Lemon Problem

This week we discussed the concept of the Lemon Problem in respect to the used car market. This problem is that since it is not possible to distinguish between reliable cars and lemons, there are too many lemons and too few reliable cars. The seller has no incentive to be truthful and they also have little incentive to care for their cars.

I would argue that due to an increase in the awareness of the average consumer that the Lemon Problem is more common with private sellers rather than dealerships. There are a multitude of websites and networking communities that a consumer can rate a dealership on which is an increased motivation for the dealership to provide it's customers with quality vehicles. If they routinely sell lemons then they will not receive referral based business and they will also get a bad reputation among consumers. Before the popularity of the internet this was not as much of a concern but now there are simply too many available options for consumers for a dealership to overcome a bad reputation.

A private seller does not have this limitation in that they will not be reviewed with the same publicity. They are typically selling a vehicle once every few years so the Lemon Problem certainly applies to them.

Predatory Pricing

This week we discussed the concept of predatory pricing, which is the act of setting a low price to drive competitors out of business with the intent to establish a future monopoly. Specifically we discussed some of the practices of Wal-mart and the accusations of predatory pricing against them.
I would argue that this is just another business practice that is done on a daily basis in business. If Wal-mart drops the price of certain DVD's from $20 to $5 for a period of time then they are not only going to sell more of those DVD's but they will also have traffic through their store to purchase other items as well. Convenient Stores do this all the time as HESS has times that they sell soda for $2 per 12 pack. Obviously the store is not making money on this particular item but they are making money on other items that are purchased.
When a large retailer can sell an item at cost or even at a loss but increase their business because of that reduction then I would consider it a smart business move. That company should not be penalized for having success that allows them to operate at a more productive level than a local retailer.

Monopolistic Competition

This week we discussed monopolistic competition and realized that most of the real world markets are monopolistically competitive. An interesting aspect of this market is in the area of product development and marketing. We looked at innovation and differentiation and questioned whether all innovation was really innovative. By keeping up with technology or spending money on advertising a company could increase the value of their product. Looking at a shift of the demand, production costs, and price we saw that this innovation did not always increase the profits of the company. I would wonder how long this would be the case though as if nothing is done to advertise the product or keep up with technology then sales will eventually decrease and production costs will increase. Less profit now could still result in more profit in the long run which shows that this could be a case of making a long term business decision based on short term data.

Monopolies

This week we are discussing the concept of Monopolies and, being a sports junkie I am interested in the relation to professional sports. The definition of a monopoly includes the following criteria:

- A market with a single supplier
- No close substitutes
- Barriers to entry

I would like to examine these requirements in relation to Major League Baseball in order to determine how much of a monopoly the sport truly is.

First off, the criteria of a market with a single supplier is both true and not so true in that we can consider minor league baseball as a division of the MLB so they are not competition for the big club. In a worldwide sense there are other popular professional leagues like the Japanese League but none as popular as MLB. Some people would stop there and determine that MLB meets this criteria but I would argue that we can also group the NFL, NHL, NBA, and other professional in with the MLB and say that there is some competition. Often times the public is forced to decide to spend money at one event and not the other so this would disqualify MLB from being the single supplier.

The second criteria of no close substitutes is also disqualified by the other professional leagues for many consumers but a die hard baseball fan will not be accepting of a basketball game instead of a baseball game. That fan may be able to substitute a local high school baseball game instead of going to a major league game though, so ultimately this criteria depends on the individual and not the group.

Finally, there are a great number of barriers to entry involved in professional baseball which make it impossible for someone off the street to just start a team. A rival league would take not only a lot of money but it would require the collaboration of multiple cities and businessmen making it very unlikely.

After breaking Major League Baseball down into the three requirements I would conclude that there is not a clear cut answer to whether or not MLB is a monopoly. If you are a potential major leaguer or an avid fan of baseball then in many ways it is a monopoly. However, if you are a casual fan or a die hard sports fanatic then the numerous options for enjoying different professional sports make this not a monopoly but rather another option in the sports market.

Technology Changes

This week we discussed the idea of the perfectly competitive markets and the effects in the change in supply, demand, and technological changes. The perfectly competitive really does not exist but the requirements for a market to be perfectly competitive are as follows:

-Many sellers, many buyers, identical good
-No barriers to entry or exit
-Buyers and sellers enjoy perfect information
-Established firms have no built-in advantage

The requirements of a market being perfectly competitive make it more of a mythical idea but the effects of changes can be applied to markets that are nearly perfectly competitive. I am most interested in the effects of a technological change on this perfectly, or near perfect, competitive market.

The theory regarding the technological changes is that the new technology will improve effecience thereby lowering costs and lowering prices. But in order to implement this new technology a firm must have the funding as well view it as a beneficial change for the future. While most instances where conforming to the technology changes would be necessary there are examples of firms reacting to the changes instead of conforming with them.

One example of this would be in the banking industry with the bank Charles Schwab. While most banks have utilized the technology provided with the ATM's Charles Schwab chose instead to react to the changes by eliminating the need for their own ATM's. All banks charge a usage fee for using their machines so if a Bank of America customer withdraws money from an ATM owned by Wachovia then they are charged a fee. Charles Schwab chose to pay their customers back that fee that is charged instead of attempting to operate their own ATM's. Instead of competing with the other banks by utilizing the technological advances they utilized the advances of the other banks which increased their customers available ATM's to all of the ATM's in existence.

Short Run Cost

Short run costs include the ideas of total cost, average cost, and marginal costs. While it is important as a business to understand these costs I believe that they must be utilized as a tool to allow for long term success of the business and not as a quick decision tool. Small businesses are often started with limited financial backing and therefore are susceptible to small changes within their business plan. If sales are not at a projected level for a quarter then the business may lay off employees when in fact the best course of action would be to maintain these employees and focus on building sales.
This does bring about an entirely separate issue of businesses starting without a well-thought business plan but this happens so often that I am willing to ignore that and look at how they can succeed despite that failure. Short run costs can be affected by a variety of factors such as increased demand, unexpected weather, labor disputes, and so on. It is the ability of the business to weather the unexpected events of the present and focus on the growth in the long run.
I believe that short run costs are a very important function of business. They need to be examined carefully to determine how certain changes in the business effect the long term success of the business. Without careful examination of these costs a business owner would not be able to continue evolving the business in order to grow.

Questions of Utility

A few weeks ago we discussed the concept of Utility (benefit), which is the question of how much do you want an item. The overall goal for an individual is to maximize utility with their choices. We looked at this with examples of one good in exchange for another, but I am thinking of utility in a bit larger sense.

My wife and I recently made the decision that I would return to school and complete my Bachelor's Degree. This decision was made by comparing the overall costs to the long term benefits. The initial costs are numerous due to the reduction in my monetary contribution to the household, these can include nights out, new clothes, vacations, new furniture, and many more items which make life more enjoyable. The benefits are not guaranteed though, which makes me question the role of risk in the equation of utility. If I complete my schooling, and am able to secure a position due to my degree then my utility was reasonable. If I am either unable to complete school, or unable to secure a position due to the degree earned then I have sacrificed valuable time and money to go to school unsuccessfully.

In this situation, my utility cannot be determined until many years after the initial decision was made to go down this path. So is utility actually a perceived concept or is it more of potential utility than a guaranteed thing?

Overfishing

This week we discussed a concept known as the Tragedy of the Commons in the marginal benefits do not equal the marginal costs. The example used in class was of fisheries and overfishing. We have seen a large increase in the number of fishermen in the United States and therefore there is a decrease in the quantity of "fish in the sea". There are theories regarding how to combat this issue and the current solution is to put a quota on the amount of fish a fisherman is allowed to haul in. While overfishing is a problem caused by the fishermen themselves I would argue that the lack of government intervention within the industry is causing the industry to struggle. Instead of having smaller quotas and a larger quantity of fishermen there should be larger quotas and a smaller pool of fishermen allowed to catch those fish. With the high cost of fuel and other costs associated with commercial fishing a smaller quota makes it much more difficult for a commercial fisherman to operate successfully and profitably. If fewer permits were allowed then the quotas could be raised therefore controlling not only the costs of the commercial fishermen but also the prices of the fish within the consumer market.

Public Choice Theory

The topic of Public Choice Theory was discussed this week in class and I found it to be a fairly irrational theory that only applies to a select few. The first problem that I have with this is the idea that politicians and government agencies are "self-interested actors" and "are always trying to increase their own utility". We can look at any area of life and see opportunistic people who are simply concerned with improving their place in life. This includes politics, real-estate transactions, ticketing brokers, and any other level of business. We can also look at these areas and see folks who are working hard to improve their place in life, but doing it in an ethical and honorable manner.
This theory sounds like the bullett from the gun of an activist who thinks that all government is bad. There are thousands of politicians in the United States from the Senators and Representatives in Washington DC to the city politicians in small towns all over the country. Many politicians, and I would even go so far as to say most politicians, follow a calling to public service not to get rich but because they believe they can make things better. There is corruption in all levels of politics but that can be said for any industry in the world today, including the churches, but these organizations are filled with good, hard working people that offset the few bad apples. We elect public officials not because we agree with everything that they say, but rather because we believe them to be ethical and representative of our communities. A large part of what they do in office is to listen to different views and determine which decisions are going to benefit the people the most, or hurt the people the least. To argue that all politicians are only interested in increasing their own utility instead of pushing towards what they believe is the best course of action for all involved is an extremely pessimistic way to look at things.
Another part of this argument that I disagree with is the "Paradox of Voting" which argues that for a rational, self-interested voter, the costs of voting will exceed the benefits. I believe that we underestimate the power of one's influence on others. Can one vote decide an election, 99.9% of the time the answer is no but one person can certainly have a domino effect on many people. If I decide to vote and then wear my "I Voted" sticker in public that day then I am advertising for voting. Further, any conversations that I have with friends, or even a younger sibling or relative about the importance of voting can have a future effect on whether that person will cherish the right to vote in the future. Now if I am negative about voting and voice my opinion that no single vote counts and it is a waste of time to participate then my negative opinion can have an influence on whether or not someone will be a voter. I would argue that while the benefits of voting in a current election may not match up with the costs, the long-term benefits of voting will be substantially greater than the investment.

External Cost or External Benefit...

This week we were discussing, among other things, the topic of externalities within the realm of Microeconomics. After thinking about the idea of externalities I would argue that external costs and benefits are determined on an individualized basis.
One of the examples that was used in class this week was that of a residential development and the external costs and benefits that are associated with that development. A resident of a home in that area will see an increase of traffic within their community as a result of the development, they will also see more traffic in their everyday lives in the shopping centers, restaurants, and stores that they are accustomed to using. Initially, this can be a external cost for many people due to the inconveniences that are placed upon them, but it can be an external benefit for the owners of the area stores as well as the employees who work in those stores.
Look at the same community two years after the development has been built and the situation can be completely reversed. The neighboring residents who felt an external cost immediately may now have seen the value of their property rise due to increased demand in the area. Instead of having a very limited number of restaurants to eat in, grocery stores to shop in, and shops to visit there are now a variety of national retailers, national eateries, and national grocers. This variety provides not only choices that were not previously there but also most likely provides a financial savings due to the additional competition. Consequently, the area stores that previously serviced the area have seen an increase in competition that most would not survive due to a national retailer's ability to provide lower prices by bulk ordering. Initially their business was booming but the growth of the area eventually wound up costing them their business.
All of the above is hypothetical but I believe it points out that the idea of externalities is one that can be relevent to the individual and can change for those individuals as time goes on.

This week we discussed taxes and more specifically the split of the tax burden between the buyer and the seller, which is known as the tax incidence. I would like to propose the theory that the tax burden upon the buyer does not truly exist and it is instead only a tax burden on the seller.

We discussed the necessity of taxes to run a city, and therefore if we were to remove those taxes the city would require another form of funding to survive. Say for example that without the revenue from collecting taxes the city raised its fees for other services such as impact fees, utility fees, and other fees that affect not only businesses but residents as well. At this point both buyers and sellers would be directly affected by the fees and the sellers of a good would be able to incorporate those costs into their business plan to effectively set their prices. The buyers of goods and services would have less money to spend on these goods and services due to the fact that their everyday bills went up significantly.

With the tax system set up in its current form sellers set their prices to be at an efficient level and the buyers buy the amount that they need and/or can afford at that level. This sounds like a similar argument that we heard in class until you look at the price that a seller charge for their good or service. If a seller is able to charge more for their product or service then they are going to charge more for it. For example, a vendor could charge $5 for a t-shirt with a $2 tax included and make enough sales to do run a successful business. If we eliminate the tax then that same vendor would not be wise to only charge $3 for their t-shirt when they could charge the same $5 but not have to pay out the $2 in tax.

While I admit it is a bit out there in terms of analyzing the tax burden, I believe there is a potential theory in this line of thinking.

Paying farms to not produce food...

An interesting point was brought up this week regarding the policy of paying farms to not produce the crop that they specialize in due to an overabundance of that crop being produced. While I can understand the economic implications of having too much of a product in the marketplace, I cannot believe that this is the most effective approach to the potential problem. The fishing industry has limits on the amount of fish that can be brought in, a limitation which some would argue has damaged the fishing industry, but this limitation is in place to protect from a potential extinction of the fish.

I believe that instead of limiting the farming industry from maximizing their production of crops that the government should instead subsidize those farms that are overproducing crops and use the production to contribute to the fight against world hunger. Although we do not see it everyday in the United States, hunger is a major problem worldwide, and the additional crops produced by the US farming industry could help to combat this.

It seems to me that it is far more wasteful to simply pay farmers to not produce crops, but it would make not only a greater human impact, but also a greater economic impact. When the government pays a farm to not produce, there is no positive economic impact for the workers on the farm, the trucks that transport the crop are not being paid to do their jobs, and we can follow the trail through the entire economy. If however, the farms are paid to produce these additional crops for a world aid purpose, then the price of these items would not be affected locally, the economic impact would be increased as the workers would be earning an income and the industries that complement these farms would have a positive economic impact as well.

Elasticity and the Internet

I am curious as to the effect of the world wide web on the elasticity of everyday items. Specifically the lack of elasticity of gasoline prompted this thought being that we all have to use gasoline. Before the internet we would have been limited to getting our fuel at the most convenient location to our home or work. There are now various websites that will update a consumer with the gas prices from various gas stations so it is possible to plan a route that will pass a station with lower prices. The necessity for this has dropped recently with the lowering of prices but if we are headed back to over $3 per gallon in the future then how is this going to effect the elasticity of gasoline.

The internet effect can be examined further by looking at a variety of industries including travel, we no longer have to rely on a local travel agent when we can be our own on hundreds of websites. Shopping for a car has moved from the dealership around the corner to a search including dealerships within a 200 mile radius. The addition of that amount of inventory must have an effect on the prices that are paid for these items, which I would hypothesize will change the elasticity of the items as well.