Category Archives: Economics

Economists Agree?!

Economics is the only subject where two economists can share a Nobel Prize saying opposing things.
Roberto Alazar

But all the big names (25 all told including a bevy of Nobel winners) agree on this:

Prediction markets are markets for contracts that yield payments based on the outcome of an uncertain future event, such as a presidential election. Using these markets as forecasting tools could substantially improve decision making in the private and public sectors.

We argue that U.S. regulators should lower barriers to the creation and design of prediction markets by creating a safe harbor for certain types of small stakes markets. We believe our proposed change has the potential to stimulate innovation in the design and use of prediction markets throughout the economy, and in the process to provide information that will benefit the private sector and government alike.

Amen. Too late for Poindexter.

Fixed And Variable Costs

These kinds of complaints betray an ignorance of business economics. One would expect that from Congress, but it would be nice to think that the American people are smarter (sadly, what with the clamor for “anti-gouging laws” and the like, there’s little evidence of it on the ground).

As Peter Suderman points out, the problem is that the cost of adding a cable channel is extremely low relative to providing the service in the first place. Like him (and no doubt many others) I am paying for many channels that I never watch, and will never watch, and wish that I could dump them for a lower satellite bill. But that’s not how the business model works.

It’s similar to the restaurant problem (which to my mind is one of the causes of the “obesity epidemic” among Americans, to the degree that it exists). The bulk of the cost of eating in a restaurant (unless it’s serving larks’ tongue pie and pan-fried snail darter) is overhead: rent, lighting, environmental control, power for cooking and refrigerating, wages, benefits, etc. I’m not sufficiently familiar with the business to know the exact numbers, but it wouldn’t surprise me if the cost of a meal, at least in a small place, was sixty to seventy percent overhead, with the rest going to the cost of the food itself. Say that it’s three quarters. That means that if you provide twice as much food, you only increase the cost of the meal by twenty-five percent (and the converse is that if you provided no food at all, but merely the ambiance and pleasure of having people wait on you, the price of a twenty-dollar meal would still be fifteen bucks).

There are various ways to compete in the restaurant industry, including branding, food quality, atmosphere, service, but one that’s of value to a lot of people is food quantity. Based on the economics described above, the latter is one of the cheapest things to increase, and much less costly than hiring better chefs, or classier waitpeople, or investing in a branding. This is particularly the case when you increase the quantities of really cheap food, such as starches and sugar. The fast food industry figured this out a while ago, with “biggie drinks” and “supersizing.” Giving the customer an extra potato’s worth of fries, or another spoon of corn sugar with flavored water added only pennies to the meal cost, but seemed to many customers to provide a bargain.

This is in fact why Mexican restaurants have such high profit margins relative to other cuisines. You rarely get good-quality meat (and if you do, you pay a lot more for the dish). It’s usually bits of chicken parts, shredded beef or pork, or (in some of the less reputable places) “meat”…, disguised in a hot sauce, and wrapped in a flat unrisen bread made of corn or wheat, combined with rice and beans. You can get stuffed with unhealthy high-glycemic carbs. Not to mention, of course, filling you up pre-meal on sectioned deep-fried corn tortillas and a chopped tomato sauce. It used to be that Mexican meals were cheap, relative to others, but once it became trendy, they started to make a killing, particularly the chains, charging as much for this low-cost meal as other restaurants do for meat that you can actually identify (at least as regards to species).

What’s worse is that these are exactly the kinds of excess calories that we don’t need. If they upped the protein, it would be much healthier for us, but that would cost much more (though even there, they’ve managed it, with double and triple burgers, but you’ll notice that there’s a much bigger price jump for these, since the meat and cheese are the most expensive parts of a burger). I’ve often wished that I could get a cheaper, smaller meal, but like the case of the bundled cable or satellite channels, the economics militate against it.

By the way, it should also be noted that misunderstandings of the difference between fixed and variable costs also lies at the root of many people’s ignorance about the source of high space launch costs, even among professionals in the space industry.

Is There an Eco in Here?

I landed at the Ft. Lauderdale airport yesterday and there was a sign that said that to decrease water use, the airport has changed its thermostat from 74 to 78. Call me hopelessly brown, but it seems to me that they can attract more money to pay for more water via tourism if their airport is comfortable rather than politically correct. Water can be recycled, pulled out of the ocean and the air. The economic value of the savings is summarized by the market price for more water which is still measured in hundreds of dollars per acre foot. An acre foot is enough water to cover an acre one foot deep, or 325,851, gallons putting the price of water in gallons per cent. Skimping on use is pain for no gain. Or is masochism the main point of being Green?

Hungry for Ethanol

Food prices are up as corn prices have doubled to $4.50/bushel with the $0.51/gallon of ethanol subsidy. As the US is (soon to be was) a huge corn exporter, this is causing higher prices worldwide. Foreign Affairs in the May/June issue says that could lead to doubling the world hungry from 600 million to 1.2 billion. They hope that

relying more on sugar cane to produce ethanol in tropical countries would be more efficient than using corn and would not involve using a staple crop.

No, if sugar cane is more profitable than corn, it will also outcompete staples for land and labor until the price of staples is hungry high.

Scientific American makes the same mistake in the June issue:

[Jatropha, an oil crop] favors hot, dry conditions and hence an unlikely threat to rain forests. There is no trade-off between food and fuel either, because the oil is poisonous.

No, Jatropha will pull away farm equipment, labor and land from other crops driving up the price of every other crop.

Ethanol is an OK energy delivery system to convert solar energy, but if biofuels stay competitive with petroleum (via subsidies for now), all arable land will be converted to corn and other energy crops until the food crop prices are driven up enough to be competitive with the energy crops.

The only way to bring the corn price down is to either bring a multiple of the current acreage under cultivation (all US arable land devoted to corn would get us 12% of petroleum consumption) or reducing the corn/ethanol subsidy.

Space Solar Support?

Taylor Dinerman calls for space solar power in this week’s The Space Review. He trots out hydrogen as an alternative energy source. No–it’s an alternative energy delivery method. Last time I checked, to get hydrogen, we had to use another fuel source and lose energy to crack the hydrogen. To make space solar power viable, we need an advance that will advantage space solar power to terrestrial solar power. Does this meet the objective:

One technology that might radically reduce the weight requirements for these systems is the technique pioneered at the University of Notre Dame where single-walled carbon nanotubes are added to a film made of titanium-dioxide nanoparticles, doubling the efficiency of converting ultraviolet light into electrons. Any solar cell technology that could reach conversion factors of over 50% or even higher would reduce the size and weight of an SPS and thus make it easier and cheaper to build and launch.

It also makes terrestrial solar power potentially reach conversion factors of over 50% too. To make space solar better than terrestrial solar, we need launch costs to be no more than 3x manufacturing costs per kg if space solar is 4x as efficient. With manufacturing costs $350/kg, we need launch costs $1000/kg to make space solar viable.

Unintended Consequences

I’ve never been very thrilled with the idea of converting food to fuel. This article explains why:

President Bush has set a target of replacing 15 percent of domestic gasoline use with biofuels (ethanol and biodiesel) during the next 10 years, which would require almost a fivefold increase in mandatory biofuel use, to about 35 billion gallons. With current technology, almost all of this biofuel would have to come from corn because there is no feasible alternative. However, achieving the 15 percent goal would require the entire current US corn crop, which represents a whopping 40 percent of the world’s corn supply. This would do more than create mere market distortions; the irresistible pressure to divert corn from food to fuel would create unprecedented turmoil.

Thus, it is no surprise that the price of corn has doubled in the past year