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Category: microeconomics

Published on Leave a comment on Harvard’s Financial Aid Reforms

Much has been made in the last three weeks about Harvard's decision to reduce the financial cost of attending for students from families with incomes up to $180,000 per year. Consider this article in yesterday's New York Times and a typical reaction in a Dartmouth-focused blog. I think most of the hype is overblown, particularly if it is just Harvard making this switch.

Suppose that Harvard's changes to its financial aid policies don't change the pool of applicants it receives. Then the policy simply amounts to a transfer from Harvard to some upper middle class families who send their children there, and there is no reason for any other college to change its behavior. So the impact of the policy is in the change it induces in the applicant pool to Harvard and the improvements that allows Harvard to make in its incoming class.

Who are these additional applicants? Upper middle class students who previously didn't apply to Harvard because, even if they got in, they lacked the financial resources (or the desire to spend them) to attend but who would attend under the new financial aid policies.

I'll conjecture that very few of these students are now applying to, say, Dartmouth. Compared to Harvard, Dartmouth has about the same cost, a financial aid policy that is no more generous than the Harvard's old policy, and an academic reputation that is no better than Harvard's. If financial costs were a barrier at Harvard, then they were a barrier at Dartmouth as well. So if Dartmouth chose not to match Harvard's new policy, I don't see why it would lose students out of its current applicant pool. And what's true of Dartmouth is true of colleges that are presently even less competitive with Harvard, making the opening to the New York Times article about Dickinson College a bit far-fetched. The article does identify the colleges that will see their applicant pools change:

In the competitive scramble for prestige and rankings, numerous colleges already try to lure some top students away from the Ivy League by showering them with “merit aid” even if they are well off and can afford full tuition.

The price of buying a better class just went up, so these colleges will have to modify their behavior if they still want to compete in this way. Let's assume that the higher prices discourage some (even if not all) of this behavior, generating a better applicant pool at Harvard. The better applicant pool, in turn, means a better set of applicants who do not get into Harvard. Some of the students induced to apply will get the spots that would have otherwise gone to other applicants, presumably of all financial backgrounds given Harvard's need-blind admissions policy.

And where will these newly denied applicants go? To their second-choice schools, which will include Dartmouth in some cases. So one impact of Harvard's change in financial aid on colleges like Dartmouth is that it allows them to also be more selective, even without changing their own financial aid policies.

This impact is offset to the extent that there are students admitted to both Harvard and Dartmouth that would choose Dartmouth if both cost the same but Harvard under its new financial aid policies. If it's just Harvard, then I'll conjecture again that this is a small number of students. If other colleges, very few of whom are more competitive with Harvard than is Dartmouth, follow Harvard's lead, then the set of admitted students who might be lost to their second-choice colleges will go up to the point that it would be difficult to maintain a higher price and the same quality of matriculating student.

So it is not Harvard's behavior that is important--it is the behavior of the large number of colleges that consider themselves competitors to Harvard.

Published on Leave a comment on Score One for Monsanto

I thought I was reading The Onion when I happened upon this AP story, which was also carried by my local paper today:

HARRISBURG, Pa. (AP) — Pennsylvania is stopping dairies from stamping milk containers with hormone-free labels in a precedent-setting decision being closely watched by the industry.

Synthetic hormones have been used to improve milk production in cows for more than a decade. The chemical has not been detected in milk, so there is no way to test for its use, but a growing number of retailers have been selling and promoting hormone-free products in response to consumer demand.

State Agriculture Secretary Dennis C. Wolff said advertising one brand of milk as free from artificial hormones implies that competitors' milk is not safe, and it often comes with what he said is an unjustified higher price.

"It's kind of like a nuclear arms race," Wolff said. "One dairy does it and the next tries to outdo them. It's absolutely crazy."

I think I am well within my rights to declare Mr. Wolff's office a "Microeconomics Free Zone." I wouldn't use the word "crazy" to describe producers' desire to compete with each other to offer the consumers a product they might like better. Whether the hormone has been shown to affect the milk is irrelevant here. If the statement is true about the production process, the producers should be allowed to label their product as such.

Published on Leave a comment on A New Way to Regulate Local Monopolies

Neely Tucker of The Washington Post brings us the story of Mona Shaw. The plot summary:

Fear not, fellow Americans! In these dark days of war, pestilence and Paris Hilton, a new hero has arisen. She is none other than 75-year-old Mona "The Hammer" Shaw, who took the aforementioned implement to her local Comcast office in Manassas to settle a score, and boy, did she!

Enjoy!

Published on Leave a comment on The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2007

Shorter version: Leo Hurwicz, Eric Maskin, and Roger Myerson share the Nobel Prize in Economics this year for "having laid the foundations of mechanism design." Here's more:

Adam Smith's classical metaphor of the invisible hand refers to how the market, under ideal conditions, ensures an efficient allocation of scarce resources. But in practice conditions are usually not ideal; for example, competition is not completely free, consumers are not perfectly informed and privately desirable production and consumption may generate social costs and benefits. Furthermore, many transactions do not take place in open markets but within firms, in bargaining between individuals or interest groups and under a host of other institutional arrangements. How well do different such institutions, or allocation mechanisms, perform? What is the optimal mechanism to reach a certain goal, such as social welfare or private profit? Is government regulation called for, and if so, how is it best designed?

These questions are difficult, particularly since information about individual preferences and available production technologies is usually dispersed among many actors who may use their private information to further their own interests. Mechanism design theory, initiated by Leonid Hurwicz and further developed by Eric Maskin and Roger Myerson, has greatly enhanced our understanding of the properties of optimal allocation mechanisms in such situations, accounting for individuals' incentives and private information. The theory allows us to distinguish situations in which markets work well from those in which they do not. It has helped economists identify efficient trading mechanisms, regulation schemes and voting procedures. Today, mechanism design theory plays a central role in many areas of economics and parts of political science.

Congratulations to all three. Here's the official word.

Published on Leave a comment on TimesSelect, We Hardly Knew You

I remember the day I subscribed to TimesSelect. I couldn't critique the opinions I wanted to without forking over the money. And it was also my prophecy this spring that, "Eventually, we all blog for Google." The two have collided, and the former has died. Felix Salmon lays out the details.

I thought TimesSelect was a wonderful thing. It imposed a $50 per year tax on a readership whose opinions were almost certain to be opposite of mine. I'm going to miss it.

Published on Leave a comment on Packaging Matters

A student directed me to a post earlier this week on the Freakonomics blog, in which Steve Levitt asks, "Should Apple Burn Its Economic Textbooks?" The post considers whether a more profitable strategy might have been to not charge such a high price for the iPhone initially, to avoid irritating the early adopters with such a quick price decrease and ultimately offering to rebate them half of the decline.

Leaving aside that the appropriate disposal is to sell the books, if disposal is what's required, the answer to the question is "no." Apple's economics textbooks are not necessarily wrong, but they certainly seem to be lonely. Give them some company, maybe a marketing textbook or two.

Products don't always sell themselves. Advertising works. Marketing works. Packaging matters. An ironic lesson for Apple to learn--we thought they had it mastered. Perhaps it has been digitally remastered. We'll know when the iWhatever is released.

Published on Leave a comment on More Sensible Cross-Border Flows

This is probably not the best timing, given the very weak August employment report, but I regard the developments in this article in Wednesday's New York Times as a good sign. Five months ago, I asked the question in the context of the immigration debate, "Is Labor Now the Mobile Factor?" I wrote:

In the current environment, I would expect to see capital going south across the border with Mexico, drawn by the high returns available due to the large amount of low-wage labor. But that's not what we are seeing. We are seeing the labor cross the border--at considerable personal cost--to take the low-wage jobs and then send remittances back to Mexico. (Even in agriculture, where the land is obviously not mobile, I would be surprised if much of the agriculture in the Southwestern U.S. couldn't also be produced in Mexico. But there is nothing in the argument that requires the unskilled labor to work in agriculture or any particular industry.)

The article notes that there are American farmers who are moving their businesses south of the border:

Steve Scaroni, a farmer from California, looked across a luxuriant field of lettuce here in central Mexico and liked what he saw: full-strength crews of Mexican farm workers with no immigration problems.

About 500 people work for Steve Scaroni’s farming operation in Mexico. Farming since he was a teenager, Mr. Scaroni, 50, built a $50 million business growing lettuce and broccoli in the fields of California, relying on the hands of immigrant workers, most of them Mexican and many probably in the United States illegally.

But early last year he began shifting part of his operation to rented fields here. Now some 500 Mexicans tend his crops in Mexico, where they run no risk of deportation.

“I’m as American red-blood as it gets,” Mr. Scaroni said, “but I’m tired of fighting the fight on the immigration issue.”

That's good to know. I consider our "blood" to be the same color for the same reason, and I am also tired of fighting the fight on the immigration issue. I'm tired of hearing people treat American citizenship as if it is incidental to an economic transaction. Stepping up to that task in this article (filling in for the President, I guess) is Senator Dianne Feinstein of California:

She predicted that more American farmers would move to Mexico for the ready work force and lower wages. Ms. Feinstein favored a measure in the failed immigration bill that would have created a new guest worker program for agriculture and a special legal status for illegal immigrant farm workers.

There is nothing so sacred about cheap lettuce that we should create a population of second-class citizens to pick it in California rather than Mexico. So I'm glad Mr. Scaroni has moved his operations to Mexico if he feels that is what is essential for his business if he is to abide by our immigration laws. I am particularly glad that the legal and economic infrastructure has developed in Mexico to the point where he can do it.

I wish him the very best in his endeavor, and I'll reward him like I do all other businessmen--I'll buy his product if it's the best one on the market for the price. The article gives a good accounting of the various business challenges involved, and it's worth a read.

Published on Leave a comment on More CO2 Emission Comparisons

It seems like I'm not the only one making comparisons of greenhouse gas emissions from alternative processes. From our friends at the AFP, via TerraDaily in the aptly named "Eat a Steak, Warm the Planet:"

A kilogram (2.2 pounds) of beef causes more greenhouse-gas and other pollution than driving for three hours while leaving all the lights on back home, according to a Japanese study. A team led by Akifumi Ogino of the National Institute of Livestock and Grassland Science in Tsukuba, calculated the environmental cost of raising cattle through conventional farming, slaughtering the animal and distributing the meat, New Scientist reports in next Saturday's issue.

Producing a kilo (2.2 pounds) of beef causes the equivalent of 36.4 kilos (80.08 pounds) in carbon dioxide (CO2), the principal greenhouse gas, Ogino found.

Most of these greenhouse-gas emissions take the form of methane, released from the cow's digestive system.

That one kilo (2.2 pounds) of beef also requires energy equivalent to lighting a 100-watt bulb for nearly 20 days. The energy is needed to produce and transport the animals' feed.

A Swedish study in 2003 suggested that organic beef emits 40 percent less greenhouse gases and consumes 85 percent less energy because the animal is raised on grass rather than concentrated feed.

The study appears in full in a specialist publication, Animal Science Journal.

The full paper is here, if your library subscribes.

Comparing this to other sources of CO2 emissions, the 80 pounds of CO2 emitted is equivalent to that emitted by 4 gallons of motor fuel. It seems like we need to expand our systems of tradable permits to include enteric methane, or cut back on the product.

Published on Leave a comment on Trade and Child Labor

Via Mark Thoma, I learn of a very clear summary at VoxEU of the evidence on the relationship between international trade and child labor in developing countries. It is written by my colleagues Eric Edmonds and Nina Pavcnik. They write:

Our recent research shows that children are less likely to work in countries with more international trade. The negative association between trade and child labour holds even when considering only poor countries’ trade with high-income countries. It also holds up for trade in unskilled-labour intensive products. Quite simply, child labour is less prevalent in countries that trade more because countries that trade more are richer, and children work less in richer countries.

Income effects seem to outweigh the substitution effects when prices rise due to international trade. Their conclusions are worth keeping in mind:

Where does this research leave the concerned consumer? Stories of children engaged in export industries should be met with concern about why children hold those jobs. Before one boycotts a product with child labour content or supports punitive trade sanctions, one should ask whether these measures will make the child better off. Will boycotts or sanctions eliminate the reasons why children work? Thus far, most of the existing evidence suggests that eliminating sources of income will not make poor families better off. It will not change the circumstances that cause children to work.

Read the whole article.

Published on Leave a comment on Retroblogging Hawaii

The Voxfamily just returned from a week in Hawaii. I leave the blogging at home on family vacations, so I'll share some of the experience this week.

We spent the whole week on Oahu, which contains about 80 percent of the state's population. We stayed at the biggest resort in Waikiki, which was a wonderful place. Since we live in Hanover, we have no need to "get away from it all" on vacation. We actually like to be among people and on this trip deliberately tried to avoid an isolated feeling. Even so, I found each place we visited to be not quite unspoiled, but far less crowded than I expected for the first week of summer.

It seems like I am not alone in my assessment. This story from last week's USA Today reports that convention bookings at the new Hawaii Convention Center (shown below) are down.

According to the story:

Even paradise, it seems, can have a down year.

Only 16 out-of-state conventions are booked in 2008 for the $350 million Hawaii Convention Center, which was built by the state on the edge of Waikiki nine years ago to attract more business conferences.

The number is less than half the 35 conventions that are booked for 2007. In 2006, there were 37.

The culprits? The story continues:

Waikiki's hotel prices, second in the country only to New York City's, are a contributing factor, says Paul Brewbaker, Bank of Hawaii's chief economist.

Through May, the average room rate in Hawaii was more than $198 a night, according to consultants Hospitality Advisors, based in Hawaii.

The high prices seem to be having an impact on quantity:

Hawaiian tourism has been virtually flat the past several years. The state welcomed about 7.5 million visitors in both 2005 and 2006, according to the state Department of Business Economic Development & Tourism. This year, it forecasts 7.6 million visitors.

However, the University of Hawaii Economic Research Organization predicts that overall tourism numbers will actually drop by 0.2% this year.

Meanwhile, overall tourism to the United States has steadily grown since 2003. Last year, the USA received 51.1 million tourists, and officials expect a 3% increase this year. Kathryn Goldstein, spokeswoman for Meeting Professionals International, a Dallas-based trade group, said concerns over Hawaii as a convention location might depend on the issues facing a specific group.

So look for prices of trips to the Aloha State to fall over time.