Archive for July, 2011

Prices, Substitutes and Opportunity Costs

July 18, 2011 Leave a comment

A New York Times article on China’s high speed rail system compares the price of tickets on the fast and slow trains from Guangzhou to Changsha. Since I’m taking the slow train tonight (!) now’s as good a time as any for some comments:

1) The author quotes the prices as $51 for the 2-hour trip and $15 for the 9-hour trip. But these prices aren’t the only ones that should be compared, because on the slow trains, many people (like me) buy a sleeper berth for the overnight trip. There’s a huge difference in sitting for 2 hours and sitting for 9 hours, so much so that a large portion of my fellow passengers tonight will not have bought the $15 seats–they will have bought the $30 bunks. That’s the more comparable price. The gap for most passengers is going to be just 40%.

If we’re thinking in terms of substitutes, for most people the overnight bunk is the closest substitute for a seat on the fast train, not the seat on the slow train.

2) The author says the high-speed rail ticket is “expensive for a migrant worker from Hunan who might earn only $160 to $400 a month in wages in Guangzhou.” Of course it is: if you are earning $4 a day, why spend $20 more to save seven hours? But for an office worker making a typical Guangzhou salary, saving $3 could be well worth it. I know college students who tutor for more than that. If they could stay an extra day in Guangzhou and merely tutor a few more hours, the more expensive ticket would be worth it.

And who really thinks a manager’s time in Guangzhou is worth less than $3 an hour? Maybe 15 years ago…certainly not today.

A final, anecdotal reason the tickets are not likely to be “too expensive”–I couldn’t buy one, even days before my departure date. Every seat, sold out, on every fast train.

That means for enough people, the opportunity cost of the slow train is higher than the ticket price of the fast train. When people become more productive–as the average Chinese worker steadily has in the past 30 years–their opportunity cost of time goes up, too.

Categories: China, Microeconomics

Why “Scarce” Does Not Mean “One Day We Will Run Out of Oil”

July 11, 2011 1 comment

I recall reading a book about the future when I was about 10 years old. One of the predictions was that the world would run out of oil within 10 or so years.

Thirty-odd years later, of course, there are more proven oil reserves than when that prediction was made, but still I have a hard time convincing students that the world will never run out of oil.

The problem is a fundamental lack of understanding the idea of scarcity and how it effects prices. We’ll never recover the last barrel of oil–wherever in the world it might be–because it will likely be the most expensive barrel of oil ever brought to the surface of the earth, and there’s no way anyone would pay the costs to extract and use it.

The same goes for rare-earth minerals. This week scientists at the University of Tokyo announced the discovery of vast expanses of deep-sea mud, which contain the same rare-earth minerals for which China presently enjoys a near-monopoly on production.

But as this article explains, the cost of bringing these minerals to the surface is far above the current market price. For the foreseeable future, these scarce minerals will stay put…because they are not scarce enough, yet.

For that matter, they may stay there forever.

This would make for an excellent essay question on the relationship between supply and demand, expectations of future prices, and the availability of substitutes, no?

Categories: China, Microeconomics

International Labor Mobility and Mexican Immigration

We didn’t have time to get around to this topic in the International Economics class, but this article is a treasure trove of topics on the subject.

Being from Texas myself, this isn’t just theoretical for me. It’s a case where economic theory and real life intersect, in a way that impacts real people’s lives…and livelihoods.

It occurs to me that there is a lot of room for debate and research into how best to reduce the number of illegal immigrants, and that analysis from the supply side is going to look very different from analysis on the demand side.

Categories: International Trade

Questions for Bob Dinneen

The president and chief executive of the Renewable Fuels Association, Bob Dinneen, takes issue with The Great Corn Con, an article I linked to and discussed here.

He points out that:
1) There’s a lot of corn production.
2) Ethanol avoids, in part, some externalities associated with gasoline.
3) The industry creates value and pays taxes.

I suspect that’s not the problem The Great Corn Con has with the industry. Here are some unanswered questions:

1) If this industry is so productive, why does it require a subsidy?
2) Assuming there is a valid answer to the above question, how long will this subsidy be required? When will we know the industry can survive without revenues from government?
3) Do you favor repeal of the tariff on imported ethanol?
4) If not, is it because it would lower the price domestic consumers of ethanol pay for the product the producers you make represent?

Categories: Microeconomics, Tax Policy

How Subsidies Create Economic Distortions

July 1, 2011 1 comment

If ever there was a “textbook” case, it’s ethanol subsidies in the U.S.:

To ease the pain, Congress threw in a 45-cents-a-gallon subsidy ($6 billion a year); to add another layer of protection, it imposed a tariff on imported ethanol of 54 cents a gallon. That successfully shut off cheap imports, produced more efficiently from sugar cane, principally from Brazil.

Here is perhaps the most incredible part: Because of the subsidy, ethanol became cheaper than gasoline, and so we sent 397 million gallons of ethanol overseas last year. America is simultaneously importing costly foreign oil and subsidizing the export of its equivalent.

So many real-life examples here of what we studied in class:
1) Subsidies create different internal and external prices.
2) Tariffs create different internal and external prices.
3) Distortions in the market create inefficient resource allocation.

In sum, U.S. policy on ethanol is both reducing potential gains from trade that could be realized beyond the U.S. PPF, and moving production further away from the U.S. production possibilities frontier, into less efficient territory.

Categories: Microeconomics, Tax Policy