Monday, November 24, 2008

Supply-Demand Economics

This is such a good news-bad news story/concept. The good news? The higher gas prices over the past year led to 11 straight monthly declines in miles driven by Americans. The high fuel prices had everybody salivating on methods and strategies for implementation of alternative energy sources and created the demand for more fuel efficient vehicles. Great, right?

Well, because it's a feeback loop, the decline in demand for fuel (not only by less driving but declining activity of world-wide economies), has led to an ABRUPT reduction in gas prices. This removes the impetus and inherent pressure to innovate, and I fear we will be back to square one. This is why we never learn the lesson. I think we need to implement a carbon tax. There is no other way around this. I know it is messing with free-market relationships, but, please, there is no need to be consuming so much oil, particularly when we get the majority of it for a high cost from not so friendly countries.

38 comments:

Don said...

Steve, is the problem

1 - People are too stupid to factor in the long-term ill effects of petrol use into th emarket appropriately.

2 - People don't have enough information to factor in the long-term effects of petrol use into the market appropriately.

or

3 - The long-term ill effects of petrol use are not that big of a deal and are factored in to th emarket appropriately?

Anonymous said...

go don! it's your birthday! we goona sip bacardi

kath said...

Don,
I don't know if you are being fair about possible explanations for the disconnect. I think a lot of it is that collectively, we have very short term memories. I am not as pessimistic as Steve about changes in petrol consumption even in the face of crude at $56/barrel. I think this past summer was a bit of a wake up call for new technology and that large, fuel inefficient vehicles are not reasonable. The Japanese car companies have known this...it isn't even about alternative energy but more efficient technology certainly is being explored and, I think, considered more sersiously by consumers. Perhaps this is naive but I think we are on the verge of an energy revolution in the coming decades (which will also provide for more domestic jobs, I hope).

Will said...

neither 1 2 nor 3, esp not three. how can the long-term ill effects of fossil fuel use be factored into the market appropriately? how does the market account for global warming/melting of polar ice caps?

you aren't goona sip any bacardi with the carribbean islands under water

Don said...

okay mr. smary pants, then why are people consuming so much oil when they know it will kill the planet?

Don said...

If people really believed and cared that the world was doomed because of oil consumption, they would use less oil.

Don said...

The market DOES account for global warming. It accounts for everything. It just so happens that the overwhelming majority of consumers do not care about the issues so dear to most of your hearts -- which is why those consumers need benevolent liberal dictators to tell them how to live their lives.

Cocameister said...

Greg Mankiw, former chairman of the current president's Council of Economic Advisers, current adviser to former presidential candidate Mitt Romney, and one of the smartest free-market economists that I know, supports a carbon tax:

http://www.nytimes.com/2007/09/16/business/16view.html?_r=1&ex=1190520000&en=c5631129bd038614&ei=5070

http://gregmankiw.blogspot.com/2006/10/pigou-club-manifesto.html

Even arch-Conservative Charles Krauthammer supports a carbon tax:

http://www.realclearpolitics.com/articles/2008/06/gas_tax_puts_money_in_our_pock.html

As do many other free-market economists:

http://online.wsj.com/article/SB121010926955071849.html

Don said...

nice dodge of the question, coca

Anonymous said...

mo money mo problems

biggie RIP

Bob said...

Don said...
okay mr. smary pants, then why are people consuming so much oil when they know it will kill the planet?


Why do people smoke when they know it will kill them?

I think you answered your own question when you said:

"If people really believed and CARED that the world was doomed because of oil consumption, they would use less oil"

and

"It just so happens that the overwhelming majority of consumers do not care about the issues so dear to most of your hearts"


Most people only care about their wallets.

Anonymous said...

hey bob, stick a sock in it. u r a dope.

and i am sure you are viloating company policy and writing that nonsense from work.

Anonymous said...

jay z is the man. beyonce is smokin'! lebron to NY.

Anonymous said...

job interview?

Bob said...

No worries. No violation here. How come you are afraid to attach your name to some of these comments?

Don said...

Bob,

I don't understand the hostility. If people only care about their wallets, then option #1 is correct. This is not hard, and I don't understand why Will and Coca won't admit that opinion. That is the underlying premise behind a carbon tax. They know it. They just don't want to say it.

Bob said...

No hostility. I can see your argument in point 1. I just think there is a difference between stupidity and not caring. You used the phrase long-term and that is the problem. Nobody thinks long-term. I don't think people are too stupid to factor in long-term ill effects or that they don't have enough information about the long-term ill effects. They just don't care long-term. People barely care what happens a year down the road as long as they can make their payments this week or this month.

Will said...

Don - again, it's not 1,2 or 3. This is not a question of what the individual consumer is too stupid or too whatever to do. This is a failure of the free market. There is no mechanism for the invisible hand to incorporate cost of environmental degradation.

Normally the price will go up as supply gets scarcer. In this way, the price set by the market will likely keep oil from ever being totally depleted -- it will become scarce enough and expensive enough that other technologies will replace it. In the mean time, burning it causes irrevocable harm to the environment. The market has no way to accomodate this into price. I don't expect individual consumers to factor this in and create their own 'price' any more than I expect people to factor in the wear and tear on a bridge before they drive over it.

Anyway, policymakers have already come to terms with this as Steve pointed out. The question is, how to spread the cost of externalities fairly.

Don said...

If you Che Guevara devotees are so correct that market forces are the cause of all ills and the answer to none then.....

Why is the demand for cigarettes falling? Adjusted for inflation the price is little different than in years past. In states like Virginia with low cigarette taxes, demand is still falling.

Why? Supply is still high. Cost is low.

Hmmm.... I am sure it is just another failure of the marketplace. I blame Bush!

Will said...

U.S. demand for cigarettes is dropping b/c, increasingly, individuals see more harm than benefit in using them. Why would this be a failure of the market?

Let's say, for the sake of making this topic relevant to the discussion, that cigarettes did not make you feel like crap and did not cause heart disease and 14 kinds of cancer. Rather, if you put cigarettes in your gas tank, they could get you to work and help you do all the things you need to function in your society. You'd be willing to pay for cigarettes even if they got quite expensive. YOu would almost *have* to buy them no matter how expensive they got because you have to go to work. Cigarettes might cause holes to form in the ozone layer some day but what are you supposed to do about that? You have to go to work and burning cigarettes is the only way for you to do it.

In this scenario, the market failure is that there is no incentive on the part of the producer or the consumer to incorporate environmental cost into decision-making. And there is no free market mechanism for that cost to be incorporated into price. Saying people are 'too stupid' to incorporate this cost into price is missing the point. Saying people are only concerned about their wallets is also missing the point. And saying that the environmental cost of burning fossil fuels is negligible is just plain wrong.

But the real debate is how to spread this cost that is not accommodated by the market. Taxing individual consumers more is not the fair solution as I see it unless you can simultaneously provide them with cheaper, cleaner alternatives. And, as Detroit has shown us, waiting for car makers to do this at the pace of the free market is a lost cause. But I don't think they're evil or stupid in this regard -- it's just they have no incentive to change.

Don said...

Consumers don't need something that is biologically addictive? Millions of cigarette smokers would beg to differ.

I am just disappointed that Will has never made a consumer purchase driven by his concern for the environment. You, obviously, are part of the problem, Will. Thank the Obamessiah that we soon will have a righteous government that will no longer leave such decisions to evil people like you. I hope he makes you buy 25 squiggly light bulbs and jail you the next time you don't bring your own bag to the grocery store.

Freeloaders like you make me sick. Our planet is dying Will.

Jeanette said...

This doesn't relate to the Mr. Smary-Pants back and forth here but I find this story incredibly disconcerting and I think the response from industry is appauling.

http://news.yahoo.com/s/ap/20081129/ap_on_re_us/toy_worries#full

Don said...

I swear.... at some point bleeding hearts have to run out of blood.. right? You people AMAZE me. Please step out of the cocoon for 5 minutes.

I spent the vast majority of my childhood given a list of all the toys I couldn't have. I coveted the Millenium Falcon bit settled for the 3 (count 'em 3) Star Wars action figures I had obtained through some clever comic book trading. I turned out all right.

The kids (and their parents) will live. In fact, the sooner you get used to disappointment the better.

We are very lucky to live in a world where THIS is a concern.

Regardless, don't let Will up off the mat. I won't to know why he doesn't change his lifestyle at all for the planet. Is it because he is selfish or stupid or both?

Don said...

...and please don't let my typos undermine the undeniable intelligence behind this missives.... I won't an edit button Coca!!!

kath said...

Sometimes from the blog I am not sure if I am actually a closet conservative. Regarding the "Toy Story", I couldn't stomach the entire story...there is so much wrong with it but most glaring is #1 Parents cannot say no or set limits on their children and #2 Paretns clearly cannot control their children and, god forbid, limit their TV watching...maybe, I don't know, even spend TIME with their children? GASP! Heresy! Give me a break. Writing letters to ask companies not to market their products? You either introduce your kids to the classic Rolling Stones song or tell the Santa is not so fond of that hair pulling on the way to school and remembered that or just maybe even instill values into your family such that acquiring material goods is not a right and play with your kids. That story is total bullshit. Maybe I'll change my tune when my little ones get older but I really hope not. Bottom line, I totally agree with Don on that second to last post.

I am sorry for Don that he is that cynical and can't just trust in the infrastructure of our country, in the long term, to suck it up and hope for the best over these trying 4-8 years. Typos or not, you are a bit dramatic about the "liberal" agenda, which, based on appointments so far, Obama has actually been pretty moderate. We dealt with W for all this time...and I have faith we'll be fine in the long run despite the current economic and global/international problems.

As for Will be selfish, stupid, etc...I think he does practice what he preaches. He bikes a lot, he does recycle...I don't know about his lightbulbs but I think his lifestyle is consistent with his convictions.

Jeanette said...

So, Kathleen, is direct to consumer advertising okay in the pharmaceutical realm? I love when my heroin addicts, who cannot afford food, somehow catch a snippet of TV somewhere and come in saying "I need Plavix, the TV said so." I mean, comeon! How is this any different? And yes, Kath, I agree with you that there is significant blame to place on parents but coming from an incredibly disadvantaged family and going to school without all the latest and greatest toys, clothes, lunch boxes--I can tell you it does take a significant toll. AND my parents did say no, and we didn't get to watch TV (for many years we didn't have one) but it was still a bit degrading when on the other end it does go way out of control. I can tell you how hard it was to watch my parents have to say no. There has to be some balance and I applaud the parents for at least trying. I think that limiting advertising directly to children is one way to at least curb some of this. Or, at least finding creative ways to advertise such that healthy, educational toys get the top spots. I do not think it will solve the problem but can at least lessen the blow in my eyes.
As for Don's attack on Will, sorry but I can't keep quiet. After spending a fair amount of time with him, I will agree with Kathleen on this point. Will doesn't own a car. Will recycles. Will uses his diswasher as a drying rack. Will refuses to buy anything new when he has a *perfectly good* one at home--even if the *perfectly good one* hasn't worked in years. Will lived in a third floor attic apartment for five years and never ran the air conditioning. If given the choice between watching TV or going for a hike, you can be sure Will will be out there in the wilderness...even if he can't hack it. In fact, much of the liberal I am today was shaped by watching Will's approach to the world. So, Don, where is the evidence behind your accusations?
So, yes, I am a bleeding heart in many ways and I hope I never run out of blood because I think I turned out pretty "OK" too, Don.

Don said...

1 - PlayStation3 commercials are the least of our worries.

2 - Obama's cabinet selections so far have been quite moderate and signal that he likely will follow foreign and economic policies little different than Bush's. I applaud him for it and am cautiously optimistic. I'd rather have a competent government worshiper than an incompetent government worshiper, and Obama actually is giving me some hope for the first time ever. The more his picks anger the left, the more hope he gives me.

3 - I guess you both do not see the trap I laid for Will (he undoubtedly did, which is why he remained quiet). Of course, he has done much to protect our planet. I know this. He leads by example, and he makes economic decisions every day based upon his environmental beliefs.

So, the market DOES account for the environment. The "problem" is that not everyone acts like Will does. So, back to my original question. Are those people selfish? stupid? uninformed/ or right?

Cocameister said...

Sorry I've been out of touch the past few days. Glad you all are still having a grand ol' time!

People are not "too stupid" to factor in the long-term ill effects of anything, but the problem is that people, in general, are inherently selfish and short-sighted. Will is one of the most environmentally conscious people that I know, but most people do not have this type of willpower and foresight. Instead most people live for the moment, for speed, power, money, fame, glory. It's all "in the now". When no government or laws are present, some of the population regresses back to some primordial animal. For example, in times of earthquake when there is destruction across a city, people become ravenous thieves and steal products out of stores that have had their boundaries impaired or destroyed. Or, when there is a massive sale at Walmart, people trample poor workers at the bottom of pile and kill someone!!

It is unfortunate, but the exorbitant few, whether they comprise 1, 2, 5, 10, or 20% of the population, ruin it for everybody.

Thus we need governmental rules and policies for the good of humanity.

I think it is indisputable that we will one day run out of oil. The earth is also warming. There are also cleaner sources of fuel, which much of the world has begun to implement without much of a disturbance. I think the only thing in question is how much will curbing of fossil fuel consumption result in ameliorating global warming. That is in debate, but why not err on the safe side rather than the gluttonous side?

As far as toy advertisements, this is still a free country and free market and it is completely un-American to limit or change the way toy manufacturers advertise. Direct to consumer advertising for medications by pharmaceutical companies is different, because people no matter how rich, cannot get their own prescription drugs without a prescription.

Jeanette said...

Can children, who are completely reliant on their parents, go out and get toys without money, transportation, or permission? Just like patients cannot go out and get prescriptions without the approval and agreement of their physicians. Sorry, I think that the compairison stands. I agree with the fact that this is a free country, but we do regulate what children can watch--porn, rated R movies, or otherwise. Don't you think it is possible to limit the way we advertise to children? Maybe then things like this won't happen:
http://www.thelocal.se/15742.html.
Don't get me wrong, I am not looking for censorship here or changes to the "american way." I just think that a small amount of regulation-not by the government, but by the toy industry itself-would go a long way. Just the way cigarette companies stopped targeting advertisements at teenagers. I realize that children are the market that the toy companies are after--but they can't get to the children without going through the parents in some way--financially, transportation, permission, etc. Just some food for thought, that is all.

Don said...

Coca,

Nice way of saying people are stupid. :) Call it animal or primordial or whatever $5 word you want. But we all know that is what you're saying. I know you are reluctant to say it, but that is what you are saying. Will is smart enough to care for our future. The rest of us are not. This sentiment is at the core of most liberal initiatives to make us do what we don't want to do. I am not saying you're wrong. I just want you to be consistent.

As for toys.... wow. I cannot believe we are even discussing this topic. I think kids need to hear "no" MORE often not less -- ESPECIALLY when you can actually afford the nonsense they want.

And then there's this

"Don't get me wrong, I am not looking for censorship here or changes to the "american way." I just think that a small amount of regulation...."

And that's how it begins. We're just going to tighten the noose a little bit more. Just a little...

Cocameister said...

Ok, the boy collapsed after playing Warcraft, but it's still up to the parents to regulate that kind of stuff.

Plus, back to the original point, even though it's a recession, I think parents can use it as a useful teaching opportunity in regards to saving money and earning rewards. I remember piling together my allowance money to get the toy that my parents originally wouldn't buy for me. It was so rewarding after I got to buy the toy or game for myself.

Plus, remember 70% of the economy is consumer spending, so one sure-fire way to ensure that the recession to last longer will be to limit or ban advertising on discretionary items.

kath said...

JT, it so funny you raised the pharma advertising issue. As soon as I entered the blog I was talking it over with Paige and quickly pointed out that I might be a hypocrite b/c I get so incensed by direct-to-consumer advertising by the pharmaceutical companies and feel like it has actually stunted innovation in the medical/pharmaceutical arena AND wasted valuable physician/patient interaction time b/c you have to justify why, just b/c you see something on TV and it is expensive, does not mean the drug performs any better than the formularies at the VA. It is completely different and affects (or not) the health and outcomes of patients at a cost to the insurance companies and, you could argue, the health care system in total.

As for the toys, I can't budge on this. I didn't get everything I wanted growing up. My parents were super frugal. And if my parents didn't want to buy something for me, I knew I had to earn the money somehow on my own. I didn't have Cabbage Patch kids growing up...all my friends did but my parents thought they were creepy and over-priced. And you know what? They were right! The times I felt most spoiled were when my dad coached my soccer team and my mom coached track. Or when they were both totally committed to my swimming...those are the things I remember most. Are the pangs of regret that I didn't have everything my friends had? Not really, b/c I think it helped me learn what was important early on and that material items do not equal happiness. I am quite certain there are several adults who are still unaware of this and this makes for a very sad existence.

My point is, parents are primarily responsible for how their kids respond to the world, including marketing. I don't feel sorry for parents who can't buy Johnny 100% of their Santa list this year. It is a wake up call for both the parents and the kids. You don't show your kids you love them by getting them everything they want.

Don, glad to hear that you were just messing with Will. I was wondering if he had a frivolous alter-ego. But we have had a nice love-in for him today, huh? And I am also glad you are feeling somewhat optimistic about the direction of our country, whatever the reasoning might be. I admit, I am also relieved he is working from the middle so far. The far left, like the far right, takes it too far.

JT, I hope we are still friends!

Jeanette said...

I hear you all on all of this. I figured this would spark some interesting debate...and it did.
Of course we are still friends...that is why I love you--because sometimes we have differences of opinion, though on most things we agree. (Sorry, Don, if that is too sappy and too much of liberal love-in for you).
And, just to clarify my point, I don't think this news story is meant to effect people who had lives like yours and mine and Steve's growing up where, despite lack of well-off-ed-ness, we were taught morals and the value of the dollar and what it means to buy something for ourselves. It is more for the lady in the story who would resort to prostituting herself to get her kid what he/she wants. I agree, this is a bit far fetched. But, think about it, do you think her kid even gets an allowance to go and buy something? I doubt it. I work with these people everyday. They are often unfortunately stuck in a vortex of lack of parental control that may date back farther than they are able to fathom. AND I never said that parents shows their love by getting children everything they want. I think anyone who knows me would agree that this is in exact contradiction to the way I feel. All I am saying is that I am delighted to see parents take an interest in their kids (often this does not happen, especially with the patients I see) but it is not always as black and white as you two make it here. And, for the under-privilidged and often under-educated, I think making some strides to convey distatste in direct-to-consumer advertising to children is a big step. It is much better than the alternative where children are taught hatred for those who do *always get what they want* which may eventually lead to resorting to less than effective ways of showing distaste. Additionally, I just would have liked to see more of a sympathetic response from the toy company. Again, I go back to the cigarette companies which stopped advertising to teens which has been an effective way at cutting new teen smoking initiates.
As for Don's original question, I am not sure if it is selfishness, stupidity, being uninformed or being right (or all of the above). But you are right, the market does account for environmental response it is just unfortuante that most people don't look at it that way. Just like parental control and "taking the moral highgrouund" should take care of the way children look at their current situations, however, there are many, many families who do not look at it this way and frankly, do not have the means to do so. I know, I know, why the hell should that be our problem anyway when we do have the capacity to teach our children these things? I guess that is what makes me a bleeding heart liberal.

Don said...

Yeah.... I guess it does...

You pretty much summed up the core and the problems with the left. If we tried to legislate everything that pulled at our heart strings on occasion, we'd ..... be Jimmy Carter.

I actually am one of the sappiest people you'll ever meet. I cried during Pursuit of Happyness, and I'd give the shirt off my back (and underwear off my bum) for friends like Will.

But I won't make anyone else do it.

More Christmases will be happier because of the American toy industry (both from the joy of the toys and the economy generated from those sales). Sure, some kids will get all the toys they want. Many kids will be disappointed.

I feel very sorry for the kids who get all the toys they want.

Will said...

wow ... I stopped checking for a couple days and look what happened.

Though I love reading good press, most of my decisions that have positive effects on the environment are done for other reasons...most of which are financial, some health-related. For example, it takes me 12 minutes to bike to work. It would take me 12 finding parking alone if I drove. The squiggly bulbs last 10 times longer so end up being cheaper, etc etc.

Public goods (functioning roads, the military, clean air) cannot be financed on the basis of 'how much individuals care about them' because of the well known 'free-rider' problem. Even conservative macroeconomists agree on this. Where the disagreement comes is the fair way to spread cost. And when it comes to burning fossil fuels - how to fairly spread the cost globally not just here. These are such complicated issues it's no wonder Bush punted on them for 8 years.

Don said...

So, Will DOESN'T change his actions for the environment.

You can't donate enough to NPR to wipe this stain off your birkenstocks, Will. You can't wear enough hemp to make up for this slight. Grow all the organic soy you want, Will, it will not change the fact that your motivations all center around the most evil of American inventions (and there are many) ..... the loathsome dollar.

For shame.

Will said...

I can't even open the toy story -- sounds like it must've been a doozy.

My mom drilled a hole in a safe and used to lock the TV plug in it except for 1 hour a day of pre-chosen shows during the summer....and if you had already seen that Laverne and Shirley episode - tough crap junior. But we were so rich from our chain of organic watercress ponds that I could just take cash and pay people in the street to reenact famous TV shows. That's how I found out who shot JR.

Don said...

Damn, I love Will. You just don't see enough water cress jokes these days.