Market Power

Ethanol Standards

From John Whitehead's blog:

From the inbox:

Dr. Soren T. Anderson of the University of Michigan will be presenting a paper entitled "The Demand for Ethanol as a Gasoline Substitute" at the [Triangle Resource and Environmental Economics] workshop today (Thursday, February 28).

The abstract indicates that ethanol standards are a bad idea:

This paper considers the role of household preferences in evaluating policies designed to promote ethanol as a substitute for gasoline. I develop a model of household production with inputs of a polluting good and a clean good that are perfect substitutes from the household’s perspective. The key parameter in this model is the relative price at which the household is indifferent between the two inputs. I aggregate households and then use the model to formalize the link between the distribution of household preferences for the clean good and the response of aggregate demand to price changes. I estimate the model using data for ethanol sales volumes at a large number of retail gasoline stations during 1997–2006. I find that demand for ethanol is sensitive to relative prices, with elasticities that range from 2.5–3.0 in magnitude. I use the distribution of preferences implied by my estimates to simulate the effects of a national minimum ethanol content standard for gasoline. I find that the efficiency cost of a 25% standard is about $50 billion annually. Costs are half as large as when I naively assume that households have identical preferences based on ethanol’s fuel economy performance relative to gasoline, as is done in previous studies. Costs are lower because households with particularly strong preferences for ethanol are induced to purchase the fuel with less severe distortion of market prices. The policy remains quite expensive, however, with implied costs per gallon of gasoline saved or ton of carbon emissions avoided exceeding most conventional estimates of marginal external damages.

Emphasis mine.

Mr. Anderson is a PhD candidate at the U. of Mich.  Here is his paper.

 

From the inbox:

Dr. Soren T. Anderson of the University of Michigan will be presenting a paper entitled "The Demand for Ethanol as a Gasoline Substitute" at the [Triangle Resource and Environmental Economics] workshop today (Thursday, February 28).

The abstract indicates that ethanol standards are a bad idea:

This paper considers the role of household preferences in evaluating policies designed to promote ethanol as a substitute for gasoline. I develop a model of household production with inputs of a polluting good and a clean good that are perfect substitutes from the household’s perspective. The key parameter in this model is the relative price at which the household is indifferent between the two inputs. I aggregate households and then use the model to formalize the link between the distribution of household preferences for the clean good and the response of aggregate demand to price changes. I estimate the model using data for ethanol sales volumes at a large number of retail gasoline stations during 1997–2006. I find that demand for ethanol is sensitive to relative prices, with elasticities that range from 2.5–3.0 in magnitude. I use the distribution of preferences implied by my estimates to simulate the effects of a national minimum ethanol content standard for gasoline. I find that the efficiency cost of a 25% standard is about $50 billion annually. Costs are half as large as when I naively assume that households have identical preferences based on ethanol’s fuel economy performance relative to gasoline, as is done in previous studies. Costs are lower because households with particularly strong preferences for ethanol are induced to purchase the fuel with less severe distortion of market prices. The policy remains quite expensive, however, with implied costs per gallon of gasoline saved or ton of carbon emissions avoided exceeding most conventional estimates of marginal external damages.

Emphasis mine.

Mr. Anderson is a PhD candidate at the U. of Mich.  Here is his paper.

 

Hal Varian on the Theoretical and Empirical Sides of Economic Science

Via Newmark's door is a conversation with Hal Varian at the Freakonomics blog:

Q: Your job sounds extremely interesting. What jobs would you recommend to a young person with an interest, and maybe a bachelors degree, in economics?

A: If you are looking for a career where your services will be in high demand, you should find something where you provide a scarce, complementary service to something that is getting ubiquitous and cheap. So what’s getting ubiquitous and cheap? Data. And what is complementary to data? Analysis. So my recommendation is to take lots of courses about how to manipulate and analyze data: databases, machine learning, econometrics, statistics, visualization, and so on.

And

Q: You once said that “marketing is the new finance,” because of the data and tools that are now available. In your opinion, what are the three most useful quantitative techniques for analyzing this kind of data? To what extent does Google use this type of analysis?

A: The three most important techniques, in my opinion, are: 1) experimental design and analysis; 2) regression; and 3) Bayesian methods. We use the first two extensively, and are beginning to use Bayesian techniques more.

I'd add that computing power (a tool of data analyzers) is also getting cheaper and more powerful, surely improving the productivity of analyzers.  Improved productivity and improved opportunities:  that's a recipe for WIN!

On mathematical models and behavioral economics:

Q: Do you feel that more traditional economic models do an adequate job of representing what economists would like them to? Do you think that emerging fields of study, like behavioral economics, will become increasingly important and/or potentially integrated into the core of economic focus? Given the assumptions we make in economics with respect to human rationality, optimal decision making, and large-scale generalizations, how can anyone in the field feel confident that a theoretical conclusion/result/finding is truly significant?

A: I think that the “traditional model” is a good starting point for economic analysis, but I don’t think that it is necessarily the ending point. You have to explore different alternatives to see which model seems to explain the data best. However, I will say that I think that formulating a model mathematically is quite important, as it serves as a check for internal consistency. Furthermore, a mathematical model allows you to draw out the consequences of an assumption that often allows for better understanding.

Creative Destruction - The Rock Band Edition

Via Instapundit comes this story of creative destruction (literally):

The other day someone showed me a copy of a local suburban Seattle neighborhood paper leading with picture of Issaquah High junior Derek Brown. Derek is grinning away. It ends up that he and his friends, like throngs of other gamers anxiously awaited the release of Rock Band late last year, especially for its realistic drum set up. When it showed up they laid into the drum kit’s orange kick pedal only to have it break within a few hours. Those who bought the Special Edition of the game will remember a pink sheet included that detailed how to deal with defective, or um, broken parts. I don’t know if Derek saw that sheet, but instead of packaging the game up and waiting 2-5 weeks for a replacement he simply went out back to his dad’s shop, created a new foot pad that could be attached to the game's broken piece and got back to rocking. He soon realized that this probably wasn’t an isolated occurrence and since there have been several mods for Rock Band instruments, that people might pay for something like this. Thus a entrepreneur roadie was born.

A week after the game’s launch on November 26, 2007, Derek sold his first Rock Band Bass Pedal Repair kit online and DB Enterprises was born. Three months later he’s sold more than 4,000, most right here on Amazon. Yet another example of why kids should play video games. Kits costs between $15-30 depending on which one you want. For anyone without a backyard metal shop handy this is a pretty cheap way to keep rocking. Check out the three versions of Derek’s Bass Pedal here.

Emphasis is mine.  I just bought my our first Playstation and I the kids just love it.  The PowerWife and I are a little concerned that I am our kids are going to get all chubby if I they play video games too much. But, in using a term one of my MBA students used tonight when I told this story, maybe I should look at gaming as an investment in my retirement.  My kids could become entrepreneurs and support me and my wife in our old age.

You think that will fly with my wife?  Me neither.

Neuroscience and Math Abilities

Here's a fascinating article via EconLog on how neuroscientists are studying how the human brain understands math.

Rant at ZooRahBlog

I'm not pissed... just a little puzzled.

Changes Coming at Market Power

When I started Market Power, my vision was to write a blog that would be of use to my Principles of Microeconomics and Sports Economics students, and my hope was that it would be a blog that anyone interested in economics would find interesting.

 

Actually I was hoping I could think of enough to write about.  But I digress...

But over time, I began to blog a lot about ol' Mizzou, and many of the Mizzou posts had little or nothing to do with economics.  So I've decided to start a new blog dedicated to posts about the University of Missouri, primarily its athletic teams.  You can find it here.

Congratulations, Carl Edwards

Carl Edwards won today's rain-delayed Auto Club 500.  Congratulations, Carl.

Best Sentence I Read Today...

from E. Stephenson at DOL:

Just one problem--saying gasoline is enhanced by ethanol is like saying a swimming pool is enhanced by pee.

Stuff on My Cat

Inspired by websites like stuffonmycat.com, lolcats.com, and icanhascheezburger.com, I piled stuff on my cat and snapped away pictures.

Happy Birthday, Big Guy

PowerKid, the Youngest, turns 6 today.  Happy birthday, Big Dude.