In his chapter on globalization, Harford offers many examples of how free trade can lead to greater development in a country and a higher standard of living for its citizens. In espousing the merits of globalization, Harford also refutes two common arguments against globalization; that it is bad for the environment and the world’s poor.
January 10, 2008
Why Coffee Farmers Are Poor
Harford highlights 2
Highlights/Lowlights Chapters 6-10 The Undercover Economist
For me, the highlight of these chapters was the part about sweatshops in Asia and South America. What got my attention here is that it is both a positive step up in the developing world and how people view globalization.
The accepted view of globalization is that there are poor people being repressed by big, evil multinational corporations. In addition to this the multinationals are simultaneously creating poverty in wealthy countries by no longer employing people there. They’re out to get us. What this view ignores is that the multinationals paying lower wages also charges the consumer in the developed world a lower price. The worker who lost their job in the developed world also has opportunities to gain new skills and move into a new field whereas the worker in the developing country most likely does not.
The view of globalization as a harm to the industrialized world is the most interesting part. If a company closes a factory it is because it is inefficient. The most likely reason is that it is costs more to produce than the value of the good in the marketplace. If the company were to raise the price, they would lose all of their business to more price competitive companies. However, if the company were to move its operation to place where it can pay lower wages and regain its price competitiveness it will. The really great thing about this is that nobody is forced to take the position.
When a multinational company makes the decision to move its manufacturing overseas it does so to a place that allows for freedom in economic choice. What I mean is a company is most likely to move its manufacture to a place where people choose to work there. There is no slave labor left in the world. The fact that people can choose to work for a company implies that they have options. Nobody will knowingly take an option that will make them worse off. If the working conditions in anyplace are too bad, nobody will work there without charging a premium wage. The people working in what the industrialized world considers sweatshops are working there because they perceive it to be their best alternative. While the working conditions are not such that any of us would work there, the conditions are adequate to the people who choose to take the jobs.
The other part of this is that when the multinational companies move into a new place they often create conditions and pay wages that are meant to attract the best workers available. This encourages other local companies to raise wages to compete for the best labor available in the market. The increased wages meant that there is now more money to spend on consumer goods, housing, and education. This will cause increases in wages for producing consumer goods and housing, bringing people out of rural areas and causing prices for agricultural products to rise to something more sustainable for the population of those rural areas. As consumers make more money they also begin to demand a higher quality of the goods that they are purchasing. This will raise the standards of working conditions as well as wages for the most qualified workers.
The increased wages also allow for money to be spent acquiring and education. This raises skill level in the workforce while it raises awareness and participation in the political process. All of these things will increase the standards of living in the country and cause it to grow economically. Together, all of these factors mean that the deplorable working conditions and wages a multinational force on the people of impoverished nations will actually raise the living and working conditions in that impoverished nation given time. Furthermore, the educational advancements will allow the people there to diversify and retrain or gain new skills should the sweatshops move on. Much like what has happened in the United States and the United Kingdom since the industrial revolution. Overall, globalization doesn’t have any long term losers. It can’t be that bad.
For me, the highlight of these chapters was the part about sweatshops in Asia and South America. What got my attention here is that it is both a positive step up in the developing world and how people view globalization.
The accepted view of globalization is that there are poor people being repressed by big, evil multinational corporations. In addition to this the multinationals are simultaneously creating poverty in wealthy countries by no longer employing people there. They’re out to get us. What this view ignores is that the multinationals paying lower wages also charges the consumer in the developed world a lower price. The worker who lost their job in the developed world also has opportunities to gain new skills and move into a new field whereas the worker in the developing country most likely does not.
The view of globalization as a harm to the industrialized world is the most interesting part. If a company closes a factory it is because it is inefficient. The most likely reason is that it is costs more to produce than the value of the good in the marketplace. If the company were to raise the price, they would lose all of their business to more price competitive companies. However, if the company were to move its operation to place where it can pay lower wages and regain its price competitiveness it will. The really great thing about this is that nobody is forced to take the position.
When a multinational company makes the decision to move its manufacturing overseas it does so to a place that allows for freedom in economic choice. What I mean is a company is most likely to move its manufacture to a place where people choose to work there. There is no slave labor left in the world. The fact that people can choose to work for a company implies that they have options. Nobody will knowingly take an option that will make them worse off. If the working conditions in anyplace are too bad, nobody will work there without charging a premium wage. The people working in what the industrialized world considers sweatshops are working there because they perceive it to be their best alternative. While the working conditions are not such that any of us would work there, the conditions are adequate to the people who choose to take the jobs.
The other part of this is that when the multinational companies move into a new place they often create conditions and pay wages that are meant to attract the best workers available. This encourages other local companies to raise wages to compete for the best labor available in the market. The increased wages meant that there is now more money to spend on consumer goods, housing, and education. This will cause increases in wages for producing consumer goods and housing, bringing people out of rural areas and causing prices for agricultural products to rise to something more sustainable for the population of those rural areas. As consumers make more money they also begin to demand a higher quality of the goods that they are purchasing. This will raise the standards of working conditions as well as wages for the most qualified workers.
The increased wages also allow for money to be spent acquiring and education. This raises skill level in the workforce while it raises awareness and participation in the political process. All of these things will increase the standards of living in the country and cause it to grow economically. Together, all of these factors mean that the deplorable working conditions and wages a multinational force on the people of impoverished nations will actually raise the living and working conditions in that impoverished nation given time. Furthermore, the educational advancements will allow the people there to diversify and retrain or gain new skills should the sweatshops move on. Much like what has happened in the United States and the United Kingdom since the industrial revolution. Overall, globalization doesn’t have any long term losers. It can’t be that bad.
January 9, 2008
Eat the mountain? I'm HUNGRY!!!
| I came back to Colorado Springs after being away for nearly 10 years. When I left, there was nothing on the east side of Powers… other than good areas to four-wheel and drink beer! Now, there are schools, neighborhoods, shopping super-centers, cinemas and more! What happened to Colorado Springs? I thought this was just a way station for people in the military, formerly in the military, or who were fleeing their prairie homes in Nebraska or Wyoming for something ‘different,’ but not a big city. The businesses here were on a 5-year flip-flop system, and any talent or skilled labor seemed to come and go… or stay miserably waiting for the beauty of the mountain to sustain them! Chapter 10 and the story about Zhengzou made me think of Colorado Springs. I left here looking for options of employment and a faster paced life, just to return and discover that all I needed was patience! Despite being in a drought, the city has grown humongous! How do we get water to everyone? How is the city appealing to people? As was the case in China, the leadership changed from Mao to Deng and Deng brought with him ‘the truth’ and allowed for capitalistic growth to occur as an aggregate of individuals responding to self-interest incentives. ‘The truth’ came to Colorado Springs as well. Instead of the city giving 5-year low-tax incentives to companies, the city allowed developers with self-interest to come in and do what they do, develop! I remember when there was a lot of land, but not much development. I also remember a lot of shady situations of land being purchased under the guise of intent to develop, but then the owners moving away and simply holding onto undeveloped land with the truthful intention of holding onto to sell back to some developer someday in the future. I guess through some legal action by the city and county, that land was reclaimed or those title-owners got to eventually sell to developers. By ceasing to offer companies tax-exemptions (at least as many as in the 70’s through the early 90’s), a dynamic occurred that people actually stuck around in this way station. Californians were drawn by the low costs of living, Texans were drawn by Colorado-based companies, similar to Texas-based companies, popping up (local businesses doing what they do) and offering incentives to individuals to move here. Thus, more people, more developers, acquisition from the land title owners who did nothing with the land, and the area grew! As well, the city could do things like discover ways to supply water to the area because they weren’t hemorrhaging money that was essentially lost to tax-exemption-enjoying businesses. Chapter 10 speaks of the investment of Japan and the US into Chinese markets, as well as ‘the truth’ being considered by politicians (Deng) and a sort of dynamic of the government stepping back and allowing markets to do what they do. In a sense, Colorado Springs profited from the investment of the city/county into itself by doing less of the self-mutilation of tax-exemption, and the movement of Texas, California and others into the area. There are other dynamics at play, such as the growth of Denver southward allowing for commuter residence ease in the Springs and the popularity of government contracting as an industry being fed into by 5 military installations around; their employees who already have government clearance and experience stick around, instead of leaving the way station. Of course, just because Colorado Springs has grown, it doesn’t mean that I’m going to eat the mountain. I’m going to behave as an undercover economist and look for opportunities ANYWHERE they may occur, not just THIS market. |
Highlight/Lowlight 2
Foreign Investment Highlight
Foreign Investment as defined by Harford is the building or buying of companies abroad; and cross border investments in financial assets like shares and bonds. Harford concentrates on a common trend which is for rich countries to build factories in poor countries. Foreign Investment, especially in this respect is important to remember, since I do not believe that all people have a clear understanding of this practice.
One example Harford gives is of factories that are opened by a rich country in a poor county and commonly referred to as “sweatshops.” Most people are familiar with the negative connotation of the word sweatshop itself. This is largely due to the generalization that factories, which are operated in developing countries but owned by developed countries, pay next to nothing and force its laborers to work in dreadful working conditions earning the label of “sweatshop”. Another widespread belief is that these “sweatshops” produce many products we purchase and use daily such as clothing and shoes. Some people will even criticize you for wearing something like Nike shoes, stating that you are endorsing these “sweatshops”. I have read various articles reporting the horrendous working conditions the laborers endure. So naturally I have always wanted to know what the real story is.
During my reading of the last 6 chapters of Undercover Economist, I was able to grasp the concept and understand more about foreign investment and how it affects the lives of foreign laborers, the countries and their economies. Harford details how trade and foreign investment are closely related, and support economic growth, create jobs and provide opportunity for learning. A foreign owned factory is one way that a country can benefit from production without having to invest its own money. It makes sense that these developing countries are willing to produce products in their “sweatshops”, to ship back to rich countries, since this supports their local economy. Harford makes it easy to see the common misconception about “sweatshops” when he explains that even though the wages are low and the working conditions are bad they are still better than in the factories that are owned locally. This directly supports the statement that people willingly work in foreign owned factories; since they are willing to work in these, slightly better, conditions there are lower turnover rates.
I think that the term “sweatshop” could be better thought of as a “foreign factory” because this is a better description of the production work that takes place there. We do not buy products made in developing countries to support “sweatshops” we buy these products to support foreign investment and because we need them. These points are important to remember for the next time you hear someone complaining about the treatment of foreign laborers. If it were not for the foreign investment in the factories in developing countries and the trade of the products they produce, the workers would actually be forced to work in even worse conditions.
Foreign Investment as defined by Harford is the building or buying of companies abroad; and cross border investments in financial assets like shares and bonds. Harford concentrates on a common trend which is for rich countries to build factories in poor countries. Foreign Investment, especially in this respect is important to remember, since I do not believe that all people have a clear understanding of this practice.
One example Harford gives is of factories that are opened by a rich country in a poor county and commonly referred to as “sweatshops.” Most people are familiar with the negative connotation of the word sweatshop itself. This is largely due to the generalization that factories, which are operated in developing countries but owned by developed countries, pay next to nothing and force its laborers to work in dreadful working conditions earning the label of “sweatshop”. Another widespread belief is that these “sweatshops” produce many products we purchase and use daily such as clothing and shoes. Some people will even criticize you for wearing something like Nike shoes, stating that you are endorsing these “sweatshops”. I have read various articles reporting the horrendous working conditions the laborers endure. So naturally I have always wanted to know what the real story is.
During my reading of the last 6 chapters of Undercover Economist, I was able to grasp the concept and understand more about foreign investment and how it affects the lives of foreign laborers, the countries and their economies. Harford details how trade and foreign investment are closely related, and support economic growth, create jobs and provide opportunity for learning. A foreign owned factory is one way that a country can benefit from production without having to invest its own money. It makes sense that these developing countries are willing to produce products in their “sweatshops”, to ship back to rich countries, since this supports their local economy. Harford makes it easy to see the common misconception about “sweatshops” when he explains that even though the wages are low and the working conditions are bad they are still better than in the factories that are owned locally. This directly supports the statement that people willingly work in foreign owned factories; since they are willing to work in these, slightly better, conditions there are lower turnover rates.
I think that the term “sweatshop” could be better thought of as a “foreign factory” because this is a better description of the production work that takes place there. We do not buy products made in developing countries to support “sweatshops” we buy these products to support foreign investment and because we need them. These points are important to remember for the next time you hear someone complaining about the treatment of foreign laborers. If it were not for the foreign investment in the factories in developing countries and the trade of the products they produce, the workers would actually be forced to work in even worse conditions.
Tale of Two cities
In the last six chapters of Tim Harford’s “The Undercover Economist” many interesting ideas and concepts were touched upon. There was one line in the chapter titled, “Beer, Fried, and Globalization” that stood out from the rest. The line is, “if you would like to be rich, then it is a good idea to forge close links with the rest of the world. The example discussed just prior to this line involved two cities in the fifteenth century. The cities of Bruges and Antwerp were both located on the Zwin estuary. Bruges for the previous 250 years had enjoyed great economic success through trading with other cities. Bruges had an enormous amount of wealth, twice the population of London, and was developing new industries.
The Zwin began to silt up and ships trading goods could no longer reach the Bruges port. The “Hanseatic League” then moved its trading operations to the nearby city of Antwerp which still had access to the Zwin. Bruges quickly became what we would call a ghost town. The entire economic activity taking place in Bruges moved to Antwerp which experienced a great amount of economic prosperity. Today, Antwerp remains an economic powerhouse while Bruges is still essentially a ghost town.
The example shows that cities gain much from trading with each other. If one country (A) can create something cheaper and quicker than another country (B) than it should produce that item and sell it to the other country. Perhaps country A could create guitars for $20 and it takes them 30 minutes to create one which was twice as fast and half as expensive as country B could do it. Country B may also make drums for $20 and it takes 30 min while country A takes double the time and money. If each country practiced isolationism they would each spend a total of $60 and 90 minutes on creating a drum and guitar set. If the two countries each produced what they were best at then both counties could have a guitar and drum set that cost only $40 and took only 60 minutes to produce.
This goes to show how trade helps our economy. Trade barriers such as tariffs, quotas, or subsidies may help some domestic company but will only hurt the consumers/citizens of that country. Antwerp is successful today because of trading and if one were to locate Antwerp and Bruges on Google Earth one would be able to see that Bruges (which was once the capital city) looks like nothing more than a tiny suburb of Antwerp.
The Zwin began to silt up and ships trading goods could no longer reach the Bruges port. The “Hanseatic League” then moved its trading operations to the nearby city of Antwerp which still had access to the Zwin. Bruges quickly became what we would call a ghost town. The entire economic activity taking place in Bruges moved to Antwerp which experienced a great amount of economic prosperity. Today, Antwerp remains an economic powerhouse while Bruges is still essentially a ghost town.
The example shows that cities gain much from trading with each other. If one country (A) can create something cheaper and quicker than another country (B) than it should produce that item and sell it to the other country. Perhaps country A could create guitars for $20 and it takes them 30 minutes to create one which was twice as fast and half as expensive as country B could do it. Country B may also make drums for $20 and it takes 30 min while country A takes double the time and money. If each country practiced isolationism they would each spend a total of $60 and 90 minutes on creating a drum and guitar set. If the two countries each produced what they were best at then both counties could have a guitar and drum set that cost only $40 and took only 60 minutes to produce.
This goes to show how trade helps our economy. Trade barriers such as tariffs, quotas, or subsidies may help some domestic company but will only hurt the consumers/citizens of that country. Antwerp is successful today because of trading and if one were to locate Antwerp and Bruges on Google Earth one would be able to see that Bruges (which was once the capital city) looks like nothing more than a tiny suburb of Antwerp.
January 7, 2008
Price Gouging? Think not.
After having read the 8 chapters of Undercover Economist, but focusing on the first five, I find some of the insights very interesting at least to me. Despite some of the remedial nature of some of the book, I found unique and interesting the idea of the passing of profit margins among so many different parties. I liked the part where the coffee sellers were analysed. It discussed and dispelled the common misconception that prime-location coffee shops are "ripping us off."
Coffee that san be purchased at busy, crowded areas, like train stations, wherein people are in a hurry demands a higher price than other coffee at any quantity. This is because in such pell-mell circumstances, the costumers are effectively willing (but not neccesrily super excited about having) to purchase and pay for more services than other wise. Coffee in busy, rushed areas is more valued and price-shopping is either not possible or easy for buyers in this areas. For all these reasons coffee in these kinds of areas can (and probably will) fetch higher prices.
This begs the question. Does that mean that customers will be charged higher prices just because they can be? The answer is most likely so. But What I liked about the book was that I was surprised to find out that it is probably not the coffee shop charging this premium, and likely also that the coffee shop's profits may well be razor-thin. Because the station manager (whose job is likely to include raising revenue for the station) knows that things like a coffee shop there can charge exhorbinent revenue so it extracts these premiums revenues from the coffee shop in the form of higher rents.
What I took away from reading these passages was about how it is now my belief that, perhaps, this chain continues. Perhaps the people to whom the train station is accountable, perhaps their landlords, or their tax collectors probably. This makes me wonder how deep this chain goes. It makes me wonder if the train station can even keep any of the high profits it forces the coffee shop to earn. I wonder that with so many immediate suppliers all supporting and offering inputs goods to subsequent steps with the end result being coffee upon which a premium can be added whether or not it is even possible to discount. I wonder with such a high number of profit seeking links in such a chain if it is even possible to avoid charging for these convienience and locational charges, or if there are too many links in this train station that at least one of them will price-discriminate and thereby force each subsiquent link to do so as well.
Either way, the coffee shop, while price discriminating, is not gouging after all, a coffee shop so located is in fact offering more servicesthan an average coffee shop, in the way of locational convienience, they are merely now charging for them.
Coffee that san be purchased at busy, crowded areas, like train stations, wherein people are in a hurry demands a higher price than other coffee at any quantity. This is because in such pell-mell circumstances, the costumers are effectively willing (but not neccesrily super excited about having) to purchase and pay for more services than other wise. Coffee in busy, rushed areas is more valued and price-shopping is either not possible or easy for buyers in this areas. For all these reasons coffee in these kinds of areas can (and probably will) fetch higher prices.
This begs the question. Does that mean that customers will be charged higher prices just because they can be? The answer is most likely so. But What I liked about the book was that I was surprised to find out that it is probably not the coffee shop charging this premium, and likely also that the coffee shop's profits may well be razor-thin. Because the station manager (whose job is likely to include raising revenue for the station) knows that things like a coffee shop there can charge exhorbinent revenue so it extracts these premiums revenues from the coffee shop in the form of higher rents.
What I took away from reading these passages was about how it is now my belief that, perhaps, this chain continues. Perhaps the people to whom the train station is accountable, perhaps their landlords, or their tax collectors probably. This makes me wonder how deep this chain goes. It makes me wonder if the train station can even keep any of the high profits it forces the coffee shop to earn. I wonder that with so many immediate suppliers all supporting and offering inputs goods to subsequent steps with the end result being coffee upon which a premium can be added whether or not it is even possible to discount. I wonder with such a high number of profit seeking links in such a chain if it is even possible to avoid charging for these convienience and locational charges, or if there are too many links in this train station that at least one of them will price-discriminate and thereby force each subsiquent link to do so as well.
Either way, the coffee shop, while price discriminating, is not gouging after all, a coffee shop so located is in fact offering more servicesthan an average coffee shop, in the way of locational convienience, they are merely now charging for them.
Economics for Non-Economic Thinkers
Roman Kozhevnikov / Prof. Eubanks / ECON 398-OL1 / 06 Jan. 2008
To my wife:
I am writing to you about a book called The Undercover Economist by Tim Harford. I have not finished the book yet, but I am eager to read more, because it puts the information I have only seen explained in complicated charts and graphs into common sense explanations and everyday applications. For example, Harford explains how and why Starbucks’® high prices drive up the company’s rent, not the other way around. Also, he explains the naughty truth about grocery stores’ careful placement of expensive organic foods in order to discourage price-comparisons with the cheaper, non-organic options. Additionally, Harford uses the popular Jim Carey movie Liar, Liar and other scenarios as analogies to provide simple explanations of complex topics, like free markets and the healthcare system. More than all of these interesting examples, though, it seems that the most important thing to take away from The Undercover Economist is that having at least a basic understanding of economics can be both simple and valuable, and with a slight shift in our way of seeing the world around us, we can begin to think like true economists. What a relief it is that you do not need to understand all the fancy words in order to apply economic principles to your life!
For example, Harford writes that “Economics is about who gets what and why” (102). An example used in the book is that landlords in New York City, Washington, D.C., and other big cities around the world can charge coffee companies ridiculous prices to rent office space in certain locations because of the almost-guaranteed profits from the endless stream of price-blind, half-asleep customers that pass by the location every day. If selling coffee did not rake in such profits, then landlords would know that they could not demand such high rents from coffee companies.
Now, I know that we do not live in a big city or ever go to Starbucks®, but the ways that Harford analyzed the coffee situation can be used to explain the hidden truth about why that two-bedroom townhome we rented last year for $599/mo. was so cheap. We were led to believe that the landlord simply wanted to fill the space quickly, since any rent was better than no rent. However, if we had used Harford’s logic, we would have been able to see through the fresh paint and assigned parking spots to know that if living in the townhome was actually worth more, the landlord would have charged more. We found this out the hard way and now know that living with a broken toilet, without weather stripping, and with rude neighbors is definitely not worth more than $599/mo. The economics of our unfortunate situation is that the landlord got too much of our money because we signed a contract for a product that appeared on the surface, quite literally, to be acceptable. From now on, I say we follow Harford’s lead and analyze the “whys”—when house hunting, grocery shopping, or buying anything for that matter—a bit more closely.
In the other economics classes I have taken so far, many terms like “marginal,” adverse selection,” and “asymmetric information,” among others, sometimes seemed to make the subject of economics very abstract and hard to wrap my head around, like it did not apply to my own life, only to governments and large companies. Tim Harford, on the other hand, not only makes the point that economics does apply to my life (and yours); he also makes the subject of economics understandable and interesting for me; I think he would do the same for you, even though you have said many times that reading about economic theory is harder for you than listening to rap music.
To my wife:
I am writing to you about a book called The Undercover Economist by Tim Harford. I have not finished the book yet, but I am eager to read more, because it puts the information I have only seen explained in complicated charts and graphs into common sense explanations and everyday applications. For example, Harford explains how and why Starbucks’® high prices drive up the company’s rent, not the other way around. Also, he explains the naughty truth about grocery stores’ careful placement of expensive organic foods in order to discourage price-comparisons with the cheaper, non-organic options. Additionally, Harford uses the popular Jim Carey movie Liar, Liar and other scenarios as analogies to provide simple explanations of complex topics, like free markets and the healthcare system. More than all of these interesting examples, though, it seems that the most important thing to take away from The Undercover Economist is that having at least a basic understanding of economics can be both simple and valuable, and with a slight shift in our way of seeing the world around us, we can begin to think like true economists. What a relief it is that you do not need to understand all the fancy words in order to apply economic principles to your life!
For example, Harford writes that “Economics is about who gets what and why” (102). An example used in the book is that landlords in New York City, Washington, D.C., and other big cities around the world can charge coffee companies ridiculous prices to rent office space in certain locations because of the almost-guaranteed profits from the endless stream of price-blind, half-asleep customers that pass by the location every day. If selling coffee did not rake in such profits, then landlords would know that they could not demand such high rents from coffee companies.
Now, I know that we do not live in a big city or ever go to Starbucks®, but the ways that Harford analyzed the coffee situation can be used to explain the hidden truth about why that two-bedroom townhome we rented last year for $599/mo. was so cheap. We were led to believe that the landlord simply wanted to fill the space quickly, since any rent was better than no rent. However, if we had used Harford’s logic, we would have been able to see through the fresh paint and assigned parking spots to know that if living in the townhome was actually worth more, the landlord would have charged more. We found this out the hard way and now know that living with a broken toilet, without weather stripping, and with rude neighbors is definitely not worth more than $599/mo. The economics of our unfortunate situation is that the landlord got too much of our money because we signed a contract for a product that appeared on the surface, quite literally, to be acceptable. From now on, I say we follow Harford’s lead and analyze the “whys”—when house hunting, grocery shopping, or buying anything for that matter—a bit more closely.
In the other economics classes I have taken so far, many terms like “marginal,” adverse selection,” and “asymmetric information,” among others, sometimes seemed to make the subject of economics very abstract and hard to wrap my head around, like it did not apply to my own life, only to governments and large companies. Tim Harford, on the other hand, not only makes the point that economics does apply to my life (and yours); he also makes the subject of economics understandable and interesting for me; I think he would do the same for you, even though you have said many times that reading about economic theory is harder for you than listening to rap music.
Environmentalism and free trade: An unlikely duo
Again, the last several chapters of Mr. Harford’s book were pretty great, I thought. He goes at all questions from all major angles, and treats everything very fairly. Of course, environmentalists would not say the same after reading his Chapter nine about globalization.
I’m specifically referring to his reference that environmentalists “should be manning the barricades to demand global free trade immediately.” I’m sure every environmentalist reading something like that would be thinking “posh, free trade, capitalists, dirty, evil…” And I’m hardly exaggerating. But he does bring up a good point, and indirectly implies another point, at least to me, which I think are worth remembering.
First, he basically says that environmentalists have got it wrong, not because they are stupid, though. It’s generally because of bad information, a theme he seems to like. Several times, Mr. Harford mentions that many claims by political groups decrying globalization in its environmental role are usually overblown and I’m guessing the statistics to support such statements, if they exist, are manipulated, perhaps more than the average statistical manipulation.
Accordingly, he thinks that free trade should be one of the main platforms for environmentalists, and I happen to agree, but not just because of the reasons he lists, like the fact that globalization probably causes less pollution than isolation, not to mention more poverty. A more integrated world, which economic cooperation will help to foster, will, I think, be able to better handle the problems of pollution. It’s not hard to figure that my pollution may float across the world to China, and that is exactly what I have been told in some classes. If that’s so, then there’s a serious problem with every country in the world using autos, because the pollution caused is doubtlessly affecting more than just the driving citizens. In a world with economic sanctions and retaliation, it’s hard to imagine much getting done about this problem, and Presidents of the United States, at least recent ones, are notorious for lagging behind in world environmental standards.
Not to say they shouldn’t be skeptical. No doubt economic interference of any kind is certain to cost somebody something. But the point is that nations in a more integrated world, which free trade might help to foster, might be held more accountable to other nations and be better able to respond to such problems. At least they might talk about them, instead of simply refusing to sign any and every act which might hurt special interest support. Since this is what the environmentalists want (and I’m not saying I do, just that they do), then they really should be supporting free trade.
January 6, 2008
How Coffee Shops and Grocery Stores Pick Our Pockets
Chapter 2 of Harford's The Undercover Economist talks a lot about how coffee shops and grocery stores price discriminate in order to get more money out of us. I work at a local Target store (which also contains a Starbucks) and I experience every bit of these "discriminations" virtually every day.
Let me start off by saying I work as a cart-pusher. Colorado weather, which we all love, ruins my day virtually every single time I work. Often times I come inside the building and want a nice, hot, drink to help me warm up. I then proceed to walk in to Starbucks and look at the vast amount of beverages on their menu. Don’t get me wrong, I like Starbucks (just not all of the fancy drinks), however sometimes I just feel like a plain, ordinary, cup of coffee. When I ask for this, the baristas frequently look at me like I am crazy. They can’t believe that I want plain coffee over a White Caramel Mocha Caffé Latte Frappuccino with a cherry on top. Since I am not a huge fan of all the fancy drinks, I don’t regularly fall victim to Starbucks high prices. However, many times I see people order the same, complicated, overpriced, fancy drink that the person in front of them ordered because they want to feel special. As Harford says “I feel very special” when referring to getting the White Chocolate Mocha over the regular Mocha. They do just as Harford says in getting “Turkeys to Vote for Thanksgiving.” They simply take basic products, add special features to them, and charge a premium for those features.
Target has done virtually the same exact thing as Starbucks in terms of price discrimination. Usually when we go grocery shopping we will see a few name brands of a certain product, as well as a store brand. The store brand is almost always cheaper. However, target has taken this to a new level. They created two store brands. Market Pantry is their brand for the ordinary items and Archer Farms is the name they use for the premium items. However, the items are almost always identical except for a small detail here and there. Noodles are a perfect example of this. Market Pantry noodles come in regular plastic packaging, and look like normal noodles. Archer Farms noodles come in fancy packaging and come in different colors. All target really did, in this case, was add some food coloring to the noodles and change the packaging. Then they significantly marked up the price. I’m sure that many people purchase the Archer Farms noodles not because they are better tasting, but because they give people the feeling that they are more “upscale.”
On a side note, the example that Harford uses about discounts at Disney World, if you live locally, also applies to my work life. Target tends to charge somewhat higher prices than its main competitor, Wal-Mart. To counteract this, Target offers its employees a 10% discount on all products purchased. There is a catch. These days, most people pay using debit or credit cards. In order to get your employee discount, you have to pay either with cash or a Target Credit Card. Target conveniently has an ATM by the registers, which is mostly used by employees (Target probably makes a profit off of the ATM fees). Also, the interest rate on Target Cards is very high. In most cases it is a whopping 23-29 percent. So even though employees get 10% off up front they end up paying more than that back in interest if they use a Target Card.
The above are just a few examples of how grocery stores and coffee shops pick our pockets!
Let me start off by saying I work as a cart-pusher. Colorado weather, which we all love, ruins my day virtually every single time I work. Often times I come inside the building and want a nice, hot, drink to help me warm up. I then proceed to walk in to Starbucks and look at the vast amount of beverages on their menu. Don’t get me wrong, I like Starbucks (just not all of the fancy drinks), however sometimes I just feel like a plain, ordinary, cup of coffee. When I ask for this, the baristas frequently look at me like I am crazy. They can’t believe that I want plain coffee over a White Caramel Mocha Caffé Latte Frappuccino with a cherry on top. Since I am not a huge fan of all the fancy drinks, I don’t regularly fall victim to Starbucks high prices. However, many times I see people order the same, complicated, overpriced, fancy drink that the person in front of them ordered because they want to feel special. As Harford says “I feel very special” when referring to getting the White Chocolate Mocha over the regular Mocha. They do just as Harford says in getting “Turkeys to Vote for Thanksgiving.” They simply take basic products, add special features to them, and charge a premium for those features.
Target has done virtually the same exact thing as Starbucks in terms of price discrimination. Usually when we go grocery shopping we will see a few name brands of a certain product, as well as a store brand. The store brand is almost always cheaper. However, target has taken this to a new level. They created two store brands. Market Pantry is their brand for the ordinary items and Archer Farms is the name they use for the premium items. However, the items are almost always identical except for a small detail here and there. Noodles are a perfect example of this. Market Pantry noodles come in regular plastic packaging, and look like normal noodles. Archer Farms noodles come in fancy packaging and come in different colors. All target really did, in this case, was add some food coloring to the noodles and change the packaging. Then they significantly marked up the price. I’m sure that many people purchase the Archer Farms noodles not because they are better tasting, but because they give people the feeling that they are more “upscale.”
On a side note, the example that Harford uses about discounts at Disney World, if you live locally, also applies to my work life. Target tends to charge somewhat higher prices than its main competitor, Wal-Mart. To counteract this, Target offers its employees a 10% discount on all products purchased. There is a catch. These days, most people pay using debit or credit cards. In order to get your employee discount, you have to pay either with cash or a Target Credit Card. Target conveniently has an ATM by the registers, which is mostly used by employees (Target probably makes a profit off of the ATM fees). Also, the interest rate on Target Cards is very high. In most cases it is a whopping 23-29 percent. So even though employees get 10% off up front they end up paying more than that back in interest if they use a Target Card.
The above are just a few examples of how grocery stores and coffee shops pick our pockets!
The Grocery Game!
I think we can all agree that groceries are a
necessity. There aren't too many people in the US who grow enough of their own food to avoid at least a weekly trip to the grocery store. So, food is a necessity and we obtain it by purchasing it from the store.
Food, in the form of groceries, also constitutes a large portion of the family budget; whether you are rich or poor, you have to eat. So we have two established facts: we have to buy groceries at a store and we are committed to paying a good sum of money for those groceries.
Now comes the strategy for making the most of this situation. Harford puts into words some of the intricacies of the "grocery game" that I have been playing for years. Location, sale pricing, shopping cheaply and careful comparison are the hallmarks of the grocery game -- and any parent on a tight budget knows that this game can pay off big in the end!
Let's talk location -- like Harford discusses at the beginning of the book, location can play a big part in drawing in those who want the convenience of a store close to work, close to home or on the way to school. The store may pay a premium for this location, so be open to shopping at stores that are not as convenient. Grocery stores also have another game they like to play with regards to location -- while they may pay a similar cost per square foot for the grocery store located at Circle and Galley and the grocery story located next to Broadmoor Towne Center, they don't charge the same for the items sold. This location game they play happens all over the country -- grocery stores charge more for everyday staples in higher per capita neighborhoods than in lower per capita neighborhoods. Sometimes a few miles can make a big difference in the cost.
Does anyone disagree that when we are in a hurry, we spend more money on groceries? Harford points this out: "An expensive shopping trip is the result of carelessly choosing products with a high mark-up". Shopping cheaply involves using a list (and sticking to it) and paying close attention to the items you are purchasing. Don't grab the first jar of peanut butter you see or the can of soup that is directly in your line of vision -- look at the price, and choose accordingly. His suggestion of comparison shopping also comes into play here -- you are in a contest with the grocery store for your money. You want as much as possible for your pennies and they want to give you as little as possible for your dollars. Look high and low for items; stores like to make the cheaper stuff hard to find! Bulk garlic is usually cheap -- but I can't tell you have long I have to spend to find it. I can find jars of minced garlic, boxes of organic garlic but I swear the cheap, bulk garlic gets moved every week to a different part of the produce section!
Sale pricing -- this strategy can pay off in big savings when filling that grocery cart! You just have to change your attitude about the costs of food staples. Harford hit the nail on the head when he said "...it is just as accurate, and more illuminating, to turn the "sale" on its head and view prices as premiums on the sale price rather than discounts on the regular price."
By shopping with this attitude, you can select items that offer a fair value to you. When spaghetti is normally sale priced for $1.00/pound and you see it for $1.89/pound, it doesn't make sense to purchase any more than you absolutely have to have that day. This particular strategy works best if you have an excellent memory for prices or you have the organizational skills to keep a price book. Frugal grocery shoppers know the trick of the price book -- a listing of items your family regularly purchases along with the least expensive price paid for the item in the last six months. When shopping, consult your price book; if the item is close to the "low price listing", buy as much as you want -- if it is high, consider other options.
The price book strategy also helps to even out the problem of "inside knowledge" that Harford refers to. Grocery stores know that you are going to purchase meat, dairy, frozen foods, snack foods, etc. They spend a great deal of money tracking consumer spending habits in order to increase profits. You, on the other-hand, don't know if the prices that the grocery store is selling those items for is high, low or somewhere in between. Even advertised items can be high -- 10 for $10 is no bargain if the item usually sells for 89 cents. By keeping a price book, you have the inside knowledge to know whether the price is good. You may be surprised to learn that most "loss-leader" sales happen on a rotating six week schedule. If your family likes spaghetti, you want to buy it once every six weeks at the lowest cost. The same goes for Hot Pockets, ground hamburger and shredded cheese. Buy them during the low cost cycle and save your pennies for something else.
The biggest hurdle to the grocery game is time -- when we have the time to shop, to make a list, to keep a price book -- we can win the game. Those of us working full-time, going to school and raising a family frequently lose the game because we don't have the time to play (and that is just what the stores are counting on).
Stefanie Hudgins
necessity. There aren't too many people in the US who grow enough of their own food to avoid at least a weekly trip to the grocery store. So, food is a necessity and we obtain it by purchasing it from the store.Food, in the form of groceries, also constitutes a large portion of the family budget; whether you are rich or poor, you have to eat. So we have two established facts: we have to buy groceries at a store and we are committed to paying a good sum of money for those groceries.
Now comes the strategy for making the most of this situation. Harford puts into words some of the intricacies of the "grocery game" that I have been playing for years. Location, sale pricing, shopping cheaply and careful comparison are the hallmarks of the grocery game -- and any parent on a tight budget knows that this game can pay off big in the end!
Let's talk location -- like Harford discusses at the beginning of the book, location can play a big part in drawing in those who want the convenience of a store close to work, close to home or on the way to school. The store may pay a premium for this location, so be open to shopping at stores that are not as convenient. Grocery stores also have another game they like to play with regards to location -- while they may pay a similar cost per square foot for the grocery store located at Circle and Galley and the grocery story located next to Broadmoor Towne Center, they don't charge the same for the items sold. This location game they play happens all over the country -- grocery stores charge more for everyday staples in higher per capita neighborhoods than in lower per capita neighborhoods. Sometimes a few miles can make a big difference in the cost.
Does anyone disagree that when we are in a hurry, we spend more money on groceries? Harford points this out: "An expensive shopping trip is the result of carelessly choosing products with a high mark-up". Shopping cheaply involves using a list (and sticking to it) and paying close attention to the items you are purchasing. Don't grab the first jar of peanut butter you see or the can of soup that is directly in your line of vision -- look at the price, and choose accordingly. His suggestion of comparison shopping also comes into play here -- you are in a contest with the grocery store for your money. You want as much as possible for your pennies and they want to give you as little as possible for your dollars. Look high and low for items; stores like to make the cheaper stuff hard to find! Bulk garlic is usually cheap -- but I can't tell you have long I have to spend to find it. I can find jars of minced garlic, boxes of organic garlic but I swear the cheap, bulk garlic gets moved every week to a different part of the produce section!
Sale pricing -- this strategy can pay off in big savings when filling that grocery cart! You just have to change your attitude about the costs of food staples. Harford hit the nail on the head when he said "...it is just as accurate, and more illuminating, to turn the "sale" on its head and view prices as premiums on the sale price rather than discounts on the regular price."
By shopping with this attitude, you can select items that offer a fair value to you. When spaghetti is normally sale priced for $1.00/pound and you see it for $1.89/pound, it doesn't make sense to purchase any more than you absolutely have to have that day. This particular strategy works best if you have an excellent memory for prices or you have the organizational skills to keep a price book. Frugal grocery shoppers know the trick of the price book -- a listing of items your family regularly purchases along with the least expensive price paid for the item in the last six months. When shopping, consult your price book; if the item is close to the "low price listing", buy as much as you want -- if it is high, consider other options.
The price book strategy also helps to even out the problem of "inside knowledge" that Harford refers to. Grocery stores know that you are going to purchase meat, dairy, frozen foods, snack foods, etc. They spend a great deal of money tracking consumer spending habits in order to increase profits. You, on the other-hand, don't know if the prices that the grocery store is selling those items for is high, low or somewhere in between. Even advertised items can be high -- 10 for $10 is no bargain if the item usually sells for 89 cents. By keeping a price book, you have the inside knowledge to know whether the price is good. You may be surprised to learn that most "loss-leader" sales happen on a rotating six week schedule. If your family likes spaghetti, you want to buy it once every six weeks at the lowest cost. The same goes for Hot Pockets, ground hamburger and shredded cheese. Buy them during the low cost cycle and save your pennies for something else.
The biggest hurdle to the grocery game is time -- when we have the time to shop, to make a list, to keep a price book -- we can win the game. Those of us working full-time, going to school and raising a family frequently lose the game because we don't have the time to play (and that is just what the stores are counting on).
Stefanie Hudgins
Everyday Economics
I never knew it was possible to apply economic thought to so many aspects of one's life. Author Tim Harford explores several daily economic issues in his book, The Undercover Economist. In the first five chapters of his book, Harford discusses (among others) the issue of scarcity power, price targeting, price gouging, perfect markets, lemons & market failure, health care, externalities and pollution.
Chapter two of his book really got me thinking about the economics that might be involved in the bridal store that I manage. Although it is not exactly like the example he points out, it is similar in some ways. The store seems to have a small amount of scarcity power over the brides in Colorado Springs and many of the surrounding areas because of a regional exclusivity agreement with certain designers. If any bride wants to purchase a gown by those designers, they have to pay the price that is quoted by our store or risk purchasing by means of the internet (which doesn't seem like a big deal to many, but in the bridal industry they are taking a rather large and possibly costly risk as seen by four years of dealing with these types of problems...) The internet could be considered a type of leak in the bridal industry. Although there are legitimate ways to sell gowns online, often times it is prohibited by the designers. Some gowns may be found online at a significantly lower price without the customer service and no guarantees.
Harford also clearly points out another place in the market where there are no guarantees, for buyer or for sellers, when he writes about "lemons" as a type of market failure. Uncertainty and "incomplete information" prevents some transactions from taking place and other transactions are altered. This altering is visible in the market for cars.
Chapter two of his book really got me thinking about the economics that might be involved in the bridal store that I manage. Although it is not exactly like the example he points out, it is similar in some ways. The store seems to have a small amount of scarcity power over the brides in Colorado Springs and many of the surrounding areas because of a regional exclusivity agreement with certain designers. If any bride wants to purchase a gown by those designers, they have to pay the price that is quoted by our store or risk purchasing by means of the internet (which doesn't seem like a big deal to many, but in the bridal industry they are taking a rather large and possibly costly risk as seen by four years of dealing with these types of problems...) The internet could be considered a type of leak in the bridal industry. Although there are legitimate ways to sell gowns online, often times it is prohibited by the designers. Some gowns may be found online at a significantly lower price without the customer service and no guarantees.
Harford also clearly points out another place in the market where there are no guarantees, for buyer or for sellers, when he writes about "lemons" as a type of market failure. Uncertainty and "incomplete information" prevents some transactions from taking place and other transactions are altered. This altering is visible in the market for cars.
"The market doesn't work nearly as well as it should; secondhand cars tend to be cheap and of poor quality. Sellers with good cars want to hold out for a good price, but because they cannot prove that a good car really is a peach [typically a lemon], they cannot get that price and prefer to keep the car for themselves. You might expect that sellers would benefit from their inside information, but in fact there are no winners: smart buyers simply don't show up to play a rigged game."
The market for cars has now changed slightly because of useful tools such as CarFax. This is however still a relevant discussion because of the bearing that lemons have on other areas of the market. Harford's analysis moves to the market for health insurance which has very similar implications. Seemingly healthy individuals are forced to pay higher rates for health insurance because of the lack of complete information and a balancing effect to offset those beneficiaries who are insured and unhealthy (or may become that way.) This is one very costly market failure to the general public, but is there really a feasible solution?
Source: Tim Harford, The Undercover Economist. 2005
My Grocery List
Chapter 2 of The Undercover Economist has some very interesting thoughts behind it. The chapter deals with supermarkets, and similar consumable goods, and how companies try to maximize profits and customer’s preferences and willingness to pay. This chapter raised questions of Why is the variation in coffee prices some wide? Why do I pay so much more for organically grown food? Why does it always feel like more money at Whole Foods? All these questions are asked be each of us when figuring out why we spend so much. If we grab the cloak and dagger and go undercover along with the author we may be able to cut out some of these everyday costs we each incur.
I go shopping at a grocery store twice a week, more or less, and do all my shopping at Safeway because I think its cheaper. Safeway is an old store with dimmed lights and broken machines. It feels cheap and dirty. I also see the clerks and stockers putting sale prices on items. I must be getting the best deal, they don’t even have the money to fix their machines. Yet the author Tim Harford explains why it seems so much more expensive at Whole Foods: choices. At my corner Safeway I have two choices of onion red or white. But, as he explains, Whole Foods has pearl, yellow, organic, etc. with some of these varieties costing much more per unit. But when I was walking through I picked the onions that looked the best; I wasn’t shopping for the best price. If he is right I fell victim to price discrimination. Whole Foods saw me coming, and not me as a person but me as a group of shoppers.
Whole Foods, like any other business, is trying to maximize profits. Now Whole Foods knows that if they charge any difference between them and Safeway for regular white onions they will not sell any, or very few. But if Whole Foods leave items the Safeway has at a similar price if may get my walk in business: Whole Foods being a different experience. Since Whole Foods can’t charge a higher price for the same item it must offer a subtle difference to the product and then charge more. Now my group of shoppers looks at my regular white onions and the pearl onions. Well I have never had pearl onions and they have a higher price, maybe pearl onions are better or better for me. Since Whole Foods offered me a choice they gave me enough “rope” to hang myself. Whole Foods provided a similar item to my Safeway, white onions, and at a similar price, but they also included a “luxury” onion. I traded my white onion for the BMW of onions just because it was presented.
If I can tell this about myself then I can take that information to make future actions. How do I still make choices without always buying the BMW instead of the Toyota? To fully understand a purchase I need to look at alternatives. This becomes hard to do because of the cost of doing it in time and energy. If every onion I purchase has to be compared to every onion on the planet it would be ages before I could eat my an onion. I need instead to simply look at the choices presented. While in Whole Foods, for example, I need to pay attention to the price differences of similar items at that store. But to make sure I am not paying to much compared to another store I must go “undercover”. I will also need to go back to my local Safeway to find how much they charge. Since Safeway and City Market and other supermarkets are similar it would be reasonable to assume that their prices will be similar (excluding sale items or promotions). Therefore, I get a basket of goods at Safeway and the same items at Whole Foods. Compare my prices and now I know what to look out for at Whole Foods: my “luxury” onions.
I go shopping at a grocery store twice a week, more or less, and do all my shopping at Safeway because I think its cheaper. Safeway is an old store with dimmed lights and broken machines. It feels cheap and dirty. I also see the clerks and stockers putting sale prices on items. I must be getting the best deal, they don’t even have the money to fix their machines. Yet the author Tim Harford explains why it seems so much more expensive at Whole Foods: choices. At my corner Safeway I have two choices of onion red or white. But, as he explains, Whole Foods has pearl, yellow, organic, etc. with some of these varieties costing much more per unit. But when I was walking through I picked the onions that looked the best; I wasn’t shopping for the best price. If he is right I fell victim to price discrimination. Whole Foods saw me coming, and not me as a person but me as a group of shoppers.
Whole Foods, like any other business, is trying to maximize profits. Now Whole Foods knows that if they charge any difference between them and Safeway for regular white onions they will not sell any, or very few. But if Whole Foods leave items the Safeway has at a similar price if may get my walk in business: Whole Foods being a different experience. Since Whole Foods can’t charge a higher price for the same item it must offer a subtle difference to the product and then charge more. Now my group of shoppers looks at my regular white onions and the pearl onions. Well I have never had pearl onions and they have a higher price, maybe pearl onions are better or better for me. Since Whole Foods offered me a choice they gave me enough “rope” to hang myself. Whole Foods provided a similar item to my Safeway, white onions, and at a similar price, but they also included a “luxury” onion. I traded my white onion for the BMW of onions just because it was presented.
If I can tell this about myself then I can take that information to make future actions. How do I still make choices without always buying the BMW instead of the Toyota? To fully understand a purchase I need to look at alternatives. This becomes hard to do because of the cost of doing it in time and energy. If every onion I purchase has to be compared to every onion on the planet it would be ages before I could eat my an onion. I need instead to simply look at the choices presented. While in Whole Foods, for example, I need to pay attention to the price differences of similar items at that store. But to make sure I am not paying to much compared to another store I must go “undercover”. I will also need to go back to my local Safeway to find how much they charge. Since Safeway and City Market and other supermarkets are similar it would be reasonable to assume that their prices will be similar (excluding sale items or promotions). Therefore, I get a basket of goods at Safeway and the same items at Whole Foods. Compare my prices and now I know what to look out for at Whole Foods: my “luxury” onions.
Withholding information. Assuming you have information to withhold.
Harford’s book thus far has done a tremendous job of putting into words what I could not in my own life. Having the economic mind that I do, I constantly am able to explain why prices are what they are and consistently arrive at this dead end of, “well that’s the fair price and I just have to deal with it.” But what if I want to pay less than the fair price and I can bargain to do so? In order to do that I would have to arrive at a deal lower than the fair price which would either indicate that the seller is not going to sell to me or there was information with-held and he will sell to me albeit that the original description of the item is probably not correct. As I look through the blogs posted thus far I see a lot about how this book has shown people how they are getting taken or how this will help people be more educated on their lattes, etc. However, what I have read in this book is better ways to equip myself to not just avoid being taken at the auto dealer, but to take the auto dealer himself.
Harford talks in chapters three and five about how if information is withheld then markets don’t work efficiently and unfair prices are usually reached. Thus was the case of a recent purchase of mine, however, I withheld information as well that offset the inefficiency of the first withholding. Recently my wife and I bought a new (used) car. A 2002 Subaru WRX Wagon with some fun jargon that I won’t toss out here to make the car faster than it already is stock. The book price on this car: $14350. The price we paid: $8700. Now I had made offers similar to this to dealers on WRX’s for weeks and it was no surprise every time when they turned me down. It’s a popular car, especially in Colorado and since I knew the cars I was looking at were in good condition it was hard to justify being frustrated with those dealers. This was a time for what Harford calls the “undercover economist.” I knew that to get a WRX in this market that was in good shape I would have to pay book value or more. I know enough to tell if the car is in good shape so I could point out flaws and have the price adjusted. But here’s the catch and how I actually beat the dealer. Typically, if someone finds a flaw with a car, it is reasonable to say that a dealer will usually adjust the price of the car based on what it will cost to make that repair. I.E. if the car books at $14350 and I see that the water pump sounds bad I will require that the car is adjusted by the $600 it would cost to replace the water pump on that car. Since I have acquired the knowledge to fix the car myself and withhold that information from the dealer by acting like normal and taking it to a mechanic to have it inspected (even though I can do a better inspection myself), I request adjustments for market value of the adjustments and then do the adjustments myself at a fraction of the cost.
Thus was the case of our new car. I ordered the car from Texas sight unseen. Immediately this screams information withheld and whenever I heard the dealer agree almost instantly over the phone to my first offer I knew that there was definitely information withheld. However, at that price, I figured I could buy the car and drop a new engine if it needed it, and still sell the car for more than I bought it. Well, truly the dealer did withhold information. He took pictures of the rear tires that were good while the fronts were bald, assorted interior pieces were missing, etc. First of all, we assumed that we were already receiving a discount off of the book rate due to the lower demand for Subarus in Texas. So that should have brought the value of the car down around $12000 and thus was the amount I would have not wanted to exceed for a good car coming from Texas. We paid $3300 less than that and had I not fixed stuff myself I would have ended up paying around Texas market value for the car to be in good condition after all. However, since the dealer assumed I would be paying typical labor rate for those repairs and he knew that I assumed he was withholding information, he gave me an adjusted price that has drastically larger discounts than what I actually repaired the car for.
Did I get a deal? Yeah! But then again, even that is simple economics and didn’t come for free. There were costs and time associated with my knowledge. To me the core point of this book is just that… all costs within an economy can in some way be accounted for. While I did receive a good deal on the car now, it did cost me something at some point to attain the knowledge I had to fix the car for a cheap price. So the lesson is that you can be information withholders at their own game but you have to have some skill to back it up or it’s all for nothing.
Harford talks in chapters three and five about how if information is withheld then markets don’t work efficiently and unfair prices are usually reached. Thus was the case of a recent purchase of mine, however, I withheld information as well that offset the inefficiency of the first withholding. Recently my wife and I bought a new (used) car. A 2002 Subaru WRX Wagon with some fun jargon that I won’t toss out here to make the car faster than it already is stock. The book price on this car: $14350. The price we paid: $8700. Now I had made offers similar to this to dealers on WRX’s for weeks and it was no surprise every time when they turned me down. It’s a popular car, especially in Colorado and since I knew the cars I was looking at were in good condition it was hard to justify being frustrated with those dealers. This was a time for what Harford calls the “undercover economist.” I knew that to get a WRX in this market that was in good shape I would have to pay book value or more. I know enough to tell if the car is in good shape so I could point out flaws and have the price adjusted. But here’s the catch and how I actually beat the dealer. Typically, if someone finds a flaw with a car, it is reasonable to say that a dealer will usually adjust the price of the car based on what it will cost to make that repair. I.E. if the car books at $14350 and I see that the water pump sounds bad I will require that the car is adjusted by the $600 it would cost to replace the water pump on that car. Since I have acquired the knowledge to fix the car myself and withhold that information from the dealer by acting like normal and taking it to a mechanic to have it inspected (even though I can do a better inspection myself), I request adjustments for market value of the adjustments and then do the adjustments myself at a fraction of the cost.
Thus was the case of our new car. I ordered the car from Texas sight unseen. Immediately this screams information withheld and whenever I heard the dealer agree almost instantly over the phone to my first offer I knew that there was definitely information withheld. However, at that price, I figured I could buy the car and drop a new engine if it needed it, and still sell the car for more than I bought it. Well, truly the dealer did withhold information. He took pictures of the rear tires that were good while the fronts were bald, assorted interior pieces were missing, etc. First of all, we assumed that we were already receiving a discount off of the book rate due to the lower demand for Subarus in Texas. So that should have brought the value of the car down around $12000 and thus was the amount I would have not wanted to exceed for a good car coming from Texas. We paid $3300 less than that and had I not fixed stuff myself I would have ended up paying around Texas market value for the car to be in good condition after all. However, since the dealer assumed I would be paying typical labor rate for those repairs and he knew that I assumed he was withholding information, he gave me an adjusted price that has drastically larger discounts than what I actually repaired the car for.
Did I get a deal? Yeah! But then again, even that is simple economics and didn’t come for free. There were costs and time associated with my knowledge. To me the core point of this book is just that… all costs within an economy can in some way be accounted for. While I did receive a good deal on the car now, it did cost me something at some point to attain the knowledge I had to fix the car for a cheap price. So the lesson is that you can be information withholders at their own game but you have to have some skill to back it up or it’s all for nothing.
Give Me $$$ Because I Ride My Bicycle Everywhere (And Therefore Give You Very Little Gas)
But even if you don’t, I’ll still ride anyways.
Every morning I leave for work, I compete for shoulder space with everyone else going to work in their cars.
Now, the question is: Who is getting to work for free? Is it me or the drivers, some of which do not believe bikers are entitled to sharing the road with them?
The correct answer: me.
I pay nothing to ride and I actually benefit from the exercise I get every morning (a positive externality) whereas every driver I see is paying for wear and tear of their vehicles and for the consumption of gasoline.
Is Harford correct in saying that there is no additional cost for driving after you pay to get on the road (which for all intent and purpose translates to vehicle registration, insurance, and maintenance here in the States)?
Not quite. According to Harford, driving is a voluntary activity (because it is indeed a voluntary activity) so there is a marginal cost, which is the price of gas. The more you drive, the more you pay, and rightfully so.
Why? Because gasoline is a variable cost, not a fixed cost, that can be avoided by not driving as much.
You know, we have it pretty easy here in the United States. Countries in the rest of the world pay so much more for gas that we have no right to complain. Three years ago when I was in Norway, folks over there were paying $7-$8/gallon. And that was back in 2005!
Why not do this right here in the Colorado? I think that would be fantastic!
Like Harford says, the trick is to get drivers to pay for the cost of their actions: they need to pay the externality costs. Make them pay for wearing down our roads! Make them pay for polluting the air! And more importantly, make it more expensive for them to feed me the occasional whiff of car exhaust!
Harford is right: we need to address prices at the margin. Increase the price at the pump. And use that money to 1.) pay for the negative externalities that driving causes and 2.) force existing drivers on the road to have a come-to-Jesus moment and ask themselves “Do I really need to make this trip to the grocery store at 2 am to buy a candy bar?”
One thing is certain: whether you are rich or poor, you will indeed change your behavior because externality charges will make other alternatives look more attractive.
Will rich people continue to drive and poor people resort to public transportation? Probably. But I would rather breathe in a Cadillac Escalade fart than exhaust from an old beat-up truck. At least new car gas doesn’t smell as terrible as old car gas.
But I also have another motive. When rich people waste their money at the pump, I benefit because I own quite a few shares of an oil/gasoline-based mutual fund. Anytime I see people filling their tanks or oil rising in price, the inner economist in me says, “I’m making money off of this so drive all you want while I bike.”
Oh, and before I forget, if any of you want to give me some money because I do my part in sharing very little of my Toyota Camry fart with you (it’s a V6, by the way), just add a comment and let me know where you want to meet.
I’ll bike there!
Coffee Addiction is costly
The Book, The Undercover Economist by Tim Harford is a fascinating yet simplistic way of breaking down economic concepts. The first chapter seems especially practical due to the fact that all businesses want to maximize profits and all consumers want high quality at a low price. The struggle between the two is the interesting part. In the first chapter Harford expresses the significance of location, rent and thinking on the margin. He uses the example of a coffee shop located in a prime spot in the Waterloo train station in London. He demonstrates through his example how this coffee shop due to location makes high profits. Far outselling its competition. The coffee shop is even able to sell its coffee at a higher price and people will pay the extra money because of the convenience of the shop. The best locations are where the major players reside.
What about competition ? The coffee shops that are not able to have the best locations are broken down further into next best location and the margin or the worst location. The coffee shops are all competing for customers and therefore are competing for profits. The coffee shops with the prime locations will make the most profits. Those with the worst locations will also have the lowest profits. The stores with the lowest profits set the margin or the comparable profits. This is key to understanding why businesses will pay more for location. The profits reflect the location of the business.
Businesses will compete for locations which in turn drives the rent of the location up. This also explains why certain locations products are considered more expensive then others. As in the coffee example, the shop with the prime location probably has a higher rent then the shop with the least desirable location, and the product prices reflect the difference. However the price difference is usually not enough to cause people to choose cost over convenience, therefore the prime location will still have higher profits then those in less convenient, noticeable locations.
They all want your money!
I wish I would have read Harford’s book sooner, before I bought the used car, renewed my health insurance and bought groceries while sipping on my large double shot, half cream, and half steamed espresso with $4 sprinkles. So far I’ve gotten “shafted” on all of these. After reading the first 5 chapters of Harford’s book I will now become a savvier buyer and get less of the “shaft”. The most important thing that I have learned so far is to stop and take a look at what I am buying, who is selling it to me and what are the alternatives. This can give me the upper hand in the deal or give me insight to just how much I’m going to swindled.
Last month I bought a used car and no, I didn’t get the best deal on it but I did get the one I had been looking for, for the last 8 months. I wanted a newer Jeep Cherokee with anti-lock brakes. Turns out those anti-lock brakes on that SUV are somewhat of a rarity in used dealerships along the Front Range, hence my over whelming joy that flooded into me when I found it on a lot down the road from school. So I thought it would be a good idea to convey the message to the used car dealer that I have been looking to buy for a long time and he has exactly what I want. Woops, I should have seen the dollar signs pop up in his eyes but he was a professional and kept his cool. If I would have read the chapter on price discrimination I would have known to keep my damn mouth shut! I just gave up valuable information to him which would allow him too easily to extract every cent I had for the Jeep. I just self-incriminated myself to the fact that I am willing to wait a long time to get what I want and possibly will pay a premium for it when I find it so I won’t have to wait another 8 months to find another one. If I would have just stopped and thought about what I was buying and who was selling I could have kept this information shift from happening.
First, I was buying a car that was hard to find (yes, everyone advertises ABS on them but every time I’ve gone to look they were lying or assuming it had it) and on this lot next to the one I wanted was 6 others without ABS. So I had alternatives but they were not what I wanted, because last year I could have made that corner going down the icy hill and not parked my car on baby Jesus and the tree wise men in the front lawn of a very angry man, if my car would have had ABS.
Second, I should have realized that I really knew nothing about bargaining with a professional trickster. I’ve bought one used car from a dealer six years ago. This salesman does this every day. He knows what to look for and how to exploit it. There is asymmetric information here, he knows what to do and I have no clue. How could I avoid getting into this situation, learn more about it. I could have brought people who know more about this with me to help, or even read a book about it. But I didn’t, because I’m too impatient.
I wanted that Jeep so bad I could taste it. I did haggle a bit and he did come down some. But if I would have sucked it up and just walked away he would have called and offered a lower price. I would have shifted the information balance back into my favor by sending the signal that I’ve waited 8 months a few more won’t hurt (even though it really would have). In the end I got the Jeep I wanted and it is better than I had thought. I have also learned a great deal, coupled with this book and my experience, I could go to any dealership and get the car I want at a price I like. I just have to remember to keep my thoughts to myself, keep salesman in the dark, not let emotions get in the way, and act like they have to pay me to take it off the lot. Remembering all this will keep the dealerships from price discriminating and nativity scenes from getting demolished. Robbe Uhrhammer
Last month I bought a used car and no, I didn’t get the best deal on it but I did get the one I had been looking for, for the last 8 months. I wanted a newer Jeep Cherokee with anti-lock brakes. Turns out those anti-lock brakes on that SUV are somewhat of a rarity in used dealerships along the Front Range, hence my over whelming joy that flooded into me when I found it on a lot down the road from school. So I thought it would be a good idea to convey the message to the used car dealer that I have been looking to buy for a long time and he has exactly what I want. Woops, I should have seen the dollar signs pop up in his eyes but he was a professional and kept his cool. If I would have read the chapter on price discrimination I would have known to keep my damn mouth shut! I just gave up valuable information to him which would allow him too easily to extract every cent I had for the Jeep. I just self-incriminated myself to the fact that I am willing to wait a long time to get what I want and possibly will pay a premium for it when I find it so I won’t have to wait another 8 months to find another one. If I would have just stopped and thought about what I was buying and who was selling I could have kept this information shift from happening.
First, I was buying a car that was hard to find (yes, everyone advertises ABS on them but every time I’ve gone to look they were lying or assuming it had it) and on this lot next to the one I wanted was 6 others without ABS. So I had alternatives but they were not what I wanted, because last year I could have made that corner going down the icy hill and not parked my car on baby Jesus and the tree wise men in the front lawn of a very angry man, if my car would have had ABS.
Second, I should have realized that I really knew nothing about bargaining with a professional trickster. I’ve bought one used car from a dealer six years ago. This salesman does this every day. He knows what to look for and how to exploit it. There is asymmetric information here, he knows what to do and I have no clue. How could I avoid getting into this situation, learn more about it. I could have brought people who know more about this with me to help, or even read a book about it. But I didn’t, because I’m too impatient.
I wanted that Jeep so bad I could taste it. I did haggle a bit and he did come down some. But if I would have sucked it up and just walked away he would have called and offered a lower price. I would have shifted the information balance back into my favor by sending the signal that I’ve waited 8 months a few more won’t hurt (even though it really would have). In the end I got the Jeep I wanted and it is better than I had thought. I have also learned a great deal, coupled with this book and my experience, I could go to any dealership and get the car I want at a price I like. I just have to remember to keep my thoughts to myself, keep salesman in the dark, not let emotions get in the way, and act like they have to pay me to take it off the lot. Remembering all this will keep the dealerships from price discriminating and nativity scenes from getting demolished. Robbe Uhrhammer
Highlight-Lowlight 1
After reading the second chapter in this book I found myself saying YES, YES, YES! I have been saying for many years, that grocery shopping is the biggest waste of time, but it is a necessity that humans have to do. First the item is made and shipped to the grocery store, where a human unpacks and stocks the shelves, and then a customer places the item into their cart, and then on to the register, where the item is sacked into a bag and taken to the customers house where it is unpacked and placed into a pantry. When I look at the concept of how many times items are placed and or handled it’s a waste of time, and I can say I hate grocery shopping. Having such a dislike to grocery shopping I find myself walking into Whole Foods or Wild Oats, or even an upscale store. My thought is if I have to do the grocery shopping, I better shop at a store with a great astrosphere. While these upscale stores or natural grocers know how to target the customers that come through their doors. When walking into Whole Foods many people can get lost in the aisles of what they have to sell. Any shopper has to be smart and go shopping with a plan of what is needed and know that there are many things that lure customers in and it’s those products that the stores get the customers on. Not only do grocery stores target customers but almost all stores feed on impulse buying customers.
Personally I am an organic shopper, and for the most part if I know we need something from the store I will just purchase it without any further thought of how much it costs. Simple little tactics can be a huge help, and the biggest one that stands out to me is price comparing. Remembering the prices of the same product from different stores and being wise about where to purchase an item from. That’s seems so simple but people get wrapped up in life and don’t want to worry about price comparing, and it’s those people that will get sucked into purchasing the higher priced item. I am totally aware of grocery stores putting two sections of all the fruits and vegetables so people don’t see the price differences next to each other. That’s not the only thing that stores do, they “target” customers into buying the more expensive product, which boils down to the packaging of the generic brand versus the more expensive brand. Having traveled many places, packaging is a huge deal in other countries, and it’s amazing to me how countries look at the concept of packaging. This could be a paper in its self but it is a notable idea having just come back from Brazil, and seeing how that country packages its cookies. I purchased cookies for about 2 dollars, these cookies are what we know as oreo’s in the United States, and every single cookie was individually wrapped. The cost of wrapping every cookie individually brings up the overall production costs, knowing I paid about 2 dollars, while the packaging probably cost 1.50.
Tim Harford hit this right on the money when talking about the different strategies stores use in chapter two. This really seems so simple and that everyone knows this, but really I feel this is really important and Tim Harford must also think this is a notable concept because after all it is a chapter in his book.
Personally I am an organic shopper, and for the most part if I know we need something from the store I will just purchase it without any further thought of how much it costs. Simple little tactics can be a huge help, and the biggest one that stands out to me is price comparing. Remembering the prices of the same product from different stores and being wise about where to purchase an item from. That’s seems so simple but people get wrapped up in life and don’t want to worry about price comparing, and it’s those people that will get sucked into purchasing the higher priced item. I am totally aware of grocery stores putting two sections of all the fruits and vegetables so people don’t see the price differences next to each other. That’s not the only thing that stores do, they “target” customers into buying the more expensive product, which boils down to the packaging of the generic brand versus the more expensive brand. Having traveled many places, packaging is a huge deal in other countries, and it’s amazing to me how countries look at the concept of packaging. This could be a paper in its self but it is a notable idea having just come back from Brazil, and seeing how that country packages its cookies. I purchased cookies for about 2 dollars, these cookies are what we know as oreo’s in the United States, and every single cookie was individually wrapped. The cost of wrapping every cookie individually brings up the overall production costs, knowing I paid about 2 dollars, while the packaging probably cost 1.50.
Tim Harford hit this right on the money when talking about the different strategies stores use in chapter two. This really seems so simple and that everyone knows this, but really I feel this is really important and Tim Harford must also think this is a notable concept because after all it is a chapter in his book.
Sometimes you win, Sometimes you lose. Highlight (Chapter 6-10)
My highlight for the second half of Harford's book is Chapter Seven "The Men Who Knew the Value of Nothing". The reason this section particularly grabbed my attention was two fold. First I'm a big fan of puzzle solving and problem construction, so as soon as I got into the Game Theory and Auction Theory parts of the chapter I was hooked.
I think the reason why this fascinates me so much is the whole idea of people trying to predict what others will do in a given situation and acting accordingly. Read this as poker or establishing auction roles or negotiations etc... Again, similar to my highlight for Chapters 1-5 it goes to the basis for what economists do, understanding your choices, those of others. And then tying it to personal economics by deciding how it can best serve your interest or on a more philanthropic level the economics of others.
I read this Chapter and started to think of it's relationship to establishing political policy, economic policy or any other sort of regulation. It comes down to understanding the entire scope of incentives available to everyone involved and what information they have available to them and should have. The chapter goes on to show the failure of not understanding the player's involved as well as what the benefits of successful outcomes can be and how games work to produce efficiency in the market and how they also fail to.
This leads me to more extended questions, "Can anyone who makes policy for a group for 'their benefit' (health care for example) be able to do it better then the market?" Well of course not, but when a corrupt or lopsided market system exists sometimes it's necessary.
I think it's funny when I see people play a game without reading the rules. It's important to be able to partcipate with a degree of skill that you know what you're doing and what others can do to you. This reminds me of the first time a pawn of mine was taken 'en passe' in chess. I eventually lost the game (I'm not a very good chess player anyhow), but more so it was an early lesson to me of how important it is to understand all the 'rules' of what you're into and the ramifications of what happens when you're not. It's a testimony to educating yourself and others.
The second more subtle part of it was the reinforcement of what Harford spoke to earlier in the book regarding the lopsided effect of asymmetric information. As we look at the examples of the auctions they worked properly when everyone was allowed to read the signals that were given out by the other participants and after the auction design team had been able to set up a game (a mini market) where all parties were open to the same rules, had the same information and protected themselves and all the parties involved.
I think the reason why this fascinates me so much is the whole idea of people trying to predict what others will do in a given situation and acting accordingly. Read this as poker or establishing auction roles or negotiations etc... Again, similar to my highlight for Chapters 1-5 it goes to the basis for what economists do, understanding your choices, those of others. And then tying it to personal economics by deciding how it can best serve your interest or on a more philanthropic level the economics of others.
I read this Chapter and started to think of it's relationship to establishing political policy, economic policy or any other sort of regulation. It comes down to understanding the entire scope of incentives available to everyone involved and what information they have available to them and should have. The chapter goes on to show the failure of not understanding the player's involved as well as what the benefits of successful outcomes can be and how games work to produce efficiency in the market and how they also fail to.
This leads me to more extended questions, "Can anyone who makes policy for a group for 'their benefit' (health care for example) be able to do it better then the market?" Well of course not, but when a corrupt or lopsided market system exists sometimes it's necessary.
I think it's funny when I see people play a game without reading the rules. It's important to be able to partcipate with a degree of skill that you know what you're doing and what others can do to you. This reminds me of the first time a pawn of mine was taken 'en passe' in chess. I eventually lost the game (I'm not a very good chess player anyhow), but more so it was an early lesson to me of how important it is to understand all the 'rules' of what you're into and the ramifications of what happens when you're not. It's a testimony to educating yourself and others.
The second more subtle part of it was the reinforcement of what Harford spoke to earlier in the book regarding the lopsided effect of asymmetric information. As we look at the examples of the auctions they worked properly when everyone was allowed to read the signals that were given out by the other participants and after the auction design team had been able to set up a game (a mini market) where all parties were open to the same rules, had the same information and protected themselves and all the parties involved.
Highlight/Lowlight 1
Externality- a definite Highlight
In reading the first 5 chapters of Harford’s book, “Undercover Economist” I learned the meaning to a word that was formerly foreign to me. This word should be remembered by everyone as it is applicable in almost all aspects of life, not only in economics. This word is externality and it is unique to me because I feel that it is something that most people know about, like myself previous to my reading, but can not really explain the worth of its existence. The definition of externality in the context of economics is explained by Harford as; “a side effect, because it lies outside the original decisions.”
The relevance of remembering externality is to assist in looking at decisions from other perspectives than just result. For instance externalities can be applied when visiting a doctor for back pain. The doctor might prescribe a pain relieving medication. Obviously the medication is going to alleviate the pain, but what are the externalities associated with taking this medication. Most people ask about these externalities because they ask about the side effects, like whether the medication will cause sleepiness or an upset stomach. More importantly is the subtle real life externality. This is exemplified by a young person who starts working at a job, with upward mobility, in high school. This person continues working full time at this job into college until junior year when this person is promoted to a stepping stone position, somewhere between hourly worker and salaried executive. This person likes this position because it has more perks, it pays better and it is just one step away from a full blown career as an executive making a hefty salary. The downfall is that this person will only be able to attend college part time, and after a while decides that college is not needed in their career so college is given up altogether. Just as this person predicted after about a year, the person is promoted into the executive position and is very happy for a few more years. After a few years there is opportunity for advancement to a vice president position, the only hang up is that the competition has a college degree in a related field but has less job experience. The decision is made and the competition is promoted, justified by the college degree. Now this person realizes the side effect or externality of not having the college degree. Had our person looked at all perspectives before deciding to drop out of college, the decision might have been to keep plugging along with college until completed as there is the possibility of more opportunity in the future.
Once I was able to understand externalities in every day situations it was easier to apply the instrumental role they play in much larger arenas. Harford provides a great example that really helped me to consider the depth of a controversial and very timely matter. Harford refers to oil refining, gasoline retailing and the price a driver pays for the gas, where the result is the negative externalities of pollution, local poisoning and global warming. Economists consider whether these externalities could or should be included in the price the driver pays for gas, or whether the oil company should pay the extra charge for these externalities. More importantly since consideration is given for charging for the externalities, how do we measure them in cost? This is the real economic thought process, which embarrassingly enough I had never thought about before.
Many examples can be used to convey externalities of various decisions. The most important aspect of externalities is that they exist and are fundamental in all decision making processes. Many of us are quick to make decisions or form opinions but by remembering how to figure out the externalities we might be able to decide without future regret. Thank you Harford.
In reading the first 5 chapters of Harford’s book, “Undercover Economist” I learned the meaning to a word that was formerly foreign to me. This word should be remembered by everyone as it is applicable in almost all aspects of life, not only in economics. This word is externality and it is unique to me because I feel that it is something that most people know about, like myself previous to my reading, but can not really explain the worth of its existence. The definition of externality in the context of economics is explained by Harford as; “a side effect, because it lies outside the original decisions.”
The relevance of remembering externality is to assist in looking at decisions from other perspectives than just result. For instance externalities can be applied when visiting a doctor for back pain. The doctor might prescribe a pain relieving medication. Obviously the medication is going to alleviate the pain, but what are the externalities associated with taking this medication. Most people ask about these externalities because they ask about the side effects, like whether the medication will cause sleepiness or an upset stomach. More importantly is the subtle real life externality. This is exemplified by a young person who starts working at a job, with upward mobility, in high school. This person continues working full time at this job into college until junior year when this person is promoted to a stepping stone position, somewhere between hourly worker and salaried executive. This person likes this position because it has more perks, it pays better and it is just one step away from a full blown career as an executive making a hefty salary. The downfall is that this person will only be able to attend college part time, and after a while decides that college is not needed in their career so college is given up altogether. Just as this person predicted after about a year, the person is promoted into the executive position and is very happy for a few more years. After a few years there is opportunity for advancement to a vice president position, the only hang up is that the competition has a college degree in a related field but has less job experience. The decision is made and the competition is promoted, justified by the college degree. Now this person realizes the side effect or externality of not having the college degree. Had our person looked at all perspectives before deciding to drop out of college, the decision might have been to keep plugging along with college until completed as there is the possibility of more opportunity in the future.
Once I was able to understand externalities in every day situations it was easier to apply the instrumental role they play in much larger arenas. Harford provides a great example that really helped me to consider the depth of a controversial and very timely matter. Harford refers to oil refining, gasoline retailing and the price a driver pays for the gas, where the result is the negative externalities of pollution, local poisoning and global warming. Economists consider whether these externalities could or should be included in the price the driver pays for gas, or whether the oil company should pay the extra charge for these externalities. More importantly since consideration is given for charging for the externalities, how do we measure them in cost? This is the real economic thought process, which embarrassingly enough I had never thought about before.
Many examples can be used to convey externalities of various decisions. The most important aspect of externalities is that they exist and are fundamental in all decision making processes. Many of us are quick to make decisions or form opinions but by remembering how to figure out the externalities we might be able to decide without future regret. Thank you Harford.
highlights/lowlights 1
Highlights/Lowlights Chapters 1-5 The Undercover Economist
For me, the highlight of these chapters was the brief space in the fist chapter where Hartford discuses wage competition and immigration. He represented the highly contentious issue in economic terms to show the effects on the entire workforce. His argument is based on the influx of highly skilled workers to the United Kingdom and how it affects the labor market there. Unfortunately the first chapter is more overview than anything else and this argument was little short.
In Harford’s argument, immigration is contentious because is it self interested. People will contest immigration because they are afraid of losing their own jobs. The people protesting the issue will be those who stand to lose wages or wage increases due to the influx of new workers in their field. The example is given of highly skilled workers moving to the U.K. and taking positions within the health care field. This has lead to the wage repression of those in nursing. What is happening is that the new workers are flooding the market with a supply. The increased amount of workers will keep the wages of everybody down because there could be more workers than there are jobs.
This same thing happens in the lower skill level and is the reason why so many Americans are concerned about the issue. What is interesting is that more middle class Americans are upset about the issue. It’s not that they shouldn’t care; it is that the majority of immigrants to the United States are low wage workers. The immigrants to the U.K. are more in nursing and other health care related fields. Currently, hospitals in the U.S. are experiencing a shortage of workers in these positions. The wage repression is occurring at a lower skill level, and a lower wage. This is resulting in lower prices on the consumer goods purchased by the middle class.
I felt that this is worth noting, because the increase in the number of workers in the United States is an increase in the lower skill levels. The people protesting this immigration are typically people who have a higher skill level than those immigrating. The people protesting are therefore enjoying the benefits of lower cost on the things they buy, without seeing their own wages reduced or stagnated. In the case of the U.K. the costs of acquiring new or better skills will begin to be higher than the expected payoff for those skills. When that happens, people will stop seeking to acquire those skills and spend their time and money elsewhere. In the Untied states, the current citizens are more likely to be economically capable of acquiring new skills and will be enjoy the higher wages that they receive after. The immigration issue in the United States is most often fought by the people who have the most to gain from our current situation. As long as there continues to be an influx of low skilled workers that middle class has nothing to complain about. And the American lower class is often more educated and has more skills than those immigrating. There is really little reason to complain and all the incentive to make more of an effort to acquire more skills.
For me, the highlight of these chapters was the brief space in the fist chapter where Hartford discuses wage competition and immigration. He represented the highly contentious issue in economic terms to show the effects on the entire workforce. His argument is based on the influx of highly skilled workers to the United Kingdom and how it affects the labor market there. Unfortunately the first chapter is more overview than anything else and this argument was little short.
In Harford’s argument, immigration is contentious because is it self interested. People will contest immigration because they are afraid of losing their own jobs. The people protesting the issue will be those who stand to lose wages or wage increases due to the influx of new workers in their field. The example is given of highly skilled workers moving to the U.K. and taking positions within the health care field. This has lead to the wage repression of those in nursing. What is happening is that the new workers are flooding the market with a supply. The increased amount of workers will keep the wages of everybody down because there could be more workers than there are jobs.
This same thing happens in the lower skill level and is the reason why so many Americans are concerned about the issue. What is interesting is that more middle class Americans are upset about the issue. It’s not that they shouldn’t care; it is that the majority of immigrants to the United States are low wage workers. The immigrants to the U.K. are more in nursing and other health care related fields. Currently, hospitals in the U.S. are experiencing a shortage of workers in these positions. The wage repression is occurring at a lower skill level, and a lower wage. This is resulting in lower prices on the consumer goods purchased by the middle class.
I felt that this is worth noting, because the increase in the number of workers in the United States is an increase in the lower skill levels. The people protesting this immigration are typically people who have a higher skill level than those immigrating. The people protesting are therefore enjoying the benefits of lower cost on the things they buy, without seeing their own wages reduced or stagnated. In the case of the U.K. the costs of acquiring new or better skills will begin to be higher than the expected payoff for those skills. When that happens, people will stop seeking to acquire those skills and spend their time and money elsewhere. In the Untied states, the current citizens are more likely to be economically capable of acquiring new skills and will be enjoy the higher wages that they receive after. The immigration issue in the United States is most often fought by the people who have the most to gain from our current situation. As long as there continues to be an influx of low skilled workers that middle class has nothing to complain about. And the American lower class is often more educated and has more skills than those immigrating. There is really little reason to complain and all the incentive to make more of an effort to acquire more skills.
Even more about what super markets don't want you to know....
The chapter titled “What Supermarkets Don’t Want You to Know” was by far my favorite. I have worked in a local supermarket for more than 3 years where I am a cashier, but I also am the back up scan coordinator. This means that each week when we change our ad I go around and hang the new tags, make new signs, fix any mistakes sent down by our corporate office (there are more than you would think) and possible make any in store specials we made need. I could probably write a book on the number games that supermarkets play, but I’ll try to be brief. As Harford mentioned, a good shopper does not find the cheapest store (because in the end it won’t be the cheapest), shop the sales and the ads as much as possible and you will end up on top. More often than not our ads run specials that are much better than even a Wal Mart would offer as an everyday price.
The first way that super markets get customers is by impulse buying. I’m sure everyone has heard of this and probably done it a few times. This is way candy bars, chips and soda are located conveniently next to where you wait to check out. The less obvious was that this works is by putting the products that are considered necessities (more inelastic items) towards the back of the store and the less needed items (elastic goods) right along the path to get to the other items. This is why in a lot of stores milk, eggs, meat, bread, cheese and these things are a long the back wall or in the corners of the stores. The point is to get the consumer to pass all of the impulse buys along the way and end up buying more than you came for. I know this works because one of the main questions I have to ask people when they check it is “did you find everything OK”. 90% of the time the answer is “I found more than I needed”.
Next is the way things are priced. Recently the pricing “10 for 10” has been popular. The first way they get people is by offering products for just $1.00. What a deal (some weeks these very same products go one sale for 75 or 80 cents but they sell better at 10 for 10). With this people assume they have to purchase ten of the item to get the deal so everyone comes up to check out with ten cans or jars of everything. Most of the time you can buy just one and get it for a dollar. Stores that run sales will also raise the everyday price on the tag while they are running the sale to show more of a savings. For example, if a can of tomatoes is regularly $1.59, on a sale week they might raise that price to $1.79 and put it on sale for 10 for $10. Now you are still getting a good deal, just not as good as you might have thought leading customers to believe they are saving more than they really are. This is also part of the discount card scam which tracks what you buy and then runs sales based on this purchasing histoy. At the end of your visit you may hear, "you saved $27 today", but did you really? Not even close. In the same breath store will also run amazing deals on turkeys or hams around the holidays where they are actually losing money on the product. So this IS a good deal, except the sale is draw new customers in (and regulars too) in hopes they will buy all the other items they need that are now marked up higher to compensate for the ham. This last Thanksgiving our store did exactly that. Our turkeys were on sale for $.88 a pound with a $20 purchase, but the green beans that are normally $.99 a pound were marked up to $2.99 a pound. They do this because you are already in the store and less likely to go elsewhere to get the additional products needed and especially at the holidays, where certain items are less likely to be substituted. This is where a good memory comes in handy, as Harford said, if you can remember and compare like items you will be better off.
There are many, many other ways that supermarkets make money. Hopefully this will help next time you go shopping.
The first way that super markets get customers is by impulse buying. I’m sure everyone has heard of this and probably done it a few times. This is way candy bars, chips and soda are located conveniently next to where you wait to check out. The less obvious was that this works is by putting the products that are considered necessities (more inelastic items) towards the back of the store and the less needed items (elastic goods) right along the path to get to the other items. This is why in a lot of stores milk, eggs, meat, bread, cheese and these things are a long the back wall or in the corners of the stores. The point is to get the consumer to pass all of the impulse buys along the way and end up buying more than you came for. I know this works because one of the main questions I have to ask people when they check it is “did you find everything OK”. 90% of the time the answer is “I found more than I needed”.
Next is the way things are priced. Recently the pricing “10 for 10” has been popular. The first way they get people is by offering products for just $1.00. What a deal (some weeks these very same products go one sale for 75 or 80 cents but they sell better at 10 for 10). With this people assume they have to purchase ten of the item to get the deal so everyone comes up to check out with ten cans or jars of everything. Most of the time you can buy just one and get it for a dollar. Stores that run sales will also raise the everyday price on the tag while they are running the sale to show more of a savings. For example, if a can of tomatoes is regularly $1.59, on a sale week they might raise that price to $1.79 and put it on sale for 10 for $10. Now you are still getting a good deal, just not as good as you might have thought leading customers to believe they are saving more than they really are. This is also part of the discount card scam which tracks what you buy and then runs sales based on this purchasing histoy. At the end of your visit you may hear, "you saved $27 today", but did you really? Not even close. In the same breath store will also run amazing deals on turkeys or hams around the holidays where they are actually losing money on the product. So this IS a good deal, except the sale is draw new customers in (and regulars too) in hopes they will buy all the other items they need that are now marked up higher to compensate for the ham. This last Thanksgiving our store did exactly that. Our turkeys were on sale for $.88 a pound with a $20 purchase, but the green beans that are normally $.99 a pound were marked up to $2.99 a pound. They do this because you are already in the store and less likely to go elsewhere to get the additional products needed and especially at the holidays, where certain items are less likely to be substituted. This is where a good memory comes in handy, as Harford said, if you can remember and compare like items you will be better off.
There are many, many other ways that supermarkets make money. Hopefully this will help next time you go shopping.
"There is no such thing as a free meal," so who pays?
"There is no such thing as a free meal," so who pays?
By Brandon weber
In regards to chapter 4 on page 82 in Tim Harford's The Undercover Economist, a topic of externality charges is presented, examined and judged. The goal of this post is to evaluate a point made in the first five chapters, and this will be the topic of my argument.
In this argument it will first be necessary to re-explain externality charges. An externality is made by making decisions, that cause cost/benefit factors to be imposed on, to those who participate in a transaction... or externalities can be seen as the extras or impacts as a result from tasks. These costs or benefits must be incurred by someone. An example of this is presented by the old saying, "there is no such thing as a free meal." Harford has a very good method of relating this topic, approaching the issue from two sides. The first side being those who oppose the charge, and the second side are those who believe the charge is necessary. Leading to a topic of who is right, who is wrong and are these externality charges aimed at the right group. In regards to Harford's fuel debate and who really incurs the final charges, I believe that it is ultimately the consumer. It is not targeted only towards the rich, and only towards the poor. The same taxes are imposed on everyone who drives an automobile. The driver must make a choice to either drive and pay the externality charges, or to find a different way to commute.
So who is right? well this is a question that will never be completely answered. Harford shows this by asking another question is it fair to charge a person who rides a bicycle, with the environmental contaminants (pollution, dirt, smells, noise, etc...)? unfortunately life is not always fair, and in economics "some interest groups will always complain the externality charges are not tough enough, while others squeal that they are draconian." Harford Page 86
My opinion is that it is not fair, however society has deemed these externality charges the best way to be tough, either way someone pays.
Does anyone have any alternatives, ideas, comments?
By Brandon weber
In regards to chapter 4 on page 82 in Tim Harford's The Undercover Economist, a topic of externality charges is presented, examined and judged. The goal of this post is to evaluate a point made in the first five chapters, and this will be the topic of my argument.
In this argument it will first be necessary to re-explain externality charges. An externality is made by making decisions, that cause cost/benefit factors to be imposed on, to those who participate in a transaction... or externalities can be seen as the extras or impacts as a result from tasks. These costs or benefits must be incurred by someone. An example of this is presented by the old saying, "there is no such thing as a free meal." Harford has a very good method of relating this topic, approaching the issue from two sides. The first side being those who oppose the charge, and the second side are those who believe the charge is necessary. Leading to a topic of who is right, who is wrong and are these externality charges aimed at the right group. In regards to Harford's fuel debate and who really incurs the final charges, I believe that it is ultimately the consumer. It is not targeted only towards the rich, and only towards the poor. The same taxes are imposed on everyone who drives an automobile. The driver must make a choice to either drive and pay the externality charges, or to find a different way to commute.
So who is right? well this is a question that will never be completely answered. Harford shows this by asking another question is it fair to charge a person who rides a bicycle, with the environmental contaminants (pollution, dirt, smells, noise, etc...)? unfortunately life is not always fair, and in economics "some interest groups will always complain the externality charges are not tough enough, while others squeal that they are draconian." Harford Page 86
My opinion is that it is not fair, however society has deemed these externality charges the best way to be tough, either way someone pays.
Does anyone have any alternatives, ideas, comments?
We're all in this together!! (Highlight Chap. 1-5)
Pages 59-60!!
"That may seem like a ridiculous hypothetical scenario. But economists can measure and have measured some of these effects: when frosts hit Brazil, world coffee prices do indeed rise, Kenyan farmers do buy aluminum roofing, the price of roofing does rise, and the farmers do, in fact, time their investment so that they don't pay too much."
Now don't get me wrong the book is great, but the reason I picked this particular area is because it really sums it all up. The quoted section and the parts of the book immediately preceding and following it are really what makes all of what we do, study and comment on possible.
It's suggests to us that the choices we make have an effect whether it be profound or minuscule but an effect none the less, and furthermore it's an effect that causes another and another and so on. It gives us a real world example, measurable and something that sounds like it's from an economist's paper on 'The Butterfly Effect' - (not the movie but the concept). This makes me think of voting, 1 vote matters a little bit and when everyone matters a little bit big things happen.
I solidified this for my first highlight as I was reading Russ' highlight on money buying happiness. I believe that the extra dollar that we spend on the White Chocolate Mocha Latte (my personal favorite) does make a difference (just not immediately to the farmers as we had hoped). Even if it goes 99% into the pocket of the Starbucks 'big-wig's, they spend money too and the decisions they make with the 99 cents they realize from my purchase then trickles through-out the system until it affects the farmer's and me and you and the whole of our global economic system.
It may seem like so many things in Harford's book as 'duh' moments like.. you read them and you say to yourself, well 'duh' I should have known that. However for me it really encompasses the entirety of economics as the study of choice. Cause and effect on it's grandest and most drawn out scale. And as I read through the rest of the book Harford continues to unfold this economic Karma if you will.
Anyhow that's my 2 cents, I'm interested in what other's think about this idea. I invite you to post!!
"That may seem like a ridiculous hypothetical scenario. But economists can measure and have measured some of these effects: when frosts hit Brazil, world coffee prices do indeed rise, Kenyan farmers do buy aluminum roofing, the price of roofing does rise, and the farmers do, in fact, time their investment so that they don't pay too much."
Now don't get me wrong the book is great, but the reason I picked this particular area is because it really sums it all up. The quoted section and the parts of the book immediately preceding and following it are really what makes all of what we do, study and comment on possible.
It's suggests to us that the choices we make have an effect whether it be profound or minuscule but an effect none the less, and furthermore it's an effect that causes another and another and so on. It gives us a real world example, measurable and something that sounds like it's from an economist's paper on 'The Butterfly Effect' - (not the movie but the concept). This makes me think of voting, 1 vote matters a little bit and when everyone matters a little bit big things happen.
I solidified this for my first highlight as I was reading Russ' highlight on money buying happiness. I believe that the extra dollar that we spend on the White Chocolate Mocha Latte (my personal favorite) does make a difference (just not immediately to the farmers as we had hoped). Even if it goes 99% into the pocket of the Starbucks 'big-wig's, they spend money too and the decisions they make with the 99 cents they realize from my purchase then trickles through-out the system until it affects the farmer's and me and you and the whole of our global economic system.
It may seem like so many things in Harford's book as 'duh' moments like.. you read them and you say to yourself, well 'duh' I should have known that. However for me it really encompasses the entirety of economics as the study of choice. Cause and effect on it's grandest and most drawn out scale. And as I read through the rest of the book Harford continues to unfold this economic Karma if you will.
Anyhow that's my 2 cents, I'm interested in what other's think about this idea. I invite you to post!!
January 5, 2008
| It’s Saturday night and though there was once a time in my life I spent Saturday nights doing something exciting and personally enriching, I'm spending it reading books and thinking! Maybe doing this IS as personally enriching and exciting as dancing Tango with exotic women, drinking in fancy night clubs, playing a competitive sport or other things. I guess it depends on my set of preferences. I think economists have a hard time explaining themselves because they are not out to explain themselves, as they are here to: A) make observations B) gain understanding C) to personally enrich themselves. I think that when economists try to apply their observations and understandings to other people, they violate one of the conditions that make them economists: the assumption that people are rational. If they were inclined to make suggestions about what others do or should do, they violate the other condition Among the Econ: the assumption that no individual’s preference is better than another’s. To suggest a decision might be a form of placing a higher value on the suggesting party’s values than on the party receiving the suggestion! Also, economists have their own preferences, and applying economics to one's personal set of preferences and decision making IS personal enrichment. It could be assumed that all people apply a sort of economics (whether understanding or misunderstanding is appropriate vernacular here isn't for me to dictate) to their decision making, but then the term economics might be defined differently than it is. Perhaps economists share their observations because it doesn't make them any less well off, but for others gleaning some of the shared information, might be better off as free-riders of sort. But, maybe somebody is worse off somewhere for it, I just don't think so! |
I need you!
Dear Stella and Dave,
Forgive me for such a hasty email. Im sure you are watching the news right now, im sure it is being watched on television sets around the globe. I am writing to you as i was able to secure a wireless transmission through globasystems telenetworking. Im on a bus right now, we were just able to make it out before the storm hit. Im so afraid right now Stella, what are these people going to do, the t.v. is showing pictures of them perched on their roofs. the levee is broken and the grief has begun, atleast in my heart and many others as well. Where were the sirens, the warnings from above, the evac decisions? I was sitting on the veranda reading Tim Harfords book, the undercover economist, and although it was very sentimental, i never thought i would witness what he was referring to when he laid down the framework for power scarcity and price gouging. As i am looking out the window, there are lines of cars at the nearbye petrol station. I wish i were with you right now, you are the only thing that could take the fear away. I miss you so much! I can remember laughing in your smokey apartment room, listening to your stories of wildness at Woodstock, trying to find a bottle of water for less than 20 $ before Metallica got on stage, although the psychotropics were in abundance. Harford is spot on with his optimistic assessment of a dire kernal of truth, that scarcity of resources determines the level of bargaining power. Everyone has somewhere they need to go, but how can i say that one person values a gallon of gas to that of another? In this case, the willingness to pay has become the ability to pay, and prices have gone up to twice the amount. This ain't no disney world, Stella. The sensitivity to price has been knocked onto its heels, so why can't there be price controls? Harford would say that by reducing the price from its natural level, the demand would be even greater, and the inventories of the stations would risk being depleted, hurting more people than helping. Thus, he says, in order to maintain social control and avoid long lines and potentially violent competition between those in line, gas stations, as Harford says, must "smoke" out those who are not willing to pay more for gas. Its the poor who die Stella, and it pisses me off! But how can i argue with that, if what he says is that the worth of a bottle of water to someone in the desert is priceless compared to someone down the street from you right now? What are these people going to do, i'm going to try and see if i can find a guy or girl to live with me at my aunts house up north. Its the least i can do. Hopefully they don't gauge the low-income renters who need to find housing. It would be wrong! I feel completely responsible for all of this. I should have seen it coming. People are saying as i write this that the president has ordered in shipments of food and water, blankets and cots, and is sending in the national guard. They better be right, because if they forget about us down here, then will have lost my trust. I will stay in touch. Much love. Josh
Forgive me for such a hasty email. Im sure you are watching the news right now, im sure it is being watched on television sets around the globe. I am writing to you as i was able to secure a wireless transmission through globasystems telenetworking. Im on a bus right now, we were just able to make it out before the storm hit. Im so afraid right now Stella, what are these people going to do, the t.v. is showing pictures of them perched on their roofs. the levee is broken and the grief has begun, atleast in my heart and many others as well. Where were the sirens, the warnings from above, the evac decisions? I was sitting on the veranda reading Tim Harfords book, the undercover economist, and although it was very sentimental, i never thought i would witness what he was referring to when he laid down the framework for power scarcity and price gouging. As i am looking out the window, there are lines of cars at the nearbye petrol station. I wish i were with you right now, you are the only thing that could take the fear away. I miss you so much! I can remember laughing in your smokey apartment room, listening to your stories of wildness at Woodstock, trying to find a bottle of water for less than 20 $ before Metallica got on stage, although the psychotropics were in abundance. Harford is spot on with his optimistic assessment of a dire kernal of truth, that scarcity of resources determines the level of bargaining power. Everyone has somewhere they need to go, but how can i say that one person values a gallon of gas to that of another? In this case, the willingness to pay has become the ability to pay, and prices have gone up to twice the amount. This ain't no disney world, Stella. The sensitivity to price has been knocked onto its heels, so why can't there be price controls? Harford would say that by reducing the price from its natural level, the demand would be even greater, and the inventories of the stations would risk being depleted, hurting more people than helping. Thus, he says, in order to maintain social control and avoid long lines and potentially violent competition between those in line, gas stations, as Harford says, must "smoke" out those who are not willing to pay more for gas. Its the poor who die Stella, and it pisses me off! But how can i argue with that, if what he says is that the worth of a bottle of water to someone in the desert is priceless compared to someone down the street from you right now? What are these people going to do, i'm going to try and see if i can find a guy or girl to live with me at my aunts house up north. Its the least i can do. Hopefully they don't gauge the low-income renters who need to find housing. It would be wrong! I feel completely responsible for all of this. I should have seen it coming. People are saying as i write this that the president has ordered in shipments of food and water, blankets and cots, and is sending in the national guard. They better be right, because if they forget about us down here, then will have lost my trust. I will stay in touch. Much love. Josh
price discrimination? WHAT? They do that to ME?
| Wow! If I had every moment of my wasted life back, I wonder how much time that would add up to. For one, very specific piece of wasted life, I can remember thinking “why do generic brand items have such HORRIBLE packaging?” If I could have the time I spent thinking about just that question and the subsequent moments pondering, to no avail, I wonder if I could have spent more time at the gym or pursuing higher education, or any number of things. But, I didn’t do some undercover economic investigation. Maybe because I’ve been going to grocery stores for about 22 years and I simply locked in the habit, the paradigm, of thinking the same question and coming up with NO answer. The highlight of these first five chapters for me is in chapter 2. Producers and retailers actually make generic items more unappealing as a form of price discrimination. They sell the name-brand goodies for those who aren’t price-sensitive and they sell the generic goodies for those of us who measure the price per ounce or unit and who realize that the ingredients on the back of the package are the exact same as the name-brand goodies. I always knew that, but to actually provide a disincentive to people whose preferences lead them to buy the more expensive (higher priced) items; they are brilliant in that they also appeal to those people whose preferences lead them to buy bargain. They capture both markets! In later years (recent years), I noticed that cell phones have all the bells and whistles, and that the better service packages simply don’t have those bells and whistles turned off! “What some people don’t realize is that the professional version is typically designed first, and certain features are disabled for the mass market version.” (Harford, 52) It also explains to me how flying stand-by works; I used to think that I was the only one making out on the deal, but in reality, other parties (perhaps all concerned) are possibly making out better, and if they’re not, then at least I AM. And that is what makes being an undercover economist is all about. Not unexpected, I can approach better economic satisfaction (personal decision efficiency) regarding time vs. wasted time through using my understanding of economics in everyday circumstances. |
After writing this out, and then reading the other blogs, I see that quite a few of us have been made better off by reading this book... now I wonder how many producers will be worse off by our becoming privvy to this concept of price-targeting and how effective the discrimination they practice will be after this! Hmmmm.......
Hidden Price Discrimination (Chapter 1-5 Highlight)
In reading the first five chapters of Harford’s book, what really appealed to me was his ability to explain common queries about different parts of life with such simple economic analysis. Granted, there is more to the stories Harford tells, but the underlying causes of the things he goes into are readily explained using fairly easily understood concepts.
What was especially fascinating in the supermarket chapter was how supermarkets purposefully delineate between “quality” brands and “generic” brands such as pop-tarts versus toaster pastries or dr. pepper versus dr. thunder. One of my favorite things in life is searching for the most absurd looking knock-offs of popular products, mocking them, and then indulging in them with my friends because we are admittedly too lame to think of better things to do. While I acknowledged the sharp differences in presentation (clever slogans and cartoon characters with bright colors everywhere in high end products as opposed to a box that looks almost ridiculous in comparison with its shoddy attempts at eye-catching colors and pitch-characters) I never considered that it was on purpose. To identify consumers willing to pay more for an item by putting them off the cheaper option through boring presentation is something that never considered to me. However, like all the other examples Harford gives, it made a lot of sense. It was more obvious with the coach/first class distinctions on planes.
The ability of companies to price discriminate without openly stating it and maximize profits through it is a very intriguing concept and one that Harford not only explains through very simple economic terms but also stimulates interest for further investigation in. Reading that particular chapter has possibly made me more paranoid about how much I should be paying for any given item I wish to consume.
January 4, 2008
Money can buy happiness (Highlight Ch.1-5)
Tim Harford's first five chapters contained many interesting ideas. My personal favorite idea came in chapter two with with the Starbucks menu board on P.32. The Starbucks contains 5 different drinks priced from $2.20 up to $3.40. Each item on this menu costs nearly the same to produce, down to a few cents. As mentioned by Harford, Starbucks is not trying to offer a variety of drinks to its customers, Starbucks is smoking out those customers who are less price sensitive.
By offering a wide range of products, a company can sell its "cheap" product to the price sensitive customer and its "premium" product to the luxurious consumers when in reality, they are both buying almost the same thing; at least something that cost the same to produce.
My favorite ploy by the coffee sellers was the "Free-Trade" coffee. Coffee that comes from farmers who are paid and treated "well". The coffee company can double or even triple a Guatemalan farmers salary while only increasing the cost to its coffee (per cup) by a penny or two. The coffee company uses "free-trade" coffee in the same way it uses its' premium drinks. Customers are willing to pay a dollar or so more for their coffee because it makes them feel better/special about themselves. "If I spend an extra dollar on my coffee, I'm making a difference in the world." Well, not really, But thinking you did sure makes you feel good inside.
So, in a sense, money can buy happiness.
By offering a wide range of products, a company can sell its "cheap" product to the price sensitive customer and its "premium" product to the luxurious consumers when in reality, they are both buying almost the same thing; at least something that cost the same to produce.
My favorite ploy by the coffee sellers was the "Free-Trade" coffee. Coffee that comes from farmers who are paid and treated "well". The coffee company can double or even triple a Guatemalan farmers salary while only increasing the cost to its coffee (per cup) by a penny or two. The coffee company uses "free-trade" coffee in the same way it uses its' premium drinks. Customers are willing to pay a dollar or so more for their coffee because it makes them feel better/special about themselves. "If I spend an extra dollar on my coffee, I'm making a difference in the world." Well, not really, But thinking you did sure makes you feel good inside.
So, in a sense, money can buy happiness.
The truth about taxes and economics papers
So far Harford’s book has been pretty interesting. He’s pretty fair with most of the issues, it seems. Every time I think of a criticism, thinking I have the great talking point for my review due in a week, I come across his acknowledgement of the criticism, and his arguing his way out of it. Honestly, it’s a little annoying.
Probably the best example of this is his treatment of taxes and their efficiency, which I find incredibly fair and enlightening. Generally, you get people on one side of the spectrum, saying taxes are always bad, or on the other, saying taxes are always good. But Harford treats the issue fairly and, I think, accurately, which is why I have chosen to spend thirty minutes writing an entire page about it.
I gather that Harford is a realistic person who acknowledges that, yes, government will take your money. Too bad, nothing you can do about it. He also acknowledges that taxes are inefficient, because they don’t convey any information, like prices do. Taxpayers know they’re gonna pay, so they don’t think about it in their decisions. The free market works differently, because every dollar is considered in making purchases, purchases that convey information about seller and buyer as far as costs and benefits go. This is not really how I had viewed taxes beforehand, but it makes a lot of sense.
Basically, Harford believes that taxes may be inefficient, but that this might be offset by gains in other areas, like fairness or stability. Of course, his view of what is fair is, as any view of what’s fair will be, normative and subject to his own opinion. Point is, if taxes are used correctly, they might be worthwhile. This fits well with my own worldview, which is always, always, always questioning government action in the economy. I don’t necessarily condemn it, I just think it should be a careful prospect. After all, government takes our money without really asking us (at least, I’ve never been asked), so it isn’t subject to the same natural checks that free market firms are. This is why you have to question what the government does with taxes in a somewhat market oriented economy. It didn’t get that money in a free market manner, so using it in the free market is very suspicious and difficult to do correctly (but not impossible).
This also goes to say that any paper by any math-loving-economist that uses taxes-as-costs analysis to judge efficiency is basically a load. I mean, honestly, can anyone say that they consider how much they paid for the roads this month (or, how much was taken from them for the roads this month), and drive accordingly? No. So we don’t think about those taxes in considering costs and judging our behavior. I’ve read a few papers that use just such analyses of taxes versus usage to show something to the effect that “taxpayers underpay for the roads, and therefore use them too much, and therefore via my incredibly complex, ninety-nine variable calculus equation, which I spent more time writing than actually thinking about, pollution is bad and needs to be taxed more!” or some nonsense like that. Now that we know such papers are useless, we should simply ignore them.
I’ll be the first to thank Mr. Harford for saving my otherwise wasted time.
Probably the best example of this is his treatment of taxes and their efficiency, which I find incredibly fair and enlightening. Generally, you get people on one side of the spectrum, saying taxes are always bad, or on the other, saying taxes are always good. But Harford treats the issue fairly and, I think, accurately, which is why I have chosen to spend thirty minutes writing an entire page about it.
I gather that Harford is a realistic person who acknowledges that, yes, government will take your money. Too bad, nothing you can do about it. He also acknowledges that taxes are inefficient, because they don’t convey any information, like prices do. Taxpayers know they’re gonna pay, so they don’t think about it in their decisions. The free market works differently, because every dollar is considered in making purchases, purchases that convey information about seller and buyer as far as costs and benefits go. This is not really how I had viewed taxes beforehand, but it makes a lot of sense.
Basically, Harford believes that taxes may be inefficient, but that this might be offset by gains in other areas, like fairness or stability. Of course, his view of what is fair is, as any view of what’s fair will be, normative and subject to his own opinion. Point is, if taxes are used correctly, they might be worthwhile. This fits well with my own worldview, which is always, always, always questioning government action in the economy. I don’t necessarily condemn it, I just think it should be a careful prospect. After all, government takes our money without really asking us (at least, I’ve never been asked), so it isn’t subject to the same natural checks that free market firms are. This is why you have to question what the government does with taxes in a somewhat market oriented economy. It didn’t get that money in a free market manner, so using it in the free market is very suspicious and difficult to do correctly (but not impossible).
This also goes to say that any paper by any math-loving-economist that uses taxes-as-costs analysis to judge efficiency is basically a load. I mean, honestly, can anyone say that they consider how much they paid for the roads this month (or, how much was taken from them for the roads this month), and drive accordingly? No. So we don’t think about those taxes in considering costs and judging our behavior. I’ve read a few papers that use just such analyses of taxes versus usage to show something to the effect that “taxpayers underpay for the roads, and therefore use them too much, and therefore via my incredibly complex, ninety-nine variable calculus equation, which I spent more time writing than actually thinking about, pollution is bad and needs to be taxed more!” or some nonsense like that. Now that we know such papers are useless, we should simply ignore them.
I’ll be the first to thank Mr. Harford for saving my otherwise wasted time.
Undercover Economist
So, this is day 3 of the course, and assuming just a chapter a day, you should be reading today about perfect markets and the world of truth. Or, given your first posting is due in just 2 more days, maybe you've already finished the first 5 chapters of Harford's book.
Well, how do you like the book so far? Can this book really be about economics? I've been through the entire book and there is not one graph in it.
Harford ends his book with:
Well, how do you like the book so far? Can this book really be about economics? I've been through the entire book and there is not one graph in it.
Harford ends his book with:
In the end, economics is about people -- something economists have done a very bad job at explaining. And economic growth is about a better life for individuals -- more choice, less fear, less toil and hardship.Assuming Harford is correct, why do you suppose economists have done such a bad job at explaining themselves?
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