Market Power

The Economics of Storm Chasing: the Negative Externality Edition

From the WSJ:

Officials in storm-ravaged parts of Oklahoma and Kansas are complaining about last weekend's influx of storm chasers—a ragtag band of amateur weather spotters, researchers, extreme-weather tour guides, news crews and adventure seekers. Their ranks have expanded in recent years with the advent of TV shows such as "Storm Chasers," cheaper technology for tracking weather and social-media sites where people can post news and videos of the latest storm.

Now, when a well-publicized storm pattern like last weekend's rolls around, chances are high for what storm chasers call "a convergence," in which they begin to get in each other's way—not to mention the way of emergency workers.

"In the past, there might have been 25 or 50" storm chasers during a weather event, said Todd Thorn of Storm Chasing Adventure Tours of Bozeman, Mont., which charges clients $2,400 for a week of chasing. "Now, there might be several hundred on a big day on the weekend."

The National Weather Service rightly applauds the services of chasers/spotters that provide the eyes to see what Doppler radar cannot.  But, to coin a phrase, too many eyes spoil the view... not to mention cause traffic congestion.

Tornado Recovery and Private Property Rights: Joplin vs. Tuscaloosa

On April 27th, 2011, the city of Tuscaloosa, Al. was ravaged by a tornado which killed over 50 people.  On May 22nd, Joplin, Mo. was blasted by an EF-5 tornado that  killed over 160 people.  Both cities were heavily damaged, but which city is recovering faster?  According to David Beito and economist Daniel Smith, Joplin.

In Joplin, eight of 10 affected businesses have reopened, according to the city's Chamber of Commerce, while less than half in Tuscaloosa have even applied for building permits, according to city data we reviewed. Walgreens revived its Joplin store in what it calls a "record-setting" three months. In Tuscaloosa, a destroyed CVS still festers, undemolished. Large swaths of Tuscaloosa's main commercial thoroughfares remain vacant lots, and several destroyed businesses have decided to reopen elsewhere, in neighboring Northport.

The reason for Joplin's successes and Tuscaloosa's shortcomings? In Tuscaloosa, officials sought to remake the urban landscape top-down, imposing a redevelopment plan on businesses. Joplin took a bottom-up approach, allowing businesses to take the lead in recovery.

Tuscaloosa mayor Walt Maddox responds here.

This brings to mind the question of what's the best way to develop a society: top-down or bottom-up.  A top-down society is an Astroturf society, essentially imagined and designed by rulers who then impose their will on people.  

A bottom-up society, on the other hand, is a grassroots society that develops organically, and it emerges from the decentralized actions of people.  If Beito and Smith are correct, chalk another one up for spontaneous order.

 

Price Discrimination at The Economist

Dumb Agent alerts us to an interesting pricing scheme at the Economist:

- Subscribe to a full year of online access to The Economist  for $59.

- Subscribe to a full year of the print edition of The Economist in print for $125.

- Subscribe to a full year of both the online print editions of The Economist for $125.

Essentially giving two options:  spend $59 or spend $125.

Now, if you were to come across this you might think they hadn’t put much thought into it at all, right. More importantly, however, if a magazine you enjoyed had this pricing structure, which option would you choose? Well, since online access costs $59 and the print edition costs $125, the smart money would decide to purchase both, where the entire cost of online access is done away with, right?

Since the majority of the cost of providing content, online or in print, is the cost of writing the articles, it costs virtually nothing to add one new print or online subscriber once the issue is written.  So the marginal cost of adding one more subscriber, print or online, is close to zero.  But the Economist has discovered that folks who want a hard copy to read are willing to pay over twice as much as online subscribers.  So this is a good old-fashioned price-discrimination scheme, with the Economist making it seem to print subscribers that they are getting a good deal by getting online access at no extra charge.

 

An Update to the Van Halen Brown M&M Story

Earlier this year I wrote about the brown M&M story that is part of the legend of Van Halen:

That got me to thinking about a wonderful story of how one of rock's legendary bands ensured that their shows were set up properly - and safely.  Van Halen's contracts would spell out any and everything that had to occur before they would go on stage.  Not surprisingly, since these contracts covered everything but the kitchen sink, it would be nearly impossible to make sure all the i's and lower-case j's were dotted.  So they came up with a smart way to make sure everything was followed to a tee.    

In their contracts, they buried a rider in that said that the band would be provided with a jar of M&M's with all the brown ones removed.  The thinking was that if the contract were read thoroughly, the M&M's would be provided sans the brown ones.  If that was done properly, so, likely, would everything else.  So rather than checking to see if everything was taken care of, they simply looked for the jar of M&M's.  If there were brown ones inside, they'd have everything checked top-to-bottom

When you think about it, that's a nearly costless way to check for quality control.  So much for the dumb musician stereotype.

Is this a true story?  Was the brown M&M rider a quality control instrument?  David Lee Roth says so in the video below.  

A Cafe Hayek reader who has experience in the business gives a different take on part of Dave's story.  Dave claims that the Van Halen stage ruined a new basketball floor on a day that brown M&M's were discovered backstage.  The reader, Bill, writes to CH's Russ Roberts:

Roth is correct that the floor suffered major damage from the weight of the stage, but it wasn’t due to Barry Fey not reading, or understanding the rider. Barry was used to dealing with Led Zeppelin and Pink Floyd, so he knew a bit about massive theatrical rock productions. If I remember correctly, Fey also provided the stage, and it is essentially four-feet-high scaffolding with a plywood deck built on top as a stage floor. I also don’t remember if the stage legs were set on 18-inch plywood pads, or if it was just the steel pads of the scaffolding strait to the floor. When we build on dirt, we use the plywood pads, but I didn’t work the Van Halen concert. Either way, the damage was caused by no one realizing that weight needed to be more uniformly spread over the rubber floor. It is possible that the gym floor would have been damaged no matter how much they spread the weight of the stage. Van Halen has been claiming for years that the brown M&M clause was simply to make sure the rider was being read, but (as George pointed out in the comments) the fact that it never changed discredits that assertion. My belief has always been that it was there because they were young rock-and-rollers enjoying wretched excess. I have no problem with that (if they pay for the damage they cause), but his assertion that the floor was damaged because Barry Fey didn’t read, or didn’t comply with the technical aspects of their rider, is simply not believable.

 

 

"Bill adds:"

 

 

I don’t know how production riders were assembled back then, but these days, they are usually separated into chapters, and the hospitality part, which covers the dressing room details (brown M&Ms, what kind of food, spirits, etc, that the Artist prefers) would be a separate chapter from the technical aspects. Also, because of the physical limitations of the Pueblo venue, I can state with near-certainty that Feyline and Van Halen’s tour manager exchanged multiple phone calls negotiating what Van Halen would be willing to do without, in order to accommodate those limitations, which further discredits the notion that Barry Fey was unaware of the rider’s technical requests.

Here's an excerpt from Barry Fey's book Backstage Past:

The Pueblo show was the first time I'd heard about the brown M&Ms. There are different stories about it, but one I was told is that the band wanted to make sure its contract rider, which detailed every little thing from trash bags to what kind of foods would be served to
the roadies and at what time; virtually nothing was left to chance. So, someone suggested they put in "no brown M&Ms" as a gotcha; if there were brown M&Ms, then whoever was supposed to read the rider didn't and other important details, like the tube of K-Y Jelly, might have been overlooked.

In their Pueblo dressing room, the band found brown M&Ms and the boys, who had proven that they didn't need much of an excuse to damage hotel rooms and the like, tore up the college's dressing room. Tore it up so badly that the University banned not only Van Halen, but all rock concerts at the school.

 Just because I enjoyed being a smart ass, I guess, four years later when I booked Van Halen to headline The US Festival (more on that in another chapter), I bought a big, silver chalice, had it filled with ONLY brown M&Ms, walked into Van Halen's dressing room and put it down on the table. The guys--Eddie and Alex Van Halen and David Lee Roth--laughed their asses off.

The brown M&M story is a great story, and not just about the excesses of rock and roll acts.  If it's as Dave says, then it's an example of a low-cost way to ensure contracts are read and followed.  

But some of the commenters to Russ's post aren't fully convinced.  One of the commenters notes that once word about the brown M&M rider got out, its usefulness as a quality control signal would become limited.  But just looking at Barry Fey's excerpt, there were other seemingly-trivial riders (12 Reese's Peanut Butter Cups, 12 Dannon yogurts on ice, etc.) and others the band could randomly choose to inspect to ensure the contract was indeed followed.  One day it was brown M&M's.  Another day it was the peanut butter cups.  Another day, the yogurt - on ice - gets inspected.  If the band randomized inspecting various riders, the brown M&M rider would be an effective quality control signal for years on end.

Note:  if you buy something at Amazon through the link to Fey's book above, you will help support this blog at no charge to yourself.  I thank you in advance.

NASA Ignoring What Might Have Been Developed

From Wired UK:

"Why are you spending all our money up there, when he have problems down here!"

That's often the typical cry of a US taxpayer when they see that Nasa gets about 17 billion dollars a year to play golf on the Moon and fire rockets into Saturn.

..."This year's Spinoff demonstrates once again how through productive and innovative partnerships, Nasa's aerospace research brings real returns to the American people in the form of tangible products, services and new jobs," explains Nasa Administrator Charles Bolden.

This is all well and good, but Wired is ignoring the fact that had the money been spent elsewhere by the government or, gasp, not ever been collected as taxes, other things would have been developed.  No-one knows what the world would be like if there ever no NASA, but to think it would be exactly like it is minus all the NASA-related stuff is not correct.

On Trade and Value

 

I quibble with one small point.  Trade doesn't take place because somebody values something.  Trade takes place because somebody values something and somebody else is willing and able to sell it to him at a lower cost than if he made it himself.  

That point aside, this is a fun video.

Economic Forecasting is Really, Really Hard

There is an article in this morning's Washington Post on the discussions the Fed members had regarding the state of the economy in 2006, just as the housing bubble popped.

In his first meeting as Fed chairman, in March 2006, Ben S. Bernanke noted the slowdown in the housing market. But he said he shared the view that “strong fundamentals support a relatively soft landing in housing,” adding: “I think we are unlikely to see growth being derailed by the housing market.”

The year began with adulation all around for Greenspan. In that January meeting, Roger Ferguson, then Fed vice chairman and now head of the TIAA-CREF financial services group, called Greenspan a “monetary policy Yoda.”

Janet L. Yellen, then president of the Federal Reserve Bank of San Francisco and now the Fed’s vice chair, told Greenspan “that the situation you’re handing off to your successor is a lot like a tennis racket with a gigantic sweet spot.”

Looking back...

In the six years since, Greenspan’s record — seemingly so sterling when he left the central bank after 18 years — has come under substantial criticism from outside economists and analysts. Many say a range of Fed policies under his watch contributed to the financial crisis, including keeping interest rates low for too long, failing to take action to stem the housing bubble and allowing inadequate oversight of financial firms.

Forecasting economic variables is very, very hard.   It's hard to forecast for particular microeconomic markets, and it's even moreso with entire economies.  What is the theoretical model of the economy?  What variables do you include?  Why?  What variables do you exclude?  Why?  How do you account for the infinite number of relationships between various economic variables?  What about the effect that foreign economies have on the domestic economy?  What about the effect that the German economy has on the British economy and, in turn, on the US economy?  What about military conflicts and the price of crude oil?

Given the theoretical model, what statistical model do you use?  How do you account for things like autocorrelation and moving averages?  What data sources do you use?  How do you account for differences in how different countries gather and release data?  

Then have the forecaster predict two years out? As they say, past results are not necessarily indicative of future performance.  So, even if we got the theoretical and statistical models correct for past data, does that mean our models will be correct in two years?  Will there be a major war in the period you are forecasting?  

The old joke goes "Why did God make economists?  To make weather forecasters look good."  Go out and find the best tornado scientist in the world and ask that person how many tornadoes will occur in 2014.  Asking an economist, say, to tell you what the unemployment rate will be in two years is a lot like asking a tornado scientist how many tornadoes there will be in two years.  Even with all their knowledge and skill, Josh Wurman and Reed Timmer can't even do that with any precision worth pay attention to.

We economists may not like to admit it, but we are better historians than forecasters.  Our knowledge of what makes the economy tick is very limited and we learn by looking back, not by looking forward.  So while it's tempting to jab at the Fed members for failing to see what was going on in the economy, given them a little break.  

Even so, this episode is an example of why it's very risky to put too much power into the hands of central planners (yes, setting monetary policy is central planning).  Their knowledge is limited, even though those credentials after their names may tell us otherwise.

Thoughts on the End of the Ethanol Tax Credit

From the New York Times comes a story describing the end of the ethanol tax credit in the US.

The tax break, created more than 30 years ago, had long seemed untouchable. But in the last year, during which Congress was preoccupied with deficits and debt, it became a symbol of corporate welfare. Fiscal conservatives joined liberal environmentalists to kill it, with help from a diverse coalition of outside groups.

In the United States, most ethanol is produced from corn. The demise of the subsidy is all the more remarkable because it comes at the peak of the political season in Iowa, where corn is king.

Is it really all that remarkable?

The higher prices have “created additional income for corn producers” but also appear to have increased costs to meat and poultry producers, big food companies, grocery shoppers and federal food programs, the Government Accountability Office said.

While the poultry industry is dominated by large-scale producers, cattle and pigs are grown by your typical farmer.  These farmers also grow acres and acres of corn, so the corn producers and meat producers are largely the same group.  The ethanol supports, therefore, have simultaneously increased farmer income and costs.  My guess is that the average farmer's costs have increased more than his revenues from these supports.

While this is a step in the right direction, there are still two more types of government support propping up the ethanol industry: the tariff on imported ethanol and ethanol mandates.  As I've written before, a product that needs this much government support probably isn't all it's cracked up to be in the first place.  Let domestic ethanol, foreign ethanol,  and plain old petrol compete on the same plane, and let consumers make their decisions about which type to use.

Update:  Doug Mataconis has further thoughts here.  

Update:  John LaPlante writes...

The ethanol industry says that rising gasoline prices have helped make its product competitive with regular gasoline. Score one for standard economic theory, which said long ago that ethanol could become more attractive, without government-imposed distortions, if the price of petroleum rose high enough.

Today in the Tragedy of the Commons: Christmas Edition

From the WSJ:

At the Top of Texas Catholic Superstore in Amarillo, owner Moneisa Thompson said she noticed one-ounce packages of frankincense disappearing from displays in her 3,800-square-foot store about four months ago. She has since moved the packages into a glass case.

"We'd go through the count and we'd come up one or two short," Ms. Thompson said. "We had to put it under lock and key."

Frankincense comes from a tree called the bowellia tree, which grows in the horn of Africa.  The problem is:

While the trees historically grew from the southern Arabian peninsula to the Horn of Africa, they are now found mostly in Ethiopia, Eritrea, Somalia, Sudan and India. "There is no real sustainable management of forests" in East Africa, said Frans Bongers, a Dutch ecologist at Wageningen University and one of the authors of the study. "There are no new trees coming into the system. All trees are dying, continuously."

Part of the problem is farmers burning down the trees to make way for grazing lands for their cattle. Of the trees that haven't been destroyed, he said 85% are "heavily infested by one or more long-horned beetles" that bore into the wood of adult boswellia and eat them from the inside.

It's not clear to me that the beetle problem isn't also partly a problem with the tragedy of the commons.  

 

Today in Externalities...

A Mythbusters experiment involving a homemade cannon goes horribly wrong...

The cantaloupe-sized cannonball missed the water, tore through a cinder-block wall, skipped off a hillside and flew some 700 yards east, right into the Tassajara Creek neighborhood, where children were returning home from school at 4:15 p.m., authorities said.

There, the 6-inch projectile bounced in front of a home on quiet Cassata Place, ripped through the front door, raced up the stairs and blasted through a bedroom, where a man, woman and child slept through it all - only awakening because of plaster dust.

...It exited the house, leaving a perfectly round hole in the stucco, crossed six-lane Tassajara Road, took out several tiles from the roof of a home on Bellevue Circle and finally slammed into the Gill family's beige Toyota Sienna minivan in a driveway on Springvale Drive.

As my eldest sister would remark, "Da-yum!"  

The Mythbusters crew was incredibly unlucky that the cannonball did all this damage, but they were amazingly lucky that no-one was hurt.

Link via Chris Matyszczyk via Mike Moffat.