Thursday, November 30, 2006

Nassau County Stats

If you want to check out some interesting stastistics on our county, click here . Here is a hightlight with some thoughts by me below.

Nassau had the nation’s sixth-highest
median household income in 2004 ($78,762),
in part because many residents commute to
New York City for high-paying jobs.

• Personal income was the second-highest in
the State and represented almost 10 percent
of total New York State personal income.
• Nassau’s economy added jobs between 2003
and 2005, but at a slower pace than
surrounding areas. In 2005, total
employment averaged nearly 595,000 jobs.

• The sectors of trade, transportation and
utilities; education and health services; and
professional and business services account
for over half the jobs in Nassau.

• Nassau’s unemployment rate in the first
eight months of 2006 averaged 4 percent,
well below the State’s rate of 4.8 percent.

• In 2005, Nassau County’s average salary of
$46,010 was the third-highest in the State.
Average salaries in Nassau increased by
7.5 percent between 2003 and 2005.

The problem as I see it is that we do not have population growth. On the front page they say

"The population has remained stable, even
though the birth rate exceeds the death rate,
because more people are moving out of
Nassau than are moving in."

Since the costs of services ( police and education for example) are growing but our population is not, taxes have been heading up. With wages rising at a lower pace in the county than out, this presents a problem. While it looks like Demographics have played the major role (elderly moving to Florida), there is also the interesting emigration to Suffolk because Suffolk is further away from NYC than Nassau is.

The Mineola Police Issue Part II

The debate over whether Mineola should form its own police force has gotten interesting. As I see it, the main complaint seems to be that taxes will go up and we don't know what we will be betting in return. As to the former issue, I have already spoken, but with regards to whether we are opening up a Pandora's box, I just don't see the complaint.

First, as this article demonstrates, about 25 villages nationwide have adopted community police departments and they seem to be satisfied with them. Further, Long Island already has a number of Village Police Departments--Garden City and Floral Park for example---and they seem satisfied with them. To put it another way, there has been no movement towards joining the county but there has been movement towards establishing separate community police departments. That is telling, in my opinion.

How does this relate to what we are learning in class? It goes back to the issue of costs and benefits. Taxes are going up county wide for the Police Department at the same time Police service is being cut. By separating the community policing aspect from the County, Mineola has a chance at increasing coverage at the same (or possibly less) cost.

Another way this relates to our class has to do with specialization. While we talked about specialization in terms of increasing size (and specializing in specific features such as produing the head of pin instead of the entire pin), the theory is related to the Village Police Department. By specializing in Mineola Police issues, the Officers will have specialized knowledge of the Village, its needs and its hot spots.

Great article on Milton Friedman

Brad Delong, a respected liberal economist, has written an intelligent piece on the legacy of Milton Friedman here.

His main contention, that Friedman completed and corrected Keynes, seems right to me.

Tyler Cowen on Immigration

Economist Tyler Cowen has an interesting article in the New York Times today on immigration. He bring up an interesting issue with current immigration. Although the benefits outweigh the costs, it can be made better (and more acceptable) if we decrease the education gap.

"A high school diploma brings higher wages in Mexico, but in the United States the more educated migrants do not earn noticeably more than those who have less education. Education does not much raise the productivity of hard physical labor. The result is that the least educated Mexicans have the most reason to cross the border. In addition, many Mexicans, knowing they may someday go to the United States, see less reason to invest in education"

One solution he offers is to combine tighter border security with an increase in legal immigration , and require more education.

What Economists Believe

Greg Mankiw and Arnold Kling post survey results of Economist opinions. There is actually a wide range of agreeement on many key issues.

Here is a sample:

87.5 percent agree that "the U.S. should eliminate remaining tariffs and other barriers to trade."
85.2 percent agree that "the U.S. should eliminate agricultural subsidies."
85.3 percent agree that "the gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged."
77.2 percent agree that "the best way to deal with Social Security's long-term funding gap is to increase the normal retirement age."
67.1 percent agree that "parents should be given educational vouchers which can be used at government-run or privately-run schools."
65.0 percent agree that "the U.S. should increase energy taxes

From what you learned in class, what do you think is behind these beliefs?

Wednesday, November 29, 2006

Presidential Candidates picking economic advisors

2008 Republican presidential candidates have started to pick their congressional candidates. Looks like they are starting early.

Nintento vs PlayStation

The WSJ has a good article comparing the new Nintendo to the new Playstation system. You can read it here

The description of the two clearly shows that we have a heterogeneous product and we are no longer in "perfect competition," but rather "monopolistic competition."

"The PS3 includes a hard disk, a networking port, Wi-Fi wireless networking, and playback of DVDs and CDs. It produces high-definition video. In fact, the PS3 can also play a next-generation, high-definition movie disk, called Blu-ray...The Wii is a small, thin white box that costs just $250 and has much wimpier specs than the Sony. It does have Wi-Fi, but it lacks a hard disk, a networking port, and the ability to play DVDs or CDs, let alone Blu-ray disks. It cannot produce high-definition video. It has fewer ports and connectors."

It is also clear that the two machines are targeting two different types of "gamers"

"The Wii is for casual game players, including younger kids and older adults who find the complexity and finger skills required for the PlayStation and Xbox to be intimidating. Even adventure games and racing games on the Wii seem easier to get into than similar titles on the PS3."

Tuesday, November 28, 2006

Bernanke on the Economy

Fed Chairman Bernanke speaks on the economy here .

On GDP growth (Economic Growth)

"the pace of economic activity has moderated over the course of the year. According to the latest estimates by the U.S. Department of Commerce, real gross domestic product (GDP) increased at an annual rate of 2.6 percent in the second quarter of 2006 and at a rate of only 1.6 percent in the third quarter. These figures are down noticeably from the 3-1/2 percent average pace of growth of the preceding two years. We will receive an updated estimate of third-quarter GDP growth tomorrow. At this juncture, information about economic activity in the fourth quarter is limited, and the range of plausible outcomes remains wide. But the indicators in hand suggest that real GDP growth this quarter is likely to be in the same general range that it was in the second and third quarters"

On Inflation

" Core inflation is expected to slow gradually from its recent level, reflecting the reduced impetus from high prices of energy and other commodities, contained inflation expectations, and perhaps further reductions in the rate of increase of shelter costs and some easing in the pressures on capital and labor resources. However, substantial uncertainties surround this baseline forecast...In its latest statement, the FOMC reiterated its view that the upside risks to inflation are the predominant risks to the forecast and indicated that it is prepared to take action to address inflation if developments warrant. "

On the Housing Sector...cutting to the heart of the matter.

"Notwithstanding the sharp reduction in starts of new single-family houses, inventories of both new and existing homes for sale have increased markedly this year. For example, according to the most recent data, homebuilders currently have about 550,000 new homes for sale, roughly half again the number that has been typical during the past decade. Moreover, the official statistics likely understate the full extent of the inventory buildup, as many homebuilders have reported a sharp increase this year in the number of buyers canceling signed contracts. A home for which the sales contract is cancelled becomes available for sale once again but is not included in the official data on the inventory of unsold new homes. To reduce this inventory overhang, builders are likely to continue to limit the number of new homes under construction. "

Note: Remember your basic supply and demand. High prices combined combined with large inventories are a recipe for reductions in price and cuts in output. This is because high inventories mean surplus, so suppliers cut prices (leading to a decrease in quantity supplied) in order to induce more demanders in the market.

From a Macro point of view (if you want to learn more about this, sign up for my macro class) the direct risk from the housing sector is decreases in construction. This in itself is (probably) not enough to induce a recession unless it is combined with an indirect effect, which would come in the form of lower consumer spending. The tranmission here is that lower home prices reduce net wealth and decreaes the amount of cash someone could extract from their home to fund current consumption (in the form of home improvements, etc.). But we will see.

Department of Useless information

Did you know that you can survive in outerpace exposed for up to 2 minutes without suffering any long term problems? No?

Hat tip Tyler Cowen

Physics vs Economics?

This is an amusing post on why citizens often give absolute deference to Physicists but not to Economists.

Monopolistic Competition and Oligopoly

These two Wiki posts are good for your studies. Here is the link for Monopolistic Competition. Here is the link for Oligopoly. The most interesting aspect of Oligopoly is, in my opinion, the Prisoners Dilemma. Read about that here . We will connect it to Oligopoly and, more specifically, OPEC.

Mineola Police Force and Marginal Utility

Using Economics: The Mineola Police Force.

The Village of Mineola is considering opting out of the Nassau County Police Force and establishing its own police force (ala Garden City). To read a summary of the debate (scheduled for a vote on Dec 5th), click here. For a more detailed summary, click here

This is certainly a contentious issue, but how can we use economics to wade through the debate?

1) Rational Ignorance and vested interests - The first topic we can use is the idea of government failure. That is, most of the voters are rationally ignorant about how their taxes are being used. How many people here know how much of their property taxes went towards funding the Nassau County Police Department? On the other hand, the Police department has a strong vested interest in maintaining the revenue source coming from Mineola (estimated at $6.7mn dollars a year). Part of the problem seems to be that taxes have gone up while coverage has gone down. A first pass look at this suggests that the increase salaries of police officers over the years has made it harder to hire police officers (since that increases revenues and necessitates a tax hike. With taxes at already high levels in the county, this is a problem.)

On the other hand, the village certainly has a vested interest in making sure the report favors establishing a police department rather than maintaining the current service (although the Village debate mentioned this, they curiously understated the vested interest mentioned above). However, from the standpoint of the Village residents, a Village police force would bring the police closer to the "check" of the voters. That is, if the residents are unsatisfied with how things are going they can vote in a change. The mayor, in turn, has a vested interest in getting re-elected so he is unlikely to want things to spiral out of control. As far as I can tell, the voters do not have this choice under the current police force (since their votes are dispersed among the county).

2) Marginal Utility - However, the economics of government can only take us so far here. The key issue is whether the marginal utility per tax dollar goes up or go down. So the question for residents becomes, how much "juice" (police coverage) am I getting for the "squeeze" (tax dollars). But this makes the whole debate about a tax hike completely irrelevant. If the marginal utility of the tax dollars goes up, you should support it. If it goes down, you should oppose it. Here is how I can demonstrate this:

Assume that initially you pay $100 a year in taxes to the government for police protection (your coverage is the Nassau Police Force). Assume also that there is only one type of crime, robbery, and that crime, if committed, will cost you $100,000. Finally assume that the police force, via the deterrant of arrest and prosecution, lowers the risk of arrest to 1% (0.01). Without a police force the probability of your home being robbed is 25%

The benefit to you of the police force is, of course, huge. Without it the expected cost of a robbery is $25,000. With a police force it is $1000. (According to Marginal Utility theory you should support a measure so long as the MB>MC. Here the Marginal Cost is $200 while the Marginal Benefit is $24,000.)

Now lets assume that under the Village police department two things change. Your taxes go up to $200 a year while the added protection decreases the risk of robbery to 0.1% (0.001). This lowers the expected cost of the robbery to $100 dollars. Obviously you would support it over no police force, but would you support it over the next best alternative (the Nassau Police Force.)


The expected cost of the crime under the Nassau Police force is $1000
The expected cost of the crime uncer the Mineola Police Force is $100
The marginal benefit is therefore $900

On the cost side,

The cost of the Nassau Police force is $100
The cost of the Mineole Police force is $200
The marginal cost is $100

So you should still support it since (MB = $900 which is greater than MC = $100.)

Although these figures do not support or oppose a police force--since I made them up in my head--they do clear away a lot of nonsense such as

1) You should automatically oppose a police force if your tax dollars go up. Not true. If your taxes go up but the benefits go up by MORE then you should still support it. (Note: The Village Mayor believes that the tax change will be neglible. So this point could be moot. But it may not be, so it is worth discussing).

2) How much of a benefit does a community police force bring via increased accountability to the voters and more direct policing? This is hard to estimate (although I could probably do a study if the Village paid me some money and gave me the data---hint hint). But one quick way to estimate is to look at the current villages who do have their own Police Force and then see if they have succeeded or whether they are happy or not. (A quick pass suggests that they are succeeding and are happy, but I stand ready to be refuted by better estimates).

Then you can decide.

Monday, November 27, 2006

Becker/Posner on the minimum wage

Economists Gary Becker and Richard Posner (also a Judge) discuss the minimum wage here and here.

Debate over at Harvard Professor Blog

Harvard Economist Greg Mankiw has linked to the latest Salvo in the ongoing Jeffrey Sachs/Bill Easterly debate (Sachs is a big proponent of foreign aid, Easterly is a noted skeptic).

Sachs latest response offers up the Nordic Economic Models as enviable models for developing (and I guess by implication Developed?) countries to follow. I am not so sure for reasons you can read about here.

This is what most worries me:

But Sweden retained the world´s highest taxes, generous social security systems and a heavily regulated labor market, which split the economy: Sweden is very good at producing goods, but not at producing jobs. According to a recent study of 35 developed countries, only two had jobless growth: Sweden and Finland. Economic growth in Sweden in the last 25 years has had no correlation at all with labor-market participation. (In contrast, 1 percent of growth increases the number of jobs by 0.25 percent in Denmark, 0.5 percent in the United States and 0.6 percent in Spain.) Amazingly, not a single net job has been created in the private sector in Sweden since 1950.

You can read about that here

The Economics of Now

This is an interesting article on why people seem to consume too much now, rather than later.

GAP is struggling

This WSJ article is about the ongoing struggles of the clothing company Gap. Although a company like the Gap is best modeled using "monopolistic competition," even that type of industry is subject to competitive pressures:

"None of these projects addresses the once highflying retailer's major problem: how to revive sales broadly at the uncompetitive Gap and Old Navy divisions. The enormous chains, with 1,338 and 1,008 stores, respectively, in the U.S. and Canada, need to appeal to broad audiences, which has made them vulnerable to growing competition. Gap's classic styles have been widely copied, and it now competes with everything from department stores to teen-focused specialty retailers such as American Eagle Outfitters Inc. Old Navy has failed to stay ahead of discount competitors whose fashion sense is growing"

One way for a company like the Gap to continue to earn economic profits is through constant remodelling of its brand (new sweaters and jeans) and advertising (the whole Red line thing). But lets be honest, how good are the new Gap sweaters? Anyone? And how many Polo shirts can one buy before enough is enough?

Friday, November 24, 2006

Movie Ticket Pricing

Here is another explanation for why theatres do not charge variable pricing for movies (i.e. a higher ticket price for Spiderman and a lower price for Gigli). The answer, according to some research, is market power on the part of the distribution companies.

Thursday, November 23, 2006

Test Averages

I was more satisfied with Test 2 than I was with Test 1
Overall the average was 76.5 with a median of 78 (meaning the class tilted slightly towards the higher end.

Compared to test one the average was 73.8 with a median of 75.

There were less low grades than there was last time, rather than more high grades among people who did well on Test 1. That accounts for the increase.

Happy Thanksgiving.

Article on Blogging Economics

Apparently we have a fan base (well not me)

Wednesday, November 22, 2006

Monday, November 20, 2006

Quiz 8 - Question 10 explanation

#10 is the question that most people got wrong. (Answer D), with C being the main answer people who got it wrong gave.

A and B do not make sense for a natural monopoly so the question is whether C or D is the better answer. C asks you whether a company that owns a large portion of a countries natural resources could be considered a natural monopolist. D asks you whether an industry with extensive economies of scale could be considered a natural monopolist.

C cannot be a natural monopolist because a natural monopoly is both inevitable and desirable. That is, it is not inevitable that a Diamond Company controls all the worlds diamonds and then exists as a natural monopoly. The same with Wheat, grain, or oil. You don't have to have one company running the business, it just ended up occuring. The government can step in and break up this company without undo social harm.

This is not the case with D because the large economies of scale mean that any breakup of the company raises ATC (remember the graph). Higher costs mean higher prices. Higher prices lead to less quantity demanded (remember the demand curve). So breaking up the monopolist is undesirable. In other words, if you get your electricity from LIPA or Con Edison, you do not want that company broken up because smaller companies cannot offer you electricity as cheaply as the one company you currently have.

Saturday, November 18, 2006

Answers to Quiz 8

I will try and post explanations for questions that were answered wrong by a majority of the class.

1) D
2) B
3) C
4) C
5) D
6) B
7) B
8) D
9) A
10) D)

Thursday, November 16, 2006

Milton Friedman

Milton Friedman was one of the greatest economists of the 20th century. He just passed away today at the age of 94. Most of you might not know who he is but both this class and, to a greater extent, the macro class you will take are heavily influenced by his thought (even if the professor does not mention his name.

The New York Times has an good obituary here.
Here are some other reactions.

The is a great summary of his beliefs:

"Outside monetary affairs Friedman remained a mainstream economist. As he himself wrote in Capitalism and Freedom (a book published in 1962 which meant went much deeper than Free to Choose) he could offer no hard and fast line for the limits of government intervention. But he believed that an objective study of the facts, case by case, combined with an underlying belief in personal choice, would usually swing the argument in favour of private provision in the market place"

Wednesday, November 15, 2006


There is an in class quiz this class Thurs Nov 17th.

If you skip out on this class then you miss the in class quiz and hence will be penalized, unless you contact me before the class with a valid excuse.

Good posts on Healthcare

Read this here for the difficulties facing US Health Care. The moral of the story is that it will not be easy to slow down growth in medical spending, nevermind cut medical spending.

You may also be interested in this essay on how to reform the US Welfare State. The author's plan is an attempt to harness competition in the presence of market failure. In the case the health care market is riddles with information problems, specifically adverse selection and moral hazard. His proposal resembles the voucher system I was discussing in class last night.

How Rich are you

If you think you are poor or rich you can test to see where you rank compared with the rest of the world here.

Drug prices and R&D

As we discussed last night, one possible negative side effect of negotiating lower drug prices due to large market power is a decrease in research and development in new drugs. This post--and paper--provides evidence of this. It's worth a look.

Tuesday, November 14, 2006

So you don't learn about externalities or monopoly?

This is an interesting post on how students in an intro Economics class did not learn about market imperfections such as externalities, monopolistic competition or the trade off between efficiency and equity. A good response can be read here (scroll to the second point).

Here is an interesting assignment for you that can count towards extra credit. Name and explain the various market imperfections and qualifications we discussed in this class.

Economist post on European vs American Growth

Here is an interesting post on European Growth vs American Growth

The key thing here is that Europe has higher taxes and more generous benefits, which tend to slow growth. You can use your economics training to explain how this might be the case.

The big debate is whether it is worth it or not. On the one hand, it slows growth so their economies do not grow as fast as the US. On the other hand, the benefits do yield gains for citizens right now (in the form of higher unemployment benefits, more vacations, etc.) The counter-argument is: sure it works fine now, but in 50 years this means that the income disparity and growth in the US will be much, MUCH more than it is now. How appealing will be the current model then?

Friday, November 10, 2006

Quiz 7 (Due in Class Tues Nov 14th)

Quiz 7 – Perfect Competition (Due in Class Tuesday 14th)
Professor Matthew Festa

1) State the 4 assumption of Perfect Competition and explain the meaning behind them (2 points)

2) In the graph below, what will happen if the producer produces more? What will happen if he produces less? Why is this the case? (2 points).

3) In the graph below, why is the market out of equilibrium? What will happen to price and output as competition corrects the imperfection in the market (2 points).

4)In the graph below, why does the monopolist enjoy economic (or monopoly profits? Why can’t the market compete these extra profits away? (2 points).

5) If the authorities attempt to force the monopolist to produce at P = MC, what is the problem from the standpoint of profits?. Base your answer on the graph of the monopolist? (2 points).

Upcoming events before Thanksgiving

I am very sorry I had to cancel class last night, but I got sick with an eye infection and had to see the doctor. Unfortunately, that meant I could not give you the outline for the next few weeks, so let me do that now.

1) The next quiz (Quiz 7) will be due on Tuesday. I am working on it now and it should be up today.

2) I am planning on an 8th quiz, in class, on Tuesday as well. It will be 10 quick multiple choice questions, each worth 1 point each. I am doing this to give you a base to see what type of questions will be on Test 2.

3) Test 2 will be Tues 21st. So I got it in before Thanksgiving.

If you have any further questions please feel free to e-mail me.

Tuesday, November 07, 2006

Walmart and Marginal Cost

This post at Econlog explains how Walmart has bid down extra profits (that is MB>MC) due to their large size. Since Walmart can switch suppliers, the supplier will lower his price and thus MB comes closer to Marginal Cost.

The main effect is to lower prices, especially for the poor.

Saturday, November 04, 2006

2006 Mid-Term Elections and Perfect Competition

One way to examine how competition works in the economy is to look at the Stock Market. An interesting market that has popped up in recent years has been the prediction markets such as tradesports. Tradesports has been a good predictor of previous elections, books, popes and other events.

For this year, tradesports has a prediction market up for "Republican controll of congress during the midterm election." You can view their current up to date predictions here.

The market is currently predicting the Democrats to take over the House of Representatives (by a large portion) and the Republicans to hold on to the Senate (although if you look at the predictions for each individual race, the market is predicting a large Democratic pickup).

The main reason why these markets have been so good at predicting events is that there are a lot of people trying to make money of these things. Since they have to put their money where their mouth is, they overall bet they make tends to be very accurate. If someone tries to screw up the market, then other people re-enter with money and bid back the contract to its equilibrium price.

Let's see how accurate this prediction is on Tuesday.

Friday, November 03, 2006

Is Imperialism good for Economic Growth?

The Economist discusses here

Quiz 6 due Nov 7

Quiz 6 – Production Theory
Professor Matthew Festa
Due in Class: Tuesday Nov 7th

1) (2points) Jim quits his job as a construction worker to open his own construction business. Jim’s revenues are $150,000 while the costs of operating are $100,000 (included in this number is $10,000 in order to purchase equipment, an office and other expenses in order to open the business). The salary at his old job was $40,000 a year. In order to obtain the $10,000 to open his business he took out his savings of $10000, which earned him $1,000 a year in income.
a. What is his accounting profit?
b. What is his economic profit?

2) Based on the following 2 graphs, tell me where productivity per worker is increasing at an accerating rate, where it is increasing at a diminishing rate and where it starts declining. Why does total production begin to decline after point a? (use the textbook as a reference). (2 points).

3) Calculate the ATC and the Marginal Total Cost for the following. (4 points).

0) 0 100
1) 10 100
2 )15 100
3) 18 100
4) 23 100
5) 33 100
6) 45 100

4) How much can be produced while costs are decreasing (2 points).

Thursday, November 02, 2006

Perfect Competition

This article in Wikipedia explains in 2 pages what it takes the book 20 pages to do. If I were you, I would print this article out

Note: Do you see the importance of mastering the basics of Chapter 9 (production theory)?

Also this graph is the jist of the theory.

Facebook and Pigouvian Taxes

If you are a member of facebook you want to join the Pigou club, click here.

Note: Remember that the Pigouvian taxes are one way to rectify a market imperfection, which according to our Physic's professor friend, we don't really talk about enough....

Physics professor Criticizes Economics

This here is an article and discussion that would make an excellent extra credit project.

Quick Question: How long did it take for me to raise complications/caveats/problems/limits in basic supply and demand theory?

Further, I take issue with the suggestion that economists are not concerned with irrational behavior. It's all over the literature right now and the problem seems to be somewhat overblown (despite bubbles, the market is curiously efficient in my opinion).