Bastiat’s Bastions

This last week and this weekend I wrote a paper with Gary Pecquet of Central Michigan University on ANWR oil. Chad Turner gave me some help, so any errors are his fault—just kidding, they are Dr. Pecquet’s fault. Some of my students may recognize the idea, as I used it on a recent exam. Here is the gist of the paper taken from the introduction.
Everyone knows that oil discovered today, say at the Alaskan National Wildlife Refuge (ANWR) will not have any effect on prices until that oil hits the market. For instance, on its website, the Democratic Policy Committee (2006), (http://democrats.senate.gov/~dpc/pubs/107-1-72.html) states that “it will require seven to twelve years from approval before there is any oil production from the ANWR area. Therefore, production in ANWR will have no impact on current or short-term gasoline and oil supplies and prices.” While this is something that “everyone” knows, it is another example that the theory held by “everyone” happens to be wrong.

Using oil now reduces the amount of oil that will be available for the future, and so, the higher the price, and the higher is profitability of oil in the future. The more profitable it is to produce and sell oil in the future, the greater will be the opportunity cost of selling oil now instead of waiting to sell it in the future. This opportunity cost of selling now instead of waiting to sell it sometime in the future is called the marginal user cost or the scarcity rent of the resource. This is a cost of producing the oil just like the cost of pumping the oil, sometimes referred to as the marginal extraction costs.

If oil in ANWR is approved for production and that oil will reach the market in 10 years, it will surely reduce oil prices in 10 years, reducing future prices to something less than they would have been if the oil were not being produced. Since future prices are expected to be lower, future profits are also lower, so the value of oil not produced now, but held for future sales, is lower, making it more profitable to go ahead and produce and sell the oil now instead of waiting for future profits, as the opportunity costs will be lower. Oil from wells that are already producing can produce more now or can be slowed to produce more of its oil at some future date.

We use a simple two-period model (now and the future) to show that if an amount of oil that is discovered is significant enough to reduce prices in the future, that drop in future prices reduces the future profitability of oil, reducing the marginal user costs or the scarcity rents of oil now. That reduction in the marginal user costs reduces the current price of oil just as if there were instead a reduction in the marginal costs of extracting oil now. We explore the effects of the reduction in marginal user costs in a monopoly scenario, in a competitive scenario and one where a monopolist or dominant supplier responds to a substantial discovery by another seller, but where the discovery will not contribute to production for some years to come. We find that in all of our cases the discovery of oil that is expected not to reach the market until some years hence still has an immediate impact on oil prices.

Morris Coats

I heard about this one on WDSU, but found the article on the web.

The basic story is that a man in Tucson, AZ wants there to be a lottery associated with elections. One lucky voter, selected at random, would win $1 million dollars.

The story would be that this inducement would make it more likely for people to vote, thus increasing voter participation, and making the world a better place to be.

I am not sure that first it would work. I am also not sure it would make the world a better place to be.

This brings me to several questions.

1. Do you want voters – those that would not have voted without the lottery – to come to the polls?

2. Do you think these voters be more “informed” or less informaed than the average voter. Does it matter?

3. Some demographic groups are found to be more likely to play the lottery. Will some demographic groups be more likely to vote as a result?

4. For the non-voters, would this make you want to vote?

5. What is the expected value of this inducement?

I can answer the last one – say there are one million voters in a state. Then the probability to win the prize would be 1 in a million. If you have taken your QBA classes, the expected value of this arrangement is $1.

Last question – if you agree with the policy of giving people something worth $1 and asking them to vote, would you agree with people giving someone worth $1 and asking them not to vote?

–CT

Some questions for you:

• If the employees don’t like the conditions under which they labor, aren’t they free to find another job?
• And if they remain employed at this firm, doesn’t it mean that being employed at the firm beats alternative employment?
• If you were running a firm, wouldn’t you want to be able to determine the wages and benefits you offered your workers?
• What if you were a stockholder of this corporation?
• If a firm offers a less competitive package than other firms, wouldn’t they have a difficult time finding and retaining employees?

I think these questions have reasonably clear answers – or do they? Perhaps they do until I mention that some people are implicitly asking these questions of the dreaded, gasp, WALMART! Run for the hills!!!

Read this article. People are complaining about some changes Walmart made in their labor policies.

One of the things economists know from studying labor economics is that each job offers a package of wages and working conditions. Other things equal, jobs associated with more desirable working conditions are associated with lower wages, while jobs with less desirable working conditions are associated with higher wages.

Washing windows on the sides of skyscrapers is dangerous, collecting trash is smelly, and working in a cubicle is not fun. Other things equal, these workers receive higher wages to compensate for these conditions. Being a lifeguard, a forest ranger, or a fishing tour guide are associated with desirable working conditions. Thus these occupations have lower wages as a result.

One aspect of some jobs is that they have flexible hours. Do you think that workers at these type jobs “pay” for the flexible hours in the form of lower wages? I bet they do.

Do you think college professors pay for their flexible hours and the ability to do research on their topics? I know they do.

So here’s the interesting question. Subject to the law, should firms have the right to set up their compensation packages to attract the types of worker they want to work at their firms?

Suppose some firm likes its workers to be there all the time. Suppose they are more stringent about arriving on time and unexcused absences than other firms. This will make this firm less desirable for people who required flexible schedules (say working mothers). Is that discrimination against people who require flexible schedules (working moms)?

But before you answer that one, say a firm really thinks working mothers make great employees. What if they lower wages just a bit and use the savings to offer company-sponsored day care? Clearly that would be good for working mothers, and would attract working mothers to that firm. But is that discrimination against workers without children? Don’t they get lower wages than they otherwise would and don’t enjoy the benefits of the child care?

Tricky, eh?

Could it be the case that workers will sort themselves into occupations and jobs based on what types of packages they prefer?

Is Walmart doing something wrong?

–CT