Market Failures
- Scarcity Power
- Missing Information
- Externality
Different kinds of prices: marginal and average
- Average price vs Marginal price (pay for extra trip)
"Externality Charge" e.g. traffic congestion (drivers incur no costs for making an extra trip), pricing should reflect the damage
- externality charge is not to discourage everyone from doing anything that might inconvenience anyone else; it is to get them to take into account the inconvenience they cause to others.
Example: Pollution from Driving
Externality cost (costs inflicted on others but not the driver)
Two Objections to Externality Charges
1. Unfair tax aimed at a disadvantaged group
- The rich will be able to do whatever it was that was objectionable (it is targeted at stopping voluntary activities)
- Raising more money from the rich (redistribute income)
2. Some simply feel the pollution should be illegal
Determining Externality Charges
it should adress all the externality costs, and externality costs along. Since it is very awkward to determine externality charges, the best way is to look at their "revealed preference"
- it does rely on the shaky information about how much it is really worth to us to reduce externalities such as noise, pollution and congestion; adding to that is we don't know how much it costs to reduce it. So we rely on scientific information
Battling Pollution
Example: EPA's auction for sulphur dioxide emission rights (few made high bid and exaggerates costs of reducting pollution); let EPA find out how much reducing pollution really costs
Monday, August 13, 2007
Friday, July 20, 2007
The Undercover Economist - Part III- Perfect Markets and the "World of Truth"
- A world of truth leads to a perfectly efficient economy, one in which it is impossible to make someone better off without making someone else worse off
- price tells the truth: no one would buy things that are worth less than the asking price and sell things that are worth more to them than the selling price
- in a perfectly competitive market the price of coffee would equal to the marginal cost of coffee (if price were lower, firms would go out of business; if price were higher, new firms would enter)
Perfectly Competitive Market
- Companies are making things the right way (otherwise will go out of business)
- Companies are making the right things
- Things are being made in the right proportions
- Things are going to the right people (those willingto pay the right price)
Non-Market Systems
- Police Force / Schools (conceals the truth about values)
Why are Taxes Inefficient?
- They destroy the information carried by prices in perfectly competitive, effiient markets: price no longer equals costs, so cost no longer equals value
(Taxes are higher when price-sensitivity is low)
- Head start theorem (all efficient outcomes can be achieved using a competitive market, by adjusting the starting position) e.g. lump-sum payments & levying onetime taxes that puts everyone on an equal footing
- price tells the truth: no one would buy things that are worth less than the asking price and sell things that are worth more to them than the selling price
- in a perfectly competitive market the price of coffee would equal to the marginal cost of coffee (if price were lower, firms would go out of business; if price were higher, new firms would enter)
Perfectly Competitive Market
- Companies are making things the right way (otherwise will go out of business)
- Companies are making the right things
- Things are being made in the right proportions
- Things are going to the right people (those willingto pay the right price)
Non-Market Systems
- Police Force / Schools (conceals the truth about values)
Why are Taxes Inefficient?
- They destroy the information carried by prices in perfectly competitive, effiient markets: price no longer equals costs, so cost no longer equals value
(Taxes are higher when price-sensitivity is low)
- Head start theorem (all efficient outcomes can be achieved using a competitive market, by adjusting the starting position) e.g. lump-sum payments & levying onetime taxes that puts everyone on an equal footing
Saturday, July 14, 2007
The Undercover Economist - Part II - What Supermarkets Don't Want You to Know
Businesses with scarcity power cannot force us to pay unlimited prices for their products, but they can chose from a variety of strategies to make us pay more.
Example (London Eye Coffee Shack Price discrimination):
- Dilemma (Higher margin per cup, but fewer cups; or lower margins on more cups)
- Price discrimination- Charge high price to the lavish (on free trade coffee) and a low price to the thrifty (normal coffee), they can maximize profits (yet have similar costs)
- By charging different prices for products that have largely the same costs, coffee shack is able to smoke out customers who are less sensitive about the price.
Three strategies for finding customers who are cavalier about prices
1. First Degree Price Discrimination "Unique Target Strategy"
- to evaluate each customer as an individual and charge according to how much he or she is willing to pay
- e.g. used car salesman or real estate agent (for products with high value relative to the seller's time)
- e.g. supermarket discount cards
2. Third Degree Price Discrimination "Group target strategy
- to offer different prices to members of distint groups
- e.g. reduced far for children and elderly
3. Self Incrimination Strategy
- to get customers give themselves away by selling products that are at least slightly different
Price-gouging the natural way
- Organic food
- Supermarket have come to the rescue with a plentiful supply of organic products that happen to be marked up far above their additional costs to the supermarket
Bargain shopping and bargain stores
- Similar products are, very often, price similarly. An expensive shopping trip is the result of carelessly choosing products with a high mark-up, rather than wandering into a store with "bad value", because price-targeting accounts for much more of the difference between prices than any difference in value between one shop and another.
Sale Pricing
- If some customers shop around for a good deal and some customers do not, it's best for stores to have either high prices to prise cash from the loyal
Reality Check #1 (Scarcity Power)
- Often, scarcity is something we we give companies through our own laziness (e.g., popcorn)
- Wine @ restaurant, charge higher price for things tend to be savoured during longer meals (i.e. dessert & appetizers as well)
- It is the lack of price sensitivity that allows a business with scarcity power to practise price-targeting
Reality Check #2 (Leaks in price targeting strategy)
- Price insensitive customers may buy cheap products unless the products are deliberately sabotaged
-e.g., own value brands at supermarket may of similar quality with disgusting design to put off customers
- Grooup targeting (customers who are being offered a discount may buy the product and then resell it at a profits to the customers who are being charged a higher price)
- e.g., DVDs
Example (London Eye Coffee Shack Price discrimination):
- Dilemma (Higher margin per cup, but fewer cups; or lower margins on more cups)
- Price discrimination- Charge high price to the lavish (on free trade coffee) and a low price to the thrifty (normal coffee), they can maximize profits (yet have similar costs)
- By charging different prices for products that have largely the same costs, coffee shack is able to smoke out customers who are less sensitive about the price.
Three strategies for finding customers who are cavalier about prices
1. First Degree Price Discrimination "Unique Target Strategy"
- to evaluate each customer as an individual and charge according to how much he or she is willing to pay
- e.g. used car salesman or real estate agent (for products with high value relative to the seller's time)
- e.g. supermarket discount cards
2. Third Degree Price Discrimination "Group target strategy
- to offer different prices to members of distint groups
- e.g. reduced far for children and elderly
3. Self Incrimination Strategy
- to get customers give themselves away by selling products that are at least slightly different
Price-gouging the natural way
- Organic food
- Supermarket have come to the rescue with a plentiful supply of organic products that happen to be marked up far above their additional costs to the supermarket
Bargain shopping and bargain stores
- Similar products are, very often, price similarly. An expensive shopping trip is the result of carelessly choosing products with a high mark-up, rather than wandering into a store with "bad value", because price-targeting accounts for much more of the difference between prices than any difference in value between one shop and another.
Sale Pricing
- If some customers shop around for a good deal and some customers do not, it's best for stores to have either high prices to prise cash from the loyal
Reality Check #1 (Scarcity Power)
- Often, scarcity is something we we give companies through our own laziness (e.g., popcorn)
- Wine @ restaurant, charge higher price for things tend to be savoured during longer meals (i.e. dessert & appetizers as well)
- It is the lack of price sensitivity that allows a business with scarcity power to practise price-targeting
Reality Check #2 (Leaks in price targeting strategy)
- Price insensitive customers may buy cheap products unless the products are deliberately sabotaged
-e.g., own value brands at supermarket may of similar quality with disgusting design to put off customers
- Grooup targeting (customers who are being offered a discount may buy the product and then resell it at a profits to the customers who are being charged a higher price)
- e.g., DVDs
Monday, July 02, 2007
The Undercover Economist - Part I - Who Pays for Your Coffee
Strength From Scarcity
- AMT (The coffee shack @ Waterloo station) has the power to charge high prices because of the scarce location of the coffee kiosk
- Network Rail has the power to charge high rents because there is only one location and many companiess are eager to sell coffee there
David Ricardo and "Marginal Land"
- Prime coffee-bar locations will command high rents only if customers will pay high prices for coffee
- There is no absolute value for rent, everything is relative to the "marginal land"
- The coffee-kiosk is not an optimal location for selling 2nd hand cars or noodles (have no shortage in better alternative); yet, cheaper rent at other locations for selling coffee will not be sufficient to compensate for sales volumes generated from floods of price-insensitive customers
Different Reasons for High Rent
1. It's worth paying a lot for good land, because the grain that good land produces is so valuable.
2. Because the alternative that should be available are not (e.g., London's Green Belt restriction)
- AMT (The coffee shack @ Waterloo station) has the power to charge high prices because of the scarce location of the coffee kiosk
- Network Rail has the power to charge high rents because there is only one location and many companiess are eager to sell coffee there
David Ricardo and "Marginal Land"
- Prime coffee-bar locations will command high rents only if customers will pay high prices for coffee
- There is no absolute value for rent, everything is relative to the "marginal land"
- The coffee-kiosk is not an optimal location for selling 2nd hand cars or noodles (have no shortage in better alternative); yet, cheaper rent at other locations for selling coffee will not be sufficient to compensate for sales volumes generated from floods of price-insensitive customers
Different Reasons for High Rent
1. It's worth paying a lot for good land, because the grain that good land produces is so valuable.
2. Because the alternative that should be available are not (e.g., London's Green Belt restriction)
- "sustainable competitive advantage" (have edge over the competition that will produce profits year in and year out)
- "rent seeking" (avoid competition from others)
- Effectiveness of an organization - creates barriers to entry and sustainable profits
Conspiracies against the laity
- Unions, professional organizations etc.
- Immigration of cheap labour (well-educated workers welcome immigration, poorly educated workers resist immigration)
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