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Happy Tuesday. Hope you had a good weekend. Our hardworking GSIs have gotten most of the
grading done, so you'll be getting your stuff back on Thursday. The bad news
is that you'll be getting Homework 2 on Thursday. The good news is that is 2 out of
3 of your homeworks. The reason that I'm pushing to get homework
1 and 2 done now is that you'll have them before the midterm, and my ideological
goal is that most of the math that you face will be before the midterm and on the
midterm. After that we're going to be doing a lot more
case study type of economic discussion. So we'll talk about fisheries. I listened
toÉI'll get to Damien's thing. I listened to
Damien's lecture about transportation yesterday (I'm behind also). So that kind of
discussion and brainstorming and what's going on here, and what are the incentives
and very holistic picture is very helpful to understanding how the world works. And
that's what I want to get to as well. And Damien was lucky enough to jump right
into it. But once we get past some of these basic tools of economics and
mathematics and analysis, then hopefully you will get to do this type of stuff as well.
That is, obviously, what you're doing right now. Your first stab at (well not you first
stab, but in this class) your blogposts. You're trying to give a holistic idea of how
things fit together. Just in terms of what's going on with the blogpostÑI've gotten
about 20. And I suppose that's 20 out of 90 for people that want those 10 points.
Blogposts have already been sent in. As I mentioned numerous times, I will not
read, approve, vet, analyze, do anything with your blogpost. The only thing I want is
an e-mail. And in the e-mail, there will be text. There will be a bottom line. And I
want the words "bottom line" and a colon and stuff. And what is meant to go here is
the takeaway message, right? The thing that you want your grandmother to know.
If your grandmother is going to figure out why you said that, then she will read this
text, right? That's what a bottom line is. The bottom line is notÉ"The bottom line is
this is the end of my post." That's not a bottom line.
If you give me a title, that'd be awesome. If you don't I'll make one up. It won't be
a nasty title. It'll just be whatever I feel
like kind of fits. And I might be happy to make
up a good title, I might be lazy and it'll be a crappy title. So if you'd like a title,
send me a title.
So all I'll do isÉI'll get it, I'll say, "I got it" (because I'll look and seeÑis
there a text? Is there a bottom line?). That means I got
it. And I'll put it aside, and then I'm going to randomly publish these starting October
2nd. So there'll be roughly two a day for forty-five days in a row.
The e-mail address that it comes from will be the e-mail address that's linked to
your name. And on my blog I'll add a little thing to the top, and I'll say, "John Doe
says: dot dot dot", and that'll be it. It's basically cut and paste. Now some of
you (this is another note) have been putting references
at the bottom. I will probably just stick the references at the bottom. But
if you want a link to a particular statement like, "Cats are good" then put a
link in that text, so I can hyperlink to that sentence, okay? If you're trying to substantiate
a statement. If you're just going to say, "References: Wikipedia" that doesn't
help anybody, right? I went to Wikipedia and I learned some stuff.
So you have to have and actual link. If you don't have any references or anything
like that, that's fine, but it's just considered good manners to put in references. Any
questions about the blog post? How does the scoring go? If somebody slams
your post, thenÉ Doesn't matter. You get your points. You just
look like an idiot. So this is the difference between intrinsic
and extrinsic motivation, which I told you before. And earlier I said, "Look, if you
guys want to walk out of an economics class and you want to know economics, then your
blogpost should make sense. If you look like an idiot, then you're not really
good at economics, right?" So my job is to help you get better economics,
which unfortunately means practice, homeworks, midterms, blogposts. Later in the
quarter you will be doing briefings; those will be much higher quality. And if
you didn't know it already, you will be doing each other's briefings. So it's going
to be: "My classmate wrote this awesome briefing. I will give them good points". OrÉ
"They suck and I will give them bad points". So keep in mind that your economic
analysis shall be improving hopefully through practice and through time. Any other
questions on that stuff? The blogpost doesn't have to be about natural
resource economics right? Nope, it can be about anything with economic
analysis attached to it. I'm writing a post on Putin right now, who is one of my
least favorite politicians, and so that's political economy (oh, well, natural resourcesÑoil,
so I get to call that my expertise.)
Office hours today at 12:30. On Thursday I'm going to be moving (I'm sorry I keep
moving my office hours around) but I'm moving it to 3pm from 3:30, if that matters.
ThursdayÉohÉI'll be handing out the homework that day, so that means you might
have a question. So just keep that in mind. One half hour earlier.
Let me go over some things that came up in office hours (under the logistical tag).
And this is just a simple thing to keep in mind that may not be clear the first time.
So what's the difference between these two figures? This is one of those pattern
recognition tests, the SAT. Is the right one likeÉmore combinedÉlike
aggregate market? I meanÉ Perfect. That's actually good. That's big
Q, right? This is an individual firm. And this is the market. Now the market can be
composed of an infinite number of perfectly competitive firms. So the firms
that are facing the market may have a demand curve that's shaped like this, but
a supply curve that's shaped like that, because they are price takers. Remember that?
So when we aggregate all of them together, the market looks like this. But none of
these firms are actually making a decision that affects price, okay? So if you take an
infinite number of these guysÉor I should say that if you take an infinite number of
these guys, okay? Oh no that's wrong. An infinite number of
these guys, and you put them together, you're going to get an aggregate market. And
supply and demandÉin a fairly passive way you've got equilibrium price and
equilibrium quantity. And they're codetermined, right? Price and quantity.
Over here, for the individual firm, they have an upward slopingÉthey face a
downward sloping demand curve. And this could be the entire market for a firm.
This monopoly situationÑnow this is the demand capacity for the whole market.
And this particular firm, if it acts like a profit maximizing monopolist, will do
whatÉin terms of doing what? Decision making. What happens in the head office?
Yeah? Produce where MR equals MC.
Right. Produce where MR equals MC. Is that right here? No. where is that? Is that
right here? Kind of. Is this the price or the quantity here?
Quantity. Quantity, awesome. There's price and that's
Qm. So I could draw that right next to that on a test, for example, and say what's
the difference? And you'll say, "Oh look, pay attention to
the axis." This is where axis labeling really does matter. It depends what the firm is facing.
Alright, so that's just a note. Another note of a more philosophical nature
is why are we doing so much of this math. Why are we doing math when we're trying
to do economics? Is this really just confusing to doÉis this confusingÉor
is it helpful? These are the same thing here. The reason
that we're going back and forth between the math and the mathÉeither the algebra
or the figures (the graphics) is because we're trying to do, "I like more" right? But
we want to have a reasonably concise way of doing "I like more" and this, for some
people, is more concise than this. This is actually more concise. It's more communicative
for some people. It's easier to understand this because I like more and
more to
a less and less degree. Increasing at a decreasing rate. So the use
of mathematics in economics is not meant to torture you, it's just meant to be
a way of working with the concepts, so that they're clearly communicated. It may
seem to be the opposite of clearly communicated when you see all this math, and
you're trying to do optimization, but this is the goal. So I'm sorry that it's not
the most obvious thing sometimes for some people, but over time when you're working
with it you should be able toÉremember, who saw the matrix? Remember
when they're looking at the screen and the letters are falling down? And they're
like, "Oh I canÉ" And after awhile you can see reality through
the letters? Some of you are still seeing these letters and saying, "What the hell is
going on here?" But this should beÉafter a while you'll be
like, "Oh yeah, people like more." Okay? You'll see through the math. I'm not trying
to put so much math so you can't see through it. That's the idea. A minimal amount
of math so you see through it, and you say, "Oh I see what's going on here."
Now if I write this on the board and say it's my utility function, is that a good thing
or a bad thing to write down? It's a bad thing. What does it look like?
Concave up, right? This is not a very good shape for utility function, because it
implies the more you have, the more you like the more you have. It's not common to
find anybody in that situation. In fact, what this utility function implies is that the
demand function does what? What happens to demand of that utility function? It
slopes up. The higher the price, the more I want. That's kind of weird, except for
those bling things I talked about before. There can be something about psychology
involved, but generally speaking, this is not a viable expression of preferences (of
economic preferences). When we talk about a luxury good, can we use
that? Not really. Who owns a luxury purse (girls)Éthose
Guccis or LVs or whatever they are? Or the rip off Guccis or LVs? Does anybody
own one because you're all still students? Do you have two? Do you have three?
Do you have four? No, it's like, maybe one's enough, right?
Even Vanelda Marcos ran out of shoe space, so she's like 1200 pairs of shoes, that's
plenty enough for me. So luxury itemsÉthe demand for luxury items
slopes down, just like any other demand, but it tends toÉwhat happens to the
demand for luxury items withÉwhat happens with that? In terms ofÉ
What's the difference between a luxury item and ramen? Here's a demand curve for
LV purses, and here's the demand curve for ramen. Why are they different? How
are they different? [Inaudible]
Right, so your budget increases, ramen shifts inÉand?
The LV demand curve shifts out right? Because this is the relationship between
price and quantity, holding income constant. If Louis Vuitton bags are luxury goods,
then the definition is income elasticity is positive with luxury goods, and it's
negative with inferior goods. Right? So that's the answer to your question.
Is income elasticity automatically zero in a normal good? Because it's not inferior orÉ
I think it'sÉit would not tend to be zero. I think it would beÉwell yeah it could be.
Well the definition is, as your income goes up, I think the income elasticity (change
in quantity over change in income times income over quantity). And it's defined
asÉI think it's around one isn't it? In normal goods, I think the income elasticity is
one. Right, as your income goes up by one, your
demand for a normal good goes up by one. Or it goes up by more than one. It goes
up by more than one, so more than one percent. And less than one percent for inferior
good. So it's one, not zero. Zero means no response. Right? That would be wrong,
I think. Is there any commodity that would look like
that? In this class, no. It won't be on the exam.
I can't think of a good example, if you can, great, send me an email?
What about utility of just wealth? Utility of wealthÉthis is an interesting
question. Economists always assume that you get utility from the things money buys,
not from the money itself. But you can haveÉit's an interesting questionÉis a billionaire
a thousand times happier than a millionaire? That would beÉin fact even more
than a 1000 times happier than a millionaire, right? That would be this kind
of utility function. There's some interesting in development economics of threshold
effectÉonce the country's income crosses about 10,000 dollars, it seems
that the connection between wealth and happiness is not so strong. It used to
be zero, but now it's like waitÉI guess there is a connection. But I think that money
(if this is money) just the pure dollars in your bank account is one of these things
still. Would you apply drugs to that graph?
Like addiction? Probably no also. Because that first hit is what the addict wants.
Usually they're out, right? Till the next hit. But the idea of drugs is that they create
their own demand. So what you're having there is your demand is like this the first
time you try it, and then it goes out. Because your tastes are endogenous in this
situation. The more you use, the more you like what you're using.
Would a product like laundry detergent or toothpaste have an income elasticity of
zero? In a sense that you'll never use more of it?
Yeah Well, it depends. If you're talking about
likeÉwhat kind of laundry detergent is it? Is it tide, is it ultraclean bright? Or is
it Walmart's discount dog food, right? So you're shifting between products. Within
that product class, maybe we do consume more laundry detergent.
Would that product class have a name? NoÉI don't know. Well, you're either talking
about inferior goods or normal goods, right? So Walmart laundry detergent is an
inferior good in a sense that as you get richer, you get brighter and brighter detergent,
right? After awhile, you send your underwear to drycleaners because you can't
be bothered. If you break one class into smaller classes then you start playing around
with what's inferior versus what's normal. Does that make sense? Any other questions?
Couldn't that happen, like do nothing the entire graph, but after that inflection point,
[inaudible] you don't benefit from having a small quantity up to a certain point you
benefit a lot more from havingÉ? You don't benefit from having small quantity,
what does that mean? Like, sayÉ
Your utility from the first several units is zero,
Or just like relatively low, and at a certain pointÉfrom each additional unit you start
to gain more from having an additional unit. LikeÉit becomes more useful. Like
there's some sort ofÉ It's like socks?
Something that benefits from having moreÉ What if you have likeÉsomebody was giving
out individual playing cards or something? Like there's a deck of 52, right?
What are playing cards? What kind of good is a playing card? A king of hearts, what
kind of good is that card? Substitute?
No, is a King of Hearts the same as the King of Spades? Is it exactly the same?
No No. A deck of cards is a 52-dimension set
of complements, right? Plus the jokers. Let's say somebody's doing a lot of drugs
and they take 2 or 3 hits, and they don't get
that much of an effect and then after more they start toÉ
That's production function that you're dealing with. That's decreasingÉno wait.
That's a threshold effect. You need to get over a certain amountÉso your utility is
low, and then it will go up at a decreasing rate. Which technically is cool; you can't
do calculus around here, but that's all right. So you're saying there's not a good where
it will get bigger at a certain point? Yeah it's hard...I can't think of one. I mean,
I can take apart any example you guys come up with.
Maybe like some plant, if you're a farmer, just some plant in your garden, then you get
to a point where you can't farm a large amount of food, and you get to a point where
you can't do much more with the labor. Yeah, but now your changing the definition
of what the product is. Is it land for garden? So this is my garden utility versus
my farming utility. But I'm not trying to deconstruct everything that you're saying,
but let's just do it this way: if you do deconstruct it you can still use that.
Look for a way for it to fit to that, and you can usually. I'm hard pressed to find
a way you can't.
What about a collector's item in general where the 5th item is worth much more than
the 1st, and so the 10thÉ But why is the 5th item worth more? Is it
a set? No, it's not a set. LikeÉyou just get pleasure
from getting more and more. The more you have thenÉmaybe somebody is willing to
pay for his 20th collection of cards, willing to pay more than his 5th collectionÉ
I doubt that. Now the order of acquisition of the card may matter, but when you ask
someone about their baseball card collectionsÉit's like, "What's your best card?"
"This card." Now you start drawing your demand function.
Hank Garren (whatever it isÉ39) all the way down to MelÉGibson or whatever. Some
useless baseball player, right? You have a downward sloping demand function, which
is your utility function we're talking about.
This is great; let's get off this topic. This is too fun.
So let's get back to annoying things. So I listened to Damien's chitchat on
transportation. It was very interesting. Two questions that came up in my mind:
One was this $68 per semester cost of theÉwhat's this thing called? The fast pass?
The class pass? The survey says that there's about 12 people
or 15 people that ride the bus. Let's just say that that's representative. Let's
just say 20% of the population of Berkeley rides the bus. Why would 88%, or 51% even,
vote for the class pass? Why? I'm just throwing it out there. I'm not doing economics.
Anybody? Well I think that 20% of the population relies
heavily on the bus. And the other 60%...it's like you're walking on Telegraph
and the number one comes, you're just going to hop on it. but if the number one
doesn't comeÉ. You keep walking.
Yeah. Alright, so the idea is that it's worth paying
$140 a year for the opportunity to jump on the bus if it should come by. And save
yourself a dollar. So it happens 140 times a year, or more, right?
I think what it wasÉwas the 20% was people who used the class pass to get to
Berkeley, and that was a lot more than the people who actually do use the bus pass to
the point that it's worth $68 a semester. To go between your house and somewhere else?
Yeah, just going around Berkeley in general but not necessarily commuting.
Okay so it could be more than just that 20. Who uses the class pass at all during the
semester? Okay that's much more interesting. Who feels like they get $68 of value
out of that class pass? Okay, well that explains it. Any other questions?
I was going to say maybe when they had to vote all the people who really wanted the
class pass showed upÉ Yes. Absolutely. That's a big deal. The people
who really cared did show up. This wholeÉin the bookÉwhen you read The Logic
of Collective Action, you'll definitely see that effect. This is called interest group
politics, right? You might have heard of that.
But the otherÉbecause I thought about it and I calculated and I was like wellÉI'm
actually paying more than I'm getting, but I don't mind because it's going to AC
Transit. [An organization we all love] So I look at itÉ
He said, "I got a $250 ticket and got out of it" and I got a $250 ticket and didn't
get out of it. And it's the same stupid ATM machine.
And there's no bus stop there anymore.
It's a public transport company. Whereas if it went to Coca ColaÉ
Evil. Public companies. Like Apple. And those iPod things. They're horrible. We
should ban them. Get the Zune. Everybody should get the Zune. [Laughter] Oh no
wait, that's Microsoft. They're more evil. Okay. Any other observations on the
political economy of $68? My parents pay around $4000 a semester for
tuition anyways, so it's like a $68É Mom, Dad, go for it! It's not your money!
Okay, that's actually really important. Who is paying, right? And even student loansÉit's
like whatever, I'll pay it later. But the other thing also is that if the majority
votes to tax you, then you kind of don't have an option, right? Because the class pass
is funded, right? It's an automatic fee? You don't get to opt out. So now it's likeÉnow
it's free. I think you can actually opt out.
You can? I think you can go over there and talk to
them and I think they give you a check back Give me my $68 back? How much of the $68 do
you get back? I want to seeÉsomebody tell me if that's true. Yes?
No? No. I think it's also the convenience of it
Well the convenience factor is much different. Anybody can buy a pass.
Wouldn't that take utility though? No, no I'm talking about you could've bought
a pass on the side. You still have to get your Cal1 Card and get
the sticker. Right. That's once per semester or once per
year? Once per semester.
Once per semester right? But that's not per month, so you're right, it's a transaction
cost (we'll get to transaction costs). What that means is like your class pass is
attached to your student ID, so you don't have to carry around a separate cardÉas opposed
to using that monthly pass. Right, so this is interesting. AC Transit
is not interested in offering a semester class that is not a class pass. They could. They
could call it a "not-class pass that you pay for". ButÉdid I get this rightÉ2/3 of that
$68 does not go to AC transit? He said it goes to some kind of financial
aid. Financial aid. Which is like "wooo" black
hole. And what is that? You guys are out there protesting stuff, right? Protest that.
Where the hell is my money going? It went from $18 or something to $68, and wow,
1/3 of 68 is about $18 dollars. It's 23 dollars or whatever. So someone out there
has got a whole pile of money coming in. Now that brings up (what I call) the political
economy of taxes, which is once a tax shows up, it almost never, ever, ever goes
away. Once they got you, then it's never going to
go away. I've got two examples of that. One of them is my favorite of all time, is
the tax on telephones to pay for the Spanish American War. When was the Spanish American
War? 1898. When did the tax on telephones pay for the Spanish American War
end? Never.
Tax on telephones in what sense? Like if you own a [Phone brand], you pay 52
cents a month. For the Spanish American War. For 100 years. And someone's
likeÉ "Yo, we paid for this like 10 times over." And that was the problem. They
had paid for it by 1920, but they just kept it rolling in. If you look at a regulated
phone bill and it's got all these 62 line itemsÉeven your cell phone bill is crazy,
right? What does this mean? And this is the logic of collective action.
Maybe the tax on your bill was 52 cents. Okay, $6 a year. What's my time worth? Even
at minimum wage it's worth $6 an hour. Maybe it's going to take me an hour
and a half to look this up and figure it out or whatever, so I'm not going to do this?
But if you multiply $6 by 600 million citizens, or let's call it 100 million phone
connections, boy now we're talking real money. [Why is it $6]
That's the annual cost of tax at 52 cents. I just threw that number out there. Just
saying. 50 cents a monthÉthat's nothing. But once you scale it up it starts to get
big. 600 million dollars. You can give 10% of that
toÉyou knowÉseveral busloads of lawyers to knock that thing down and still
keep 95% of the benefit. So this is the problem of collective action, which is the
marginal benefit to the person that is acting (anyone of you, $6) is less than the
marginal cost which isÉlet's just call it $12. It'll take you hours to go to congress
and fight it and throw down the tax. In economic terms, marginal benefit, marginal
cost, what should we be doing? What's the economically rational thing to
do? Do nothing, right? You go find a couple of friends, you organize your own special
little interest group, and then you go do it, right? But worse than that, it's
like wow. It only takes three of us to get a
good cost benefit ratio. Well let's let someone else do it. Let's just put an
advertisement on Craigslist and "Please help me, go work for me." And I'll benefit
from it. You will too, but you do it first. Right? What's that called in economics?
The jargon? You have
a homework group of three people. Two people do all the
work. The third person is a what? A freerider.
Freerider. Just like that. Okay? This is the problem with collective action. How do
you take care of free riders? In homework groups, you kick them out. But in
political economy stuff, it's much more difficult. Someone had a hand up? No?
Alright Someone asked in the audio (I think it might
have been you, but I'm not sure)Éwhat about the fixed cost of setting up the network?
No? Yeah? No? Somebody, whatever. And what about the fixed cost of
setting up the AC Transit? Is that small or large? Anybody know how much those bendy
buses cost? Like easy 100K, right? How much do drivers
cost a year? You know BART drivers make $40 an hour. To drive a train, on tracks,
that goes in one direction. I mean a bus driver, there's a challenge.
There's no bikes in the wayÉ They actually don't even drive the train.
They don't even drive the train! They just sit there andÉthey don't even tell good
jokes! They suck! Sometimes. So you've got a cost of a bus. But you've
got the system map, and you've got someÉ (and anybody who's going into urban planning
will be like, "Cool! Urban planning job!" Right? "Oh we should go from here to
here." "Why?" "Because I think so." So there's this huge cost of setting up the
network. You know you've got to the study, you've got to do the traffic reports,
you've got to buy the drivers, you've got to
get the busses, you've got this huge administrative group. You've got to have ticket
sellers and ticket printers and accountants and all kinds of stuff. So the fixed cost
of operating the AC Transit is huge. If anybody
does this on a blogpost. You just got to their website and get their annual report.
It'd be awesome. I bet it's probablyÉif you take busses into account, what are marginal
costs? What are variable costs for busses? What's the variable cost?
Gas Gas.
Maintenance. Maintenance, what else?
Upkeep. Maintenance.
Wages. WagesÉyeah the drivers are kind of a little
bit fixed, a little bit variable. We could call them variable in a senseÉbut then you'd
shut down the whole network, right? So let's just put that into a sunk fixed cost
because I wouldn't be surprised if the drivers were union. And the biggest growth
in the union since World War II has been in the public sector or the private sector?
Public. Public sector right? Surprisingly there's
no competition in the public sector, so why not unionize, right? If fixed costs are 70
plus percent, then I'm guessingÉthen you just want to throw a bunch of riders on there
because the marginal costs are going to be quite low compared to the revenue. Right?
Fixed costs, 70%. Revenue, 0. You might as well take some passengers on to get
some money back. But here's what I'm getting at. Is this network actually efficient
at meeting passenger needs? Who's trying to take the bus sometimes, and
it's not going from point A to point B, where they want to goÉthat's happened right?
The whole Vacaville dialogue. The 3 hours from VacavilleÉtake my car. That's very
rational, right? But interestingly, what's the alternative in terms of public
transportation to the bus? What could be? Rideshare?
Rideshare. So you kind of have to show up at a corner and hope that you can get
around town, right? A bit trickyÉvery trickyÉ Around Berkeley? OrÉ
Around Berkeley, Oakland, Richmond. Bike.
BikeÉpublic transport, kind of. Individual transport. But what does a bike do? A
bike is very efficient for getting from where you want to be to where you want to be.
Right? You can walk, you can bike, or you can take a car. Taxi? Why not take a taxi?
Expensive. Expensive? Why are taxis expensive? Did you
know that there's a limit on the number of taxi licenses in Berkeley? So has
anybody ever been to a country where they have deregulated [inaudible] or busses?
Dolnishes? In Turkey? Things like that? It's likeÉyou go into the traffic,
and it is insane because it's crazy, because everyone is driving around all over the place,
but it only costs like 12 cents to take a taxi or share a taxi. That system is not allowed
in many, many parts of the developed world, right?
We want our nice, orderly, mapped out system that somebody with a PhD in Urban
Planning figured out that is good for you, and you, and you, and you, and "I know
exactly what you need." And unfortunately, "I know exactly what you need" means
that you don't get what you want, and what you do get costs a lot of money. So this
is a counterexample. This is a really sad example of the public transport system in
Santiago in Chile. Chile's like a really free market place if
you follow politics. The Chicago school of economicsÑthey've had a whole bunch of influence
and they had this completely deregulated, third-world taxi market. Everybody's
happy, costs are low. They decided to make it more efficient and the
costs went up, and the ride delay lengthened and people were less happy, and
they lost crazy amounts of money. They didn't even make money, they list money.
So it's an example of the fiasco of central planning that happened only a couple
years ago. But it's all in the name of some kind of planning
efficiency. And that is actuallyÉwhat I'm getting at with the question
of markets, right? The idea ofÉit's like do we want markets or do we want order?
I think UC Davis has these school subsidized tipsy taxis that drive you from point A to
a certain stop for 2 dollars.
Right. What's the reason for that? I was there, I never took it. I was biking under
the influence. What's theÉa BUI, you can get a ticket. I have a friend that got a ticket
for walking his bike because he had the potential to get on it. It was likeÉthe cops in
Davis have nothing to do. Unlike Berkeley. Although I did like Damien's comment.
There's like 120 different parking violations that you can get in Berkeley. This place
has too many parking rules. Hold on one second I want to get to this question.
So why are there tipsy taxis in Davis that are subsidized?
They help pay for the tuition. Yeah, they pay for the tuition, and that's
sources of it. But why subsidize the taxis for drunk people? Not for sober people?
Public Safety? Right. I meanÉwhat's the cost of a dead person?
Very high. The cost of a person sober walking homeÉwhatever, who cares, right?
I think that's better than BearWalkÉI don't knowÉ
What is BearWalk? Someone will walk you home. On their bike. So they have a
bike? Oh so they can get to you. They're supposed to run away.
What? Yeah, that's like their orders. To run away.
All in the name of good fun. I have a friend who's a Bear Walk. They have
a walkie-talkie to call the police and a flashlight. And that's all.
It's someone to walk with you to make sure you don't get in trouble.
Yeah. That's exactlyÉ That's better than nothing.
But they're supposed to beÉyou're supposed to call them if you're worriedÉ
WellÉwhat I've seen drunk people doÉnot a good thing. So if they come up to you
with a club and hit you in the head, that'd be fine with me.
They also pick up after 11, so if you're at the library and you're like 5 blocks away,
and it's like 2 in the morning, you get picked
upÉ See, that's cool too. I mean that's like a
public safetyÉI wasÉthe whole "take back the night" thing, I've looked into that a
long time ago. There's a whole industry called "safety from predators". Which is an
interesting industry. It's more cost than benefit, let's just say it that way. But it
doesÉI'm happyÉI'm glad that it exists. The
industrialization of it is like a military industrial complex. A little bit scary. Any
more comments on that stuff? But they have the whole seminars and things like
that. It's like NGOs and fundraising seminars on how to get more money.
So the thing about this is the efficiency of this plan system may be less than the
efficiency of the other system, but politicians like it because they can point at it and
say, "I organized this system." Politicians cannot point at a bunch of bicycles
and say, "I organized that." Politicians cannot point at a bunch of taxis and say,
"I organized that." So they can take credit for something, even though it might suck because
it's something that they can put their hands around. And that's the difference
between markets versusÉI'm going to write bureaucracy.
So you mean free markets? YeahÉmarkets in a sense that individuals
making decisions. Okay so it's like you go to the market, and you say I want to go get
a yogurt, an orange, a ramen (because you're in an inferior goods situation). Or
I, the central planner, decide on cafeteria food. You have this food today. And old school
cafeteria foodÉit was like, it was that meal. You go to a cafeteria now it's
like you have 600 choices, right? Because they have to compete, in a way, with all the
fast food alternatives. Well I think the financial marketÉNew York
just came out with a really extensive article about the financial crisis and that's
pretty muchÉ No, that's not free market. That thing on
the financial crisis is all aboutÉnumber one, a whole bunch of regulators had no idea
what they were doing, number two, a whole bunch of donors getting their money's
worth in terms of bribery for their politicians, right? And number threeÉI don't
even know what to sayÉall of our money going out the back door, right? It's
not the same as free marketsÉI should talk more about that.
But isn't the financial system not regulated? Oh my god, no it's totally regulated.
Well, I mean it is, but there are parts of it that weren'tÉthat's what the article wasÉ
Right. Okay this is an interesting aside. The biggest problem was when they found
out that AIG was not regulated by anybody. AIG is American Insurance Group. The
government paid something like 100 billion dollars so farÉ
180 billion dollars of taxpayers' money. 180 billion dollars to AIG to bail out a whole
bunch of credit default swaps that were not regulated by anybody because AIG is an
insurance company. What the hell were they doing in that kind of financial product?
Now. The problem was that there was a regulatory net, and they fell through it,
right? Because there were no regulations at all, right? Then they would've just gone
bankrupt. But then step back one step, and say to your game theory mind. It's
likeÉwait a second. If I'm trying to make a deal with AIG, and they have 180 billion
outstanding whatevers, and no one's going to back me up, do I want to make a deal
with them? Well yeah, it's the same deal as moral hazard.
No, it's not moral hazard. Moral hazard comes up when the buyer thinks the AIG
seller is regulated and secure. Moral hazard is when AIG can say, "Yeah, yeah, we're
backed up by the government." And if there was no moral hazard risk, whichÉif
AIG goes BK it's your problem, then youÉI'd personally be like, "I don't want
to do business with you. I don't understand what you're doing." Right? So the problem
was the perception of regulation when there was nothing. In a free market, there
would be no regulation. You would realize that there was no regulation, right?
It's like when you sell something and they give you a whole bunch of cash, hundred
dollar bills? You're like whoaÉcheck out the hundred dollar bills, right? Because
you have to make sure they're real. They might be handing you counterfeit or
something like that. Right? And that's buyer-beware. The buyer-beware, which is
the old school, has been replaced by "regulator will take care of you."
The FDA says, "This pill will be good for me." Right? When it might not be. It might
kill me or it could do nothing at all. The whole placebo type of problem. Question
on that? So the markets (alright let me pass around this thing on markets). This is
the Hayek reading that I told you guys you would be reading. And I suggest you read
it kind of now. Not in class now, but between now and when I hand you the
homework. It's only 12 pages, it's very easy to read. It was written in 1944, and it's
also posted on the web in case you lose it or whateverÉyou want to send it to your
friends. Oh my god this is so amazing. Then go ahead and do that.
But this paper is a very, very, very important paper. It's probably the most
important paper as far as I'm concerned in economics, and it's about information.
And basically he says, "you know, and you know, and you know, and you know, and
you know stuff that I don't know. How will I find out what you know? I can ask
youÉbut you may not even know what you know. I can guess, but I might make a
mistake." That's the question of the central planner versus the individuals making
decisions, okay? And this paper is essentially the most devastating
critique of bureaucracy and central planning. And it really is important
because it helps you understand why markets are important, and why pricesÉa single
price conveys a lot of information, right? The price of a gasoline (three dollars
and whateverÉ5 cents) has a whole bunch of information. What's in the price
of a gallon of gasoline? What does three dollars and five cents mean?
What does that mean? What does that represent? In terms of costs?
Labor LaborÉsome guy to be at the gas stationÉwhat
other labor? The people standing on the platform to drill
for the oil. Someone on the oil platform. What else does
it represent? Transportation costs.
Transportation costs from Venezuela or wherever. Subsidies.
Taxes and subsidies. There's taxesÉexplicit fuel taxes, subsidies that may not be
reflected because they're lowering the price. Someone says that the cost should
beÉa barrel of oil should be $300 to include the cost of military. What else?
Political costs? Political costs. Political risks, right? Every
time Nigeria has another explosion or a civil war the price of oil goes up and the
price of gasoline goes up. That's a scarcity cost. What else? What else is a net price?
Marketing. Marketing. You need gas, buy it. Or our gas.
Not their gas. Because we have a tiger in our tank. What else? What else is in the
price? Profit.
Profit. Somewhere there's a profit. I think the profit on a gas station is like a penny
on a gallon or something ridiculous. What else?
The drilling permit? Drilling permit, capital costs.
The value to consumer? The value to the consumer?
Or how much the consumer values the profit. Now that wouldn't happen. Because that isÉthis
is 3.05 right? All these costs that we're talking about are under here. In stylized
way, this is the profit, right? I think the profit of a gallon of gasoline is not
50%. But this is the value of the consumer. Consumer surplus. What else?
The time of the year. Time of the year? That's kind of a change
in prices because ofÉpart of transportation costs, processing costs, the
snow made everything stop or whatever, if you're in Canada getting oil.
Resource rents? Resource rents. Absolutely. This is kind of
an absolute profit if there's a resource rent. That usually gets us to theÉwhere stuff
is coming from. Right? Or it's split between them and the people that are bribing
them. Others? That's back to Russia. Okay? So this three dollars and five cents
has a lot of information embedded in it. Right? The breakdownÉwho gets a penny here,
who gets 22 cents here. The breakdown is not necessarily important, but
the thing that's amazing is that those prices and costsÉwhen you pay that money
it all filters back to the system and rewards a whole bunch of people, essentially,
for taking risks and running businesses so that the system keeps going
on. What aboutÉmore on this? Yea, I mean the informationÉisn't that wrong?
Isn't there a lot of information missing from the price?
That'sÉwellÉironically the first question isÉis the cost of gas actually higher
because of things like military subsidies, right? Or is it higher because of when you
burn it? It has costs of pollution. Or when you refine it does it cause pollution? The
big case that's been going back and forth in Ecuador, right? For anybody who's been
following that. Is that called hidden costs?
Oh, it's called externalities. It's externalities right? So externalities are not included
in the price, they're externally priced. Those are externalities. But they can be quite
large. Now what if I go to the campus, and I buy
a parking placeÉwhat do parking permits cost? Like $300 a semester or something like
that? 300? What information is embedded in this price? How did that price
get set? The cost of land?
The cost of land, Administrative costs?
Administrative costs. Space?
Space. Let's say that the cost goes up to $350 next
year, next semester, whatever. Why is there a $50 difference? The cost of land and
space and administrative costs have gone up?
Wouldn't they try to charge as much as they can and still sellÉ
So the questionÉwhat I'm getting at here is important is thatÉthe price of gasoline
reflects the struggle between millions of producers and suppliers, demanders,
competing gas firms over the cost of refining gas, moving around the world, merging
with whatever, making it to California standards, bringing it to the gas station,
selling it to you guys or some guy across the street. You see the gas stations across
the street. Sometimes there's one penny right next to each otherÉsometimes it's like
50 times more and you're like what the hell is going on here?
How come some of them cost more if you use a credit card?
Well what's the obvious reason for that? Well I guess they don't want to likeÉincur
a fee? The credit card company charges a fee, first
of all. It collects 2 to 5 percent. Sometimes the most interesting example is
you pay cash, and they just put it right in the drawer. They don't pay any taxes on that
gas, right? More income. So cash discount can reflect several different things.
Yeah? So this price here is much more of an administrative
price. Now nominally, it might represent cost of land, cost of administration,
so supply and demand. But the easiest way to do supply and demand is to essentially
have an auction market for parking permits. And then there will be an auction.
The number of permits that we fix at is whatever it isÉ120 in one lot, and the top
120 bids for permits will win the permits, and that will be it. That's the price. Whatever
the price ends up being. But these prices are set administratively, right?
I guess the protests and the walkout wereÉ"We don't like where you set the price.
Set the price somewhere else." "No! But we have teachers and administrators and
janitors and land to pay forÉ" So this price is actually being set through
an administrative method. Right? Almost. It can't be arbitrary. These are completely
arbitrary questions. My favorite example of that is when I was in Cuba, breaking the
law, and they had rum. And they had 7 year old rum for $3 a bottle, and they had
5 year old rum for $5 a bottle. And the rule with rum is that the older it is, the
more it costs. But in Cuba, it was upside down. Why was it upside down? Somebody screwed
up. They put the wrong number in. All of the rum in Cuba, in cash
stores, is sold by the government. They're like, "Oops." And I go into the store
and I'm like, "I'll buy that one. That's more expensive." He's like no, no senor, you
want this one. This is better. Why? This one's betterÉthe price is *** up,
right? So Fidel's not good at business. This is notoriously well-known. Right? So this
is an example of an upside down price. This is essentially someone making a mistake.
But administrative pricing can be really wrong, right? And competitive pricing
can be really right. And you have to worry about externalities, but you have to
worry about externalities for administrative prices as well. But thing is
that people like administrative pricing. This is having control. It's like, "I know
I'm going to set the price." And people are going toÉ
Say that U2 came to give a concert at Berkeley. And U2 demands that the prices be
$10 a ticket. How many students are going to be in line for that ticket? I'll be in
line. How many people are going to be in line for
that stadium, or whatever? Thousands and thousands and thousands and thousands.
In fact, The Boss did this. He made a small economic mistake. He's like, "I want
to sell tickets cheap for my fans." So he was selling tickets for $70. What was the
black market price for those tickets? He wanted to save his fans a bunch of money.
All the scalpers bought up all the tickets. Then the fans paid $700. Right? He's trying
to do the right thing, but he doesn't get the supply and demand thing.
Who was that? Bruce Springsteen. The Boss.
Isn't that how the Dalai Lama event happened, how it ended up? Because the Dalai
Lama cameÉ It might have been free or something like
that? I don't know I think it was like $18. And students had
to likeÉ In Berkeley? Yeah.
And people had to sleep on the streetsÉ And they probably sold it to people who live
over there in Gourmet Ghetto. It's like, "Oh my god the Dalai Lama my guru!" Touch
his feet. He's a cool guy, but likeÉ you knowÉhow did heÉthere's different ways of
doing the pricing. Probably the way to do it is not sell it for $18 for students.
Just do a lottery, you know? It's 18,000 people wanting 4,000 tickets. It's likeÉissue
random numbers and give away the tickets. If you want to give away the tickets.
And maybe people will resell the tickets, and that's fine. So markets are hard
to understand, and you don't really know what's going on.
And that's something that drives people crazy, because most people deal with a
scale ofÉI have myÉthe sociologists who looked at FacebookÉit's like people have
700 friends on Facebook or whatever. Sociologists looked at the patterns of
communication of people on Facebook? Guess how many friend people really have
on Facebook? Five. Just like reality! Who's on your phone? Who do you call all the
time? Who do you talk to all the time? Facebook, same thing. And Facebook has
this thing called casual friends. But they're not friends. It's like yeah dude, but I'm
not giving you my car. Right? Just because you're my Facebook friend. So people
deal with very small scales. It's like a platoon. It's like five or seven people that we
can deal with. 100 people max. Like this will be a community in the old school.
We'd all live together, die together, fight each other, and then we'd go fight with that
other tribe, but when you get into a country of 200 million people, it goes beyond
comprehension. And buying something off the internetÉit's
almost like an act of faith, right? I'm giving someone my credit card, and there's
some guarantee somewhere and they're going to send me whatever they think I need.
So there are issues with our cognitive ability to handle markets or information markets.
This paper addresses that. And it's really hard for people to kind of let
go and relax and kind of just walk into a market and just trust that things are going
to work out. And what people in control, in power, tend to do is they say I don't like
it, and I can control it. I will have power, and I will set the price here, or whatever,
even though I have this massive cost of shortages or waste or externalities or something
like that. So that's what this paper is all about and that's what markets are all
about. I don't think we're ever going to get through
this list. Let's turn off the thingy for a second, I'm going to put in this fabulous
video. And we'll get to theory of the firm. I'm doing
this because we have this break. It's only going to be five minutes, so don't fall
asleep. At the start of the semester I mentioned that we're going to be going from
statics to dynamics. And we're doing game theory, and this is meant to do that.
And we want the video off, because this is copyright material.
[video break] What's the game theory there? What does game
theory mean? I'll wait, that's okay. A way of trying to make decisions based on
what you think other people are going to do.
Yeah. It's I know that you know that I know that you know that I know. Right? So
when we talk about game theory, we talk about the idea thatÉit's the message in
that bookÉEconomics in One Lesson. There will be consequences for the choice you
make. The consequences you should take into consideration, right? So if I have a gas
station and I'm sitting next door to another gas station, and their price is 3.04, and
I'm at 3.05. If I want to sell more gas, what do I do? Lower the price, okay? So now I
set it to 3.03. Okay so the gas station guy next door is like, "Oh yeah, whatever."
What's he going to do? Lower his price, right? You get into, essentially, a price war. That's
the response that'll be going on. Okay if I am a bus driver, and I'm making myÉwhatever
it isÉ32 dollars an hour, and a bus ticket costs $2, and someone else comes along
and says, "I'll take you for $1.50." because they're running one of these share
taxies. What do you do with the bus driver?
Get them outlawed. Get them outlawed? Not the bus driver. What
is the incentive that the bus driver has? None right? If I drive around an empty
bus all dayÉeven better: no one wants to get on the busÉright? I just make $18
an hour riding in circles. Do I care? Right? So this, essentially, is an example of administrative
pricing situation. The price is set, you do your work, you do whatever you're
doing, versus a competitive game theory price, or whatever you want to call
it. So sometimes prices are going to change in response to your reaction (if you
are a small business person) and sometimes they are not going to change. And
if you are a bureaucrat, it's much easier to just outlaw this annoying competition
that to face all those decisions about where to set prices. That's why monopolies
like monopolies because they don't have to deal with all that nasty competition.
And the worst monopolies are the ones that can outlaw their competition. What's
one of the oldest monopolies in the United States?
The post office? The post office, right? What is itÉlike 1898?
Or 1798, 1797? Forget Microsoft. Their marketing power started in 1988, and
it ended in 1998 or thereabouts. So US post officeÉthey've faced competition since
1970s from FedEx, from UPSÉe-mail has destroyed the post office, right? That's
why stamps have gone up and up and up, and that's why there's more junk mail coming
in our slots. But one thing the post office still has monopoly on, literally onÉthe
mail slot, right? It is illegal to put something on a mailslot.
It is legal to put pizza flyers on your doorknob; it is not legal to put a pizza flyer
through your mailslot. So they defend that monopoly very, very strongly. And they
have government power to do it. They can send you to jail. If you're FedEx and
you're competing against UPS, and they lower their prices, their overnightÉyou're
$14, you're $12, and they're $13, and they lower their price, are you going to respond
or not? If you're FedEx. Raise your hand if they're going to respond (FedEx)? Raise
your hand if they're not going to respond. Raise your hand if you're comatose. Come on
you guys. The people that were paying attention, yes
you are right. So that's the way that markets work. They're very hard to figure
out becauseÉdammit I lowered my price and I want to sell more and now that guy ruined
my day by lowering his price also. That's why people hate competition. They try
to get out of it as often as they can. Then can both of them just say likeÉwe'll
set the price lower, so we don't competeÉ That's called what? Collusion, cartelÉsimilarÉthey
will try. This is what Adam Smith wrote about. Adam Smith, Mr. Free Market,
he said that it's not more than three minutes, or something like that, after
a bunch of business people get in a room that they do not colludeÉthat they begin
to collude against the public. Just paraphrasing, right? Adam Smith was no laissez
faire kind of guy. He was definitely very knowledgeable about what businesses want
to do. They want to maximize profits.
I was just asking what if theyÉUPS set itself at $12É
So yeah, that's the thing. The way you can see it is airline fares. Airlines have got
millions of fares. And they all are connected by very complicated computer
programs, but at different offices, and United will look at all the fares of Delta and
Northwestern and everybody else, and they move their prices, and there's a whole
bunch of implicit collusion, essentially. But aren't there some of those that are in
the range where they move around because they stillÉI mean of course the one that
offers for free will get all the customers. They would go out of business.
Yeah, I mean, there's only so far you could go.
Right, so what they try and do is they send nice binders to secretaries embossed
with their name on it. UPS loves you Ms. Smith. To build loyalty. Because Ms. Smith
doesn't bay the cost of shipping the package, the company pays. So there's all this
incentive question. So Ms. Smith is just the bus driver. She's like, "Whatever, they
sent me a nice binder. I don't care if we pay $15 for FedEx."
Have you ever worked for a company where they send FedEx, and you sent your
Christmas letters on FedEx because it was on someone else's dime? I did. I'm an
economist. What is the situation when there's like price
matching? Like when you match the lowest price? That
is considered fair competition. But there's a big interestingÉif you want to
know about how markets work, look at marketing people. Don't look at economists.
Because marketing people are like, "How do I sell my crap?" But the price matching
literature is essentiallyÉit's the same as coupons. Coupons, you can clip outÉwho
clips coupons? Anybody? I clipped them like crazy when I was in college.
Box of cereal for a dollar, yes! But coupon clipping is a type of discrimination.
If you take the time to clip the coupon, bring it to the store, and get the product,
then, okay you get a dollar off. But a whole bunch of people don't take that
time, right? They don't care about clipping coupons. Not worth their time, literally.
So going through that whole price matching processÉthat meansÉokay I went
over here and I go to Best Buy, and you say, "Look I got this thing, here's the proof
that I need to show you so you canÉ" Dude, just buy it over there. So Best Buy
puts it out there because when you walk into Best Buy you're like, "It's probably
the mostÉthey do price matching." But it isn't, because you didn't look around. So
it's kind of a game, right? To see what's going on.
The other thing is, you know, those rebates? Who's every gotten a $10 rebate and
forgot to send it in? Doesn't that suck? It's like: "Damn I thought this was only $90,
now it's $100 because I forgot." Right? And they also count on that, when they have
these rebate claims. You only get 30 days to claim itÉ "Nope, sorry, we're keeping
your money." So that's kind of likeÉyou thought you had
the money, you thought you had the lower price, you bought it, and you go home,
and you forget to do itÉyou don't put a stamp on it or whatever. So you lose your
money. As far as airlinesÉ[inaudible]
Well, that might be too much price competition. Right? But also airlines have also
got a lot of fixed costs. Things like pensions and pilot salaries are famously high.
I feel like they would account for thatÉit doesn't even make sense.
Yeah, the other part of the airlines is they need to run their routes in order to offer
full schedule. And so you can have two airlines both losing money on the sameÉor
three airlines losing money on one route. When it gets down to one, they start
making big profit because they're monopolizing that route. There's an interesting
literature on, literally on routing in airlines. And it's basicallyÉthe more airlines you
add to a route, the cheaper the price gets, but you need to be able to drive out the
high cost airline. But typically they don't get driven out because they declare
bankruptcy, they throw out all their debt they accumulated being dumb, and they go
back into business with lower prices again. So consumers are served, but
stockholders are not. That's why it's a bad idea to buy airline stocks. Anything else?
Anymore free financial advice? Okay so let me roll through this thing here.
And that's part of theÉoh we only have two minutes. So I'll finish up on the walkout
thing. And then we'll get to theory of the firm. So the walkout thing, it's not like
I have a lot of data on the walkout. But I want to point out some more incentives. The
walkout was all about we protest because we want our administrative costs to
be lowered by somebody who gets to lower things (they just change the number).
And that's a form of political action. If the cost of coffee at Starbucks or at Yali's
or whateverÉif they raise the price of their cappuccino from $2.50 to $2.80, the people
just walk down the street and go to Starbucks. Or they go to Peet's or they go
to wherever else, right? They're competing on price; you vote with your feet
in markets. You just go somewhere else. Online it's very simple. Click, click,
click, you do a price comparison. So you have a lot more autonomy in terms of how much
you pay because you just switch firms. And those firms get the feedback because
they see those sales fall. But in a monopoly or a political situation,
price negotiation is either take it or leave it, here's the price, or we protest politically
(we call our congressman or whatever). So there's a very different way of setting
prices in administrative form versus in a market place. In water, which is an area I
spend a lot of time, it's one of the most dysfunction and inefficient segments ofÉanywhere
because almost every water utility is a local monopoly. You can't get
(I mentioned this a long time ago) tap water from somewhere else, right? You can
buy bottled water from somewhere else. You can buy coke instead of bottled water.
But tap water comes from wherever your monopoly is. And they are regulated.
They are regulated by either politicians or by regulators. So here's the thing that's
interesting. So the universityÉso you guys basically face
this huge cost of switching universities. They say, "Walk out, go to Stanford! Go to
San Diego (UC San Diego, wrong place) go to San Francisco State!"
That's a huge cost. It's not just transferring transcript; you've got to move, you've
got to lose all your friends (but they're on Facebook still) and you have toÉyou go
from one place to another. And the thing that's interesting isÉI look at this in terms
of an academic study. And I look at two dimensions. One is competition among
universities for applications based on the cost of applying. The admissions
application fee. Those prices turn out to be very competitive. But the fee that is not
competitive is the transcript fee, right? You can only get it from your alma mater.
And I thought the economic theory was they would screw you on your transcript
fee. And the UC actually is like $12 or something like that to get your transcript? But
believe it or not, Harvard, Yale, Stanford, they charge zero for transcripts. Why is
that? Why would they charge zero? Already included in fees?
They roll it into the fees, but more important than that? It's not just a bundling
example. They want people from their school to apply
to many different jobs, so they can get their jobsÉ
That's a good idea as well because they want to help you distribute transcripts to
grad schools. But I looked at one thing that's interesting is that between the cost of
the transcript fee and the percentage of alumni who donate money. The game
doesn't end when you graduate. Right? That's the key thing.
So what my point is on universities it that there's a lot of different actors or different
incentives and goals fighting with each other. You've got the cost of transcripts,
which is $12, you've got the cost of development people, development is actually
money-raising. They say we want it lowered, we want donations, okay? And inside
any organization, you're going to have struggles between different groups of
administrators, leaders, sales people, whatever. And we'll do more on that on
Thursday.