Category Archive: Economics

  1. Does Manhattan need a congestion tax on Uber?

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    I carpool with a friend; one day, he called to say his car had broken down, and asked if I could pick him up. That was a busy day for me, so I offered what I thought was a reasonable solution: he should take Uber to my house, and I’d pay for it.

    He objected: “That’s too expensive! You should just come pick me up.”

    Wrong.

    For an economist, the expense of an activity is the sum of the opportunity costs of all the resources expended in engaging in that activity. That means that the cash “price” may be a small part of the true cost.

    Taking an Uber to my house would cost $15. If I drove 10 miles to pick him up — his house is not on the way — and then to work, that would cost $10 (20 miles x $0.50/mile gas and car wear and tear), and 30 extra minutes of my time, worth at least $50 on a busy day.

    So the total cost of my picking him up was $60, compared to only $15 for the Uber. In effect, I was using the “Coase Theorem”: Who paid didn’t really matter. The efficient solution was for him to take an Uber to my house, rather than having me go pick him up.  That’s why I offered to pay for the Uber: I was much better off paying for the Uber than picking him up myself.

    That approach to public policy problems can be quite useful. Take the recent kerfuffle over “congestion pricing” for Uber in Manhattan.

    Congestion Pricing for Uber

    An article in the New York Times describes the non-monetary costs of ride-share services, pointing out that by parking and driving around between fares, Uber, Lyft, and Juno drivers are taking up space.  They don’t pay for this “external” effect directly, but everyone else pays indirectly in terms of greater difficulty parking and using the clogged streets.

    The point is that the cost of using the road depends partly on how large the road is. But it also depends on the number of other drivers on the same road at the same time. When my choices affect your costs (and vice versa) that’s an externality.

    There are several proposals being considered. One is an $8 fee for entering Manhattan through a bridge or tunnel. But that seems like a bad idea, because it is simply a fixed cost; if you have to pay $8 to enter, you’ll stay longer and look for more rides on the island itself.

    Another idea is a fee per ride for ride-shares, to match the surcharge now paid by yellow taxis. But ride-shares already have to pay sales taxes, which average more than $0.70 per ride, more than taxis pay.

    Uber suggests a different policy to account for the externalities of congestion. According to the New York Times, Uber spokesperson Alix Anfang claimed that “A new transit tax system should fully fund mass transit by setting fees based on how crowded the roads are, not the type of vehicle people are traveling in.”

    But could congestion pricing work? Putting up toll booths on every block would measure traffic, and allow the city to collect an extra nickel from each driver who travels each block. But the transaction costs of waiting in line at the toll booths would make congestion much worse.

    Cliff Winston and Russ Roberts had an interesting conversation about this on EconTalk back in 2013. Winston was talking about his paper — published in Journal of Economic Literature — that advocated congestion pricing.

    Roberts argued that having a zero price on roads was actually misleading. There is a zero money price on the use of most roads, but the actual cost of using the road includes the “queuing costs” of congestion — delay and inconvenience.

    The problem is that the only way to reduce congestion is to have fewer people use the road, at least at peak times. So, it could be true (if the congestion price could be implemented at low cost, and could be dynamically updated constantly) that charging for road use would improve the efficiency of the observed patterns of road use. But all that “efficiency” means to the economist is that the last driver to enter the highway is paying a congestion surtax that makes that driver indifferent between driving and staying home.

    The trick would be to balance two deadweight losses: “too many” people staying home and waiting for cheaper travel times, or “too many” people sitting in traffic. Achieving efficiency might well reduce the deadweight losses of traffic, but at the cost of deadweight losses of otherwise productive trips and activities not undertaken.

    “Efficiency” for Whom?

    More simply, economists often act as if achieving efficiency is always a Pareto improvement (meaning that it harms no one). But there is no reason that has to be true; there will be winners and losers. The losers in a monetized congestion price system will be those who have little money and whose time has little value. It doesn’t cost them much to sit in traffic, but it isn’t worth it to them to pay a congestion price. Those are the people who will stay home.

    In the EconTalk episode, Winston didn’t deny that. In fact, he said that this was precisely what made the system desirable. There is substantial heterogeneity in the value people place on time. This could be an intrinsic preference (patience vs. impatience with waiting), or opportunity cost of time (I would just be watching cat videos vs. I’m a skilled surgeon late to an emergency operation), or ability to pay (I’m poor and don’t have the money to pay vs. I’m rich and the congestion price is trivial to me). So the advantage of congestion pricing, in Winston’s view, is that people who don’t value travelling at peak times can defer travel until later, or can take some other form of transportation, such as mass transit.

    This reduces the deadweight losses from queuing, and much of the difference is captured in revenue from the congestion tax price. Converting queuing to revenue means that alternative transportation can now be subsidized and improved, and that benefits those who stopped using the roads. In Winston’s words,

    It’s heterogeneity and now the ability through technology to actually charge different prices, that has opened people’s eyes up to say: Wait a minute; you know, there can be sort of a better matching here, where yes, the prices are pretty high but people really have a high value of time, and it’s not just rich people. (This quote starts at 38:45.)

    Winston’s point about heterogeneity is important. In fact, it’s an underappreciated aspect of economics in general. People who disagree about the value of things are what drive much of the cooperative exchange system; average values are misleading. If I value something you own more than you value it, that means we disagree. But we can probably agree on one thing: a price. A price that is above your value but below mine. When I pay you that price, the one we agree on, we are both made better off.

    In politics, disagreement is allowed, but then it’s ignored in favor of the average or median opinion. In other social settings, such as clubs or churches, we expect others to agree on values.  The genius of markets is the ability to create harmony and agreement out of disagreement.

    What Markets Need

    Russ Roberts’s objection to Wilson’s argument is a subtle one, and it took me a long time to understand it. But once you see it, it’s obvious and important. In essence, his objection is that charging “prices” does not a market make.

    In a market, property is exchanged voluntarily, and in a voluntary exchange both parties must be (subjectively) better off. In the case of congestion pricing, there is an implicit exchange: the people who value their time at higher money price buy less congestion so they can drive faster, and the people who have lower opportunity cost of time supply less congestion by staying home.

    The reason the objection is subtle is that there is no sale by those giving up slow travel, and no purchase by those buying faster travel. As I pointed out in a theory piece on cost-benefit analysis and Coasean bargaining, there’s an enormous difference. In a Coasean setting, if I offer and you accept, a specific right is transferred and both of us must be better off, or we wouldn’t have made the deal.

    But in the case of congestion pricing, that needn’t be true. We don’t have the information component (the seller agrees) nor the compensation component (the seller gets paid). The imposed cost on travel would be redistributive, from those with low opportunity cost of time and to those with high monetary opportunity cost of time.

    So, is a congestion “tax” system a solution to the problem of street congestion? Is Uber right, and the problem is congestion in general? Or should Uber be selectively taxed, as some public officials have claimed? Or should we just leave things alone, and recognize that the total price, the sum of monetary cost and queuing cost, will cause the market to clear on its own?

    Please tell me your thoughts at mcmunger@gmail.com. I’ll offer a survey of the answers I receive next month.

  2. What’s wrong with making money?

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    Social justice advocates argue that it is “society’s” duty to eliminate pain and inequality wherever and whenever it exists. What is interesting is that I have never met Mr. Society.  Society is composed of individuals.

    What the social justice advocates really mean is that the government should redistribute wealth from rich individuals to lower-income and middle-income individuals.

    In my classes, I use the example of my orthopedic surgeon friend and my neurosurgeon friend who earn very high incomes from their private practices — and from other business opportunities presented to them because of their expertise. I would love to earn what they do, but, as I say to my students, if I ruin an economics lecture, big deal! The worst that happens is that students get bored. When my surgeon friends make a mistake, their patients are permanently affected or they die!

    So it shouldn’t be surprising that people are willing to pay a lot more to make sure those surgeons do their jobs well. And because surgery requires rare and difficult-to-learn skills, it shouldn’t be surprising that few people can become surgeons to compete in that market and bring the prices down. (In a world without government price-fixing and other interventions in health care, surgeons might earn less or more money than they do now, but I bet they’d still earn more than I do!)

    So I have no problem with surgeons being paid more than me. It’s not immoral for them to earn a high income — they should be proud of it!

    Political Redistribution

    What is immoral is for the government to punish individuals like my friends, who have worked hard to become surgeons — or to punish individuals who became successful entrepreneurs and started businesses that made them wealthy. When someone works hard and their input even makes our lives better, why is it fair for politicians to begin taking money from them to redistribute it?

    I worked hard to get a PhD in economics and I make a good salary as an economics professor. I also earn additional income from teaching more classes than required and from various speaking engagements. Why should my work efforts and the opportunities presented to me be penalized by the government?

    When entrepreneurs become millionaires or billionaires it’s usually because they created a product or service that is useful or desired by others. Unless the entrepreneurs start getting crony privileges from the government, they can’t forcibly take money from their customers.

    When a businessman or businesswoman makes a dollar, the world is better off because someone voluntarily traded their money for the good or service the business provides — it’s a win-win situation.

    Unfortunately, most of my students have been influenced by “progressive” high school teachers and professors. They come to my classroom with the belief that the businessperson “took” money from their customers and that they should feel ashamed for having so much money and such a big house or numerous fancy cars.

    I try to balance my students’ education by arguing that perhaps businesspeople and entrepreneurs should be praised, and that “profit” is not a bad word.

    Of course, I also make it clear that a supporter of true free enterprise believes it is immoral for the government to give subsidies to government organizations or to give specific corporations special protection. If a business cannot survive without government help, it deserves to die.

    Financially successful individuals do not have an economic moral duty toward others. In fact, using higher taxes to punish surgeons or those in other fields who make very high salaries or business profits could discourage young people from pursuing these essential, challenging careers. That would lead to society having fewer excellent and talented surgeons and businesspeople.

    I am not arguing that individuals should not help others, but that they should not be forced to do so through coercion by the government. Being charitable and giving away even a portion of one’s earnings should be an individual choice.

  3. The real effects of good intentions

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    Good intentions do not always lead to good outcomes. In fact, many times, they lead to dire consequences.

    One of the first principles students learn in a good economics class is that individuals respond predictably to incentives and that individuals subjectively determine their own benefits and costs. In other words, nobody knows the individual better than him or herself. Moreover, everyone looks at the world through his or her own glasses.

    I use three main examples to illustrate this.

    1. I’m being exploited.

    On the first day of my economics classes, I tell my students that if they saw my paychecks that they would realize the school is exploiting me. After a few heads nod in agreement, I ask them if they think that I can weigh my own benefits and costs and choose what is best for me.

    Most, if not all, nod in agreement. I inform them that, of course, I would love to get paid more (because I deserve it!) and that the school would like to pay me less, but the fact that I keep showing up to teach and they keep employing me proves that I and my employer are both, in a sense, winning.

    I do my best to expose students to economists and other authors who come from a more free-market perspective on various issues because my students probably have not and will not receive this perspective again. Of course, one of the names my students get to know is that of my former professor Dr. Walter Williams. Eventually, I use him as an example of looking at the world through one’s own glasses and unintended consequences.

    I tell my students that if Professor Williams saw my paycheck he would laugh — or, perhaps, cry — because he gets paid so much more than I do. So, what would happen if he flew out to California to meet with the president of my school (actually, I teach at two schools, but Williams could meet with both the presidents) and made an appeal on my behalf, to get my salary increased.

    Williams could say, “If my former student Ninos Malek is teaching here, then he must be paid what I would be paid!” I ask my students how they think I would feel. Most say I would be extremely happy. Actually, I would not be happy! I would respectfully tell my favorite professor to stop caring about me and fly home. Why?

    Because the presidents of my institutions would tell Dr. Williams, “Oh, Ninos Malek must be paid what you get paid? Well, Ninos Malek can instead be paid nothing, because we can cease employing him as a member of the faculty.” The point I am trying to make is that in this example Dr. Williams would be looking at the world through his own lenses — the reference frame of his own paychecks — not mine. His advocacy on my behalf could lead to an unintended consequence.

    Even though I would love (really love) to get paid more, the fact I choose to come to work each day must logically mean that this job is my best option and that I am “winning” in the exchange.

    2. Do wealthier parents love their children more?

    As another example, I tell my students that my wife and I send our two-year old daughter to preschool and that other parents in wealthy countries send their children to school, but that many parents in poor countries send their children off to work. So, obviously, wealthier parents love their children more than poor parents.

    When I make this claim, many students strongly shake their heads in disagreement. I then argue that wealthier parents can make decisions for their children better than poor parents can. Again, the students strongly disagree.

    But then, if I ask my students whether child labor should be outlawed — thus taking that choice away from parents — they say yes.

    My point is to drive home the fact that many individuals from wealthier countries, including some of my students look at the world through their privileged glasses.

    Their good intention in trying to outlaw child labor can actually hurt those children. The reason those children are working is not because their parents don’t love them. Instead, the family actually needs the labor of their children to help provide enough income for bare necessities like food. To put it bluntly, before a child can get educated they need to be alive.

    And once again, the fact that families are choosing to send their children to work means that’s the best option they have. Outlawing child labor can actually hurt them by taking away that option and forcing them into starvation or riskier work (including prostitution).

    3. Let’s make Ferraris mandatory

    Finally, I use my Ferrari example. I ask my students how they would feel if some famous, kindly billionaire who wants us all to have sports cars got a law passed declaring if you are driving a car it must be a Ferrari. Many of my students smile and think it’s a great idea. However, by this time, some of my students understand what that would mean — walking a lot more!

    If the only cars you can drive are Ferraris, then most people won’t be able to afford to drive at all.

    The problem is that this hypothetical billionaire with good intentions is looking at the world through a billionaire’s glasses. My life is better off driving my old Honda Civic than it would be walking. Once again, the fact that I drive my Civic shows that it is the best option I have (until I get that raise).

    As another one of my former professors, Don Boudreaux, argues in a Learn Liberty video, intentions are not results. Looking at the world through your own glasses can lead to unintended consequences.

    All people, rich or poor, should be free to make their own decisions for themselves and their families because they subjectively determine their benefits and costs. It is pure arrogance to impose on others the lenses through which we look at the world.

  4. There’s No Such Thing As An Unregulated Market

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    We all want the safety and dependable quality that “regulation” is supposed to provide. Government can provide it to some extent, but markets can do it better, if we let them. Howard Baetjer of Towson University explains.

  5. Economic Freedom by the Numbers

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    What’s the evidence that economic freedom is beneficial for society? Prof. Antony Davies shows charts of the free market’s effects on unemployment, inequality, poverty, and even child labor.

  6. College and Housing Bubbles

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    Remember the mid-2000s housing crash that wiped out homeowners? Well, there’s another bubble getting ready to pop, and this one’s in student debt. Prof. Antony Davies explains.

  7. 10 Myths About Government Debt

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    Myth 1 is that the government owes “only” $20 trillion. (In reality, it’s much more.) But luckily, Myth 10 is that there’s no way to fix this problem…

  8. 5 Inequality Myths

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    If you really want to understand how the world works today, you need to rethink almost everything you’ve been told about inequality. Prof. Antony Davies explains.

  9. The timber industry illustrates exactly what’s wrong with international trade restrictions.

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    In the August 4 issue of the Wall Street Journal, the CEO of a US lumber company claimed that “our trade laws exist to protect American businesses and jobs from unfair foreign trade practices, allowing our industries to grow and prosper.” His concern for American businesses and workers is commendable, but trade laws restricting our ability to do business with foreigners — even foreigners whose governments subsidize exporters — cause some industries to “grow and prosper” by causing other industries to shrink and struggle.

    Let’s think about international trade restrictions on the timber industry for a minute.

    Tariffs, quotas, and other restrictions on international trade make timber more expensive. With higher prices, timber companies can hire more people. It would be easy to look at the expanding timber industry and draw the conclusion that protection allows American firms to “grow and prosper.”

    That conclusion would be wrong. Just because a policy makes some American industries “grow and prosper” doesn’t mean the policy makes all American industries “grow and prosper.” In the case of restrictions on the timber trade, the higher costs and higher employment in the timber industry mean that money and labor aren’t going into other American industries. Specifically, higher timber prices mean higher costs for timber-using industries like construction, paper, and furniture. Higher costs mean lower output in these industries, which means they either don’t grow as rapidly as they otherwise would have or they contract outright.

    Trade restrictions have several important effects.

    First, they take money out of the pockets of consumers, who have to pay higher prices for timber and timber-using goods. Second, they draw resources into timber production. This sounds good until we realize that these resources could be used more advantageously elsewhere. Instead, they are being wasted producing timber that would have been cheaper had American companies been able to buy it at the world price without government interference. Third, there is less economic activity overall. At the world price, people would have bought more timber. When intervention raises prices, people buy less timber.

    There is a final cost associated with tariffs and other protections on international trade. Legislators have to be persuaded to vote for particular pieces of legislation, and persuasion isn’t free. Firms and trade associations dedicated exclusively to influencing the course of legislation have lobbying outfits in Washington, DC, and other seats of government. These groups produce nothing. Instead, they use their creative energies in a zero-sum struggle over the marginal increase in timber companies’ profits that results from restrictions on international trade.

    This is one of the reasons the rules of social and economic order are so important. When market access and political access are limited, people can earn their incomes by getting legislators to protect them from competition. This protection allows them to cut back on output and raise prices.

    It is an easy mistake to think that restrictions on international trade that help one industry “grow and prosper” will help all industries “grow and prosper.” When we look beyond the immediate beneficiaries, however, it becomes clear that we are helping some people by impoverishing others. If, instead, trade is open, our economic activities in and outside of the timber industry can make our whole society richer. Given that we impoverish one another by restricting competition, it’s important to have rules that make it hard to do this in the first place.