Aug 24 2015

The tragedy of the commons in the Arizona desert

A common access resource is one that is non-excludable but rivalrous: anyone can access it and use it but doing so reduces the benefits the resource can provide to others in society. Common examples are pastureland that is shared by cattlemen, fish in the open ocean and the atmosphere itself, which the more it is used as a sink for toxic air pollutants, the worse human health becomes.

In the American West, examples of common access resources abound, leading to several tragedies of the commons, the problems arising from individuals over-using a common resource for their own gain at the expense of others in society whose ability to benefit from the resource is diminished.

Lately farms have been popping up deep in the Arizona desert. Not because there is lots of water in the desert, which of course, there is not; rather because the water that lies under the desert floor is not managed by anyone and is a pure common access resource. Anyone is allowed to use as much of it as they want without any regulations regarding its use!

The story below from Marketplace sheds some more light on this story.

Comments Off on The tragedy of the commons in the Arizona desert

Aug 24 2015

Thoughts on Scarcity and the big questions of Economics

What is scarcity? In Economics, we say that scarcity is the basic economic problem. Because there are only limited resources available in the world, but humans’ wants and needs are practically infinite, we run into a problem, how to:

  • decide what will be produced, 
  • how it will be produced, and 
  • who will get the stuff that’s produced.

Any economic system must answer these three simple questions. Today I started off a new year of AP and IB Economics with a lesson in scarcity (the full lesson plan can be viewed here). Students were faced with a classroom with only half as many chairs as there were students. In the face of the scarcity of chairs, students had to decide who would get a chair and who wouldn’t. The suggestions from this morning’s class ranged from rock, paper, scissors, to musical chairs, to first come, first serve, to a Hunger Games style fight to the death. Ultimately, students decided that I, the teacher, should create a rotating schedule of who would get the chairs, to assure that they would be allocated fairly and no particular student would get to sit in a chair more often than any other.

It was of great interest to me that the students settled on this solution. Sure, it seems fair if a schedule is set by the teacher. But why was this their preferred solution? I asked them if this is how seats in movie theaters are allocated, or seats in top universities, or beds in hospitals? They agreed that, in fact, other scarce chairs are rarely allocated in the manner they settled on, a rotating schedule assigning seats to different people on different days in a way that assure everyone gets to have the chairs equal numbers of times throughout the year.

Of course, this is NOT how seats at top universities are allocated, nor in movie theaters. Upon reflection, we determined that university spots are typically allocated in the following manner:

  1. By merit (based on academic achievements in secondary school), and
  2. By price (based on who is able to afford tuition at the best universities).

Of course, in many cases, those who may be most qualified to attend the top universities may not be able to afford the tuition, so ultimately, university spots are allocated by price.

Once we had decided that price was an important factor in allocating the scarce chairs out there in the real world, we decided to try out a price system in the classroom. Each student was asked to write down on a piece of paper (confidentially, of course), the price they would be willing to pay each day to have a seat in my class. Once I collected the “bids” I organized them from highest to lowest, and those who were willing to pay the most ended up getting chairs, while those willing to pay the least had to stand.

Is the price system fair? During our debrief I asked students whether they believed our price system for determining chair allocation was fair. Instinctively, they said it was NOT fair. Their reasons were that those who could afford to pay the most (e.g. the richest students) ended up getting chairs, while the students with less disposable income ended up standing. But what makes this unfair?

Upon further discussion, some students pointed out that in the real world, those who are able to pay the most for scarce goods (university spots, high quality health care, nice cars, big houses), have probably worked the hardest and therefore earned higher incomes than those who cannot afford these nice things. In this regard,the price system makes sure that those who work hardest and are most productive end up enjoying a higher standard of living since they can afford to consume more and nicer products.

Or is the price system unfair? On the other hand, those who cannot afford to pay the prices of lots of nice things may not be able to do so because they have not worked hard enough (either in school or in the labor market). But how, then do we explain the fact that many factory workers, miners, fishermen, farmers and others who obviously work incredibly hard, cannot afford to buy lots of nice things (and get their kids into the best universities).

The questions we struggled with today in class are some of the most fundamental questions that the field of Economics deals with, and which we will study in great detail in my classes over the next two years:

  • What is scarcity and why does it exist?
  • What are some scarce resources in the world outside of school?
  • How should scarce resources be allocated between competing wants and needs?
  • Who should get the stuff that scarce resources go towards producing?
  • What is fair? And what is efficient?
  • What kind of system for allocating scarce resources is both efficient and fair?
These and many other questions form the basis of the field of Economics. In the coming months my students will explore the answers to these questions in  their Economics classes!

Be the first to comment

Aug 14 2015

Marketplace explains: floating versus managed exchange rate systems

For years China has kept the value of its currency, the yuan, artificially low in order to help exporters, much to the annoyance of the countries trading partners. European and American trade authorities have called for China to abandon its managed exchange rate system, hoping that a stronger yuan would help their own manufacturers as consumers would demand less of the undervalued Chinese goods.

We’ll, this week China has begun to relax its exchange rate controls, but to the frustration of Western trade promoters, the currency has moved in the wrong direction, actually weakening against the dollar and euro.

Marketplace explains the differences between floating and managed exchange rates in the podcast below.

Comments Off on Marketplace explains: floating versus managed exchange rate systems

Aug 08 2015

New Resource for Econ Teachers: Economics Practice Activities with Answer Keys AVAILABLE NOW!

Published by under AP Economics

As a new school year approaches, Economics teachers around the world are looking for the latest, greatest resources to enrich their students’ experiences in the classroom. Welker’s Wikinomics has been offering such resources to students and teachers since 2007, including the Video Lectures available on the Econclassroom.com site, hundreds of categorized blog posts on Economics in Plain English, an IB-focused textbook, Revision Guides, PowerPoints, and now, after years of requests from teachers, a comprehensive set of Practice Activities complete with Answer Keys covering topics from Micro, Macro and International Economics.

Order a complete set today, or try the activities one unit at a time. It’s up to you. These activities have been developed, refined, and revised for years in my own classes. The answer keys offer in depth responses from a “teacher’s perspective” to help students reflect on their own knowledge of Economics. Also included are a handful of “research activities”, which guide students through online research projects. These do not include answer keys.

All in all there are over 60 activities covering nearly every topic in the IB and AP course. Order a set today so you can be ready to introduce activity 1.0 on the first day of class later this month!

ORDER NOW! Economics Practice Activities with Answer Keys from Welker’s Wikinomics

Comments Off on New Resource for Econ Teachers: Economics Practice Activities with Answer Keys AVAILABLE NOW!

Feb 25 2015

Ways firms may collude in Oligopolistic markets

Oligopolistic markets are unique among the four market structures we have studied. Unlike perfect and monopolistic competition and pure monopoly,the individual firms in an oligopoly are heavily interdependent of one another with regards to business decisions relating to price, service, location, advertising, product differentiation, and so on. The actions of one firm will impact heavily the profitability of its major competitors.

This sometimes gives oligopolies an incentive to collude with one another. Collusion, as defined by Investopedia is A non-competitive agreement between rivals that attempts to disrupt the market’s equilibrium. By collaborating with each other, rival firms look to alter the price of a good to their advantage.”

Collusion can take many forms, and is not always overt in nature (in other words, it may be going on without any actual discussions between the firms colluding). Below are three ways firms may collude:

Overt, formal collusion – the cartel model: A cartel, as defined by Investopedia, is “An organization created from a formal agreement between a group of producers of a good or service, to regulate supply in an effort to regulate or manipulate prices.” An example of a cartel is California’s Raisin Administrative Committee. Listen to this story to learn more.

  • California’s raisin producers meet annually to determine the quantity of raisins that should be released to the market
  • In years where the crop is very good, they will “divert” raisins to the “reserve” and reduce the supply
  • This keeps the price high.
  • By colluding through the cartel, the raisin growers get to sell their output for a higher price and the total quantity released to the market is less than would be released without the cartel. The cartel makes the raisin market look more like a monopoly (higher price, lower quantity, less consumer surplus).

Tacit, informal collusion – the price leadership model: Not all collusion is formal and overt. In fact, because of the negative impact collusion has on consumers (higher price, lower quantity), it is actually illegal in many countries and government will investigate and possibly prosecute firms that attempt to collude to raise prices (see this story about the US Justice Department investigating the a proposed merger between two food wholesale companies). In order to avoid investigation by the government, firms often engage in tacit collusion, when firms agree to keep prices high without explicitly saying so.

Beer market in the US: The story about the US beer market indicates that a form of tacit collusion may be taking place between the two largest beer producers.

  • When Anheuser Busch/InBev raises the prices for its beers, its main competitor (Miller/Coors), tends to do so too.
  • The two firms control 65% of America’s beer market. When both raise their prices, demand tends to be relatively inelastic, allowing both firms to enjoy higher revenues.
  • If the two firms were acting competitively, the smaller firm (Miller/Coors), would most likely ignore price increases by Anheuser Busch/Inbev, and enjoy the greater demand resulting from the larger firm’s consumers switching beers.
  • The “price leadership” model of tacit collusion is when one firm (typically the largest in the market) raises prices and competitors willingly follow suit, leading to a smaller decrease in quantity demanded for the larger firm and increased revenues for all firms in the market.

Grocery stores in the United Kingdom: Another example of tacit collusion can be seen in the UK grocery market. The big grocery chains offer “price-match guarantees” that promise their consumers that they will never pay less for their groceries at another supermarket.

  • Sellers have no incentive to lower their prices because they will be less likely to steal the competition’s customers when the competition has a price-match guarantee.
  • Through such a scheme, all grocery chains are likely to keep their prices HIGH and “price-wars” (which benefit consumers), are much less likely to occur.
  • The price-match guarantee (which on the surface appears to be good for consumers) acts as a form of tacit collusion and results in consistently higher prices for groceries in the UK.

Graphing collusive oligopolies: Under competition, oligopolists that lower their prices may initiation a “price war” due to the strong incentive any price cut creates for competitors to also cut prices. Likewise, price increases are less likely under competition because price increases tend to be ignored as the competition gains market share when the first firm raises its price. These assumptions of competitive oligopolies are reflected in the “kinked demand curve” model.

noncollusive

Under a collusive oligopoly, price increases is greater and the chance of price wars is much smaller. Demand for an individual firm’s output when it is colluding with its competitors looks more like the demand for a monopolist’s output; it is relatively inelastic, even when the firm raises its prices (since price increases are more likely to be matched rather than ignored). The collusive oligopolists demand curve looks like this.

collusion

Comments Off on Ways firms may collude in Oligopolistic markets

Next »