ECON 439: Public Policy Analysis

Recently, I went to the Peacock downtown with a few friends and found there was a price increase for their signature $1 Pabst Blue Ribbion (PBR) beverage to a $1.50. A 50% mark up seemed a little ridiculous to us, especially because inflation in 2013 was 1.5% (reported by the Bureau of labor statistics BLS). This deterred the whole group of people I was with from purchasing a PBR  at all. Instead a few of them got an IPA because the alcohol percentage can be as high as 7 % sometimes. This would help accomplish their ultimate goal of inducing intoxication more rapidly, but also has a higher cost of 3-5 dollars per drink. The trade-off prior to the price increase would have simply been two PBRs for a fraction of the price, as well as a bloated stomach and terrible taste lingering. Other friends decided to go with a mixed drink that left you even less full than the other two options and tended to hit more quickly because you didn’t have to waste time consuming three pints of God awful PBRs.

At first I sided with my friends, and thought that the price increase was strictly harmful to the consumer, and the supplier only gained. Knowing a PBR was still the cheapest drink on the menu, and the loyal customers of the peacock would likely accept the increase due to “inflation”. The rational consumer may recognize the disproportionate ratio and decide to purchase another drink. But then I decided it actually benefits the consumers welfare in a physical sense rather than financial. While it does discourage binge drinking a terrible drink, it also allows consumers to more willingly pay for slightly more expensive drinks with a higher alcohol percentage. Which in turn helps accomplish the goal of inducing intoxication, and also increases the willingness to pay for more drinks. More fun, but more cost. So, maybe it hurts our wallet a little more in the long run- sure. But I contend college experiences will be remembered and valued more in the future than having to pay $.50 more for a crappy beer.

“What do you want to be when you grow-up?” is the question that every single person on the planet has been asked at least a thousand times. To this day, I still don’t even know and I am about to graduate. However, I am not alone. It is a known fact that most of the people who graduate with a specific major will most likely not end up working within their major. Why is this? We can go around and around talking about the job market, recessions and how corporations and firms just aren’t hiring anyone without the needed experience, but what is the real underlying issue. While economics has a huge role, traditional education is the other piece of the pie. From elementary to high school, we have been tailored to think about going to college, making a living, and having a family. We are taught that is will maximize our happiness, or utility, if you will. But what happens when you do just that and end up unhappy in the process? Well the average person will search for something to make them happy, which in extreme cases could lead to divorce, quitting a job, and spending more money, but that could potentially and most likely decrease your utility or personal happiness even more. So now we raise the question of “How can we prevent this?” In comes the new term “Hackschooling” coined by 13-year old Logan Laplante. Hackschooling means your schooling is based on an individual’s interests, what makes you happy. If you were like me in any way, you would immediately be skeptical and may be thinking “how on Earth is school supposed to make you happy. I mean it is designed as a form of torture right?” At least this is what I first thought; however, as I began to work through the idea, hackschooling in short-term leads to a maximizing your utility as a child, which in turn allows you to be innovative in your interests and also creating opportunities that you would have never had in a traditional school setting. Speaking in the long term, wouldn’t you think this would help our Economy? People would be doing things they like and have a passion for. They could go to college knowing exactly what they want to do, and thrive in it. They wouldn’t have to switch their majors ten times, or take 6 years to graduate leading to more and more student loans, which is another economic issue in this day and age. They might be able to get a career started right after college because they have had opportunity and experience in that field throughout their entire education.

Why do movie theaters charge 4 dollars for a soda which I can purchase at McDonald’s or a gas station for about 99 cents? That movie theater popcorn and soda prices are so “outrageous” used to really annoy me. Surely there’s an economic reason though that sodas at theaters are priced so much higher than they are at other places. When one purchases a ticket and enters the theater, movie theater rules prevent them from bringing in food and drink purchased from other locations. Essentially this restriction allows the theater a 2 hour monopoly on the supply of drink and snack items. For soda purchasers, instead of facing a supply curve where a large number of sellers such as convenience stores and fast food chains are selling, they’re facing a monopolistic supply curve with one supplier. Equilibrium prices are higher than they otherwise would be because of this. Of course, movie theaters wouldn’t charge these high prices for soda if patrons weren’t purchasing 4 dollar drinks. Who in their right mind is willing to pay $4 for a soda? Apparently a lot of people. I’ll admit that usually I’ll purchase at least a soda if not both a soda and popcorn when I watch a movie. This says something about the price elasticity of demand for sodas for movie goers. Elasticity must be lower in the movie theater environment that it is outside. Maybe because movies and sodas are complimentary, patrons have higher incentive to consume them together. It seems like this would lower elasticity and help explain why movie theaters sell 4 dollar sodas and why movie goers are actually willing to pay those prices.

According to a recent study on smartphones, nearly 50% of smartphone users do not use their phones to their full potential. The study found that 40% of users do not use their phone to access the internet and 51% of users do not use their phones for directions or other location based information. One might ask why this is the case because it could mean that an incredibly high number of smartphone users are essentially wasting their money buying these high power mobile devices and the smartphone manufacturers are wasting their resources making them. However, this is not the case because the marginal cost that the manufacturers have to pay in order for their phones to have some of the extra features is nearly 0, once the initial fixed costs have been paid. These fixed costs become worth it because they bring in other customers that otherwise may not have purchased phones. From the consumer’s point of view, they are all willing to pay a certain amount for a cell phone with a certain amount of features. If this amount is more than the price of a smartphone that has more features than what they are looking for, they will still be willing to purchase it. These extra unnecessary features remind me of the idea that “more is always better.” Hypothetically there could be some problems with the extra features being things such as apps that over-complicate the user interface or fill up the hard drive, but for the most part smartphone manufacturers do a good job of only adding utility to their products as technology develops.

For the producers, there is an extra cost for installing a light into each side of the fridge. It is a fixed cost, since there is no extra cost for the light turning on no matter how many times you open it. In order to find the reason why there is a light on one side and not the other, we need to look at the cost-benefit analysis. The benefit of having a light turn on when you open the door is that it is easier to find the things you are looking for. The refrigerator is opened much more than the freezer is,  so there is a much greater benefit to the consumer than there would be a benefit of putting it on the freezer side. So the extra cost of the producer adding a light in the refrigerator side is also a benefit. Since it is not detrimental for a consumer to have a light on the freezer side, most consumers do not mind paying the average amount for a refrigerator with no freezer light. But as income increases for the consumer, the benefit of having a light on the freezer side increases as well. The cost-benefit principle predicts that for consumers with a high amount of income, will think a light in the freezer is worth the extra cost.

As an ardent book lover, I spend a good deal of my free time roaming around bookstores. As a kid with a propensity to finish a book a day, and who planned out book releases a year in advance, the prices of new books was interesting to me. Since attending some economics classes and learning a bit about how prices are set, it has often struck me walking into bookshops how cleverly prices are set in this market. Consumers wishing to purchase a new, hardcover book will pay up to twice as much for it as would consumers willing to wait a year for the same book to be released in a softcover. Obviously it does not cost the publishing company twice as much to produce the hardcover book. While the book would become cheaper to manufacture as the printing went on due to economies of scale, that is not the primary force at play here. What they are doing in this instance is engaging in second-degree price discrimination. Consumers voluntarily segregate themselves into two categories: those who care a great deal about reading the book as soon as possible, and those who are just merely interested, but are not willing to pay top dollar. Then the publisher can charge those two groups different prices for largely the same product. They get to charge the hardcore fanatic more, without driving away the casually interested.

Hello everyone, this is the place you will be doing a lot of your writing for the class both in the main post section and in the comments to posts.  I like the blog format as it feels less formal and more immediate.  As a Writing Intensive Curriculum class, part of the goal of the class is to get you comfortable writing about economics.  It is my hope that you will have fun doing so here.  Feel free to use pictures, graphs and whatever else you can think up if you like (but this is not a requirement).

Remember, however, that this space is very much like the classroom for the course so please be respectful of your fellow classmates and obstain from offensive language or topics.  Other than that, have fun.

-Patrick Emerson