We’re always calling our markets “free,” but just how free are they? We have various formal and informal markets, which are regulated to varying degrees. Formal markets, like the pharmaceutical trade, are closely regulated to ensure quality standards. Informal markets are more fluid, and might include something like babysitting, which seems like it would have more stringent quality standards. The Coase Theorem suggests that we could also have rogue markets: trade that exists anytime an individual wants something that doesn’t have a “for sale” sign, and that includes actions that aren’t thought of as services.
On a flight on it’s way from Newark to Denver, the Coase Theorem could have been dusted off and put to good use. Just beneath this human drama is a veneer of economic behavior. Both parties are incensed at being robbed of one of their entitlements: the woman believes the reclining space to be hers, with purchase of ticket. The man sitting behind her feels that she is reclining into “his” knee space that is part of his basic human rights. They both have a point, if you ask me: the airline should consider that humans both need to recline and also have knees, and shouldn’t be profiting from double-booking the space.
However, we can’t redesign all airplanes to fix the problem. This initial design is a constraint on our space market. Those constraints define the market, and create the value of this space commodity. Once that space is under high demand, the Coase Theorem kicks in: that defined space can be commodified and allocated as a property right, however transient. Whose property right it is can be debatable, but all that matters is that one group is given domain over either the right to recline or the right to have knees. The other party can then haggle according to how much they value the space.
On the T this week, just before the start of new school year studying food choices, I just loved seeing these two ads next to each other:
Our food system offers many wonderful contrasts like this: sometimes we can spend a leisurely Sunday exploring fresh, traditional and local food — but sometimes we want a jolt of fast, new caffeinated drinks from far away. My own fridge is full of such contradictions. Care to guess what opposites might lurk in there?
NYT article here.
What do you think the reaction will be, for both consumers, and for producers who currently use trans fats in their products? What do you think of the proposed ban?
Hello everyone! I researched the topic of colony collapse disorder on honey bee colonies in the United States for my midterm project. While this topic has been around for several years, the importation of foreign bees has begun more recently. This importation has altered the economic impact of declining populations of honey bees in America. You can watch my video presentation here:
I hope you enjoy learning about this topic!
There were three economists who shared the Nobel Prize in Economic Sciences this year, and one of them was Robert Shiller, a professor at Yale. He is interviewed by the Washington Post here.
Their topic area is financial markets, so it’s not explicitly food related…but in the interview, Professor Shiller discusses his views on rationality…an important assumption underpinning many economic models, including the ones we use in class. He says, “When I look around, I see a great deal of foolishness, and I can’t believe it’s not important economically.” He’s also skeptical of the idea that everyone will properly manage their retirement savings…people are mired in habit and inertia and you’d need to allocate lots of time and energy to making financial decisions.
These ideas can be related to food economics too…quite clearly on the consumption side, and also on the production side. People do irrational things all the time when it comes to the foods they buy and eat. Habits and psychology are significant drivers of food and health decisions, as any RD or MD can tell you. So…what do you think? Are people rational when it comes to food decisions? Are people each “rational” in their own way, making it hard for economists to model their decisions? Or, are people just not rational at all, and driven mostly by urges and habits when it comes to food? Does it depend on the person? How might the answer affect food policy?
I also appreciate Prof. Shiller’s general skepticism and love of facts.
We’ll get more into this topic area when we talk about market failures later.
Last Friday I was watching CNN and the government shut down was a hot topic (and still is). What stood out the most were reports about how a prolonged government shutdown might affect grocery prices, particularly the price of milk. The news claimed that milk prices could double! I didn’t know if this was actually possible, a gallon of organic milk is about $4.50. Would people actually pay $9.00 for milk? It made me wonder how a rise in price might affect the choices consumers would make at the grocery store. Would people opt for milk alternatives like coconut, soy, or almond milk? Would people choose to consume more of other beverages instead? How would this affect the price of cereal?
Today my family in Puerto Rico told me that in the past few days the price of milk has risen to $8 a gallon. I wouldn’t consider milk to be a staple of the Puerto Rican diet, but a lot of popular baked goods are made with milk. So I’m curious about how a rise in milk prices will affect the price of other popular foods. But my question to the class is, how would a rise in milk prices affect your consumer choices?
One good opportunity to improve public health is in grocery stores, as psychologists and economists work together to help retailers increase sales of, well… groceries.
Today’s New York Times has a terrific news story about this frontier of research by their reporter Michael Moss. Moss just released a lively new book about how food manufacturers raise the levels of salt, sugar, fat and other ingredients in processed foods far beyond what you’d add in your own kitchen, while research at Tufts and elsewhere has shown similar problems in restaurant food. In contrast, grocery stores sell a lot of fruits, vegetables and other relatively healthy stuff, generally around the perimeter of the store. So, in the choice between processed foods, restaurant foods, and plain old groceries, what determines how consumers’ spend their hard-earned money?
Advertising. Taste and convenience are also important, as is factual information about nutrition and health. But those things are often hard to change, in which case advertising can provide the swing vote that nudges consumers towards what they actually buy. The effectiveness of advertising helps explain why we see so much of it.
The research featured in today’s NYT is about a great new display ad being tested in grocery store shopping carts: a mirror, reflecting the shopper’s face back at them. The researchers’ hypothesis is that commercial ads distract people from their own desires, so that a mirror reminding consumers of who they really are would nudge them back towards choices they are less likely to regret later when they leave the store.
What do you think? Where might a mirror help you make more optimal choices?
And to continue thinking like an economist, consider the problem from the store’s point of view: in your experience, when do they try to sell you things you might later regret, as opposed to helping you find things that actually fit the long-term you?
I like to listen to podcasts when I run, mostly fun stuff from Slate and the BBC, also stories (both true and fictional) and sometimes great lectures. If you already listen to podcasts, or might want to get started, here’s a great one offering 20 minutes of econotainment to ease your commute or whatever: Planet Money’s Episode 481: The Economist’s Guide To Drinking While Pregnant.
Our week 1 exercise asks students to describe an instance of thinking like an economist — that is, trying to explain individuals’ choices as if each is doing the best they can under their circumstances, and then interacting with others towards a potentially predictable result. Looking at social life as an equilibrium among optimizers cannot explain everything, but it can be useful and also a lot of fun.
The Planet Money podcast interviews Emily Oster, a famous economist (meaning, famous among economists) who’s written a new book on choices in pregnancy. It turns out that most people don’t think like economists at all when they decide what to eat or do during pregnancy. For example, when people are optimizing, we think at the margin about incremental changes — should I drink one sip of wine? how about a half glass? or a whole glass? But when people are pregnant, the rules tend to be absolute: no wine!
Emily Oster’s great story is about that kind of paradox. It turns out, that real people don’t actually optimize all the time — the calculations and subtleties would make our heads explode. So we construct simple rules that clearly are not themselves optimal, but might be a predictable equilibrium among optimizing people — doctors who need to tell lots of people the same thing, and prospective parents who have better things to think about than relative risk ratios and complicated probabilities. When we become aware of that we can perhaps overcome some of those limitations, and make arrangements to reach a much better equilibrium.
In other words, actually thinking like an economist is pretty weird… but do you find it useful? fun? Listen and let us know how you see Plant Money’s great podcast on The Economist’s Guide To Drinking While Pregnant!
Wow… the class opens for previewing tomorrow. Official first day will be September 3rd, but if you’re as keen to start as I am, you can check out the welcome videos and course details our new Trunk site!
I look forward to working with our students there — and if you’re here as a tourist checking out the blog, come back soon for their posts as the semester progresses.