Positive Externality

Most of us have experienced buying clothes but never being able to find the size we want. Particularly during clearance times, it seems that there are always excess articles in XL and XXL sizes but rarely any left in M and L. Economic reasoning tell me that this should not be so – it represents a relative misallocation of resources that could be more optimally arranged.

At its most basic level this phenomenon can be described as a relative shortage or surplus. There is a relative surplus of XL’s and a relative shortage of L, M, and S (sometimes there is a surplus of smalls though also; typically its L and M that sell out). Economists know that shortages and surpluses should generally not occur if there are no price controls in the market.

Given this situation, the producer should have an economic incentive to reduce production of XL articles of clothing and increase production of mediums and larges, since doing so will cause more transactions to occur at a higher profit level for the producer.

Because how widespread this phenomenon is, my intuition tells me that there is something else going on here. Anyone have any insights?

I’ve noticed this holiday season that Wal-Mart is taking a different approach towards attracting customers: respecting their time. Around black friday back in November, Wal-Mart was promising more open cash registers for shorter lines and quicker checkouts. Near Christmas I heard commercials advertising “gift card only” check-out lines, enticing people to purchase gift cards without all the hassle typically associated with checking out at Wal-Mart during busy times.

Shopping involves more cost than just the cash you pay at the register: it involves gasoline costs for driving to the store, wear and tear on your car (extremely small cost), but most importantly time. Time spent driving to the store as well as time spent shopping and subsequently checking out has real value, despite that fact that a disturbingly large number of people fail to explicitly recognize this fact and organize their lives with it in mind. Impatient people (like myself, frankly) get a visceral reaction to seeing a long waiting line in any situation, but there is a very real and somewhat measurable economic cost to waiting in line, since it consumes several minutes or perhaps hours of your time.

So aside from its excellent drive to cut sticker-price costs for consumers while shopping, I am pleased to see that Wal-Mart is now trying to cut time costs for consumers, representing once again that Wal-Mart really “gets it”. I sincerely hope that other companies follow Wal-Marts lead and begin to allocate resources within their company in a way that respects the value of time of their customers.

As some of you know, I am a huge fan of the venerable economist Thomas Sowell and his writings. Thomas Sowell has a gift for eloquently preaching economic fact and collapsing faulty arguments like a house of cards.

I was pleased to discover this weekend that Dr. Sowell has a new book out called “Economic Facts and Fallacies” which continues in his long writing tradition of presenting economic and social arguments which challenge widely-held beliefs to average citizens. While I find the greatests of his intellectual works “The Vision of the Annointed”, the most knowledge-packed book for everyday people regarding economic issues is by far “Basic Economics”, which recently was updated to a new edition.

Economic Facts and Fallacies contains six chapters, each dedicated towards meticulously exploring social and economic issues in an economic, super-rational manner:

Urban Facts & Fallacies – Here Sowell explores overpopulation theories of urbanization and most importantly “affordable housing” issues and price controls in the housing market.
Male-Female Facts & Fallacies – Drawing upon his vast experience researching racial and group differences, this chapter presents a critique on “unequal pay for equal work”. Sowell’s arguments are particuarly strong in here as he exposes most conclusion-jumping shallowly-analyzed statistics on this as hogwash. A more reasoned approach to the statistics indeed shows that differences in pay between men and women are quite low and even when they are are almost always described by different personal choices and home responsibilities between the sexes.
Academic Facts & Fallacies – This was probably my favorite chapters, since I feel that the subject is so rarely touched upon elsewhere. Here Sowell discusses several issues on the inefficiencies of colleges and universities. He has quite a bit to say about college professors as well – an interesting read for students!
Income Facts & Fallacies – This is the best chapter at taking widely-publicized statistics and turning the conventional dire conclusions on their head. Sowell shows that conventional analysis of income statistics contains some glaring fallacies. As close to an empirical analysis as it gets, since in here is presenting fallacies in statistic analysis rather than “fallacies” directly related to opinion-soaked issues.
Racial Facts & Fallacies – This chapter is similar in style of reasoninig to “Male-Female Facts & Fallacies” as Sowell attacks widely held beliefs. This subject is persued much more in-depth by writers such as John McWhorter, who approaches racial issues similarly to Sowell. Sowell also has several books on race and affirmative action. Unfortunately, Sowell only lightly touches on affirmative action, despite having written devastating arguments against it in other writings.
Third World Facts & Fallacies – Probably the least interesting chapter to me but still essential for debunking common myths about developmental economics and the role of “rich” and “poor” countries. Correctly focuses on corruption and “economic infrastructure” barriers as explanations to the underdevelopment of nations and exposes crackpot causes like “overpopulation”.
Although I would still recommend “Basic Economics” to anyone looking to get an overall better understanding of Economics, “Economic Facts and Fallacies” goes further in touching on social issues and common misconceptions in a devastating blow to unreasoned thinking. Pick it up today!

This will be the first in a series of articles which I preface with “The High Cost of” and the line of discussion is meant to stimulate thinking about the true costs of various things in real life. One of the most interesting concentrations in economics is cost-benefit analysis – not necessarily the formal methods of applying it, but the more abstract way of deciding which costs and benefits should be quantified.

One of the most overlooked costs in policy decisions seems to be the aggregate time loss spread across thousands or millions of citizens, even though each citizen incurs a low cost on an individual level. The tendency to not consider low-in-amount but widespread costs is a more widespread issue that many people do not properly analyze in policy decisions. Economists can point to the natural breadth asymmetry of costs and benefits in globalization/free-trade as a perfect example of this.

Road work is a great example of an action by the government that causes relatively small losses in time by citizens – but spread across a large number of citizens. The policy question that I’d like to put forth, and a question I think rarely gets properly analyzed, is what accommodations road work should provide to the public to reduce the burden of their lost time from congestion (this doesn’t even consider the statistical cost of increased accident rates as a result of the congestion, which could be a high cost in and of itself).

What bothers me about this and related issues is that people seem to be overly complacent with the status-quo without even stopping to consider that the status-quo may be grossly inefficient. A necessary trade-off for improving our roads is one thing, but an inefficient allocation of resources related to it is quite another. As an amateur economist it is in my interest to ensure scarce resources are being optimally allocated as best as possible to squeeze every ounce of efficiency out of what we have to work with.

The trade-off at stake here is this: Ultimately the government has a decision as to when to perform road work. To simplify matters, lets consider a model with only two times: day, and night. During the day the government has to pay a labor rate of w-day and at night a labor rate of w-night, where w-night > w-day, perhaps by a large amount. Whenever I start in on this issue discussing it with someone else they immediately point out “but construction works can’t work at night – you are being impractical!”. My response is that you can never categorically dismiss something like that – there is a price to everything, and there is certainly a price (a high one) on paying construction workers to work at an inconvenient time.

Clearly doing road work at night would cause significantly less congestion on the road, yet the differential in doing this is w-night minus w-day. The policy question here is whether or not the cost of lost time measured across the predicted population affected is more than or less than the wage differential between day and night time labor work.

I keep referring to “cost of time”, yet many non-economists do not even accept that this concept exists, which I find absurd. Time is, in fact, one of society’s most valuable resources. To pose this issue in a more practical manner, consider that you are faced with two decisions given that you are stuck in traffic for an estimated hour due to road work in the morning:

1. Wait in traffic for the hour and pay nothing. Get to work an hour later.

2. Pay $5 to have your car teleported around the traffic jam and back into regular traffic, saving you an hour.

That $5 is essentially the value of one our of your time at that particular moment. The marginal value of time depends a lot on the time of day and what your current situation is. The fact is that some very successful people would pay $50 to save one hour in the morning, others would barely pay $1. But the concept of time and the theoretical ability to compensate people for lost time shows that the concept exists and is very real.

I’m not a full-time economist and if I was I’d do more research into this interesting topic (well.. interesting to me!), but my intuition tells me that if a full cost-benefit analysis were conducted in the manner of reasoning that I have outlined above with such projects, significantly more road work would be done at a higher cost to the government and tax payers, but a net lower cost once the lost time value is factored in. In other words, we citizens should be less bothered by road work!

This is the kind of stuff that the government needs to be doing on a regular and rigorous basis to ensure that resources are being optimally allocated. Non-thinking or making assumptions about what is possible or reasonable without critically analyzing the situation is a disservice by the government to taxpayers.

Welcome to my new blog! To kick this off, I’ll start with an introduction and an overview of my philosophy:

My name is Ben Hughes and I’m currently a senior at Rochester Institute of Technology, finishing up a double major in Information Technology and Economics. I’m a Ruby on Rails web developer, jazz musician, tennis player, and amateur economist interested in policy issues. I am philosophically libertarian and believe that the free market works better than most non-economists assume. Capitalism, or the free market, often deserves more “respect” than most people grant it, hence the name of this blog.

Let me be clear that the opinions presented and analysis of issues discussed in this blog are based on pure armchair reasoning of issues that do not necessarily represent “hard science” with empirically provable results. I am not a Ph. D. economist and am not interested in publishing research papers backed by hard data and mathematics; I am far more interested in “thinking outside the box” and putting seemingly non-economic issues into an economic light. Some of the most interesting books I’ve ever read followed this direction.

I strongly believe in greater public understanding of economics as a thought process, or “thinking like an economist”. Economics is not business and it is not finance: it is the study of scarcity and how resources are (hopefully optimally) allocated, a fact rarely acknowledged by non-economists. I think it’s a shame that many high schools require four years of study in literature while requiring virtually no study in economics, statistics, or probability – all issues that better-enlighten the public and through democratic voting have drastic consequences on the well-being of millions of people.

Part of my drive for writing this blog arises from the seemingly widespread misconceptions of economic cause and effect that spread like wildfire throughout the popular media, but are seldom properly addressed by journalists. With all the time being dumped into research of dubious practical merit, I think economists should take a more active role in policy issues by aiding in greater understanding of the “dismal science”.