Tag Archives: economics

Congestion Tolling at the Supermarket

To help explain why toll lanes might not be the great solution to traffic congestion many believe them to be, Timothy Lee goes to an unexpected place to draw parallels: your local supermarket.

Supermarkets are a good analogy, suggests Lee, because they operate in a free market, are ruthlessly efficient, intensely competitive, and employ ‘lanes’ (checkout queues)… but they don’t use congestion pricing. The reasons why they don’t, he says, can also be applied to traffic congestion:

First, we have strong and sophisticated social norms, cultivated since we were young children, for waiting in lines. This bit of self-organization is extremely important for the smooth functioning of civil society. We see waiting your turn as an obligation we have to one another, and therefore not as an obligation that a supermarket or transportation agency can waive in exchange for a cash payment. I suspect customers would see people using a tolled checkout lane as breaking an implicit social contract.

More importantly, customers would be suspicious that the supermarket was deliberately under-staffing the free lanes to gin up demand for the express ones. […] In the low-margin grocery business, it would be a pretty effective way for a manager to pump up his short-term profits, while the long-term harm to the store’s reputation would be hard […] to quantify.

This latter concern seems particularly relevant to the case of toll roads. The revenue-maximizing pricing schedule is not the same as the congestion-minimizing schedule. An effective congestion-pricing scheme might generate relatively little revenue if people shift their driving to off-peak times (which is the whole point). The operator of a monopolistic toll road will face a constant temptation to boost revenues by limiting throughput on free lanes and jacking up the off-peak toll rates. The widespread voter perception that they’ve “already paid for” many tolled roads through other taxes isn’t exactly right as a matter of fiscal policy, but I think it’s based on a sound intuition: there’s no reason to think the political process will set tolls in a way that’s either fair or economically efficient.

The Drinkers’ Bonus: Alcohol Intake and Increased Earnings

Drinking alcohol — and the increased social capital that it leads to — may not just be responsible for a possible increase in life span; it may increase your earnings, too.

In an analysis of both the General Social Survey and the published literature, researchers for the Reason Foundation show that alcohol drinkers earn, on average, 10% more than abstainers (pdf). This is known as the drinkers’ bonus.

Recent studies indicate that drinking and individual earnings are positively correlated. Instead of earning less money than nondrinkers, drinkers earn more. One explanation is that drinking improves physical health, which in turn affects earnings (Hamilton and Hamilton, 1997). We contend that there is an economic explanation. […]

Drinkers typically tend to be more social than abstainers. As Cook (1991) explained, drinking is a social activity, and one reason people drink is to be sociable. In the medical literature, Skog (1980) showed that moderate drinkers have the strongest social networks. Furthermore, Leifman et al. (1995) documented a negative relationship between social integration and abstinence. Whether abstainers choose not to be as social or whether organizers of social occasions involving drinking exclude abstainers is unclear. Abstainers may prefer to interact with other abstainers or less social people. Alternately, abstainers might not be invited to social gatherings, work-related or otherwise, because drinkers consider abstainers dull.

Corcoran et al. (1980), Montgomery (1991), and Putnam (2000) each made convincing cases that social networks are important for finding jobs and earning promotions. Montgomery (1991) explained that companies prefer acquaintances of employees because employees screen potential candidates and thereby reduce the cost of search. Approximately half the workers surveyed in the Panel Study of Income Dynamics found their job through friends or relatives, and one-third reported help from acquaintances in obtaining their job (Corcoran et al., 1980). Therefore, a person with more contacts will have more labor market options (Burt, 1997). Granovetter (1995) suggested that a large quantity of weak ties or friends-of-friends may be most important to garnering the best job offers.

Thus, if social drinking enables greater social networks, it will also increase earnings. In terms of search theory: the more one drinks, the more people one knows, and the more people one knows, the lower the marginal costs of search.

The study is packed full of excellent references to published studies (as you can tell from the above excerpt), so I suggest reading the accessible (and very short!) report. It’s also worth noting footnotes four and five, describing how this is just like all investments in capital, in that an optimal level exists: “you must drink more than 21 drinks per week to earn as little as a non-drinker”.

via @phila_lawyer

Equal Societies Good for All

The more unequal a society’s income distribution, the more health and social problems ail both the rich and the poor.

With this theory brought to his attention through the “quite fascinating book” The Spirit Level, Nicolas Baumard displays the evidence to support the theory that economic inequality is bad for all inhabitants of a country before considering some possible explanations, and looking at what this means in terms of poverty and climate change.

It is common knowledge that in rich societies the poor have shorter lives and suffer more from almost every social problem. In [The Spirit Level], [the authors] demonstrate that more unequal societies are bad for almost everyone – the well-off as well as the poor […]. The remarkable data the book lays out and the measures it uses are like a ‘spirit level’ which we can hold up to compare the conditions of different societies. The differences revealed, even between rich market democracies, are striking. Almost every modern social and environmental problem – ill-health, lack of community life, violence, drugs, obesity, mental illness, long working hours, big prison populations – is more likely to occur in a less equal society.

Baseball fan? Baumard also points out that “the more equal the salaries in a base-ball team are, the better its performance”.

India and the Definition of Middle Class

A newly proposed international definition of the middle class for developing countries, produced by the Center for Global Development for the World Bank, has some surprising conclusions for India.

The report, produced by the president of the Center for Global Development, Nancy Birdsall, suggests that “middle class” is defined as everyone with an income above $10 a day, excluding those in the top 5% of earners in the country… meaning India has no middle class.

This is a combination both of the depth of India’s poverty and its inequality. China had no middle class in 1990, but by 2005, had a small urban middle class (3% of the population). South Africa (7%), Russia (30%) and Brazil (19%) all had sizable middle classes in 2005. […]

In socio-political terms, the middle class is traditionally that segment of society with a degree of economic security that allows it to uphold the rule of law, invest and desire stability. They do not, unlike those defined as rich, depend on inheritances or other non-productive sources of income. […]

OECD countries define their poverty lines as 50% of median income which works out […] to about $30 day. In the US the poverty line for a single individual in 2008 was $29 per day and for each individual in a four-person household was about $14 per day.

However, people in developing countries living on even $10 a day still have extremely low social indicators. Economist Lant Pritchett has shown that infant mortality of households in the richest quintile in Bolivia was 32 and Ghana 58 per 1,000. Fewer than 25% of people in the richest quintile in India complete 9 grades of school, Pritchett showed. “An upper limit of the 95th percentile, while on the high side, is just about sufficient to exclude the countrys richest,” Birdsall adds.

via The Browser

Abstraction to Increase Effort (and Spending)

When there is a medium placed between our effort and a desired outcome, we strive to maximise this medium regardless of whether or not it leads optimally to that outcome (think points or virtual currencies as a medium when attempting to obtain goods).

That’s my attempt at a concise summary of the findings from a study coining the phrase ‘medium maximisation’.

This example taken from the paper (pdf) and presented by The New York Times may help:

Students were given a choice between two simple tasks. One would take six minutes, and the students were told that they would get a gallon of Haagen-Dazs vanilla ice cream as a reward. The other would require seven minutes of work, and the payment would be a gallon of Haagen-Dazs pistachio.

Not surprisingly, since the second option involved more work and a less popular flavor, only about a quarter of the students chose it.

But the researchers also repeated the experiment with a couple of tweaks. In the new version, the six-minute task led to a payoff of 60 points, and the seven-minute task brought 100 points.

The researchers then told the students that anyone who finished with between 50 and 99 points would be given a gallon of vanilla ice cream. Anyone with 100 points would get pistachio.

Practically, there was no difference between the two experiments. But the outcomes ended up being very different.

In the comments of a previous post of mine looking at the denomination effect, the idea that “the greater the level of abstraction, the more ready we are to spend” was mooted. So it seems to be the case here.

via @BFchirpy