School kids feel the bite of high food prices – May. 5, 2008

A classic method of teaching the basic economic concept of the production possibilities curve is to illustrate the relationship between a nation’s decision to invest in military goods versus civilian goods. The model typically includes two “products” that a nation can choose to invest in: guns and butter. The specific goods themselves are not so important, rather what they are meant to represent: the tradeoff any nation faces between allocating more of its scarce resources towards national defense versus goods and services that benefit the nation’s consumers.

Today the United States faces a very real version of the old “guns vs. butter” model. Rising global food prices have put public school districts in a bind: how to feed kids nutritious meals as the prices ingredients has risen at unprecedented rates:

Rising food prices are making it harder for schools to cook up ways to give kids the nutrition they need.

Right now, they’re taking shortcuts and shuffling ingredients to make up the difference, but that’s only a short-term solution with long-term consequences on the horizon.

“I’ve been in school service for 27 years and this is the worst it’s ever been,” said Sara Gasiorowski, food service director for Wayne Township Schools in Indianapolis. “I have never seen food prices jump up so far…”

Food prices nationwide have risen 4.5% between March 2007 and March 2008, according to the Bureau of Labor Statistics’ Consumer Price Index, with flour and eggs rising even more dramatically than milk. Grumbles said milk prices in her district are up 22% from last year, which means an increase of 3.5 cents for each of the federally required 16,000 half-pints she provides every day.

“For every penny on a carton of milk, it costs me $30,000 a year,” she said. “That’s $105,000 extra on my food bill.”

Flour prices have roughly doubled over the last year, according to Grumbles, to $19 per 50-pound bag. To make up for the difference, she substitutes canned peaches for fresh apples “to save a couple pennies” per meal, or she uses ground beef in place of chicken.

Unfortunately, federal funding for school lunches has increased at a much slower rate than cost to districts of providing those meals:

Federal reimbursement programs cover all or part of school districts’ lunch tabs. Congress lifts reimbursement rates every year, but Gasiorowski said it hasn’t been enough: “We need to be looking at an increase of 12% to 15%, instead of our usual annual increase of 2 or 3%.”

The current federal reimbursement program is based on household incomes; the poorest American students receive $2.47 of federal funding towards their “free lunches”, while students from the highest income bracket only receive $0.23 per meal. The problem is, the average school lunch now costs $3.10, so these days no one is actually receiving a “free lunch”, not even the poorest American students.

This article struck me in that is truly does illustrate the concept of tradeoffs as illustrated in the production possibilities curve. Society must allocate its scarce resources towards the goods and services it deems most desirable based on the needs of its citizens. Complications arise in this basic model, however, when government is involved.

The commitment to subsidizing school lunches is based on the idea that if the responsibility of feeding American school children were left to the free market, resources would surely be underallocated towards nutritious meals, representing a market failure. School lunches are a merit good, meaning they would be underprovided by the free market, since without public provision and support, millions of American children would come to school every day without nutritious meals to get them through the day.

National defense is another service that governments find it necessary to provide.  If it were left completely up to the free market, national defense would probably not be provided at all. Instead, only individuals who could afford it would hire private security forces to protect their property. To protect a whole nation, however, government provision of defense is a necessity.

Clearly, both “guns” and “butter” create benefits for society. Among the countless other goods and services the government provides or supports the provision of, the United States faces a tradeoff arising from the scarce resources at the government’s disposal. Currently, the US government spends far more on  its military ($660 billion in 2010!) than it does on lunches for American school children. Clearly, military spending is necessary, but it may be that in the tradeoff between these two important services more resources should be allocated towards “butter” at a period in the US economy when low income households are finding it harder than ever to provide their children with one of life’s most basic necessities, nutritious food.

Discussion Questions:

1. What do “guns and butter” represent on the PPC above? Why have economists found it useful to use these two goods on their analysis of the tradeoffs faced by nations?
2. Why doesn’t the United States just make all school lunches FREE for all American school children? Wouldn’t that make sense? Give an economic argument against this suggestion.
3. Why does the government feel it necessary to allocate any resources towards school lunches? Shouldn’t the government just let American families provide their own children with lunch?
4. Say the US government decided to increase its provision of both national defense and school lunches, without reducing its provision of some other good or service. How would it do this? Why wouldn’t the government do this?

Update: I received an email message from a reader about the above blog post:

I have to say that your “guns and butter” diagram is “interesting.” I am not clear on why the United States should spend vastly more on school lunches than on defending the free world While government provided school lunches may have a place, most Americans feed their own children and do not depend on Federal financing.

Where did you get the notion that feeding our children would be “under-provided by the free market”

Here was my reply to this reader. I’m posting it here because I want to make it clear the the diagram above is not meant to make any political statement about US military spending:

Hello,

Actually, the PPC was included simply to illustrate the basic tradeoff that society faces when it chooses how to allocate its scarce resources.

Having taught at least for a short while in public schools, I can say that nutritious lunches are definitely “underprovided” by the free market, that is, many students in poor communities in America depend on the “free and reduced” lunches that are provided through federal and state funding programs… I once volunteer taught in a poor Elementary School in Spokane, Washington where 40% of the students ate only two meals a day, both provided free by the school district: one at 8 in the morning, one at noon. Many of these children had parents who were poor, unemployed, often addicted to drugs, who failed to put any food on the table whatsoever.

In other words, I do think that nutritious meals are a “merit good” which by definition is one that is underprovided by the free market, therefore requires subsidies from the government. Otherwise, why would the government offer such subsidies at all, if these meals were something the free market could adequately provide on its own?

Again, I was not making any political statement with the graph, only pointing out the basic economic concept of tradeoffs and the idea that society must allocate its scarce resources towards an “optimal” combination of goods and services. The article indicates that in this time of rising food prices, not enough of America’s resources are going towards providing nutritious meals for school children, indicating that a movement along the PPC might be in order. The degree of such a move is irrelevant, only the fact that a movement must occur if nutritious meals are to continue to be provided. In fact, the x-axis could have represented any other public good the government provides for society, I chose “military spending” so that the current example was consistent with the classic example of “guns vs. butter”.

Hope that clears things up… Best regards,

Jason

• Two sections of year 1 IB Economics totaling 35 students
• One section of year 2 IB Economics with 12 returning students
• One section of AP Economics (micro and macro combined) with 17 students
• One section of AP Microeconomics with 14 student.

Including 18 students in my colleague’s class, the 53 students enrolled in year one IB Econ represent nearly half of the 11th grade class and three fourths of the students in the IB program, making Economics far and away the single most popular IB subject at our school. I suppose this is no surprise considering finance and economics are the largest industries here in Switzerland.

One of the questions I like to ask my student during the first week of class every year is “What is Economics?” The answers are always interesting to read, because unlike many other high school classes, Econ is one of those subjects students sometimes have no idea what it’s all about when they sign up for the class. Below are some of the definitions of “Economics” students shared in their first day survey this week:

• “Economics is the study of money flow between either countries or individual companies.”
• “My definition of Economics is the control of money by a person, organization or nation.”
• “Economics is a complex system that determines and justifies global prices, currency values, and ultimately the success of a nation.”
• “I’d say Economics is the study of how humans use resources including income, investments, taxes and the economy.”
• “I think economics is the study of investments and money. Especially income and outcome, and taxes in the government.”
• “The study of the distribution of wealth and how humanbeings tend to handle wealth.”
• “A bunch of old men moaning about all of the potentially free lunch oppurtunities they had missed in their youth, passed off as the behaviour of markets.”

As you can see, most students do not yet have a clear definition of the subject in their heads when they start the course, which is perfectly understandable! So I thought I’d start the year off by sharing my definition of economics. Please read the following introduction to Economics then answer the discussion question that follows.

So what IS Economics, anyway? Well, look around you. What do you see? From here in my classroom at Zurich International School, I see five new condominium buildings being built. I can count eight yellow cranes swinging their arms hauling construction materials around their respective sites. Beyond the cranes I see a beautiful forest stretching up a hillside with green sheep pastures and quaint farm houses scattered here and there. I see a church steeple and the rooftops of the businesses down in the village below school. I can just see the tops of cars racing along the A3 highway to and from Zurich and the other cities of central and eastern Switzerland.

Now ask yourself, how did things get to be this way? Why are new condos going up in the midst of Europe’s deepest recession in decades? Why are farmers still able to graze sheep on hillsides when 100 square meter condos are selling for a million francs just below their fields? Why are the ancient forests of the Sihlwald still standing even as development has encroached into most of the region’s  forests and natural ecosystems? How do normal people make enough money to live comfortably in this expensive country? Where do the things we buy come from? Who built this computer I’m typing on and what will I be doing for a living in twenty years?

One of my favorite quotes that to me sums up what economics is all about comes not from an economist, but from the civil rights leader Martin Luther King. In 1967 King wrote:

Did you ever stop to think that you can’t leave for your job in the morning without being dependent on most of the world? You get up in the morning and go to the bathroom and reach over for the sponge, and that’s handed to you by a Pacific islander. You reach for a bar of soap, and that’s given to you at the hands of a Frenchman. And then you go into the kitchen to drink your coffee for the morning, and that’s poured into your cup by a South American. And maybe you want tea: that’s poured into your cup by a Chinese. Or maybe you’re desirous of having cocoa for breakfast, and that’s poured into your cup by a West African. And then you reach over for your toast, and that’s given to you at the hands of an English-speaking farmer, not to mention the baker. And before you finish eating breakfast in the morning, you’ve depended on more than half the world. This is the way our universe is structured, this is its interrelated quality.

Economics is about all the questions I posed above and it’s about all the interactions King describes. Economics is about solving one major problem faced by all human societies going back thousands of years. Economics is about the problem of scarcity. Scarcity is the natural phenomenon arising from the fact that all the world’s resources are physically limited in quantity.

Limited resources alone would not pose a problem if it were not for one characteristics of human beings that makes us truly unique in the animal kingdom. The fact that we have desires and wants beyond our basic physical needs. In the face of humans’ practically unlimited desires and wants, the limited nature of the earth’s limited natural resources gives rise to conflicts regarding the allocation of those resources. Economics is the social science that deals with the allocation of earth’s scarce resources among the competing wants and needs of society. Economists provides society with various tools and techniques for efficiently allocating our scarce resources.

Discussion question:

1. Scarcity of resources has given rise to countless conflicts among and between societies throughout history. Identify one conflict from the past or present that you think the problem of scarcity gave rise to.
2. Some say that many of the environmental problems our world faces to day can be solved by economics. If that’s the case, then they must have to do with scarcity. Identify one environmental problem and explain how it relates to scarcity.
3. Time is one of the scarcest resources. Explain how the decisions you make regarding your limited time in and out of school can be considered economic decisions.

Is international trade really as good for a nation’s standard of living as economists say? And, what the heck is comparative advantage anyway? And what about the foreign currency market and those confusing supply & demand curves? Yes, the quest to understand the economic benefits of international trade is enough to make any citizen or first-year economic student vomit, tremble, get a headache, or at least curse.

Having been an AP Economics’ teacher for 8 years now, I must candidly admit that it took me a few years of study and research to try to reduce international trade to pure simplicity and understanding. Let me give it a shot below. I love simplicity.

The average “Joe Citizen” in almost any country in the world is suspicious of trade, and rightfully so, since he reads or observes factories being closed, jobs lost, and the feeling that somehow his country is going down the toilet as his own home fills up with foreign-made products. Unfortunately, what Joe Citizen does not understand is that the money his own nation is spending for those foreign products (imports) is spent right back into the pockets of his own country, increasing employment and income.

Let’s take a single, real-world, international trade example being careful to accurately explain the whole economic story:

Let’s say that the United States (we’ll say Wal-Mart) decides to buy several shirts costing $400 from a Chinese shirt manufacturer, in lieu of buying those same shirts from a shirt manufacturer in Elon, North Carolina (USA). As a US AP Economics’ teacher I am one of about only 47 Americans in Fairfax County Virginia, which not coincidentally ties to the number of AP Students I taught this year, that quickly understand that the decision to purchase the shirts from China, in lieu of the US manufacturer in North Carolina, is actually BETTER for America and will make my home country better off in the long run! What? Mr. Latter, are you Benedict Arnold, the American traitor, reincarnated?

Let me explain how the US benefits (and China too!) in simple terms ignoring foreign currency transactions, which will just confuse the discussion and cause the student to lose sight of what is really happening:

The first key point is that when Wal-Mart buys the shirts from China for $400 it can only pay China with US dollars. Why? Because Wal-Mart has only US dollars! It has no Chinese currency (Yuan). It literally drains its bank account of US dollars that are transferred/paid to China!

The second key point is that when China receives that same $400 US dollars for the shirts, China cannot, unfortunately, spend any of the $400 in its own economy since only the Yuan is accepted as a medium of exchange in China! China is now forced to either throw the currency away (not advised!), or immediately spend the money back to the USA (advised!).

In summary, China has actually traded a product (shirts!) for paper (US dollars!), and those US dollars cannot be spent in China. For China to receive any value at all for the shirts it sent to America, China must now spend the $400 back into the US economy for, say, a global positioning system (GPS) from FleetMatics out of Waverly, Massachusetts (USA). Cutting through to simplicity, in essence, it’s almost as if Wal-Mart (USA) just paid FleetMatics (USA) $400 directly for the shirts!

Yes, the “punch line” is that all home-currency spending by the domestic nation on foreign products (imports), in turn, are spent right back to the domestic nation increasing the domestic nation’s employment, income, and standard of living. (Note; this is shown in a nation’s balance of payments schedule which always nets to zero, but, yuk, who cares about that right now with summer coming!)

And, yes, let’s not forget that Elon, North Carolina shirt maker that did not get the original $400 from Wal-Mart in our above example! Our nation loves competition (ready for the Olympics?) and I am excited to see if that North Carolina shirt manufacturer can “raise their game” (increase productivity), and hopefully get the next shirt contract from Wal-Mart or some other firm! If not, well, that North Carolina firm may just have to close down.

If you are still reading this post at this point, you may be thinking the following if you have a little economics’ background: “But the US has a growing trade deficit with China, so China may not immediately buy that GPS system from FleetMatics for $400”. And, you are correct, but that is also not a problem for either the United States or China. What China is really doing right now is deciding to temporarily save or invest a minority percentage of their US dollars received back into America in lieu of buying US products. Said another way, China is not buying as many GPS’ as the US is buying shirts and, of course, we call that phenomenon the US trade deficit which immediately seems to speak “problem”. But it is really no problem at all! China is still spending their “saved” US dollars back into the US economy, but in different ways. China is saving and investing some of those US dollars directly into the United States economy by building plants in America, buying US stock to fund American companies’ expansions, and temporarily saving some of their dollars, for future US purchases, by buying US bonds to help the US government pay for the war in Iraq, the war against terrorism, and several other US government initiatives necessitating borrowing. Eventually, China will sell these US bonds and buy that GPS system or build more plants to employ more Americans!

Now one last thing. Promise! Let’s get back to why trade is really so economically advantageous to any nation that pursues it. And by advantageous, I mean how it increases our incomes and standards of living. In one word, the answer is “productivity”. If we go back to the original example of the US buying shirts from China and China taking the US dollars to buy the GPS, we remember that the shirt manufacturer from North Carolina was “left out in the cold” because Wal-Mart did not buy the shirts from them. We can logically conclude that perhaps some Chinese manufacturer of GPS systems was “left out in the cold” because some Chinese business elected to buy from FleetMatics in the USA, and not the Chinese GPS manufacturer. Wow, I love global competition! What a great way to incent businesses in both the USA and China to compete against each other and increase their productivity and conserve our nations’ scarce resources, increase our choice, and lower our costs!

Discussion Questions:

1. Which basic economic principles underly the emergence of international trade as a global economic force.
2. Who are the winners and losers of trade between the US and China as explained above?
3. Why do you think free trade is such a controversial topic among certain groups of Americans an other Western nations’ people?

At $4, Everybody Gets Rational – Washingtonpost.com

Here is another excellent gas price article containing accurate economic principles.

Yes, the non-economist (ie, average citizen) doesn’t get it on how higher gas prices will ultimately lead a nation’s economy to conservation, energy independence and efficiency in the long run.

Hey, I’ll be honest: I don’t like higher gas prices any more than I do going to the dentist, but I am glad they are rising as I see and read about SUV purchases falling off a cliff, driving habits changing right before my very eyes, and the quantity demanded for gasoline falling fast.

By CHARLES KRAUTHAMMER | Posted Friday, June 06, 2008

So now we know: The price point is $4.

At $3 a gallon, Americans just grin and bear it, suck it up, and, while complaining profusely, keep driving like crazy.

At $4, it is a world transformed. Americans become rational creatures. Mass transit ridership is at a 50-year high. Driving is down 4%. (Any U.S. decline is something close to a miracle.) Hybrids and compacts are flying off the lots. SUV sales are in free fall.

The wholesale flight from gas guzzlers is stunning in its swiftness, but utterly predictable. Everything has a price point. Remember that “love affair” with SUVs? Love, it seems, has its price too.

America’s sudden change in car-buying habits makes suitable mockery of that absurd debate Congress put on last December on fuel efficiency standards. At stake was precisely what miles-per-gallon average would every car company’s fleet have to meet by precisely what date.

It was one out-of-a-hat number (35 mpg) compounded by another (by 2020). It involved, as always, dozens of regulations, loopholes and throws at a dartboard. And we already knew from past history what the fleet average number does.

When oil is cheap and everybody wants a gas guzzler, fuel efficiency standards force manufacturers to make cars that nobody wants to buy. When gas prices go through the roof, this agent of inefficiency becomes an utter redundancy.

At $4 a gallon, the fleet composition is changing spontaneously and overnight, not over the 13 years mandated by Congress. (Even Stalin had the modesty to restrict himself to five-year plans.)

Just Tuesday, GM announced that it would shutter four SUV and truck plants, add a third shift to its compact and midsize sedan plants in Ohio and Michigan, and green-light for 2010 the Chevy Volt, an electric hybrid.

Some things, like renal physiology, are difficult. Some things, like Arab-Israeli peace, are impossible. And some things are preternaturally simple. You want more fuel-efficient cars? Don’t regulate. Don’t mandate. Don’t scold. Don’t appeal to the better angels of our nature. Do one thing:

Hike the cost of gas until you find the price point.

Unfortunately, instead of hiking the price ourselves by means of a gasoline tax that could be instantly refunded to the American people in the form of lower payroll taxes, we let the Saudis, Venezuelans, Russians and Iranians do the taxing for us — and pocket the money that the tax would have recycled back to the American worker.

This is insanity. For 25 years and with utter futility (starting with “The Oil-Bust Panic,” the New Republic, February 1983), I have been advocating the cure: a U.S. energy tax as a way to curtail consumption and keep the money at home.

In May 2004 (and again in November 2005), I called for “the government — through a tax — to establish a new floor for gasoline,” by fully taxing any drop in price below a certain benchmark.

The point was to suppress demand and to keep the savings (from any subsequent world price drop) at home in the U.S. Treasury rather than going abroad. At the time, oil was $41 a barrel. It is now $123.

But instead of doing the obvious — tax the damn thing — we go through spasms of destructive alternatives, such as efficiency standards, ethanol mandates and now a crazy carbon cap-and-trade system the Senate debated last week. These are infinitely complex mandates for inefficiency and invitations to corruption. But they have a singular virtue: They hide the cost to the American consumer.

Want to wean us off oil? Be open and honest. The British are paying $8 a gallon for petrol. Goldman Sachs is predicting we will be paying $6 by next year. Why have the extra $2 (above the current $4) go abroad? Have it go to the U.S. Treasury as a gasoline tax and be recycled back into lower payroll taxes.

Announce a schedule of gas tax hikes of 50 cents every six months for the next two years. And put a tax floor under $4 gasoline, so that as high gas prices transform the U.S. auto fleet, change driving habits and thus hugely reduce U.S. demand — and bring down world crude oil prices — the American consumer and the American economy reap all of the benefit.

Herewith concludes my annual exercise in futility. By the time I advocate the tax floor again next year, you’ll be paying for gas in bullion.

Rising inflation in Asia stings in the West – International Herald Tribune

I hate bad news. But this is bad news. Just as the US economy is about to officially enter its long-dreaded recession triggered by falling home prices and weak investment and consumption, it looks like inflation will continue to accelerate as wages and commodity prices skyrocket across Asia.

“Inflation is the major threat to Asian countries,” said Jong-Wha Lee, the head of the Asian Development Bank’s office of regional economic integration.
It is also a threat to Western consumers because Asian exporters, even in very poor countries, are passing their rising costs on to their customers.

Now Americans are in big trouble. While the dollar plummets, making imports more expensive, wages and input prices in Asia are climbing, leading to autonomous increases in the price levels overseas.

That puts American consumers in a double bind, paying at least some of producers’ higher costs for making their goods, and higher prices on top of that because the dollar buys less in those countries.

So where lies the hope for relief? Is there any? What are the possibilities that input costs will fall in Asia, offering relief to consumers in the West? Daniel Altman, the International Herald Tribune’s economics blogger, has this to say:

On the labor question, there is some precedent for relief. When wages rose in Japan and Korea, production of cheap consumer goods and electronics shifted to Hong Kong and Malaysia. When wages there rose, it moved to China and Vietnam. With higher wages in those countries, it could shift to poorer nations in Africa, Central Asia and Latin America – provided those nations are stable enough to do business with foreigners.

There is no relief in sight for energy and commodity prices, however. Demand is simply too great. New technology could provide some answers with time, though it’s not clear how it can solve problems like the lead and copper shortages. In the short term, we may simply have to accept that living standards, judged by our material consumption, will not rise as quickly as they have in the past couple of decades. It was a nice ride while it lasted, eh?

Globalization and free trade have led to huge improvements in access to affordable manufactured goods for Western consumers. The hope that cheap imports will drive our consumptive lifestyles into the future, however, is waning as the basic economic problem of scarcity rears its ugly head in labor and commodity markets.

Discussion Questions:

1. Is global inflation today primarily demand-pull or cost-push? How do you know?
2. What implications do rising wages in China have for less developed countries such as those in Africa and Latin America?
3. As commodity supplies dwindle, how can the world’s economies continue to grow? Can they? Will the world ever reach a point where continued growth is impossible and a period of contraction begins?

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China rations diesel as record oil hits supplies | Markets | Reuters

As I headed into the city for dinner with friends on Saturday night, I witnessed an unusual site: as our taxi passed a petrol station, I saw about 25 or 30 blue trucks (the ubiquitous medium of transporting good from Shanghai’s factories to her ports) spilling out of the parking lot into the road, apparently queued, waiting for a spot at the pump. I’d never seen such a line at any of the petrol stations around Shanghai, and briefly wondered whether it was just a busy night or whether something else was amiss.

Well, reading the headlines in today’s news, I stumbled upon a clear economic answer to the petrol pump mystery. It appears that China has begun rationing diesel fuel at petrol stations in the East Coat provinces.

Truck drivers reported long queues at petrol stations along a national highway linking Fujian and Zhejiang provinces, with each truck getting 100 yuan ($13) worth of diesel, or around 20 litres, per visit at a state-run station and 40 litres at a private kiosk…

“What’s wrong with the oil market? Our drivers had to queue the whole night for only a small amount of fill, slowing the traffic by almost one day,” said Gao Meili, who manages a logistics company.

Continue Reading »

The price of sperm | Free exchange | Economist.com

What are sperm banks thinking? This reflective post from Free Exchange takes an economist’s look at the market for donated sperm, where only recently have sperm banks been charging interested mothers an additional fee for the sperm from PhD holding donors.

Here’s the thing, if mothers are willing to pay more for the higher quality DNA within a PhD’s sperm, wouldn’t they also be willing to pay for other qualities as well?

For example, should donors be compensated extra for every inch of height? Or for being fine featured? And what about athletic prowess? Surely some donors are more popular than others—and thus their sperm should exhibit greater scarcity and desirability. Why does the market not price that?

It’s a great question, and one that relates to the interaction of supply and demand in the marketplace. The fact is, sperm banks are not following the rules of supply and demand in the prices they charge mothers and their payments to donors.

…perhaps more accomplished donors would step forward if they were compensated more handsomely for their achievements. More aggressive bidding for sperm could raise the quality of donors, leading to more options for customers, and—who knows?—more talented children.

If prospective mothers really value certain qualities over others, why wouldn’t the market for sperm reflect those values? Perhaps sperm banks have something to learn about basic economics!

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To eat . . . . or to drive? – Times Online

The whole debate over global warming has just as many economic as environmental implications. A recent article in The Times illustrated how the growing investment in renewable biofuels impacts on global food markets.

Apparently as a result, Japanese snack packets now contain 10% less chips than they did a month ago, while the price of beer at the Munich Oktoberfest will be at record levels.

These, say industry insiders, are the first skirmishes of a conflict that could soon dominate geopolitics: the war for resources between the world’s 800 million cars and its six billion stomachs. In the developed world, the war will come down to price and choice; in the developing world it could come down to survival. The war centres largely on global demand for biofuels — “green” replacements for petrol, such as ethanol, that can be produced from sugar, corn and other agricultural products rather than fossil fuels.

Wheat and barley fields are being replaced by ethanol sources, such as sugar and corn, in the USA and Brazil. Reduced food supplies are leading to higher prices for snacks and beer. The article states starkly that the “war for resources” will be between cars and stomachs. Economists would not envisage such an apocalypse, because they believe that the price system will efficiently allocate resources even on such a wide scale over the globe and between such apparently disparate goods. But the intermediate scenarios should be interesting.

National Geographic News Photo Gallery: Week in Photos: Monster Hog

Near Delta, Alabama, May 3, 2007—Hogzilla may be headed for horror-movie heaven, but the massive swine that became an Internet sensation in 2004 may have been bested, size wise, by this reportedly wild pig killed May 3 by Jamison Stone, 11, and reported by the Associated Press on Wednesday.

From tip to tail, the newfound hog—dubbed “Monster Pig”—measures 9 feet, 4 inches (284 centimeters) and weighs in at 1,051 pounds (477 kilograms), according to Stone’s father.

At a 150-acre (60-hectare), fenced hunting range, Stone said, he shot the huge beast eight times with a revolver before tracking it with his father and guides for three hours. Finally, the boy shot the hog at point-blank range, killing the animal, the AP reported.

While hunting by children is legal in Alabama, officials are investigating whether anyone had transported and released the live feral pig into the hunting preserve, which would violate state law.

Okay, so maybe this one’s a stretch for a blog about economics, but sometimes when you see something in the news this amazing, you just have to share it with the world! Let’s see if I can come up with some questions about this one!

Discussion Questions:

1. What impact would “monster hog” have on the price of pork (assuming it goes to market)?
2. What will happen in the beef market once “monster hog’s” meat reaches the market? Explain.
3. Can you think of a product that might be a compliment to pork? Describe
   what will happen in that product’s market thanks to “monster hog”.

Looks like China could use a few monster pigs of its own to relax the steep increase in pork prices recently!

Tighter supplies lead to big price rises for pork, eggs-21food.com

THE prices of pork and eggs have soared in past weeks across China due largely to tighter supplies and increasing production costs…Food products account for 33 percent of the CPI in China with meat, poultry and related products making up about 20 percent.

According to the Ministry of Agriculture, live pigs nationwide were 71.3 percent more expensive than a month earlier, and pork, 29.3 percent higher.

In Beijing, the price of slaughtered pigs went up more than 30 percent in recent days…

An outbreak of blue ear disease, also known as Porcine Reproductive and Respiratory Syndrome, among pigs in Guangdong Province and the Guangxi Zhuang Autonomous Region, causing many deaths and a large amount of pigs to be culled, according to the National Development and Reform Commission…

“This sent a strong signal for distributors to jack up prices,” said Xu, adding that this exacerbated the unbalanced supply and demand.

“Pig raisers have lost money in the past couple years and they are reluctant to raise pigs. This led to a marginal decline in live pigs this year.”

Still worse, edible oil and grain prices rose at the beginning of this year, and feed prices followed suit.

Grain prices have risen largely due to an anticipated decline in output this summer and will continue to increase slightly in the coming weeks, boosting the prices of pork

Discussion Questions:

1. What is the “CPI” and why has it risen in China recently?
2. Does this article discuss the determinants of demand or the determinants of supply? Which determinant is being affected in the pork market?
3. What is happening in the market for pork in China? Which curve is shifting, supply or demand?
4. What “strong signal” led pork distributors to “jack up prices”?
5. If the price of pork continues to rise, what should happen to the supply of pork? Explain.

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Gas hits record high price for eighth straight day – May. 20, 2007

According to CNN.com:

“The run-up in prices is a big concern for store chains, according to the retailers’ trade group. Its survey of consumers released early Friday found the average consumer believes that the price of gas will reach $3.32 per gallon by Father’s Day… As a result, 40.2 percent of consumers are taking fewer shopping trips, while 37.9 percent told the survey they plan to shop closer to home.”

“To offset the effects of higher prices, more consumers are giving their wallets a little extra cushion by cutting back on discretionary spending or choosing to frequent retailers closer to home.”"

And this is a bad thing? To big chain stores, perhaps, but what about the neighborhood businesses (are there still any of those?) that will benefit after years of losing business to big box retailers like Wal-Mart and Home Depot? Consumers driving less may harm major retailers whose stores tend to be clumped together in mega shopping strips on the outskirts of towns, but surely the benefits of less driving outweigh the costs.

Fewer cars on the road mean less traffic, less noise, more space for cyclists, less hazard to pedestrians and children playing ball in their yards, cleaner air and a deceleration of global warming, more customers at neighborhood businesses, and perhaps even more quality time with family and friends (if we can assume less time shopping means more time with each other).

So if high gas prices result in so many improvements in our environment, relationships, communities and health, why are they such a bad thing? Perhaps because higher gas prices overburden the poor. Since fuel makes up a larger proportion of a poor family’s budget than a rich one’s, higher gas prices put a bigger dent in the disposable incomes of the poor than the rich. Economic theory would indicate that the poor’s demand for gas is more elastic than the rich’s, meaning that price increases are met with a greater decrease in consumption than someone for whom gas makes up a relatively small part of their overall budget. This, again, may not be so bad. Perhaps the poor will begin limiting their outings to those that are deemed most necessary (such as to and from work, school, child care or clinic) and cut back on unnecessary trips (such as to mall, the movie theater, the go cart track or the Wal-Mart across town). Less consumption may not lower overall standard of living when we consider that much of the consumption going on by Americans (rich and poor alike) is frivolous and ostentatious.

Even acknowledging the regressive nature of the burden of high gas prices, it still seems to me that higher prices are necessary to achieving a cleaner, healthier, better functioning society. The problem is, if prices are kept artificially high through price gouging, as the Democratic leadership in Congress seems to believe, then the full benefits of higher gas prices are being passed on to oil companies rather than society, as could be achieved with an effective gas tax.

CNN presents their own solution to the problem of high gas prices:

From higher taxes to more drilling, ways to cut gas prices – May. 10, 2007

1- Pass a carbon tax
2- Increase efficiency
3- Push alternatives
4- Require oil companies to make more gas
5- Build a gasoline reserve
6- Drill more oil

It’s too bad my AP class has finished for the year. I think a great quiz would be to hand them this list and ask, “What’s missing?” Anyone who’s completed a semester in a Principle of Microeconomics course should be able to get an A on such a quiz. Can you tell what’s missing? If so, please post your comment here. (Hint- fill in the blank: Supply and ______?_______)

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Here’s a follow-up to the previous post about stupid Americans acting stupid. Looks like the stupidity is not limited to the idiotic idea of boycotting gas for a day, rather it is alive and well among America’s leaders. Here’s the Democrats’ solution to the high gas prices faced by Americans today:

Join the Campaign to Change America / John Edwards ’08 Blog

“The ENERGY PRICE GOUGING PREVENTION ACT will provide immediate relief to consumers by giving the Federal Trade Commission the AUTHORITY to investigate prices–focusing on the causes, the burdens they put on American families and businesses, and solutions.”

And here’s an insightful and entertaining critique of the Democrat’s proposed bill by economist Tim Haab:

Environmental Economics: All politicians are idiots and other obvious thoughts on high gas prices

“There are two possibile explanations for the Democrats proposal of the STUPID bill. 1) They think the public is too stupid realize they are trying to “do something” by proposing a STUPID bill, or 2) They are idiots. Since Env-Econ readers obviously represent a cross-section of the public, and since Env-Econ readers are smart enough to know that this bill is STUPID, I have to conclude that 1) is logically impossible and therefore, 2) must be true. So we’ve now proven that Democrats are idiots. We’re halfway there.”

The stupidity of this proposed bill lies in the fact that Democrats seem to champion environmental protection, reduction of greenhouse gas emissions, and a solution to the global warming problem, while simultaneously fighting for regulations that REDUCE the price of greenhouse gas emitting fuel, the repeal of gas taxes, the expansion of oil refineries’ capacity, and other measures that will assure the cheapest gas possible for American drivers. The two goals are incompatible, as the solution to the greenhouse gas problem requires HIGHER gas prices, not lower gas prices.

What policy makers don’t realize is that “high gas prices are NOT an economic or political problem.” Markets allocate resources efficiently when markets are allowed to work. Higher gas prices reflect the basic economic law of scarcity, supply and demand. With developing countries like China demanding a greater proportion of world reserves than ever before, American drivers preparing for their summer road trips and a war raging in the middle east, higher prices at the pump should come as no surprise. Intervention in the gas market will result in greater inefficiency, as prices kept artificially low by government interfere with the market mechanism, increasing the quantity of gas demanded, and further exasperating the depletion of this scarce resource (not to mention contributing to the nation’s greenhouse gas emissions). The shortsightedness of legislators may only postpone the inevitable price rises of this resource for tomorrow’s consumers, while work in the complete opposite direction as they desire on the global warming front.

Ultimately, higher gas prices are necessary and desirable if we are to transition to more environmentally friendly fuel sources. As petrol reaches $4.00 per gallon, consumers will think more seriously about buying more fuel-efficient automobiles, using public transportation, choosing to cycle to work and taking other such steps towards reducing their carbon footprints. This, after all, is the only way Democrats will ever achieve their other supposed goal of avoiding the catastrophe of global warming and achieving greater energy independence; and this can only happen if gas prices continue to rise.

So what about “price gouging”? Concentration of market power among a handful of firms in the oligopolistic oil market may indeed result in some degree of collusion and setting of prices above equilibrium. This is inefficient, yes, but it occurs in a market in which, unregulated, equilibrium output and price would also be inefficient due to the existence of negative externalities. In other words, even were oil companies competing directly, the price would be too low and output too high since the price of gas does not include the full social cost of gas consumption. In a way, the inefficiency arising from excess market power corrects the inefficiency arising from the existence of externalities. The catch is this: consumers end up lining the pockets of oil companies rather than filling their own national tax coffers, since the higher price is a result of collusion rather than taxation.

What policy makers should be discussing is the imposition of new gas taxes, which, rather than only increasing the price consumers would pay, would reduce the ability of oil firms to price gouge, taking a chunk out of their “record profits” and turning it into tax revenues. These revenues could then be invested into research of new fuel technologies, the subsidizing of which would increase their supplies, making them more competitive as a substitute for petrol and thus more attractive to consumers. This helps politicians achieve their goal of energy independence and reduction of greenhouse gas emissions. Lower gas prices NOW will only postpone this important transition.

Here’s another clear presentation of why politicians should not meddle with oil prices: Knowledge Problem: Price Gouging – Politicians vs. Economists

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Environmental Economics: I couldn’t decide between “Gas Boycotts Don’t Work” and “Oh Crap, Here We Go Again”

So, the idea is that on May 15 (today in America), millions of Americans will boycott oil companies by not filling their cars with gas in the hope that firms like Exxon Mobil, Chevron, Shell and others will be forced to lower their prices. The goal is to make oil companies lower their price per gallon by 30 cents.

Remember my post below “Why learning Economics is SO important”? The American “Gas Boycott” is a perfect example of how people uneducated in economics can rally around really stupid and senseless ideas. The authors of Environmental Economics, a great blog, give all the reasons why this gas boycott will not achieve its goal. These are ALL basic economic concepts, which means that if ONLY the organizers of this boycott had bothered to take a principles course, they would have spared themselves of this embarrassing attempt at activism. I’ll keep finding reasons why learning economics is important, you keep learning!

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Marco’s IB Economics Blog: Class Discussion Continued

Marco, in the above post, brings up some serious questions about the science of economics. Good insights, as always Marco. I tend to agree with him on his main idea, that economics as a science tends to perhaps unwittingly make value-based judgments even as economists claim to be objective observers of some fundamental law or principle.

The risk with broadening economics’ focus to the Aristotelean “metaphysical” level that Marco speaks of is that a science rooted in the law of scarcity is scarcely equipped to deal with metaphysical resources beyond those very physical resources we deem to be finite (land/labor/capital).

Some economists, such as Julian Simon, have explored the idea of the infiniteness of resources due to the creativity and innovation of the human mind, claiming that any physical scarcity that may exist on our finite planet can be overcome as human ingenuity (the “ultimate resource”) constantly develops new and better means of employing those otherwise finite resources. Even this venture beyond classical economic thought runs the risk of shattering the foundations of the basic science, that is the belief, the TRUTH, that “scarcity exists”. If we accept this truth, and we accept that the market mechanism is an effective means of dealing with scarcity, then we have no other choice than to embrace the price mechanism in all its materialistic and dehumanizing, “Machiavellian” glory.

“…as a social study, economics studies society and the world around us. However, that does then not mean that we should only perceive the world in terms of economics, and economics today connotes profit maximization.”

As Marco says, “we should not only perceive the world in terms of economics”. On this point I could not agree with him more. Indeed, economics may not provide you or me with answers to life’s most basic questions, like where I’ll go when I die; but one question this imperfect science will help answer is how will my basic needs be met while I’m here on this earth burdened with the curse of scarcity? The answer? Markets. Alas, the invisible hand of which Smith spoke may not be that of God, rather that of the Almighty Dollar.

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