The Undercover Economistpresenting

thirumeninathan

Name : The Undercover EconomistAuthor: Tim HarfordPublisher: Abacus, UKISBN : 978-0-349-11985-4

Who pays for your Coffee?What Supermarkets don’t want you to know?

Perfect markets and the “World of truth”Cross town Traffic

Rational InsanityThe men who knew the Value of Nothing

Why poor countries are poorBeer Chips and Globalization

How China grew rich?

The Inside Story

Who pays for Your ? Scarcity power = higher bargaining power = higher earning potential i.e. rent seeking behavior

Scarcity power / rent seeking from # natural availability – 1817 England – rise of price of wheat and land rents

# regulation – maintaining exclusivity – Green belt – capping of London’s populationWhy Londoners are not interested in better

transportation facilities from suburban areas?

# effectiveness of organization – mafia vs violent drug gangs

Customers

Businesses

Landlords

Transfer of resources

aka scarcity power

High Prices = Monopoly / Controlled sector = can be verified by the ease of entry into that sector

Immigration - Skilled vs unskilled migrants– Gap between wages of skilled vs

unskilled– Manifestations of resistance to

immigration

Who pays for Your ? aka scarcity power

What Supermarkets don’t

want you to know?

First Degree price Discrimination # allow the customer to signal the maximum price he is willing to pay# getting the maximum possible from every single customer

Unique target strategy# Amazon (web pages using cookies, Costa (Fair trade Coffee)

Group target strategy # Subsidies for Children and the elderly in trains and buses# Disney world tickets to locals – frequency counts!

aka price targeting

What Supermarkets don’t

want you to know?

Self incrimination – self targeting# Same chain selling different #

class of products at different locations

# Offer of substitutes

Price gouging – using causes

Suggestion - Shop cheaply but not necessarily at a cheap store – safeway vs wholefoods

aka price targeting

Price high or low but not in the middle – always mixing it up!

# regular customers – normal sale# bargain hunters – bargain sale

What Supermarkets don’t

want you to know?

aka price targeting

What Supermarkets don’t

want you to know?

• Reality checks– Does the seller really have scarcity

power?– Plugging leaks

@ travel industry – departure lounges, economy vs business class

@ difference between premium products and standard products

@ reducing functionality in software / computer hardware

aka price targeting

What Supermarkets don’t

want you to know?

Price targeting# good – pharmaceuticals# bad – e.g. regular train services providing discounts to students

aka price targeting

Perfect Markets & the world of truth

Each and every act of selfish behavior is turned to the common good

Prices are optional & they reveal information

In perfect markets, # prices are voluntary # based on the perceived value of each participant

Perfect Markets & the world of truth

The truth, the whole truth and nothing but the truth! is MR = MC in a perfect market# due to competitors# due to profit maximization

# markets ensure that companies are making the right things, the right way, in right proportions, for the right people

Perfect Markets & the world of truth

Efficiency vs fairnessEnlisting markets for fairness – Kenneth Arrow’s head start theorem

Impractical (high taxation on artists and sportsmen) and practical ways (heating allowance for the elderly in cold countries) of achieving fairness

Cross town trafficaka externalities

Selfish behavior per se is not resulting in common good - due to influence of externalities

Traffic congestion - Negative externality

Marginal & Average externality charges (e.g. London Congestion charges )

Objections to externality charging

Cross town trafficaka externalities

Effect of congestion charging on London traffic

Effect of auctions by EPA to combat sulphur emissions # initial resistance citing high costs of abatement# real cost of sulphur scrubbers

Cross town trafficaka externalities

Right measure for the right mission# carbon neutrality – moral posturing??

Sub-optimal results due to double handling of externalities

Redefining ‘economy’ – what is part of economy or what should be part of our economyX arms and ammunitionsClean air

The inside storyaka Asymmetric information

George Akerlof – asymmetric information, adverse selection & moral hazards# used car sales# health insurance in a free market

US Model – tied to the job – one size fits allUK Model – universal health care -quality adjusted life years

Keyhole economics – addressing the failures #scarcity power – light regulation# externalities – subsidies and redistributive taxes# imperfect information – catastrophe insurance+ issue of fairness

Rational insanity aka beyond the random walk

#smart, agile, experienced birds can get the worm in the short run – stocks of amazon, google etc.

# Economy in transformation (due to technological changes) = reduction of scarcity power = not good for business

The men who knew the value of nothing

aka game theory# auctioneering using game theory

3g auction in UK3g auction in US, New Zealand

# Lessons learnt crash in the telecom sector in UK – successful bidders are still viable

# 2G / 3G auction in India

Why poor countries are poor

Theory of government banditryCameroon

Marcus OlsonDemocracy > Stable dictatorship > unstable dictatorship

Social capital # rule of law # absence of perverse incentives # building up the stake in the common good – e.g. from Cameroon (library) – nepalese dams

Beer, chips & globalizationSweatshops of developing countries – are they good or bad?

Globalization is bad for the poor?Globalization is bad for the planet?Increased trade = increased globalization

Lax environmental standards + transportation of goods over long distances = more environmental damage

Vs

Trade between developed countries are highManufacturing processes with environmental standards are often more efficient and cheap

˄foreign direct investment in China ˅ urban air pollution in China

Human cost vs environmental costIncreased consumption brings in technological growth and changes in consumption patternExternality charges for limiting impact on environment

How China grew rich?Encounters with## Great leap forward## Cultural revolution

Deng Xiaoping’s agricultural reforms (i.e. right incentives) and the resulting leap forward

Growing out of the command economy – freezing the planViable firms earned the marginal value and unviable firms shrank and went out of existence with the planGovt owned / public and private sector in competition – reduction of waste and increase in efficiency

How China grew rich?Foreign Direct Investments –40% vs India’s 2%Hongkong & Taiwan?

Right steps taken by Chinese Government -# Fight scarcity # Fight corruption# Correct externalities# Maximize information availability# Get the incentives right# Engage in trade

Economics is about peopleEconomic growth is about better life for individuals - Tim Harford