Archive | May 2016

Fear of Economics?

An economics professor at the University of Pennsylvania, Guido Menzo, says his flight was delayed by two hours because a fellow passenger thought the economics equations (relating to price-setting) that he was solving might be a sign he was a terrorist.

American Airlines confirmed on Saturday that a woman expressed suspicions about Professor Menzio who was seated next to her. She called the stewardess and passed her a note because he “was writing strange things on a pad of paper”. The plane, ready to take off, returned to the gate and the passenger left. Professor Menzio was then asked to disembark the plane and “met by some FBI looking man-in-black”.  He told the Washington Post that he was “treated respectfully throughout” the process, but remains perturbed by a system that “relies on the input of people who may be completely clueless”.

Therefore, be careful the next time that you are completing your economics homework on the train. Do not make the other passengers nervous!

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Paul Elder: the economic implications of trying to reduce meat consumption

In the middle of his exams, Paul started thinking about what would happen if we stopped eating meat……I’ll let him tell you the rest in his own words. Notice that he has coined a new word ….elasticizing of the demand curve… .I like the verb!

I found a video about animal cruelty in the meat industry, and the idea was to turn the viewer into a vegetarian. The cruelty was… horrible… enough to shake me but not enough to turn me into a vegetarian. Anyway it seems like the guy was trying to convince people to become vegetarian, and his idea was that if people stopped buying meat, it would put the cruel animal farmers out of business. So, naturally, I did some economic analysis of this (while pondering the meaning of life in the shower).

 Here’s the link in case you want to see it (warning: it is… sad. You don’t need to watch it, I’m just providing the link): http://www.meatvideo.com/
 
First of all, we would assume that the animal farming market is in monopolistic competition. There are some barriers to entry (since land is extra scarce), but the demand is definitely not perfectly elastic, the products are slightly differentiated (different types of animals/meat), and there are many many small firms (as I have observed driving from my Grandma’s town to the nearby city — there are lots of single houses with their own small animal farm!).
The guy in the video says that if people stop buying meat, then the firms will go out of business. This can be assumed to mean that campaigns such as this will convince people to not buy meat, which will therefore make the demand curve more elastic and shift it to the left, until it is below the average variable cost of all the firms in the meat market. The first problem I see in this (beside the fact that it’s market-based and in the long run we’re all dead) is that the animal farm firms, especially the ones the guy shows in the video, are huuuge! That means they have lots of labor and capital, as well as capacity to grow, so they have lots of economies of scale to exploit. Thus they can survive huge drops in price, even after all the elasticizing of the demand curve.
 
Another problem is, especially in the US, there is a huge gap in income distribution. Also remember that in the US, meat is cheaper than vegetables ($5 salad, $2 burger). Since Americans don’t “eat to enjoy” like Cantonese people do, but rather they eat because they must, they do not concern themselves with the composition of the meals. Therefore, for low income people especially, the substitution effect is more likely to come into effect, where meat prices fall and vegetables become relatively more expensive, so despite campaigns such as these, many people (in the US) will not be able to even afford becoming a vegetarian.
 
So now that we’ve established that market forces will be unable to remove animal cruelty in the meat industry, maybe the government could do something about it. (If they cared, but let’s just suggest some things that they *could* do in case they care).
 
One thing the government could do is tax firms that perform animal cruelty or tax goods produced by firms performing animal cruelty. This would act as a “stick” (carrot vs stick) incentive to firms to change their methods. This has the added benefit of raising prices and discouraging consumers from consuming the good, though it is debatable how effective this discouragement will be. The downfalls of this method is that the firms could lie about their methods, by staging non-animal cruelty when the inspection comes and reverting to animal cruelty when there is no inspection. That way the firms could lower their prices and the incidence of the tax on the firms will be negligible. Another issue is that there would be a welfare loss, since there is no explicit negative externality affecting humans, and so the tax would just act as a normal tax (model that we did in class).
 
An opposite policy, a “carrot” policy, could work as well; the government could subsidize firms as an incentive to reduce/remove animal cruelty. However, the asymmetric information problem present in taxing cruel firms could occur. Although the welfare loss also exists, since there is no externality being remedied, at least the animal cruelty problem is being solved. The subsidies may be better than the taxation, since the subsidies would assist the firms in doing R&D or purchasing specialized capital and labor (vets, etc) in order to reduce animal cruelty.
 
The minimum wage could also be manipulated, though a minimum wage rise would result in higher productivity (with cruelty) as shown in my commentary #2, and a minimum wage drop or cut is unlikely to happen for the same reason, though if it does the workers would simply move to other higher-paying firms, and production will fall so cruel animal farmers will be unlikely to reduce the wage.
 
In conclusion, I don’t think that animal cruelty can be resolved with solely market-based methods of shifting the demand curve with campaigns, since these producers are likely to have huge economies of scale at their disposal, and the price of substitutes are too high. In order to resolve this problem, the most effective method would require government intervention. Subsidies are likely to be the most effective, despite their downfalls, since not only is there an incentive for firms to reduce animal cruelty, it also provides “funds” for them to do so.”
Thank you, Paul. Your writing contains many, many economic concepts that interested me, integrating different parts of the syllabus. For instance, it was good that you brought in distributional effects. I had not realised that meat is cheaper than vegetables/salad in the US. Thus the proposed tax on meat would be very regressive. I wonder if everyone agrees that if there is cruelty towards animals this is not a negative externality because humans are not affected?
I am glad that you have not stopped thinking about issues in economic terms even after your economic exams were completed. I hope you will all find that such an approach can aid your reasoning about problems and policies in your future lives.