Simon email -
If monopolies create an artificial scarcity, and so cause prices of certain goods to be higher than they should be, why are governments so keen on giving certain suppliers or industries permission to be monopolies?
Jonathan Fortier says: Almost everyone is critical of so-called monopolies when they appear in the marketplace (for instance, people are critical of Microsoft because of its putative monopoly in software) but are apparently tolerant (and even supportive of) government monopolies, like the provision of health care or the monopolistic retailing of liquor in most provinces. Perhaps this is because the average person simply believes that government seeks to deliver goods and services in a disinterested manner in a way that benefits the consumer, whereas private companies are believed to be profiting at other people's "expense". The irony is that in almost every situation, exactly the opposite is the case: the most profitable companies are those that provide the most value to consumers. The other thing to note is that governments benefit politically and financially from monopolistic companies and so have a vested interest in handing out special favours and monopolistic privileges to the few. John Nye's new book, "War, Wine and Taxes" provides a great historical overview of how monopolies function in the 18thC British and French wine industry.
Hannes Edinger email -
My question is this: With the recent philanthropic behavior exhibited by a few of the world's wealthiest people, I have been wondering whether this sort of behavior comes from an absolute amount of wealth, or a relative amount of wealth? I think Mr. Gates and Mr. Buffet are purchasing public support with these actions and in turn enjoying upward movement in societies' hierarchy (I still think it is a very good thing!). This would be a great thing if there was an absolute amount of wealth that lead to this sort of activity... but I have a sneaking suspicion that it may be a relative amount of wealth that matters. The reason it would be nice if the amount was absolute is that, given an absolute level of income, the have's would be inclined to voluntarily redistribute their wealth to the have not's - in the pursuit of upward movement in the societal hierarchy. Assuming the premise that after our basic needs are satisfied, we seek upward movement in this hierarchy, do you think there is an absolute level of wealth where it is "cheaper" to donate to a hospital than to buy new rims for your Lexus and still achieve the same upward movement in society?
Jonathan Fortier says: Very interesting line of inquiry. All wealth is, in a sense, relative, isn't it? Relative to one another, but also to different markets at different times. I think people give for a whole complex set of reasons, and I suspect that many people who are relatively poor give more if they belong to socially cohesive giving communities (churches, for example). The theory and history of philanthropy is a very interesting area, particularly in today's world, where many philanthropists are using economic models with which to determine where to "invest" their giving and how to track the "returns on investment". Buffett's decision to give his fortune to the Bill and Belinda Gates Foundation is a good example of one philanthropist seeing a good business model of giving and investing appropriately.
Hannes Edinger email -
Dr. Fortier,
I enjoyed your insight very much in Montreal last summer, and I am happy to have this opportunity!
As for your question - the Mt. St. Helen's ash market can be explained by drawing a parallel to a common market. The marginal cost of water to in most public buildings is zero (just like the ash). Despite this fact, water is successfully sold in vending machines a few meters from the water fountains. Assuming the water quality is similar (it often is) this sort of market parallels the ash market. The explanation that I would offer is that from a consumer's perspective, time is scarce. The time saving convenience offered by the bottled ash is similar to bottled water. People must have valued having ash in a bottle, perhaps as a memento, just as they value water in a bottle - instead of going and getting a bottle, or carrying one around (a cost in time in both circumstances) they were will to exchange money for the savings in time. The marginal cost of ash in a bottle, even if the marginal cost of ash is zero, is positive in terms of time, which is scarce - they were therefore willing to pay for it.
Hospital services, urban congestion and parking spaces are rationed with time-cost as well. Because the marginal cost of these things at the point of consumption is zero (or almost zero), there is excess demand. This market "clears" because people's time is scarce and the rationing effect of prices in dollars is taken over by the rationing effect if prices in time. This some cause for concern because it means that people that consume these services with either have very inelastic demand schedules or they will not value their time very highly... this is not necessarily an equitable distribution of services (from what I understand this is the intention in health care's case).
I could follow this logic for a little while.. but I will refrain.
Andrew Root email -
Currently in the U.S. there are filling stations that offer E-85 (85% ethanol and 15% gas). While in Canada, we have very little ethanol in our fuel. With gas prices rising, and the future of gas as a fuel for vehicles only a few decades at best; why wouldn't the government of Canada create incentives for the petroleum industry to offer E-85 stations to provide fuel for the vehicles which will accept it?
Jonathan Fortier says; This a complex issue, and I think we can only really understand the market for ethanol once we take government subsidies out of the picture. As far as I understand, the production of ethanol is not cost-effective. In other words, no one would be using ethanol for a car fuel if there were not massive government reallocations to support the industry. So in response to the question, it would seem that if the Government of Canada provided incentives for the petroleum industry along the lines you suggest, it would only further distort an already distorted market.
Greg O'Keefe email -
The discussion so far has focused on public goods and commodities. But an interesting phenomena can be seen in Chinas female deficit problem. Chinas problem stems from the preference for boys over girlsgirls being financially costly to marry offand its one child policy. Simply put, more boys are being born than girls creating a surplus of men unable to marry and procreate. In 1999, for every 100 females there were 120 males. This disparity is expected to widen in the next thirty years.
Therefore, does maintaining an equal sex ratio constitute a public good, much like education or health care? And if so, should parties be able to seek solutions outside of government, as this represents as much a government failure as a cultural problem?
Jonathan Fortier says: This is a great example of government interfering in a natural equilibrium and creating unintended consequences. You rightly call it a "government failure". In a natural environment, there are roughly 48 boys for every 52 girls born. This natural balance allows things to work out down the road. The "public good" of sexual balance would be achieved if the government simply stopped meddling by introducing these penalties and incentives. I am not sure what you mean by "seeking solutions outside of government", but if it means challenging the government's proper role in this context, I say, yes.
Pork Chop Boy email -
How can we make economics understandable to folks who wouldn't know a regression from a reprobate?
Jonathan Fortier says: Dear Pork Chop Boy, Well, most people have a basic understanding that they shouldn't spend more than they make, and that some things cost more than others due to scarcity and other factors, so that's a start with the average Joe. With regards to more complex questions, I think that critical questioning is really the next logical step. One needs to encourage people to ask some essential questions: How is value created? What are profits? What are the role of incentives? What happens when you interfere with normal unregulated transactions? What are unintended consequences? and so on. As I explain in my introduction on the Fraser Web Site, I am not a formally trained economist, but rather someone interested in economic issues from general philosophical and historical perspectives. In my self-education of economics, it has largely been through asking these kinds of questions (and talking with lots of smart people!) that I have learned a little bit about how economies work.
Joe Sixpackitz email -
But how does scarcity actually enter our calculation of value? Water is clearly more valuable to us than diamonds but the former is priced at almost zero - indicating a low value - at the margin while diamonds are very expensive.
Jonathan Fortier says: Dear Joe Sixpackitz - Is water more valuable than diamonds? Well, overall, we need water more than we need diamonds,but water is relatively much more plentiful than diamonds, so the prices of each -- the exchange values -- reflect those differences. The question is how much you value one more diamond versus one more bottle of water. This is the "marginal" value of the item in question.
Jonathan Fortier email -
Dear Hannes, That's a great analysis of the Mt St. Helen's ash market. You're right, the scarcity is not in the ash, but in bottles and in the time it would take to go get the bottles and collect the ash. Given the relative availability of bottles (and the ubiquitous ash) the prices were very low -- people would probably not be willing to pay much more than $5 or $10 for a bottle. Part of this can also be explained through purely subjective interest -- people are frequently willing to pay for someone else's joke or industry or entrepreneurial activity. Paying for the bottle of ash is, in a sense, like saying to the ash vendor: "Hey, great idea! How funny!" Another example of this can be seen when we pay for lemonade at a kid's roadside stand. The lemonade might be bad, and poor value for money in the strict sense of the word, but we are willing to pay 50 cents or a dollar for a glass because we want to support the kind of industry and sense of community that the child is demonstrating.
Broke email -
The price of a loaf of bread is pretty stable but gas prices aren't. I don't get it. Does scarcity explaing why gas prices go up and down in the space of a day? Or is it supply and demand? And why doesn't the price of bread go up and down like that?
Jonathan Fortier says: Gas prices have always puzzled me too and I don't know enough about the industry to know the answer to this. It is possible, I suppose, that individual gas retailers are set their prices in response to the commodity prices. Since commodity prices on various exchanges fluctuate in response to many factors (like international politics, security issues, manufacturing expectations and so on) the retail prices might follow suit. But in the end I just don't know the mechanics of how the prices are set. In addition to the question of this fluctuating price, why is it that every gas station seems to be charging exactly the same price? Is it because there is some kind of collusion at work, do gas stations all silently agree to fix their prices at X% above certain indices?
Thirsty for Knowledge email -
Many people argue that water scarcity (unlimited wants with limited resources) is a problem my generation should expected to face. How would an economist attempt to remedy this pending crisis?
Jonathan Fortier says: Water is a great case study, because there are so many questions concerning how best to appropriate and use it. The short answer, I believe, to your question is simply to assign property rights to the water and allow people to sell the water as they see fit. Often people point to California as an example of water shortage and waste. Why is there so much agriculture, some ask in a place that is so arid? Well, one important reason is that end users (farmers) don't pay for the water! In other places where you have state subsidized water, there is no incentive for people to save water, or to direct it to the most cost-effective uses. Understanding the specific costs of certain industries allows one to understand the importance of water to that industry. The trout fishing outfitters of Montana, for example, are happy to pay the local farmers not to over-irrigate in order to ensure that they have enough water in their trout rivers. The cost structure, together with the clearly assigned property rights to the water, allows for gains from trade. Interesting work has been done on the history of water rights in the west, and I believe that both the Fraser Institute and PERC have papers on this subject.
Walter Blockitz email -
If we assume the government has some ability to collect and analyze information, can't we further assume that it can promote economic efficiency and well being by taxing certain goods more (reduce their consumption) while subsidizing other goods (increase their production)?
Jonathan Fortier says: Well, many people make the first assumption, and then proceed to support the second! To my mind, the problem is that government can't collect and analyze information in any effective way, and certainly not in a way that allows it to respond to the highly dynamic nature of the marketplace. Secondly, it would seem that government is in a very poor position to evaluate how to promote well-being, since that is a highly subjective issue. One person's well-being might consist in watching bad martial arts films and eating cheeseburgers, but I am not sure there would be much support for subsidization of either (and nor should there be!).
Vanessa Schneider email -
We still have a few minutes of Jonathan's time to continue this discussion on scarcity. Simply enter your question or comment at the bottom of the page - and don't forget to click "Refresh" regularly to see new posts!
Marie email -
What is your opinion about the new tax-free saving account introduce by the Federal Government?
Jonathan Fortier says: Dear Marie: I am no expert on taxes, and specifically not on this issue. As economists at the Fraser Institute and elsewhere will tell you, however, there are more and less "efficient" forms of taxes. Poll taxes and the GST are relatively cost-effective that is, you don't need to spend lots of money to collect the tax, and the imposition of the tax does not (relatively speaking) have adverse consequences on the economy. Other taxes, such as corporate income taxes I believe, are extremely costly to collect and very damaging to the economy overall. I am not sure how the move to a tax free savings account fits into this tax efficiency equation, but generally I think the less the government is taxing, the better.
Vanessa Schneider email -
Yes, The Fraser Institute has recently released a couple of papers on efficiency and a flat tax, and other taxation issues: http://www.fraserinstitute.org/researchandpublications/researchtopics/taxation.htm
Anti-Business Man email -
As the population ages, labour will become more scarce. Clearly the result of this increase in scarcity should be higher wages. However, many free market think tanks are arguing about how best to "mitigate" the rise in labour costs. Do you think policies that mitigate labour cost increases are actually statist in that they are, by definition, distorting a market-based scarcity?
Jonathan Fortier says: The answer to this, I believe, lies in more relaxed (if not completely free) migration of labour. The population is getting older in, say, North America and Wester Europe, but not in India, Mexico and Indonesia. If we allow these people to move to the jobs then wages will not rise as much as many suspect. I think we need to think of labour as a global resource, not a national or local resource.
Vanessa Schneider email -
Thanks Jonathan for this very interesting discussion on scarcity.
Jonathan Fortier email -
You're welcome! Looking forward to the next discussion on Thursday, March 20th. See you then.
