Very urgent paper - Economics

1 University of Wisconsin-Stout Honors Econ 215 – Spring 2017 Ferguson Problem Set #4 Due April 12 th #1) Elasticity:

a.

Define Price elasticity of demand and Price elasticity of supply and explain in words what each of them measures and tells you about the properties of a market b. Give an example of a good we haven’t talked about yet that you think would have very price elastic demand and explain why you think this. c.

Give an example of a good we haven’t talked about yet that you think would have very price inelastic demand and explain why you think this # 2) The Impact of Rent Controls : Suppose that the housing market in Menomonie is in equilibrium today. Now suppose that in order to gain student votes in the upcoming election, the new mayor agrees to institute a rent control for all apartments in the city which will cap rents at a maximum of $1 00 a month. Show the effects of this new policy on a graph AND discuss in a paragraph or two what you think might result from this. (Does this seem like an example of an elastic or inelastic good? Think about how this might affect complimentary or substitute goods, short and long run effects, and who might be helped or hurt by this policy, as well as potential unexpected consequences) #3) Read the attached article on the Gas Tax which came out in a previous presidential election. Draw a graph of the Gasoline market and show the effect of eliminating an existing tax on gasoline. Based on what is in this article and what you know about elasticity and tax inciden ce, who would benefit most from a reduction in gas tax … the consumers or the oil companies? #4) Read the attached articles on proposed junk food/Soda taxes and health food subsidies. Draw a graph of one of these markets and show the effect of one of these policies. What effect is this likely to have on the market, and is this a good or bad idea? Why? # 5) Read the attached article about Christmas gift-giving efficiency and see if you can explain the findings of the article using what we’ve learned about Consumer & Producer Surplus, Deadweight Loss, and value. Have you had similar gift-giving or gift-receiving experiences? The Gas Tax and the New Economics of Shame F R E A K O N O M I C S 0 7 / 2 9 / 2 0 0 8 | 1 1 : 4 4 am My gas tax challenge still remains unanswered: Try to find any coherent economist willing to support Senator John McCain ’s proposed gas tax holiday. In May, George Stephanopoulos posed my challenge to Hillary Clinton , who famously responded that she was “not going to put my lot in with economists.” I didn’t like her response, but at least it was honest. On Sunday, Stephanopoulos posed the challenge to McCain and elicited a truly bizarre response. Stephanopoulos : Not a single economist in the country said it’d work. McCain : Yes. And there’s no economist in the country that knows very well the low -income American who drives the furthest, in the oldest automobile, that sometimes can’t even afford to go to work. McCain’s r esponse — attack the economists — has now become a recurring theme of the campaign. I agree that we economists need to understand the lives of the folks we study. But my understanding of Average Joe is not going to help me better understand the impact vs. incidence of a gas tax. Empathy cannot change an elasticity. And th en Stephanopoulos continued, pushing the economic argument: Stephanopoulos : But they all say that … the oil companies, the gas companies are going to absorb … any reduction. McCain : … they say that. But one, it didn’t happen before, and two, we wouldn’t le t it happen. We wouldn’t let it — Americans wouldn’t let them absorb that. Stephanopoulos : How would you prevent that? McCain : We would make them shamed into it. We, of course, know how to — American public opinion. And we would penalize them if necessary. But they wouldn’t. They would pass it on. Stephanopoulos : Let me ask you about … McCain : But let me just finally say, Americans need trust and confidence in their government. McCain’s response — that tax incidence is a function of shame — is completely no vel to me. Does shame really determine oil prices? If so, why aren’t the oil companies already feeling ashamed of high oil prices? I don’t get it. And if shame doesn’t work, Mr. McCain would “penalize them.” Is he suggesting price controls? Or something el se? Help me. (Full transcript here . Hat tip: Free Exchange and Matt Yglesias , who provide further discussion.) MORNING EDITION Why Making Healthful Foods Cheaper Isn't Enough BY ALLISON AUBREY March 15, 2010, 12:00 AM A grocer arranges avocados and lemons - Researchers found that a 'sin tax' on unhealthful foods maybe a first step to raising awareness of bad habits. ( Stephen Chernin / Getty Images) Bucks for broccoli or cash for carrots? Financial incentives aimed at encouraging healthier choices are catching on from New Zealand to the Philippines. Workplaces in the United States have been offering incentives for weight loss. In a London -based study, dieters got paid when they dropped pounds. Now researchers are interested in understanding how food price manipulations may influence what ends up in mothers' grocery carts. Does increasing the cost of sugary items mean fewer people buy them? Would more p eople buy veggies if they were more affordable? To create successful incentives, says Yale behavioral economist Dean Karlan, a policy needs to specifically target the people whose behavior its trying to change. "So in the case of broccoli you'd want to fin d out who's not eating broccoli and then pay them to eat it," he says. You don't want to necessarily make broccoli cheaper for those who are already buying plenty of it, you want to target those who don't buy enough fruits or vegetables. It could be very t ricky to structure such an incentive. To find out how prices influence choices, researchers at the University of Buffalo set up an experiment where they could control food prices and see how shoppers responded. For their study, they recruited a bunch of mo ms to shop for groceries in the simulated supermarket and gave them each the same amount of money. In the first shopping trip, the food prices were identical to what was being offered at the local grocery chain. But then the researchers manipulated prices several different ways. First they discounted the prices of healthful foods — making items such fruits and vegetables much cheaper. They tried a 12.5 -percent discount, then a 25 -percent discount. "Then we looked at the purchasing patterns of these mothers, " explains Len Epstein, a professor of pediatrics at the University of Buffalo who was involved in the study. He says the mothers' choices were somewhat predictable. When the costs went down, "they did buy more of the healthy foods." A Surprising Effect But since the healthful items now cost a lot less, the moms had money leftover. Esptein says they used it to buy more junk food. "When you put it all together, their shopping baskets didn't have improved nutrition," says Epstein — they had the same amounts of fats and carbohydrates. If subsidizing healthful foods leads to the unintended consequence of people spending more on junk, might there be another way to structure incentives? The researchers tried a different price manipulation: They basically placed a hefty tax on high -calorie, low -nutrient foods. They found that that moms stopped buying so much junk. The researchers say their findings suggest that the taxes were more effective than subsidies.

This conclusion doesn't surprise Karlan. He sites the theo ry of loss aversion: "People are just more responsive to price increases than decreases." Karlan says a "sin tax" — charging more for unhealthful foods — would not change families' diets or approach to nutrition overnight. But it could serve as a first ste p in raising awareness of bad habits, alerting us to the kinds of things we choose to snack on. Could A Soda Tax Prevent 2,600 Deaths Per Year? by ALLISON AUBREY Joel Saget/AFP/Getty Images Researchers say that if the p rice of soda gets higher, people will drink less of it, which will lead to fewer deaths. A new study in the journal Health Affairs estimates that a penny -per -ounce tax on soft drinks and ot her sugary beverages could prevent about 240,000 cases of diabetes per year, and 8,000 strokes and 26,000 premature deaths over a decade (or 2,600 per year). Yes, death by soda. So the analysis got me thinking: Our behavior is hard to predict, right? I kno w mine is. Today, that dime price hike for a tall Starbucks coffee may deter my stop for a late morning pick -me -up. Tomorrow ? I might be back to my old habits. Or maybe I'll shop around and find a cheaper cup of joe. We're fickle, inconsistent consumers. Similarly, if my favorite Honest Tea (Mango Green) is slapped with a sugar -drink tax, would I choose to drink water instead? Probably not. It was with this skepticism that I phoned the author of the paper, Kirsten Bibbins - Domingo , a general internist at San Francisco General Hospital and an associate professor at the Unive rsity of California, San Francisco, to ask her a simple question: How certain are you that these estimates are realistic (or in the ballpark)? "That's always a good question when it comes to modeling!" Bibbins -Domingo told me. And as she talked me through her methodology, I began to understand how she and her team were connecting the dots. When people consume lots of sugary drinks, "we know there's a risk of gaining weight," Bibbins -Domingo says. Studies have demonstrated this. "And we know weight gain is linked to increased risk of heart disease and [Type 2] diabetes." Soda consumption also seems to increase the risk of diabetes on its own. "This association has been observed consistently across a variety of studies," she says. Bibbins -Domingo and her team relied upon findings from a range of observational studies and clinical trials that have evaluated these connections to figure out how many deaths a soda tax could prevent. She also included data from the Framingham Heart Study , which has tracked the health of thousands of residents of Framingham, Mass., since the 1940s. And the team fed all these data into a computer model, which gave them their data on the health effects of the soda tax. OK, this helps. But back to the questions about our unpredictable behaviors. Bibbins - Domingo acknowledges this is the big challenge. "We don't know what people will do," she says. But she and her team made what she thinks are some conservative assumptions. In general, th ey assume that if the price of soda rises, people will buy less of it. "We assume that 40 percent of the calories saved by forgoing a sugary drink are replaced with other calories," she says, meaning either calories from drinks such as milk or fruit juice or from food. "So for every 100 calories in soda avoided, only 60 calories are actually lost in the diet." This is not the first study to predict that a soda tax would be effective in reducing consumption. Yale University researchers concluded in this report that taxing sugary drinks would lead to economic benefits as well. But researchers are divided. And there are also data suggesting that price manipulations would not be effective in tri mming Americans' waistlines or getting us to eat better. As I reported back in 2010, a study done at the University of Buffalo found that mothers will buy more fruits and vegetables if the prices are deeply discounted. But if they save money on the healthful stuff, this means they have money left over. And what do they do? Buy more junk food. I asked Len Epstein , chief of the division of behavioral medicine at the University of Buffalo, to take a look at the new Health Affairs paper. He told me he was impressed with the modeling and the analysis. But he says the paper may overestimate the ef fects of a soda tax. "The concern, as noted by the authors, is whether people would just substitute another empty -calorie drink that was not taxed, or other types of junk foods that were not taxed, as substitutes for soda," says Epstein. Prior real -world a ttempts to actually implement a soda tax haven't gone over so well. The District of Columbia came close in 2010. But ultimately, according to this Washington Post report , the City Council killed it. And just this week, a physician in Portland, Ore., began rallying behind the idea that a penny -per -ounce tax on sweetened beverages could help reduce the heavy burden of lifestyle diseases. According to this report , Gregg Coodley is advocating for a soda tax ballot initiative in November in Multnomah County. But the American Beverage Association has called the proposed tax unfair and discriminatory. 2 Economics focus : Is Santa a deadweight loss? Are all those Christmas gifts just a waste of resources? Dec 20th 2001 | from the print edition ECONOMICS has long been known as the dismal science. But is any economist so dreary as to criticize Christmas? At first glance, the holiday season in western economies seems a treat for those concerned with such vaga ries as GDP growth. After all, everyone is spending; in America, retailers make 25% of their yearly sales and 60% of their profits between Thanksgiving and Christmas. Even so, economists find something to worry about in the nature of the purchases being ma de. Much of the holiday spending is on gifts for others. At the simplest level, giving gifts involves the giver thinking of something that the recipient would like — he tries to guess her preferences, as economists say — and then buying the gift and delivering it. Yet this guessing of preferences is no mean feat; indeed, it is often done badly. Every year, ties go unworn and books unread. And even if a gift is enjoyed, it may not be what the recipient would have bought had they spent the money themselves. Intri gued by this mismatch between wants and gifts, in 1993 Joel Waldfogel, then an economist at Yale University, sought to estimate the disparity in dollar terms. In a paper * that has pr oved seminal in the literature on the issue, he asked students two questions at the end of a holiday season: first, estimate the total amount paid (by the givers) for all the holiday gifts you received; second, apart from the sentimental value of the items , if you did not have them, how much would you be willing to pay to get them? His results were gloomy: on average, a gift was valued by the recipient well below the price paid by the giver. The most conservative estimate put the average receiver's valuati on at 90% of the buying price. The missing 10% is what economists call a deadweight loss: a waste of resources that could be averted without making anyone worse off. In other words, if the giver gave the cash value of the purchase instead of the gift itsel f, the recipient could then buy what she really wants, and be better off for no extra cost. Non -cash gifts from extended family were found to be least efficient Perhaps not surprisingly, the most efficient gifts (those with the smallest deadweight loss) we re those from close friends and relations, while non -cash gifts from extended family were the least efficient. As the age difference between giver and recipient grew, so did the inefficiency. All of which suggests what many grandparents know: when buying g ifts 3 for someone with largely unknown preferences, the best present is one that is totally flexible (cash) or very flexible (gift vouchers). If the results are generalized, a waste of one dollar in ten represents a huge aggregate loss to society. It sugges ts that in America, where givers spend $40 billion on Christmas gifts, $4 billion is being lost annually in the process of gift -giving. Add in birthdays, weddings and non -Christian occasions, and the figure would balloon. So should economists advocate an e nd to gift -giving, or at least press for money to become the gift of choice? Sentimental value There are a number of reasons to think not. First, recipients may not know their own preferences very well. Some of the best gifts, after all, are the unexpected items that you would never have thought of buying, but which turn out to be especially well picked. And preferences can change. So by giving a jazz CD, for example, the giver may be encouraging the recipient to enjoy something that was shunned before. Thi s, and a desire to build skills, is presumably the hope held by the many parents who ignore their children's pleas for video games and buy them books instead. Second, the giver may have access to items — because of travel or an employee discount, for example — that the recipient does not know existed, cannot buy, or can only buy at a higher price. Finally, there are items that a recipient would like to receive but not purchase. If someone else buys them, however, they can be enjoyed guilt -free. This migh t explain the high volume of chocolate that changes hands over the holidays. The thought actually does count But there is a more powerful argument for gift -giving, deliberately ignored by most surveys. Gift -giving, some economists think, is a process that adds value to an item over and above what it would otherwise be worth to the recipient. Intuition backs this up, of course. A gift's worth is not only a function of its price, but also of the giver and the circumstances in which it is given. Hence a weddi ng ring is more valuable to its owner than to a jeweler, and the imprint of a child's hand on dried clay is priceless to a loving grandparent. Moreover, not only can gift -giving add value for the recipient, but it can be fun for the giver too. It is good, in other words, to give as well as to receive. The lesson, then, for gift -givers? Try hard to guess the preferences of each person on your list and then choose a gift that will have a high sentimental value. As economists have studied hard to tell you, it' s the thought that counts. * “ The Deadweight Loss of Christmas ”. American Economic Review , December 1993, vol 83, no 5.