Friday links on Wednesday

I hope to be in the Kruger National Park on Friday, so here are Friday’s links in advance.

1/ Basic economics is intuitive. We have to make it that way. Here are some great examples from Brian Caplan:

1. Counterintuitive claim: Free trade makes countries richer, even if the other countries have big advantages like cheaper labor or more advanced technology.

Intuitive version: We'd be better off if other countries gave us stuff for free. Isn't "really cheap"
the next-best thing?

2. Counterintuitive claim: Strict labor market regulation is bad for workers.

Intuitive version: Employers don't like hiring people if it's hard to get rid of them. Suppose you had to marry anyone you asked out on a date!

2/ Would a partially effective HIV vaccine be bad news?

3/ How to improve organ donation rates.

4/ A decade of boom and bust on stock exchanges in images.

5/ Not the sort of thing I would normally link to but how about Hamas TV teaches kids how to kill Jews.

Telling the consumer the complete opposite of what is true

I went to see Australia versus the West Indies in the Champions Trophy at Wanderers Stadium in Johannesburg over the weekend. To buy beer from the bars, you first have to buy some tokens. You then exchange different numbers of tokens for different drinks.

This might be good for the bar - there is less likely to be money stolen, it means all cashing-up can be done in one single place, it can be easier for bar staff to count tokens rather than calculate change. Also, it means that you might buy more beer because you might as well finish your tokens.

But they sell this to us, the spectators, as a good thing for us. Apparently tokens are good for us, because we 'only have to queue once'. The exact opposite of what is true! Spectators actually have to queue twice instead of once! (Once to get the tokens and once to get a beer).

In addition, it means that you have to guess how many tokens you might want (the equivalent of how much beer you might drink). If it were just cash, you simply use cash. (Yes, we had to go back and purchase more tokens.)

On the positive side, you had to buy a cup (1 token = R5). You could keep re-using the cup. This is an excellent idea, and cuts down on waste.

-- Mostly unrelated, but yesterday England beat South Africa by 22 runs -- a great result! Though I am not sure I approve of Strauss refusing Smith a runner when he got cramp after an amazing batting display.

Friday links

1/ On the myth that Africa is resource rich.

2/ Actual research on which line you should join in a supermarket! (love it J )

3/ Charity donations down during the recession.

4/ Reasons why it is difficult to keep volunteers and what to do about it.

5/ A decade of booms and busts on stock markets in images.

6/ The marshmallow test – how a child’s patience predicts future earnings.

7/ Women entrepreneurs fight against poverty.

Strange NY parking costs

See full blog here.

Here is a photo of parking prices I took at a parking lot in New York. Does anything seem strange about that to you (apart from the very fact that I took the photo, and the guys who worked there, did seem just a little bemused)?

I am surprised by the non-linear pricing structure. In general, the longer you stay, the less you pay, but there is a sharp increase in price per minute for anyone who stays between ½ hour and 1 hour. Here is a pretty graph to illustrate:

Why does this happen? Is there really so much extra demand to stay between ½ and 1 hour that the car park can afford to increase cost per minute from 25c to 31c (about 22%) without losing customers? Or is there another explanation?

Who pays VAT: You or the seller? The example of Hershey's Kisses

Full blog here.

Economic theory shows that when a sales tax is imposed, the cost is borne partly by the purchaser (the consumer) and partly by the seller/producer.

The percentage which is borne by each depends on the price elasticity of demand*. At one extreme, for goods for which the consumer will absorb any price increase and continue to buy

the same quantity** (essential goods with a price elasticity of zero), the consumer will pay 100% of the tax.

At the other extreme, when a consumer would not purchase a product if the price increased any further, then the firm absorbs all of the taxation.

This is intuitive - when the buyer will pay any price increase, the firm can pass all of the tax onto the consumer. When consumers are very price sensitive however, the firm will lose a lot of sales if it increases the price - this will cost it a lot of profit.

All possibilities in between can also occur depending upon willingness to pay of the consumer***.

Yes, I know economics doesn’t really tell us who pays how much at all - but it does tell us on what the split depends.

At Terminal 4 of JFK airport in New York, I noticed a nice little experiment to see who pays what.

In only one shop before security (but after baggage check-in) are sales duty free. In all other stores, a sales tax of 8.875% must be added to the price shown on the label (it is not automatically included in the price tag!) See THIS blog entry.

A big 60oz bag of Hershey’s Kisses costs $17.50 in the duty free store. All of that money goes to the store (who then has to pay for all costs). In another store, sales tax must be paid, but it is not shown on the price tag. How much would I expect to pay?

My intuition and the economic theory (which came first, the chicken or the egg?) tell me that the price I will pay in the other store will be above $17.50, but that the amount received by the store will be below that. If the cost is shared equally by me and the store, then I would expect to see a price labeled of $16.77. There would then be a tax of $1.47 on top of that, so that I would have to pay a total of $18.24.

Compared with the price of $17.50, I would pay an extra 74 cents. Compared with the receipt of $17.50, the store would receive 73 cents less (okay, I rounded a little there).

But that is *not what happened*. In the (seemingly mostly chocolate) store, the price label was $15! They receive a whole $2.50 less than the other store. I pay a total of $16.31 – that’s $1.19 less, even after tax!

What has happened here? Surely the sales tax hasn’t acted to decrease the prices?!

I strongly doubt it, but I don’t have any explanations that convince me. Of course, as always in economics, there are a number of assumptions and caveats, so maybe these would be a good place to start to search for an explanation. These assumptions are:

1/ Airport consumers do not ‘shop around’ (as indeed, I did, to some extent) for their purchases and basically choose to buy or not to buy in each store separately - although I think that they should be able to have already seen one price and made one decision, and then seen another price and made a different decision (would probably need a mathematical model to verify for sure that this last statement is logically consistent) - a good dissertation topic for a final year or post-grad student?!

2/ The small price difference means that it is not systematically worth consumers’ time returning the more expensive product and buying the cheaper one instead or that most consumers do not notice both prices.

3/ There are no behavioral responses such as the very fact that I see two prices for the same good encourages me to buy the cheaper one because I feel that I am getting a bargain.

I think that these are mostly reasonable and, in fact, if the first two occurred systematically, then the prices would equalise to end up exactly the same through competition, so this cannot always be happening although the prices may incorporate a bit of all of these.

So I think that these caveats are reasonable. I have only one further explanation: Customers don’t buy just what they walk out of the shop with – they buy a whole shopping experience. I think that the customers that go to a duty-free shop to purchase expensive perfumes, liquors etc. are not the same people who walk into a chocolate shop (present blogger excepted).

The people who go to the duty-free are either (a) prepared to pay more for a more fancy shopping experience or (b) have a different price elasticity to those who go to a chocolate shop – i.e. they don’t mind paying more.

Any other explanations?

* At least over the relevant domain.

** I will ignore supply elasticity for simplicity.

*** And also the willingness to supply ad different prices of the producer but I abstract from that for the moment and assume a simple upward-sloping supply curve.

Amusing Road Scenes: UK Edition

See all amusing road scenes.

1. Situation on arriving at a service station somewhere in the UK:

2. Situation on leaving just 20 minutes later:

To include or not to include VAT in the price tag?

See the full blog here.

In most New York stores the prices of goods are labelled but do not include sales tax. So when you buy something labelled with a price of, say $15.99, you have add on an additional 8.875% to calculate the amount you will need to pay at the till. That is $17.39 when rounded in case that isn‘t instantly obvious to you.

It seems strange to me that the law should allow this at first sight. One of the major legitimate economic interventions of government is to help the free market function and one essential part of this is to ensure that customers have as much easily accessible information as possible. Why would the state allow stores to make it more difficult for consumers to understand the full cost of their purchases?

I certainly can’t make the necessary calculation quickly and easily in my head. If the tax were a nice round 10% or even 7.5% that would make it much easier. But 8.875%?! It’s almost as if the aim is to make it difficult.

So I started thinking about why it might be like this. I’ve not found any academic literature (presumably economic psychology) on this directly but I did manage to find a few websites where people wonder why this might be the case here, here and here.

Here are some suggestions I found:

1/ The stores want to make it clear how much the state is taxing. I don’t buy that because it is easy enough to mark with and without taxation on the ticket. This would also not explain why the state permits only before-tax prices to be shown.

2/ Consumers are easily fooled into believing a good is cheaper than it is if the before-tax cost is used. This would be the case if consumers systematically under-estimate the amount of tax. Here, competition between stores would ensure that all had to label the before-tax value. This might be true but I suspect that most people would prefer to round up to 10% and in fact, over-estimate the tax. That would give any store that included tax an advantage. In addition it could gain a competitive advantage by stating the tax was included. This also does not explain why the state permits stores not to include the tax on the ticket.

3/ The idea I like best is that it is actually to permit openness amongst different states and can even vary from city to city. Since sales taxes are set by local governments, the amounts are different in each state - the ever-reliable Wikipedia explains state-by-state taxation and THIS SITE summarises sales taxes by state. I am tempted to buy that but (1) I do not believe that the relevant comparison for most consumers is prices between different states but are more likely to be within the same state and city. By allowing shops to use before-tax prices, the state is making purchase decisions more difficult for most consumers; and (2) in some places the sales tax is included in the ticket in any case so why is one comparison better than the other?

One obvious other example in which taxes are sometimes included and sometimes are not are airline tickets. Personally, I always prefer to be shown the complete price first and tend to go for options that do include the taxes simply for the ease of calculation.

I don't really consider this mystery solved, so if anyone has any suggestions, they would be very welcome.

Friday Links

1/ Easterly shows African trade (or lack of) in pictures.

2/ Business Fights Poverty argues that if you want good volunteers you should forget the altruistic and hire the self-interested instead.

3/ A study to show that football players who rush penalties are more likely to miss. England and Southampton take note!

4/ Michael Shermer takes up one of his favourite topics in Scientific American: Why people believe conspiracies.

5/ You can tell when someone is writing a lie from their hand-writing. Might be these days what with all this new-fangled technology like t’interweb :)

African MPs cheer Lockerbie bomber

I've not really got a strong opinion on the release of the Lockerbie bomber. My approximate belief is that if the criminal justice system normally releases terminally ill prisoners a few months before they are likely to die, then this case should probably be no different (although there might be some doubt about the reliability of the diagnosis). Also, despite the furore over Gordon Brown's lack of comment on the matter, I agree with his silence - it is a no win for him: say something and he's a politician interfering with an independent judiciary; say nothing and, well, the Daily Mail will rip him to shreds.

But when a group of around 40 African MPs cheer the murderer in order to 'show solidarity' I start to boil. Solidarity with what? Murderers? Terrorists? Stupidly cheering someone because they are from your own continent and have got a few minutes of infamy and you are too stupid to think about it?

I wonder if any Lesotho MPs were involved...

They really must have picked a group of the most pea-brained, intellectually challenged MPs from accross Africa to get away with it. You are making a martyr out of a murderer. The message given out is that if you murder European or American citizens, when you come back to Africa, you will be given a hero's welcome. Today it is non-Africans but it is not a big step to killing any 'other' - including African MPs - if the martyr culture might make a god of you.

Every one of those cheering MPs should publicly condemn the bombing and admit to acting like a complete plonker (perhaps their per diems for this trip might be donated to some worthy cause too). Else maybe aid should be re-directed towards poor people in Europe and North America in order to show solidarity. (I'm still boiling.)

International conference on migration and development

I will be at THIS conference at the World Bank in Washington, D.C. from Thursday 10th to Friday 11th September, 2009.

The topic is closely linked to research I have done in the past, and in particular for my PhD (HERE is a summary) so hopefully it should be quite interesting. A lot of very good presenters will be there too - always good to rub shoulders with the great and the good!

Amusing Road Scenes

Friday Links on Wednesday

1/ Foreign policy has some great comparative facts on Africa. Here is the same quote Tyler Cowen used: “About 10 percent of infants die in their first year of life in Africa -- still shockingly high, but considerably lower than the European average less than 100 years ago, let alone 800 years past. And about two thirds of Africans are literate -- a level achieved in Spain only in the 1920s.”

2/ The recession has an impact on child mortality and school attendance (as it seems it should for utility maximising households). A one percentage point drop in a country’s GDP is associated with a one percentage increase in child mortality according to our own Mohammad Farooq.

3/ Research for Development has an interesting study on the likely impact of an AIDS vaccine.

4/ Brian Caplan believes human weakness is a choice.

5/ A Scientific American article speculates on what it’s like to be a baby.

6/ See a collection of the world’s greatest power mustaches.

One way street wars

Two rival Parisian mayors have declared one-way streets on the same street - but in opposite directions! La libération also carries the story.

Can any political economists come up with a good model to explain this behaviour?

I once read an interesting STUDY that suggested that human beings evolved cooperation partly because we have a propensity to punish wrong-doers, even at expense to ourselves. It's a dynamic equilibrium rather than a static one.