If you were driving along Braddock Road recently you would have seen many signs with people’s names on them.  An insight into this phenomena would be that elections are coming up shortly.  Dr. Williams asks the class:  How many of you vote? and: Why do you vote?  His conclusion is that there are non-trivial costs associated with voting and benefits are close to zero (following from the idea that one would only value voting when their vote decides an election).  There is a distinction to be made between the political sphere and the market in this way.  A vote cast in the political world doesn’t do anything if the election is not decided by one vote (the marginal vote changes nothing, has no understandable marginal impact).  A vote cast in the market (by spending a dollar) not only has a marginal impact, the person casting the vote understands exactly what they are getting out of casting that vote (in terms of whatever is exchanged for the dollar).

A second question posed by Dr. Williams:  Does your reputation belong to you?  There was some real confusion in the class over this one.  There is something in business likened to “goodwill” for a company.  This is accounted as an asset for a business.  Is there something also valuable that is associated with an individual?  Dr. Williams infers from this question that libel and slander should be legal.  In the marketplace for information in the absence of libel and slander laws, the relative price of libel and slander would be reduced and there would be lots of misinformation offered at a price where it would not be noisy, the good information and the bad information would come at the same price.  A person could not be ruined by gossip if there were no cost associated with someone putting their name to a statement.  The value of using slander would fall.  There is a property rights issue associated with this argument.  I do not own the thoughts another person has about me.  I cannot protect my reputation inside another person’s head.  Although it was not said in class, I feel that people have the ability to build up creditability based on experience with another person.  This relationship aspect is very important in considering how we view economic insight into this question.  If I do not have the right to protect you from hearing bad ideas about me, I to some extent am not able to fully “own” my reputation (where own means keep, acquire, and control).

Economics is able to answer questions by looking at the process and the outcome.  If I were to look at the following data:

Poker Players               Percentage of wins

A                                 75

B                                  15

C                                 10

I cannot immediately make implications about the fairness of play involved in the game.  For example, if I were to investigate and conclude that the game was played faithfully following well documented rules (according to hoyle) decided beforehand by all players, I would then conclude that the process was “just and fair.”  This is the economic interpretation of the process, and certifies the outcome through these further insights.

Income distribution is a result; what are the underlying process questions?  Did all people have access to the system?  Did people start with similar endowments?  Was anyone excluded from the market? 

Recall: Demand and Supply have a component of elasticity that increases in the long-run.  People adjust their behavior.  The classic Alchein example is the use of water.  If the price of water rises we don’t immediately expect to see people change all of their water consumption.  If the higher price persists, we expect to see people start to employ water saving devices (though they find out about these from the marketers of these devices who have a profit incentive to market these).  A squeeze nozzle will be employed on the hose, a showerhead will be placed in the bathroom, a rock garden could be substituted in the backyard as opposed to the grass which was there before.

Supply: shows various amounts of a commodity for which a producer will supply at a given price for a given time period.  Quanity supplied is a function of price.

Determinants of supply:

1)      Technology: Invention, Innovations

2)      Number of sellers

3)      Input prices (the wages of labor and capital)

4)      Price of all other goods (if a farmer has a choice of growing corn or wheat on his land and the price of corn rises, he will substitute more land and labor into growing corn than he would have before, he will also move out of wheat due to a change in the relative price)

5)      Expectations (If you grow coffee, and you expect that the price of that coffee will rise next week, you therefore perceive the price for coffee this week is relatively low and you will withhold coffee from the market this week in lue of selling quantities of coffee at the higher price next week.  The converse should also be true, that if you expect coffee prices to fall, the price today is relatively high).

Note:  For the first part of the semester we will be considering property to be certain, for property rights to be fixed and well known, and for all people to understand this (this assumption relaxes after the introduction of Demsetz’s theory on these issues). 

Supply and Demand a review:  Stable equilibriums:  if something happens to upset the static point (change Q* or P* ; forces will act to bring things back to the initial level.  At prices above the market level there is excess demand which forces the market back to equilibrium, at prices below this market clearing level there is excess supply which also works to return to market clearing level.  If you drop a marble into a steel bowl, there is a point in the bowl where the marble will come to rest (stable).  If you turn that bowl upside down and upset the marble on top of the bowl, it will not return to its initial position (unstable). 

If we involve politicians into this theory we have to change the assumptions about equilibrium.  These politicians can look at the market and determine that the equilibrium is in some way unfair.  This leads to things like price floors (a law saying price cannot fall beneath a certain value) and price ceilings (a law saying price cannot rise above a certain value).  An example of this is rent control. If an artificially low price is set the market does not clear.  The market on the short-side always dominates.  Although the intention was to make the housing more affordable for the lowest income persons, there is no way to make the suppliers offer the same quality of housing to the occupants at this lower price.  Since we are in a situation of excess demand, we see that lower quantities of housing are supplied at this new low price.  This is a net flow out of the market (depreciation of current capital stock).  The supply curve starts to shift leftward (over time).  A new higher price is reached which clears the market and eliminates the excess demand.  This new higher price takes into account a difference of the new higher price (PH) minus the price ceiling (PC) at the short side quantity of the market (Quantity supplied).  It is has been observed in the past that this differential (PH – PC) is paid out in non-pecuniary ways, or at least in creative ways like key deposits which never get returned, or in-kind payments (grey market). 

“Short of aerial bombing there is nothing that can destroy a city more efficiently than rent control.”

One of the unintended effects of this change is that there is substitute investment in higher end housing.  The capital that otherwise would have been profitable in the low income housing market will now be used to increase the higher end market, this has the effect of making housing cheaper for the opposite demographic than the one for which the intervention was originally intended. 

We can also apply this analysis to the gas market.  If there is a price ceiling placed on gas at a below market level, then we expect to see long lines at the pump.  The gas stations have no incentive to provide capacity for this excess demand, so that there is less gas supplied at this lower level.  The weighting inceidence is almost entirely on the consumers of the gas, the supplier is under little pressure to respond to this excess demand, so that the gas may be cheaper in money terms, but is now more expensive in total terms, when you include the opportunity costs of the time spent weighting in line at the pump (not to mention the gas used to keep the car running while you are waiting).  Price controls reduce welfare not only by the dead weight loss, but also by the forgone consumer and producer surplus which is lost and no one gains. Side note on the gas question:  Historical costs do not determine price – replacement costs are relevant to the price that is charged for the commodity, not the paid in costs.

Price ceilings lead to allocation by seller preferences.  Assume in Fairfax the max you can now rent a two bedroom apartment is going to be $500 a month.  It pays now for the landlord to be selective on who he allows to rent the property from him.  These preferences can be as subjective as they are arbitrary.  Remember that low-income people can always outbid the higher income people.  Take for example a brownstone building in the city.  One family is renting this building on a lease at $1200 a month.  A group of lower income families (6) offer to move into the building, if the owner will make 6 separate apartments and rent them each at $ 300 a month.  The lower income family will win even in the case of discrimination because the landlord decides that he doesn’t want to indulge his taste for discrimination at that price.  Think of a fat ugly smelly cigar smoking man that runs around town with a young beauty.  You would conclude that this man has a large deal of money.  The competitive differential is the money (the only way a fat ugly man can compete with Dr. Williams). 

A price floor.  If we want to keep the wage artificially high (on the premise that it is a living wage) we will create unemployment (excess supply of labor).  If this state persists for long enough, the labor supply decreaces due to the discouraged worker effect (low-skilled workers without employment options stop looking for a job).  The amount of this excess supply is equal to the displacement of low-skilled workers who were supposed to be the nominal recipients of this legislation.  This also opens the door for discrimination by buyer preference.  The employer can choose any category that he/she wants to discriminate on the workers, the pool of labor is sufficiently skilled to pick from on subjective criterion (pretty people get jobs).  The rational was to help, it ended up hurting the low-skilled workers.  Minimum wage can be though of as helping the unions.  This tool eliminates the low-skilled worker from the labor supply, so that the union workers are safe from competition.  Imagine a fence building industry.  If it takes 3 low-skilled workers to build a fence and they each charge $10 an hour, the most that a high skilled worker can charge is $30 for the same task.  If however the high skilled worker would like to make $40 an hour, he need go no further than convince the union, the preacher, the politician, and the public to change the min. wage (living wage) to $15 an hour.  He can claim to be fighting for the rights of these lower-skilled workers.  In this case he can now charge up to $45 an hour to do the project and be a better deal than the low-skilled workers.   The low-skilled workers are now out of work, however they can sleep better at night waiting for a higher wage job to appear…

Dr. Williams researched this in South Africa during apartied.  The stated goals of the white unions was to set the black min. wage at a high price so that there would be less of an incentive for employers to defect from the entrenched racial status quo.  Controlling anything to do with market prices opens the door for discrimination on non-price terms by either the buyer or the seller.  A market allows less preferred groups or individuals to compete by charging lower prices, or by paying higher prices.

Think of your grocery store:  The cube steak is $4 (basically offering you $5 to take it home and eat it instead of the alternative) and the Filet Migon is $9, regardless of the fact that F.M. is a better cut of meat, the cube steak outsells the F.M. every day.  If the government were to pass an “equal steak law” that set the price at $9 for all cuts of meat, the cube steak would not leave the store.

The incidence of taxation does not fall only on the statutory recipient of the tax.  If you tax suppliers, the consumer pays some of the tax as well. 

Applications in general of the law of demand (married couples with children go to more theatre than single couples, relative to movies).

“When you see someone doing something more than someone else – assume that it is cheaper (always relatively).”

                                    Dinner and the theatre               Movie theatre

Without children           $120                                        $50

With children                $150                                        $80

(including a babysitter)

In the first case there is a thirty dollar difference for the baby-sitter (same comparison in the second).

The relative price  2.4 (12/5) for D& T and  1.88 (15/ of the trade off One dinner and theatre costs the couple without children 2.4 movies, and the couple with children 1.88 movies, you conclude that it is relatively cheaper for the couple with children to go to the theatre and dinner more often than the other couple. We can ignore tastes and get the same result as if we looked carefully at the effect different tastes would have on this example. 

GMU parking; ex, in 1972 daily parking was $4 a day and the fine for parking illegally was $12 with an expected rate of getting caught at 50%.  In 2005 the daily rate of parking is $7.50, and the expected value of getting caught is the same.  Since your expected value of getting caught is $6, then you conclude that rational actors will park legally in 1972, and these same type of people would park illegally in 2005, based solely on the price of each option.  This counters the folks who claim that kids these days are less respectful of traffic law, when they are actually just acting rationally.

Corporations don’t pay taxes, people pay taxes, corporations are legal fictions and have at least these two options in the face of higher taxes:  lower dividends and lower employment.

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