Many university towns have problems with affordable student accommodation. In Graz things are not too bad, I think, but I guess things could also be better. Let me make the following policy proposal and let’s discuss whether we think this is a good idea. I suggest a law that states that students who rent an apartment or a room are not allowed to be charged more than €2 per square meter. At the moment gross rent prices in Graz are probably around €10 per square meter (if not more). Do you think this policy would have the desired effect?
Consider a pop music concert. For reasons that we do not necessarily have to go into, pop music stars do not always want to charge the highest possible (single-concert profit-maximizing) prices for tickets to their concerts. In fact ticket prices are often so “low” (I still find them rather expensive) that many more people would like to go to the concert (at these prices) than there are tickets. The economic term for this is that tickets are being “rationed”. What is the result of such rationing?
If tickets are sold offline in a single “brick-and-mortar”, as people like to say, ticket booth, then we get long queues and people starting to queue at 2am of the morning of the day ticket sales begin or they even get there earlier and camp out with sleeping bags. If the selling is done online, then you have about one second in which you can buy your ticket, with many people with a slower internet connection missing out. Is the final ticket allocation in such cases of rationing Pareto-efficient? Think about it.
When people say that markets are efficient then they mean the notion of Pareto efficiency I provided in a previous post: An allocation is Pareto efficient if there is no other allocation that is a Pareto improvement. An allocation is a Pareto improvement over another allocation if the former is at least as good as the latter for everyone involved and strictly better for at least one person. As we saw, Pareto efficiency has nothing to do with fairness. If I have everything there is to be had in the world and I want to have all this stuff then this is Pareto efficient. Because any other allocation would require me to give up something and, as I do not like to do this, this other allocation is not a Pareto improvement because I am not as happy as before.
This is a joke that I heard many times and once on a big stage at the 2014 annual meeting of the Verein für Socialpolitik where some supposedly important person from a supposedly important central bank (if I recall correctly) used it as a criticism of current economic methodology (as this person understood it) and generalizing it to mean it as a criticism of any economic methodology that uses math (if I understood this person correctly).
As a teacher of economics, I am always looking for good examples of economic illiteracy – a newspaper article or maybe a speech by a politician evincing a deep ignorance of simple economic principles. Unfortunately for me, such pieces are few and far between. Imagine, therefore, my delight when I read the following headline:
At first, I was convinced that the author was just kidding, that this was a good piece of satire. But no. This is serious.
Here are some highlights:
When nearly 100 drugs became scarce between 2015 and 2016, their prices mysteriously increased more than twice as fast as their expected rate, an analysis recently published in the Annals of Internal Medicine reveals. The price hikes were highest if the pharmaceutical companies behind the drugs had little competition, the study also shows.
The authors—a group of researchers at the University of Pittsburgh and one at Harvard Medical School—can’t say for sure why the prices increased just based off the market data. But they can take a shot at possible explanations. The price hikes “may reflect manufacturers’ opportunistic behavior during shortages, when the imbalance between supply and demand increases willingness to pay,” they conclude.
Now, this would all be really funny, if it wasn’t the product of a group of highly respected researchers in medicine from top universities published in a peer-reviewed medical journal. But it becomes a public health issue when people end up making policy conclusions on economic illiteracy:
To combat potentially exploitative hikes, the authors offer a recommendation:
If manufacturers are observed using shortages to increase prices, public payers could set payment caps for drugs under shortage and limit price increases to those predicted in the absence of a shortage.
Yes, you guessed it: price controls are the obvious solution to a shortage-induced price increase. Face, meet palm!
During the course of a recent online discussion, David Friedman raised the question of how to define “patriarchy” in particular and “power” more generally.
I gave the following answer which I’m sharing with you in order to elicit broader commentary (ideally from people who actually know something about social choice theory):
Conceptually, defining “power” should be straightforward.
Borrowing from standard social choice terminology, under any Social Welfare Function, which maps from the set of all preference profiles (list of policy preference rankings, one for every member of the society) to a unique social preference ranking, if my preferences correlate more with the social preferences than yours (where correlation is defined in an appropriate way), I am more powerful.
In a dictatorship, the correlation is 1 if I’m the dictator.
In a democracy, the correlation is high if I’m the median voter, low if I’m a member of the political fringe.
Patriarchy is then a system in which men’s policy preferences are more highly correlated with the social preferences than women’s.
David raised the following problem with my definition:
Suppose one percent of the population prefer outcome A to outcome B, ninety-nine percent the other way around. The social preference function, in situations where it has to choose between the two, chooses A two percent of the time.
The group of people who prefer B have more power than the group who prefer A, but does it make sense to say that an individual member of the group has more power? Might it make more sense to use a definition in which the question is not whether the social choice function correlates with my preferences but whether a change in my preferences produces a change in the social choice function in the same direction?
I think that’s a very good point. So here is my updated definition of power:
If changes in A’s preference ranking are more highly correlated with changes in the social preference ranking than changes in B’s preference ranking are, A is more powerful than B.
Is this how people in social choice have always defined power? If not, is there a deep problem with this definition which didn’t occur to me?
How does the profession of economics as a science work nowadays? How is new research added to the wealth of knowledge?