Bastiat’s Bastions

An article in the Daily Comet about the Hornets.

The article reminds me of a line in the movie Major League. Major League, for the uninitiated, is a baseball comedy about a fictional Cleveland Indians team that begins the season with a group of misfits. They lose many games in the early part of the season before hitting their stride and becoming a playoff contender. Bob Uecker, playing announcer Harry Doyle, states “In case you haven’t noticed, and judging by the attendance you haven’t, the Indians have managed to win a few ball games, and are threatening to climb out of the cellar.”

The point of the current article is that same thing is going on with the New Orleans Hornets.

So why bring it up? When I started to read it, I started to tense up. Many times these articles end up touting subsidies for stadiums and mentioning the alleged jobs created by sports franchises. That is a post for another day. An additional post for another day is why newspapers seem to support these proposals.

I am glad I didn’t see that in the current article – but I suspect it won’t be long until you read that one. I do, however, have a quarrel with one point. Here’s the quote:

It appears that the only time fans attend Hornets games are to watch someone else play. Case in point, the top three attendance figures in that span was against the Cleveland Cavaliers, Los Angeles Lakers and Miami Heat. It seems like fans wanted to see LeBron James (Cavaliers), Kobe Bryant (Lakers) and Dwyane Wade and Shaquille O’Neal (Heat) play more than the Hornets.

Why should I be surprised that holding the price constant (?), more people wish to watch the Hornets play the Lakers than watching the Hornets play a lousy team like the Grizzlies?

It seems so obvious to me, but in both of those cases, the Hornets are playing, right? Isn’t it the case that we are leaning something about how much the New Orleans residents enjoy watching the Lakers compared to the Grizzlies?

We are not learning about how much fans enjoy watching the Hornets compared to Lakers as the article suggests.

As you know, when we discuss demand curves, we always use the phrase “ceteris paribus” which of course means holding other relevant factors constant. If we were to think of the demand curve for Hornets tickets, one of these ceteris paribus conditions would surely be the quality of the opposing team. Increasing the quality of the opponent will increase the demand curve for tickets.

Now assuming that the price does not change based on opponents (?), and assuming there are still unsold tickets, and assuming that nothing else changes (day of week, start time, Mardi Gras parades), we could interpret those increased sales as indications of fans perceptions of quality of the opponent.

Let me give you some suggestions for some extra credit.

1. Do you think the quality of the Hornets team is a ceteris paribus condition for the demand curve for Hornets tickets?

2. If in fact the demand for Hornets tickets is higher for better quality teams, what can the Hornets do to increase profits?

3. Do the Hornets engage in such a policy? Only if you provide me some evidence will I give you some extra credit on this item.

4. And back to this one later during the semester, but does the fact that the Hornets don’t sell out every seat indicate they are making a pricing mistake? I’d hold off on this one until we get to discussing elasticities.

–CT

Ever since Nicholls had internet access, I have been a part of a economics teaching listserve, an email-based forum of economics instructors, in the US and beyond.  Yesterday, Humberto Bareto at Wabash University pointed out this article in the New York Times (Source: http://www.nytimes.com/2008/01/17/world/africa/17bread.html) by Michael Slackman, “Egypt’s Problem and Its Challenge: Bread Corrupts” New York Times, January 17, 2008.

One professor responded that “it’s almost normative economics” but that he agreed with the normative values. 

I could not let that remain, especially after the very good lecture we we had in my 2M class with Ms. Bhavneet Walia from Kansas State.  Normative values in the article?  Hard to see.  My response was along these lines:

The article is not that normative.  It is about what is happening in Egypt.

The government started a program and created profitable opportunities for some Egyptians–those who could get into the lines and wait.  These people made at least part of their livings off of the program, buying up bread at low, government controlled prices and reselling them to others at market prices.  They come to depend on the program and any talk of cutting back or eliminating the program comes with political resistance, because to do so deprives these people of the opportunities the government set up for them.  They are only doing what comes naturally in markets, and in politics.  

This bread program also created opportunities for government regulators and these special government sponsored bakers.  Sometimes we need to ask “Who monitors the monitors?”  or “Who regulates the regulators?”  This was posed years ago in an article by Darby and Karni (1973), in their paper, “Free competition and the optimal amount of fraud,” Journal of Law and Economics 16, 67-86.  Darby and Karni noted that with consumer fraud, you can’t really regulate it by having inspectors, because if fraud were profitable by, say, auto mechanics, it would also be profitable for fraudulent mechanics to bribe inspectors.

But when the government sets up a program that creates lower prices for some people which makes it profitable to buy up low-priced government subsidized goods and to resell those goods to others.  I bet this never happens with food stamps–yeah, right.  People will try to make these profits, even if it involves breaking the law and stooping to corrupt behavior. 

This story is not normative, a statement of what should be, but positive economics, what merely is.  My interpretation is straight prediction.  

Of course, one might interpret the facts in the story in a different way.  Whether this corruption is a good or bad thing, that is normative.  But the reporter laid out the facts and pretty much lets the reader judge.  

In Rome, something similar happened.  The government provided subsidized bread and politicians and the government provided circuses (gladiator events), placating the voters. 

Would our politicians ever create profitable opportunities for voters and supporters, creating dependence that would lead to uprisings if the program were taken away?  In a New York minute!

-MC

I am occasionally dazzled how sometimes people think because the internet is involved, that economics should be “different” – as if the fundamental facts of scarcity and the “laws of economics” should no longer apply. Check out this article from yahoo.com.

The subject of the article is the way that internet access is priced. The standard practice is to charge all users the same flat rate, regardless of how much the household uses. The article points out that a small fraction of internet users (5%) use about half of the bandwidth. That is, there are a large number of light or occasional users, and a small number of very intense users.

The question that comes to mind – should the households that use the internet more intensely be charged more? Time-Warner’s answer seems to be “maybe”. They are considering billing people on the basis of usage instead of the flat monthly rate. My answer is yes. Why shouldn’t they be?

Before we get too far, it is good to think about the beneficiaries of such a policy. If everyone is paying the same price, broadly speaking, the intense users are receiving a “discount” and the casual users are not. Clearly the people who stand to lose from a fee based on usage are those that are intense users. They’ll scream bloody murder. But there is another perspective – what is a good way to use society’s scarce resources? More downloading by person A means slower downloading for person B.

This isn’t an internet only phenomenon. A nearly identical situation came up at Nicholls last semester with a proposal for a per-unit fee for printing in academic computing labs. For the background, see the Nichols Worth articles here and here – the first is a factual article, the second the take of the Nicholls Worth editorial staff. In this case, the status-quo was a per-month fee for printing with no fee per-page printed. The proposal being considered was a per-page fee. As you can see from the editorial, there is at least some resistance. My guess is that the folks over at the Nicholls Worth do a lot of printing in labs, but I can’t be sure.

Why do I care? As we begin the semester, one of the most central concepts in Econ 211 is called the 1st Law of Demand. It states, quite simply, as the price of a good or service increases, consumers will wish to purchase a lower quantity of that good.

With a flat monthly fee, once the fee is paid, the price of additional internet usage (or pages printed) is literally zero. We would expect quite a lot of downloading (and printing). In fact, the last few items downloaded (or printed) would have very little value to the consumer. The problem is that there is a disconnect between the person using the resource and the cost of the resource being used. Resources will be used on low-value downloading (or printing). Resources are being wasted.

With a per-unit fee, the 1st Law of Demand tells us less downloading (printing will occur). The decision makers will not have to consider both the benefits and the costs of their actions, and will choose accordingly.

In the printing case, students will be more careful about what they print – they might avoid printing three copies of the same lectures notes, or not print out 60 pages of an article if all they need is the first few. There will be less “waste” and surely the total amount of printing on campus would fall significantly. We’d expect the same in internet, which means less congestion and better service.

Here’s the prevailing wisdom of the internet – a quote from the yahoo article.

But the move could prove controversial. Unlike with utility bills such as the phone or electricity, which have traditionally been based on usage, U.S. high-speed Internet subscribers have come to expect a fixed monthly charge.

Golly, because people expect a fixed monthly charge, we better give them a monthly, charge, eh?

–CT

Recently, it has come to light, thanks to this article by Joseph Somsel in the American Thinker, that buried deep in a revision of newly proposed building codes for the state of California is a requirement for something called a “programmable communicating thermostat” or PCT.  This is a special sort of thermostat that is fitted with an FM radio receiver that cannot be removed will allow power authorities in the state to control customers’ air conditioner set point on hot days or heater’s set point on cold days. 

This would be done in a limited way during “price events,” which would be, I would think, times when electricity prices spike, especially due to higher fuel costs or higher wholesale prices of electricity (the peculiar form of electricity “deregulation” in California has had some strange results).  The problem of electricity price spikes can be traced back, not to deregulation of electricity, but to the half-baked and half-thought out half-deregulaiton of electricity in California.  For a good background, see this article from 2001.  

During these so-called “price events” the power authorities can raise or lower customers’ thermostat setpoint by four degrees F and customers would be allowed to manually override the changes.  So, if prices spike, the power authorities can take control of customers’ thermostats and cut them back.  People can then choose to override the authority-determined setpoint, with some understanding that electricity prices are, at that time, higher than normal.

At times of “emergency events” which do not seem to be defined, the authorities are able to completely override customer setpoints with no alteration possible by the customer.

As Joseph Somsel points out well, the real problem is that California has taken measures to shield Californians from price changes.  Price changes, though, are signals, in the same way that the radio waves that transmit thermostat changes in the proposed regulation is a signal.  Price signals, however, enable people to remain in control of their thermostats, in control of the temperature in their own homes, but with the knowledge of the prices that they pay.  If there is only so much electricity being supplied at some price, and customers want more at that price because of particularly hot or cold weather, the electric companies have an incentive to raise prices and they will.  The higher prices for electricity will get some to cut back on their electricity use.  Higher prices will also give electricity companies to increase the amount of electricity that they provide, bringing the customers and providers in balance, in what economists call “equilibrium.” 

What has happened so far is that California has been faced with rolling blackouts, where electricity is cut to entire areas of California at one time, then another area is shut off to bring electricity back to the first blacked out area, and so forth.  The new regulations are designed to prevent these rolling blackouts, but by having state power authorities take control of people’s thermostat.  In the case of the so-called “emergency events” price incentives are taken away from customers and providers altogether.  With no price incentives in people will continue to use electricity in other ways than heating and cooling that they value far less than the extra comfort in their homes and offices.

What is also pointed out in the Somsel article is that the burden of this fix is not equal over the population of California.  In poorer areas, such as Bakerfield, where temperatures often climb into sauna ranges, cutting back people’s air conditioning can be particularly unfair, while wealthier coastal residents have no need for air conditioning in the first place and are unlikely to ever feel any discomfort from any restting of thermostats.

If the state would only take control of thermostats during “price events,” allowing customers to re-set their thermostats, noticing that the price of electricity must have gone up, this would not be such a bad regulation.  People would be aware of the price they were being charged and could respond to it.  This would have transformed California’s electricity pricing to something called “peak-load pricing.”  

I have a course note on peak-load pricing that was based on an article I published years ago.  The idea is that when there are capacity constraints, as there are with a fixed amount of classroom space in universities or a fixed amount of generating capacity and transmission capacity with retail electricity, the price goes up when everyone wants electricity at the same time.  Very hot or cold weather, pushing electricity use to capacity, leads to higher prices, as prices are adjusted to bring use and capacity in line.  Faced with higher prices during peak-use times, some consumers just cut their air conditioner or heater back, while some consumers shift certain uses of electricity, such as drying clothes, to non-peak times. 

Peak-load pricing is a long-discussed way of dealing with capacity constraints in markets such as electricity, which both reduces the need to build expensive extra capacity to meet peak demands or peak use and also eliminates the shortages when attempted use outstrips capacity.  In addition, peak-load pricing provides the needed funds to expand capacity when it is cheaper to build new capacity than to restrict use or even for customers to continue to pay peak prices.  

The “emergency event” regulation does block the needed price signals so that users and producers of electricity have no incentive to come into balance with one another.  The “price event” reglation might be closer to the more-effective peak-load pricing which does provide the needed price signals for customers to cut back now when there are peaks or spikes in attempted use, and at the same time, provide signals to power providers to build new capacity.  Of course, one of the problems in California is the NIMBY (”not in my back yard”) regulations that have prevented expansion of generation and transmission capacity.  Overcoming NIMBY is another ingredient in bringing sanity to California’s energy markets. 

We do not need to replace price signals to homes, with radio signals to corrdinate electricity use and capacity.  Prices (particularly with peak-load pricing) are much better signals than radio signals to thermostats, allowing customers to choose whether they want to cut back on their air conditioners, their lights, their dryer, or something else when prices go up.  What makes regulators think that they have better knowledge of what are more valuable and less valuable uses of electricity and know better than customers what uses should be cut back?  It is called arrogance.

–MC