Von Mises Institute, 2006. Web.
Lord Acton Quote from The History of Freedom in Antiquity

Break rooms

I would like to examine what exactly happens in the employee break rooms? In dealing with the employee break rooms you are faced with externality issues, marginal cost, total cost. Marginal cost is the polluter of the break rooms. External cost will continue to increase due to the amount of pollution in the break room. As the employees use the break rooms there will be one person cleaning will have more of an incentive to clean so they will end up cleaning more. Since the one person keeps cleaning the marginal cost of people who do not clean will go down. The pollution will keep increasing. The model in class that was used was marginal cost and marginal external coast equal optimal levels of pollution, at the intersection of MC and MEC. Implementing rules to fix the pollution in the break room could help. Posting a sing stating EVEYONE USES BREAK ROOM, CLEANS BREAK ROOM MUST CLEAN UP AFTER THEMSELVES by specifying all users will help. This will help you reach you optimal level of pollution in the break room. This will help people take into account total coast of their decisions. The externalities are because of the people who do not clean up after themselves. And in conclusion we are trying to meet total optimal level of pollution.

Monday, September 27, 2010

New Bill, Where is the Market failure?

An article titled “Democrats’ tax bill targets outsourced jobs,” discusses tax cuts and removing some taxes on businesses that remove jobs from the United States. According to the article, the bill would cut “favorable tax rates” for businesses that outsource jobs to other countries and give tax incentives to companies that create jobs for a U.S. employee that is replacing a foreign worker in another country. American companies receiving a tax break for outsourcing jobs would seem to help the consumer but it seems that there should be no government incentive for outsourcing. Likewise it seems that there should be no government incentive to give tax breaks to companies taking jobs from one country to another. One tax break creates consequences for the foreign workers and the consumers receiving cheaper goods. The foreign worker will become jobless and if the cheaper labor costs resulted in a cheaper good for the consumer than both the workers and the consumers will be negatively affected. The tax that allows companies to receive benefits for creating jobs outside of the U.S. improves the consumer assuming that the reduced labor reflected reduced prices of goods but hurt the workforce where the jobs were removed.
The article also discusses the possible policing of the new bill. In order for companies to claim the tax breaks they would have to prove that the job created was outsourced previously. Either tax break generates more government involvement where it would seem that there shouldn’t be any. The movement of jobs in and out of countries should be controlled by the labor market and the consumers desire of the good not incentives produced by the government. In the article, a tax analyst stated that, “politically it makes sense, but economically I’m not sure it will work.” The analyst’s statement seems to reflect the market should control where jobs go rather than the government. The government’s involvement in these businesses doesn’t seem to fix a market failure. Businesses should move freely and not incur a tax benefit whether they decide to move out of country or stay in country.

Rooney, Ben. “Democrats' tax bill targets outsourced jobs”. CNNMoney.com. http://money.cnn.com

Sunday, September 26, 2010

The Market Failure of Offshore Drilling (a.k.a. the BP Oil Spill)

On April 20, 2010, “destructive explosions and fire at BP…led to the tragic death of eleven workers and caused numerous additional injuries. The Deepwater Horizon rig sank less than tow days later…leaving the well gushing at the sea floor.” Estimates say it may be gushing up to 1.5 million gallons per day (gpd), and worst case scenario could increase to 2.5 million gpd. This leak has contributed to 170 miles of shoreline being contaminated with oil, as well as “the loss of fisheries, impact on marine wildlife, impact on local economies, and reduction in tourism.” It was found by ABC News investigating federal records regarding the oil industry that in the past there have been “chronic safety violations [and] inconsequential fines that often took years to collect,” and even records of incidents causing deaths of workers in which the fines were never paid. (From “National Environmental Health Association Position on Offshore Oil Drilling.”)

In a quote from President Barack Obama, he explains the desire of the government to have laws in place and enforced to prevent as well as respond to disasters such as this. Offshore oil drilling in the Gulf of Mexico accounts for about 30% of our oil production in the United States, which is important for our future energy usage. However, it is not efficient to continue this type of drilling if disasters such as this will result (Baker).

The white house press secretary explained that the company that caused the disaster (BP), and neither taxpayers nor the federal government, is responsible under current law for recovery and cleanup (Baker). However, as he listed the agencies involved in ensuring that BP follows through with their obligations, it hardly seems that there is no cost to outside parties, including taxpayers and the federal government. Some agencies he listed included the Environmental Protection Agency, Coast Guard, Minerals Management Service, Small Business Administration, and the National Oceanic and Atmospheric Administration (Baker). These agencies being responsible for overseeing BP’s actions draws them away from other work they could be doing, an opportunity cost itself. It is also likely that some of the agencies involved are at least partially funded by taxpayers or the federal government. The federal government and the president have also used their own time or resources to inform the public as well as regulate the disaster and assign tasks to these agencies after the oil spill. It seems unlikely that BP would even be able to fund the cleanup responsibilities, as they are required to. There are also unpaid volunteers that will participate in the cleanup process, who are using their volunteer time that could be used in other places.

This situation clearly imposes costs to our society and the environment from offshore oil drilling in the Gulf of Mexico, which is not included in the price of oil. In an earlier oil spill in Alaska’s Prince William Sound, previously “the worst spill in US history,” Exxon Valdez spilled less oil than the BP oil spill has. The effects of that spill are still seen there, as “two bird species show little or no recovery from the oil spill while others are still recovering, [and] human resources linked to the Sound are also in differing states of recovery from the decades old spill” (NEHA). If effects of a smaller spill are still seen this many years later, it is likely that many effects of the recent BP oil spill are not known yet, and will persist long into the future. A recent survey of Americans showed that a majority believe that the damage caused by the BP oil spill was worse than they thought it would be, and that they disapprove of the way BP has handled the oil spill (“Americans Divided”).

The temporary halt on U.S. offshore drilling following the spill also created a cost to our society, with the opportunity cost of alternative sources of oil. The fact that we drill offshore for oil implies that this is the least cost method of attaining that amount of oil. When the drilling was halted, we were forced to find alternate sources of this amount of oil for our consumption needs, which likely did not change significantly. These other sources are likely more costly to our society than the offshore drilling was, causing us to pay a higher price than we normally would have for that amount of oil. The increased demand for oil from other sources also may have created temporary inflation in the price of oil from those sources, unless they anticipated the increase in demand because of the oil spill and increased their supply correspondingly.

The costs to BP for having to pay for the “recovery and cleanup,” as well as any and all cleanup costs incurred by others, and the damage to the environment, are all additional costs in the production oil. These costs should be included in the price of oil to ensure BP or any other oil company that causes an oil spill or damage to the environment would be able to cover the costs associated with cleaning up those disasters. These costs become negative externalities, because they create a cost to society in the form of pollution and pollution repair that was not covered by the producer or purchaser of oil. Even if there are people that do not use oil, they are also forced to live with these externalities that have been created by this disaster.


Americans Divided About Future Gulf Drilling; Nearly even split found on lifting the drilling moratorium and on BP's future in the area.” (2010). Gallup Poll News Service.

Baker, P. (2010). “Obama Gives a Bipartisan Commission Six Months to Revise Drilling Rules.The New York Times, A16(L).

“National Environmental Health Association (NEHA) Position on Offshore Oil Drilling.” (2010) Journal of Environmental Health, 73(2), 5&40.

Friday, September 24, 2010

Regulating the Banks: There's an Externality, Right? ...Right?

The way I see it, there are two reasons usually used to justify government regulation: morality and economics. Oftentimes, the economic argument is used just because it's harder for most people to dispute an "economic fact" than someone else's ideology. But when it comes to Wall Street, well, it's obvious that the reasons are going to be economic.


Earlier this month, U.S. News & World Report published an article titled "Why Elizabeth Warren Will Benefit Wall Street," by Rick Newman. One of his points is essentially that Warren will be a boon because banks need someone watching over their shoulders to make sure they're not screwing us all over. It's high time for more government reform, and we may finally be getting it. But maybe I should stop a second. If government is getting involved here, I need to take a closer look. Is there a market failure here? Is government regulation the only way to achieve efficiency in the market for credit and loans? Is there an externality involved with unregulated--or, at least, less regulated--banking activity?

Newman's article points out that Warren has long been a critic of "sky-high credit-card rates, hidden fees and other objectionable lending practices." Credit card rates, fees, and lending practices of any variety look to me like they have two sticky little components that keep them from sounding like they have anything to do with externalities: they're market-based and they're intentional. There is a market for credit and loans--no one's going to deny that. And if Jonesey's credit card interest rate soars to exorbitant highs, Jonesey is the only one who's going to be feeling the hurt from it--well, maybe Jonesey and his wife and kids, but certainly Mrs. Peabody three states over isn't going to be any better or worse off. No one forced Jonesey to get the credit card, either. No one forced him to take that car loan. He chose to enter into a contract with his bank, and the exchange of funds was a market interaction each considered beneficial: Jonesey got to buy his 62" high-definition TV on his new credit card, and that new minivan his wife had been bugging him about, without having to save up all the money at once; the bank got to collect interest. If either party had thought it wasn't beneficial to him to enter into the contract, the contract wouldn't have been made. No mafia involvement here, no guns to the head or threats about sleeping with fishes.

But the system is broken, Newman says. In fact, he says that "the system is so flawed that Wall Street as we know it would have collapsed if the feds hadn't rushed in to rescue it in 2008." Well, if something's that broken, then I guess even if I can't find a way to call this an externality, there must still be some kind of market failure the government should fix. Only, it's not certain that it was a market failure that caused the collapse. The subprime mortgage market was the front and center crisis in 2008, but it's been suggested that the problem there wasn't too little government regulation, but too much. Congress had passed legislation that required lenders to accept borrowers they considered too risky and give them mortgages anyway. If the market had been allowed to do as it would, without regulation like that, there might not have been a housing bubble to pop--or at least, not such a fatally large one.

So if there's no externality, and the market failure we have seen may have been caused by overregulation, why is the government getting involved?

Well, if it can't be justified economically by efficiency standards, I guess the driving reason in proponents' minds must be their sense of morality. I'll take their values as given, they can think and support whatever they like. Fine by me.

But is it really so hard to admit it?


"Why Elizabeth Warren Will Benefit Wall Street" by Rick Newman

"Regulation, not deregulation caused the current mortgage crisis" by Mary Mostert

Efficiency in a Carbon Market

The U.N. has set up a market to regulate the production of greenhouse gases using cap and trade. The Clean Development Mechanism is a policy that focuses on reducing greenhouse gases. Also in developing countries that produce HCFC-22 as well as HFC- 23, two chemicals that developed countries have been banned from producing but developing countries can produce until 2030. As well those companies that destroy their HFC- 23 become eligible for Certified Emissions Credits(CERs), while reducing carbon production also grants you CERs it is much more profitable to reduce the production of HFC-23 in the same market.

Now the article also points to an interesting fact that in this market companies have found no incentive to reduce their emissions of HFC-23. The companies actually use the system, since you have to be eligible for the CERs to gain from destroying HFC-23 they do not when they are not eligible and do destroy it when they are. So while the U.N. may have been trying to achieve an efficient outcome where marginal social benefit might have been equal to marginal social cost it seems that very little was done to truly achieve it. In actuality the companies gained from the system by being able to trade those CERs when they received them and did not work on new methods to destroy the HFC- 23. The companies however were merely responding to the incentives presented to them.

This article presents interesting thought on what a cap and trade market might act like. It should be important when setting one up that incentives are made to have the actors actually reduce emissions and allow for them to research and develop technologies that reduce or completely eliminate them. In order to get an efficient outcome the incentives must be in line with the goal. Also it would be important to ensure that the rules are enforced. Clearly if a cap and trade market is set up it should be well thought out.

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Thursday, September 23, 2010

ObamaCare and its Constitutionality

Before I start into my analysis of this article, I want to make a disclaimer that I am not trying to make a political statement or trying to bash the Obama administration. I am simply trying to gain an economic understanding of what is occurring in our nation's government.

If you haven't heard about the new health care plan that was passed by Congress not too long ago, the basic concept is that it will provide health care to every single American, and not having it can get you fined. It will be mandatory for every citizen to have this health care coverage under law. The point of this article is discussing whether the Supreme Court will deem the law unconstitutional, but that is not my focus in this blog entry. How the health care becomes affordable and what the law includes is my main focus.

As we have learned in class an excise tax, or corrective tax, is used when there is a negative externality. The excise tax increases the price of the good, which leads to a lesser amount of the product being produced, which leads to fewer people buying the product. An example of excise tax we have discussed is air pollution. There is an equilibrium amount of air pollution, but then there is also an efficient quantity of air pollution, which is commonly not zero. About halfway down the article the Mr. Barnett tells the reader that the bill does include some excise taxes that are supposed to be used to help offset the cost of the healthcare plan. One of the those excise taxes is going to be imposed on tanning salons. To me this should not be called an excise tax or there is no reason to have an excise tax in this situation.

An excise tax is used when a negative externality occurs to achieve an efficient output of that good. Looking at what we know about negative externalities, they are an unintentional, non-market, interdependence. In other words, one person does something, makes someone who they don't know better or worse off with no exchange, and the effects are not intended. Tanning salons are the opposite of what we have just said. A pasty white person wants a tan so they walk into a tanning salon, exchange money for time in the UV tube, are made happier because they now look orange which is cool to them,. There is nothing about tanning salons that could possibly be argued as a negative externality unless the UV tubes emit some sort of ray or by-product that we do not know about. Summing it up, there is no reason for the "excise tax" that is including in the new health care plan.

As for how this new health care becomes affordable to all citizens as the President has proposed, a government subsidy would have to be involved. The government will provide money to pay for health care so that all Americans can avoid health care, which implies a subsidy. Since government will be partially subsidizing health care, then that raises the question whether there is a positive externality associated with universal health care. Using the criteria that we used in the previous paragraph, I do not believe there is a positive externality from this health care plan. The government is essentially forcing its citizens to purchase health care, although at a discounted price, but everyone having this health care does not make any third party better off. The only party benefitting from this is the people that could not have afforded health care before. Although this is a great cause and one that I personally believe in, using our economic knowledge, there is no room for government involvement in this situation.

Thursday, September 16, 2010

Gov't Bank Aide

This new legislation will give $30 billion dollars to community banks in order for them to offer loans to small businesses. According to the things we've learned in class, gov't has a place in the market when there is a market failure. The three sources of market failure that we have learned are 1) monopoly 2) externality 3) public good. So should this bill be passed into law considering the concepts we have learned about?

This article mentioned 500 community banks that might be receiving this benefit money so there is no issue of monopoly in this case. The loans are excludable so there is no issue of a public good here. When people take out loans from these banks is there an externality involved? What that person does with the money the banks have been lent might create some sort of externality, but the loans given out by the banks offer no externality at all. There is no unintended effect on others from an individual taking out a loan from a community bank. There is an exchange between the bank and the individual because the bank gives the person money and the person taking out the loan signs some sort of agreement saying that they will pay back the money in this amount of time and/or with this amount of interest.

There is no market failure associated with giving out loans, yet the government still feels lead to give out $30 BILLION dollars to make sure that these banks have enough money to give out all the loans that they want. The gov't definitely should NOT be doing this, since there is no evidence that points to a market failure in the savings and loans market.

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