Class Thirty Five

When you make something illegal, you don’t eliminate the want; instead, you raise the opportunity cost of suppliers. There is additional cost that doesn’t show on the supply and demand picture.

When you make something illegal, you have to enforce law. Illegal requires enforcement. To do that requires two costs, one not so bad, one really bad:

i.                     (Not so bad) you have to raise taxes to do it. (Tax is not costly itself, it’s just a transfer. The act of raising tax is costly)

ii.                   (Really bad) These bureaucrats can do other things that are productive. (This is really costly)

Consequences:

i.                     when you make a certain profession illegal, the job participants don't have to pay payroll tax, insurance money. They can get more pure profit, even exceeding the increasing cost. (the original and the new supply curve may intersects) The supply curve may actually shift out, even if it becomes more inelastic (price goes down): precisely the opposite that you want to see.

ii.                   There’s a strong correlations between crime rate (the big profit entices more people to join and compete) and drug law enforcement.

If we punish severely on some small sins, like smoking in the bathroom, we actually lower the marginal cost for people to commit the severe crimes.

Some people say that one of the benefits when prostitution is legalized is that government can get tax for revenue. But this opinion is odd:

i.                     Tax itself is neutral; it’s just a transfer of wealth from private sector to public sector, so no one gets benefit or hurt. It’s neither cost nor profit.

ii.                   Why is government tax revenue benefit? The signal of wealth is not how much money the government has but how many goods and services people produce.

The economic incidence of supply and demand curve
Application: Taxation

1. Excise tax: legal liability for tax is upon suppliers
the result of a tax
(1) customers and suppliers share the burden of tax and the more inelastic, the more loss the group has to suffer
(2) if the tax is $1, price doesn't go up by $1. Reason: both demand curve and supply curve usually have a slope (equilibrium quantity decreases, causing deadweight loss)
(3) The government cannot get as much tax revenue as it intended to get because of the second reason.
(4) The market is affected. Deadweight loss occurs (the forgone opportunity)
(5) We have to hire bureaucrats to enforce the law, but they don't produce anything new.
(6) People can cheat on tax
<a> they have to waste resources to avoid the tax
<b> others have to pay for your tax

The economic incidence of supply and demand curve

A way for a free market to get efficiency and equity at the same time
Head Start Theorem (Kenneth Arrow)
An appropriate program of lump-sum taxes or subsidies that puts everyone on equal footing.

EWOT Thirteen

On the recitation this week, we played the the public-private account game. I think it was a really interesting game. To be honest, I was one of the mean guys who put 20 tokens in private account every round. Why did I do this?　Because I see no reason why I shouldn't have done this way. It was just simple calculation: Every round I gain the same income from public account as every body does in the classroom, so the only difference between my total income and others is my gain from private account. As a result, to make sure that I gain more income than others, I put 20 tokens in private account.

However, we have to notice that, although put 20 tokens in private account seems to be the dominant strategy, this is so because our goal is to get higher income than everybody else. It is true that if everybody put all tokens in the public account, we get the highest income, but all same income actually no income at all. I think people who put 20 tokens in public account should not be accused mean. On the contrary, their behavior is reasonably justifiable.  In this case, 20-0 combination is the dominant strategy, any rational people who well realized what's going on will surly make this decision.

Bethpage Gray (market)

A) At Bethpage Golf course, which is a public golf course, a shortage currently exists because there are not enough tee-times to meet the demand of golfers. Also, the allocation of tee-times has allowed a black (secondary) market to emerge. With roughly 70,000 golfers trying to play the course, and only 35,000 rounds per year, a secondary market was bound to emerge. While tee-times are free if given out by Bethpage, nygolfshuttle.com plays the system in order to create a business of supplying tee-times (albeit for upwards of $500) to golfers who value playing on Bethpage on a given day, at a given time. Bethpage has taken issue with a company making money off a public golf course by "scalping" tee-times. The golf course has tried to combat the problem through various measures, but NYgolfshuttle adapts to accordingly. The problem Bethpage officials have is they have to find a balance between keeping tee-times from scalpers without "encroaching on the real life schedules of everyday golfers." I found it interesting that NYgolfshuttle is expanding into other public golf courses - clearly this shows they believe this is a viable business model.

B)

1. What could Bethpage officials do differently to keep NYgolfshuttle from obtaining tee-times?

2. Do you believe what NYgolfshuttle is doing is unethical?

3. What could Bethpage do to increase the supply? Reduce the demand?

C) Bethpage's golf course has seen a secondary market (black market) emerge because supply cannot meet demand. Therefore, the market for tee-times at Bethpage is in a shortage.

Class Thirty Four

I.                    Price floor:

Recall the rent control.

In the long run, not only you make houses less available, you actually make those poor people to get the house. It’s not even cheap for people who end up with the price you controlled.

*If curves become flatter (elastic), the problem got even worse.

There is a better to help the poor: give them wage subsidy.
This will not impair the market and people are free to use the money: not all of them will spend all the money in the houses; they may value other things more. So the clothes factories, for instance, may get profit and since now the house demand is really higher in a free market, it gives incentive to landlords to provide more houses with high quality.

i.                     labor market (the concept also applies.): Your productivity (determines your wage) is your ability to pick apples plus how much you value apples (how much society value). When there’s a price floor, like minimum wage floor, the quantity supplied exceed quantity demanded, you create a surplus (binding). It’ll be even worse when firm’s demand for labor is really elastic.

ii.                   Consequences :

(1) The law makes fewer people get the job (besides, the labor market demand is elastic, about 3, which means that a 1% increase of wage rate can result in 3% decrease in the number of workers hired) and make the existing workers harder to keep the job (because of the abundant existence of substitutes)
(2) Some workers just don't worth the new wage, it's a waste of cost.
(3) The cost has to come from somewhere. So may be the health care is gone, the vacations are gone, and the since the cost of productions are now higher, the price of the product can be higher. If you take the whole economy into consideration, a minimum wage law doesn't make any sense.
(4) The impact of minimum wage law is small.
(5) There's a better way other than the law. Give subsidy to producers. They will have freedom to hire workers, do researches or invest.
(6) Only a small portion of people live by minimum wage. Who earns the minimum wage? Basically no one makes minimum wage is poor! It’s not the people you aim! So a law intended to benefit only a small amount of people isn't good.

Rarity vs. Scarcity
Scarcity only implies that people want it more than it is available.  So the term is a relative term. People put strong value on oil, which is always abundant, so now oil is scarce despite its physical abundance. Things that are rare may not be scarce because people don't value it so much.

Surplus vs. Scarcity

Something is scarce only means we have to do trade-off to get it. Something surplus does not mean we don’t need to do trade-off. Surplus is a price phenomenon. It only tells you that prices are wrong.

Making things illegal:

The demand for drugs is really inelastic and you have some supply. Then we say that that drug is illegal to be bought and sold. Does that make your behavior go away? NO! Whose behavior is likely to change more when something is illegal? The suppliers: The supply curve tells you how the opportunity cost changes with the quantity of drug.  

i.                     Increase in elasticity (increasingly difficult to produce)

ii.                  Change the composition of producers.  Leaves more profitable opportunities for people currently engaged in drugs. People who have comparative advantage in illegal business enters.

iii.                  Drug dealers try to make more powerful drug (increase quality as same to increase quantity) since the probability of getting caught is the same.

Class Thirty Three

Price ceiling:

Suppose the rent is $800. Everything is ok, and then a boom happens so that increases the demand, driving up rents to $1,000. The term “rent” in economics has a very particular meaning:

i.                     When we say “rent” for an apartment, we mean a payment for a piece of the use of equipment, a payment for the use of capital.

ii.                   Something (unearned rent) that accrues to you that is not a result of your productive activity.

Let’s of the value in society we get in every single day, comes from rent, comes from the staffs we ourselves have little hand on producing. (so we cannot accuse the landlords for the unearned rent)

Rent control usually starts by freezing where it is today (when demand drives the price up) when you freeze the price, the market is not clearing.

The first impact is that the quantity of apartment supplied will be less and all potential units that may become part of an apartment when prices rose will never come to the market. The Second thing we need to think is what happens in the long run. I’ll argue the supply of apartment is much more elastic than you think it is.

The quantity demanded will increase when the price is lowered.

We get a weird equilibrium (not clearing) in this market.

Price ceiling results in shortage. (We say that this price ceiling is binding with the result of shortage)

Who in this case is being able to satisfy their plans? Sellers!

Question: Scarcity vs. Shortage (not the same thing. When the price of sth. falls in the free market, it does become less scarce. But in control, not really)

Consequence of rent control:

i.                     Reduced availability: If you cannot ration by price, some other rationing mechanisms must be there to get rid of the other demanders. Some other costs are going to arise:

(1)    Queue: time and effort

(2)    Favored group: you have to impress the landlord, which may be costly.(bribe, race, gender, sex, size of family, etc.

(3)    Black market: more cost.

ii.                   The deterioration of quality: When we talk about supple, generally we assume identical quality. If we decrease quality, it’s the same as reducing quantity. It’s not free to maintain the quality, you may are just not able to pay for the improvement.

iii.                  Black market will emerge: Other money just may be paid by someone in somewhere. The price in black market is at least the same as that in free market, only higher.

iv.                 Misallocations: People who value the most are not ensured to get it.

v.                   Impact on other market: If you post a price control, 4000 people need place to stay. All the people who cannot afford or cannot find house in New York City finally turned to neighborhood. You increase the price of houses in surrounding areas. You make fewer apartments available globally, so it must be the case that price rise globally.

vi.                 Fairness:  Who’s most able to pay for the black market fee? Who’s most able to travel far away? First, the binding price ceiling is unfair to landlords, who cannot charge a higher price. Second, the price ceiling law is intended to let poor people get houses, but the fact is that the poor will bear great loss. Price ceiling won't bother rich people because for them they can buy house in black market or become favored group of landlords easily, but the poor have to spend more time and energy looking for houses, and end up with living in bad quality houses.
Finally, the fucking stupid law is unfair to the whole society because it stops people from reaching an agreement in a higher price and quality. The social freedom and liberty will be hurt.

vii.                The reduced cost in discrimination:
Free market clearing: there is no customers right there when you refused one, you have to look for another one, advertise more and keep the house vacant longer. So it doesn't mean that there is no discrimination in the free market, but you have to pay for it. Even if you’re a discriminating bastard, you’re still doing social good because you’re offering houses (I don’t give you means I’ll give somebody else).

viii.              Monitoring/enforce costs
<1> long run rent supply will shift in and becomes flatter
<2> Regulations are costly. The people and resources spent monitoring are not producing goods and services that people want (not productive). Monitoring is destructive. It’s classic broken window. If destructive things following the price ceiling law, like riots, never happen, why do we pay for the monitoring? We enforce the law, we create the problems, and now we use resources to quell the problems, isn't it a cost?
<3> the government could have done something else more constructive. Tax itself is not costly (just a transfer).Raising tax, the action of taxing is costly.

Class Thrity Two

Properties of Market Equilibrium:
- When a market is at equilibrium there is no "Money on the table." [no profit opportunities]
-At equilibrium (clearing) the market is efficient, because the smallest number of suppliers will be employed and they will be the most efficient as well.
- Stopping the supply short of equilibrium is robbing the world of profit opportunity. [there is a potential trade that would profit both parties]

Eu-voluntary Exchange------Exchange is creation

Outline: This article talked about the interesting dorm location exchanges in Duke University. Student groups trade with each other for better dorms. However, when the exchange involves money, the school warned the student not to do so while they claim: we encourage trade, but no monetary exchange.


Economic concept: rationing, the advantage of price system


Three Rhetorical Questions:
i. If money is prohibited, what else will be the medium of exchange?
ii. Why would the University prohibit monetary exchange?
iii. Who benefits from the prohibition of monetary exchange?


My opinion: The announcement of Duke University is just ridiculous. Voluntary money system is the best way to allocate scarce resources. Simply emphasizing on "Fairness" will never change anything about the scarcity of good dorms. If money exchange is prohibited, there'll surely be other mechanisms allocating scarce dorms. What's more, consider the fact that this new mechanism can be physical force, or even black market，the outcome of these allocation can be much more inefficient than that under free market.