The economics of Google Reader, and the $250K Mac

This post from Austin Frakt at The Incidental Economist looks at the producer and consumer surplus of Google Reader, and makes an important point (albeit using made-up numbers) about how value can be created on both sides of a transaction, even for a free product.

My favorite example of consumer surplus is my computer. I paid around $2,000 for my MacBook Pro, plus maybe $1,000 more for third-party hardware and software. But I would have paid much more—probably somewhere between the prices of my car and my house—if no substitutes were available. (It's hard to say that given what I know about how much computers "should" cost, but if I look at it rationally I can see the enormous value I derive from my computer.) The consumer surplus is off the charts.

As Austin writes,

Given the enjoyment and convenience obtained by the multitude of products we use it’s a wonder how little of that full value we actually pay. The rest is consumer surplus.

Given how I use my car and my computer, the computer should cost more. In a world with zero consumer surplus (where each supplier was a perfectly price-discriminating monopolist) my car would cost about what it did but my MacBook would cost, I would guess, around $250,000.

Thankfully we don't live in that world.

Comparing the House and the Senate health care bills

The New York Times has a good comparison of the House and Senate health care reform bills that will go to committee to be reconciled, assuming the bill before the Senate passes as expected.

Nate Silver on Greg Mankiw

From Greg Mankiw, Stimulus Critic: So Wrong He's Actually Right on FiveThirtyEight: Politics Done Right:

So, to summarize: Mankiw is wrong that the stimulus consists mostly of Keynesian-type investments. So far, it has been closer to the tax cut end of the spectrum. But he's also wrong that the stimulus is not working. By the benchmark that he implicitly endorses -- GDP -- it's done very well. Mankiw is so wrong, in other words, that he may actually be right: the stimulus looks a lot like one he might have designed, and it's helping the economy.

HT Paul Kedrosky

Who's to blame for the public's health care ignorance?

In a letter quoted in the New York Times Stanford health economist Victor Fuchs concludes that the public is ignorant about not only health care reform but also the health care system itself:

Despite all the media coverage (or maybe because of it), most of the public has a very limited understanding of the health care system and health policy. They think the insurance companies are the main problem. They think an employer mandate is a good idea because employers pay for care. They want to control cost, but oppose every policy that might do that except for thinking that drug company and insurance company profits are too high. They say they want everyone to have access to care but only one in four favors an individual mandate.

While doing research for my paper about the now-defunct pubic option, I read a lot of the media coverage of the various reform proposals. My conclusion was that even the most thoughtful, analytical sources (to say nothing of the carnival barkers masquerading as newsmen) fail to lay out the issues simply and clearly.

Maybe it's because no one wants to pay attention long enough to understand our health care system, what's wrong with it, and how it might be fixed. It's not terribly sensational. Maybe it just can't compete for our attention with the titillating infidelities of sports heros. But the public can't bear all of the responsibility for its own ignorance.

Even if people were paying attention, they'd be hard-pressed to find the basic facts.

Amazon's new spot market for compute

Amazon Web Services just introduced a spot market for computing resources. I love seeing economics so purely expressed in the real world. If Amazon ever spins off AWS as a separate company (or even a tracking stock) I'll be all over it.

Charlie dominates the dojo

Last night I got my final health econ grades: a 94 on the final exam, a 97.34 uncurved average, a 100 after the curve, one of three "honorary" A+ class grades awarded, and in fact the highest grade in the class. So that's nice. I opted out of the macro final, so I kept my 99.25 average in that class. Which is also nice.

But I find I'm ambivalent about my grades. On one hand, I've done well. On the other hand...

Measuring the distance to the goal

My Health Econ final is tomorrow night. (Yes, night. 7-10p. Dude! Anyway...)

I like to know how I need to perform in order to make my A. So, curves aside, here's the math:

Requirement	Possible	Actual
Problem Sets	15	14.3
Exam 1	20	19.8
Exam 2	20	20
Policy Paper	15	15
Final Exam	30	?
Total	100	69.1

Since time immemorial, UT has awarded only whole-letter grades for classes (A, B, C, D, and F). But starting this semester they're adding + and - into the mix, albeit with no A+ possible, so the bar for an A just rose from 90 to 93. Bummer.

Therefore for an uncurved A I need 93 points total, or an additional 23.9 points out of a possible 30, which means a 80 or better on the final. (For an uncurved A-, which is not what I want, I need a 70 or better on the final.)

Wish me luck.

Reading for the Christmas break

Greg Mankiw's students' favorite book from his freshman seminar reading list was Milton Friedman's Capitalism and Freedom, so I'm adding that to my reading list for the Christmas break. Thanks, Greg Mankiw's students.

Note to self: HB 501 PCL 4N

Uwe Reinhardt on moral hazard and war

From Paying for Health Care (and War, by the Way) by Uwe Reinhardt:

"Moral hazard" is a term commonly applied to certain financial contracts, under which one party is obliged to pay another money if a specified event (e.g., illness or a fire or an accident) occurs. The term refers to situations in which the very existence of the contract alters the behavior of one party, so that it increases the probability of the event's occurrence or the size of the monetary payoff based on that event, or both.

In the context of health care, having an insurance plan will increase the likelihood that a person will actually use the health care system. It will also probably increase the resource-intensity of the treatments chosen by patients and physicians. Some economists even theorize that such coverage encourages unhealthy lifestyles and reckless behavior.

In the context of the wider financial sector, the now openly demonstrated willingness of our government—whether it be the Bush or the Obama administration—to make taxpayers bear the financial risk of serious mismanagement or risk within the private financial sector is likely to bring about the moral hazard of future mismanagement. Much has been written about that threat.

My point in the op-ed article was that the term "moral hazard" can also be applied to the contingency of war and its cost.

If the monetary and the blood cost of war are shifted mainly to citizens other than the elites who are empowered to declare war and decide how it is conducted, I argued, then that elite is more likely to embrace war and to spend on it.

The best definition I've heard for "moral hazaard" is "overconsumption due to artificially low prices". Most people in our society, myself included, pay an artificially low price for war, so we consume more than we would at equilibrium.

In my health econ class, we've looked a lot at moral hazard as it relates to insurance. It's interesting to note the more general applciation.

Look! There's a $20 U.S. Federal Reserve Note on the ground!

From The Efficiency of Silver Coins by The Incidental Economist:

There is a famous joke about economists: Two economists are walking to the beanie propeller hat shop. One says, "Look! There's a $20 U.S. Federal Reserve Note on the ground!" (remember, he's an economist). The other says, "Can't be. If that were true, someone would have already picked it up." They walk on, leaving the $20 bill on the ground.

The joke is about the efficiency of markets. In an efficient market opportunities to systematically make profits above the market average don't exist. Any news that suggests a profit opportunity is taken advantage of nearly instantly and the extra profit is arbitraged away. The $20 is gone. It can't be there. Don't bother looking for it. This is the efficient market hypothesis (EMH) in a nutshell.

Considering the utility of that last .75 points

Going into my macro final I have a grade of 99.25/100. I have the choice of skipping the final and keeping that grade or taking the final and possibly raising my average to 100. (If I were to score 100 on the final I could drop my grade for Exam 2, which was 97. If I were to score under 97 on the final, that grade would be dropped and my average would be unchanged.)

Now I have to consider the costs and benefits of studying for and taking the final. I've been thinking I would take it, since that would make the study for it, which would help cement the things I've learned this semester into my brain. I'm still leaning that way. But I have a long to-do list at work and a looming deadline, so the opportunity cost of studying is high, and could be huge if I were to miss my deadline.

The potential grade difference isn't significant to me, so instead of using the final exam as a forcing function I think I'll work instead and commit to thoroughly reviewing the material after I'm over the hump at work, which will be around the end of January.

Still, it would be nice to have a perfect 100 average...