And I have now decided to shut this down more or less permanently. The same sort of discussions will continue here every Friday, though, so feel free to keep reading over there if you wish.
Hope you all had a good time with the stuff here.
Friday, September 28, 2012
Thursday, May 17, 2012
Post Elsewhere
So, I am not moving away from this blog, but I am posting some more technology-related economics things on my company blog. The first of such posts can be found here, if you wish to read it: http://www.clevercloudcomputing.com/wordpress/?p=63.
Enjoy! I'll be back to updating this regularly fairly soon. Not sure how fairly soon, but fairly soon.
Enjoy! I'll be back to updating this regularly fairly soon. Not sure how fairly soon, but fairly soon.
Wednesday, April 11, 2012
Public Goods and Common Property Resources
In this post, I will cover two additional types of problems that the traditional free market structure faces: public good and common property resources. In both cases, the lack of ability to structure ownership in the form or private property prevents efficient allocation of resources.
First, a normal, market good is defined as something that is rival and exclusive; that is, only one person may use it, and the use of one prevents it from being used by others. These goods fall under the sphere of private property for efficient management, as what is essentially described is a good for which the requisites for private property are met: exclusivity, transferability, and enforceability.
A public good is the exact opposite of a normal good - it is non-rival AND non-exclusive. That is, one person using the good does not prevent someone else from using it, and that use does not prevent another person from using the good in the future.
The quintessential example of a public good is the lighthouse. The light from the lighthouse is provided to all and the provision cannot be withheld; moreover, any individual seeing the light does not prevent another individual from seeing the light, as well.
Public goods have a problem that is well understood - free ridership. Since you cannot prevent anyone from gaining access to the benefits of the good, no one is willing to pay for it. This means that the amount of resources allocated to providing a public good will be inefficiently low in a market situation.
To rectify the problem, an outside agency must provide the good and force individuals to pay for it, assuming that they can provide the good without it costing more than the benefits. This outside agency is, invariably, the government, as in many cases. This is why the government provides and maintains things such as lighthouses.
In between public goods and normal goods are common property resources. These goods are rival and non-exclusive. That is, they can be used by anyone, and the use will, eventually, prevent others from using the resource.
The problem commonly associated with common property resources is 'tragedy of the commons,' a phrase coined by Hardin in his paper of the same name. In the paper, he describes a system of common grazing grounds in which each individual herder comes to the rational decision to overgraze, eventually ruining the pasture for everyone.
This decision is reached because the individual herder gains the full benefit of grazing, but shares the cost of grazing with everyone. As such, from the herder's perspective, it is always efficient to graze more.
In essence, this problem causes individuals to utilize a resource to an inefficiently high degree. Put theoretically, individuals aim to use the resource until Net Revenue = Net Cost, rather than Marginal Revenue = Marginal Cost as normal. NR = NC is the point at which zero actual profit is gained, and this is, obviously, an incredibly inefficient allocation of resources.
Fixing the problems associated with common property resources is much more difficult than it is with public goods. There are two broad approaches - regulation from an outside source, and privatization.
Privatization involves changing the common property resource into a normal good. This is done by associating some cost to use the good, thereby changing it from non-exclusive to exclusive. As normal goods co-exist with capitalism in a much more beneficial way than common property goods, this is often the method by which the problem is fixed.
Regulation involves an outside source, again almost invariably the government or a government agency, that comes in and prevents individuals from overusing the resource. This approach is commonly used in the management of fisheries, where the regulatory agency simply prevents individuals from fishing above a certain amount by making it illegal to fish without a permit and strictly regulating the number of available permits.
This approach is largely used when privatization fails to be a realistic option, as the cost of privatizing a common property resource is often unimaginably high.
Two random asides before I wander off to do other things...
First of all, there exists a third sort of good - exclusive, non-rival goods. These are called club goods, and things such as television fall into this category. That is, you can prevent people from watching television, but one person watching television has no impact on the ability of another person to watch television.
Secondly, for those of you more environmentally inclined, the evolution from public good to common property resource is a well documented phenomenon in that area. This evolution occurs as population density increases. That is, as the density of population increases, what was once a public good with non-rival traits becomes a common property resource, with rival traits.
For example, imagine a river. If one person lives on the river and goes to the bathroom in it fairly regularly, there is little impact on the river itself and no other individuals to get upset. This situation occurs even when there are two, or three people living on the river, although perhaps not if they live right next to one another. This is an example of a public good.
However, when you have 10,000 people living on the river, if they all go to the bathroom it suddenly becomes a river of waste that no one wishes to live next to. As a result of the non-exclusive nature of using the river as a waste-removal method, it has been ruined for everyone. This is an example of a common property resource, with the only variable changed being that of population density.
And now I am done. Hopefully this was interesting. I will be moving, fairly soon, the actual finishing article of this series. I believe I have two more topics I want to cover first, and then we will be able to examine when it is that the government should be involved in the economy, what I believe to be a particularly important question.
Comments, suggestions, questions, and insults may all be put down below. In the comments section, not some other definition of down below...
First, a normal, market good is defined as something that is rival and exclusive; that is, only one person may use it, and the use of one prevents it from being used by others. These goods fall under the sphere of private property for efficient management, as what is essentially described is a good for which the requisites for private property are met: exclusivity, transferability, and enforceability.
A public good is the exact opposite of a normal good - it is non-rival AND non-exclusive. That is, one person using the good does not prevent someone else from using it, and that use does not prevent another person from using the good in the future.
The quintessential example of a public good is the lighthouse. The light from the lighthouse is provided to all and the provision cannot be withheld; moreover, any individual seeing the light does not prevent another individual from seeing the light, as well.
Public goods have a problem that is well understood - free ridership. Since you cannot prevent anyone from gaining access to the benefits of the good, no one is willing to pay for it. This means that the amount of resources allocated to providing a public good will be inefficiently low in a market situation.
To rectify the problem, an outside agency must provide the good and force individuals to pay for it, assuming that they can provide the good without it costing more than the benefits. This outside agency is, invariably, the government, as in many cases. This is why the government provides and maintains things such as lighthouses.
In between public goods and normal goods are common property resources. These goods are rival and non-exclusive. That is, they can be used by anyone, and the use will, eventually, prevent others from using the resource.
The problem commonly associated with common property resources is 'tragedy of the commons,' a phrase coined by Hardin in his paper of the same name. In the paper, he describes a system of common grazing grounds in which each individual herder comes to the rational decision to overgraze, eventually ruining the pasture for everyone.
This decision is reached because the individual herder gains the full benefit of grazing, but shares the cost of grazing with everyone. As such, from the herder's perspective, it is always efficient to graze more.
In essence, this problem causes individuals to utilize a resource to an inefficiently high degree. Put theoretically, individuals aim to use the resource until Net Revenue = Net Cost, rather than Marginal Revenue = Marginal Cost as normal. NR = NC is the point at which zero actual profit is gained, and this is, obviously, an incredibly inefficient allocation of resources.
Fixing the problems associated with common property resources is much more difficult than it is with public goods. There are two broad approaches - regulation from an outside source, and privatization.
Privatization involves changing the common property resource into a normal good. This is done by associating some cost to use the good, thereby changing it from non-exclusive to exclusive. As normal goods co-exist with capitalism in a much more beneficial way than common property goods, this is often the method by which the problem is fixed.
Regulation involves an outside source, again almost invariably the government or a government agency, that comes in and prevents individuals from overusing the resource. This approach is commonly used in the management of fisheries, where the regulatory agency simply prevents individuals from fishing above a certain amount by making it illegal to fish without a permit and strictly regulating the number of available permits.
This approach is largely used when privatization fails to be a realistic option, as the cost of privatizing a common property resource is often unimaginably high.
Two random asides before I wander off to do other things...
First of all, there exists a third sort of good - exclusive, non-rival goods. These are called club goods, and things such as television fall into this category. That is, you can prevent people from watching television, but one person watching television has no impact on the ability of another person to watch television.
Secondly, for those of you more environmentally inclined, the evolution from public good to common property resource is a well documented phenomenon in that area. This evolution occurs as population density increases. That is, as the density of population increases, what was once a public good with non-rival traits becomes a common property resource, with rival traits.
For example, imagine a river. If one person lives on the river and goes to the bathroom in it fairly regularly, there is little impact on the river itself and no other individuals to get upset. This situation occurs even when there are two, or three people living on the river, although perhaps not if they live right next to one another. This is an example of a public good.
However, when you have 10,000 people living on the river, if they all go to the bathroom it suddenly becomes a river of waste that no one wishes to live next to. As a result of the non-exclusive nature of using the river as a waste-removal method, it has been ruined for everyone. This is an example of a common property resource, with the only variable changed being that of population density.
And now I am done. Hopefully this was interesting. I will be moving, fairly soon, the actual finishing article of this series. I believe I have two more topics I want to cover first, and then we will be able to examine when it is that the government should be involved in the economy, what I believe to be a particularly important question.
Comments, suggestions, questions, and insults may all be put down below. In the comments section, not some other definition of down below...
Monday, April 2, 2012
Odd Things
So, the service through which I normally get email was transferred to Google recently and, as such, I now have two separate accounts set up to post here. Kind of weird, but it should work out fairly well.
This post is largely to clear up confusion and let anyone who actually checks this regularly that I'll have another post up by Thursday at the latest.
This post is largely to clear up confusion and let anyone who actually checks this regularly that I'll have another post up by Thursday at the latest.
Wednesday, March 28, 2012
Market Equilibrium and Externalities
So, it's been a while since my last post here, for which I apologize. I've been caught up in running my business and getting through to the end of my last semester at college.
Anyways. In my last post I examined the relation between competitiveness in markets and socially optimal market structure. Now I shall be doing the same sort of thing with markets that contain externalities, tossing in market equilibrium and a few other ideas.
First of all, let's get a clear idea of what market equilibrium is. I'm sure most of you know that you can construct supply and demand curves for any market. The demand curve shows how much people are willing to purchase at a particular price, and it decreases as price increases; similarly, the supply curve shows how much the producers in the market are willing to provide at a certain price, and it increases as price increases.
The graph of these curves, which most of you probably already know in a vague sort of sense, looks something like this...
That point where the two lines cross is called market equilibrium. This is the point at which the amount supplied and the amount demanded is equivalent; that is, there is no shortage and no surplus, as are indicated by the B and A quadrants.
More importantly than this, it is generally the case that utility is maximized at equilibrium. This occurs because consumer and producer surplus are maximized. Consumer surplus is the triangle above the blue line and below the green line on the above graph; it represents the utility gained by consumers who would be willing to pay a higher price, but instead only have to pay the equilibrium price. Similarly, producer surplus is the utility gained by producers when they can sell a unit of a good that they would provide at a lower price at a higher price, and is the area above the red line but below the blue one in the above graph.
The total area of consumer and producer surplus is maximized at equilibrium, which you can simply take my word on, work out by moving things around on the graph, or figure out mathematically with integrals or somesuch. For the moment, we will simply move over this point and continue on, with one exception: the loss of surplus as a result of moving away from equilibrium is called dead-weight loss, and will be referred to later.
When a market contains an externality of some type, what is really occurring is a divergence between social and private demand or supply. That is, the fact that the transaction in question has some impact on others is not factored into the demand and supply of individuals, but it is factored into the demand and supply preferred by society.
As an example, the social supply curve for a good whose production involves pollution is lower than the private supply curve, as the cost of the pollution is spread over everyone affected, not only those involved in the transaction. In an unfettered market, the equilibrium reached would then be one of personal utility maximization, as opposed to social utility maximization.
On the graph, this boils down to have two supply curves, rather than one - one social, one private. We can treat the social supply curve as the 'true' demand curve, while the private one is considered to be maladjusted. It can then be said that the equilibrium point created by the private supply curve creates dead-weight loss from the point of view of society, whose supply curve is different. This results in a net loss of utility for society as a whole.
This problem cannot be fixed within the confines of the market.
Let me say that again: the problem cannot be fixed simply by changing the market in some way. The only way to cause a convergence of the social and private supply curves is for some external agency to make it happen, usually through taxation or direct regulation. Regardless, the entity that performs this service in the vast majority of cases is the government.
Externalities then represent one instance in which the market will reach a socially non-optimal equilibrium without some attempt by an outside agency to bring private demand and supply in line with social demand and supply.
And that was significantly easier to write than my last post. Hopefully it was easier to understand, as well, but we shall see. Even more hopefully, I'll probably be back to updating once or twice a week over the next few weeks!
Comments, questions, suggestions, and other nonsense should be left below. I appreciate any feedback you have for me, as this is written for the rest of you just as much as it is for me.
Anyways. In my last post I examined the relation between competitiveness in markets and socially optimal market structure. Now I shall be doing the same sort of thing with markets that contain externalities, tossing in market equilibrium and a few other ideas.
First of all, let's get a clear idea of what market equilibrium is. I'm sure most of you know that you can construct supply and demand curves for any market. The demand curve shows how much people are willing to purchase at a particular price, and it decreases as price increases; similarly, the supply curve shows how much the producers in the market are willing to provide at a certain price, and it increases as price increases.
The graph of these curves, which most of you probably already know in a vague sort of sense, looks something like this...
That point where the two lines cross is called market equilibrium. This is the point at which the amount supplied and the amount demanded is equivalent; that is, there is no shortage and no surplus, as are indicated by the B and A quadrants.
More importantly than this, it is generally the case that utility is maximized at equilibrium. This occurs because consumer and producer surplus are maximized. Consumer surplus is the triangle above the blue line and below the green line on the above graph; it represents the utility gained by consumers who would be willing to pay a higher price, but instead only have to pay the equilibrium price. Similarly, producer surplus is the utility gained by producers when they can sell a unit of a good that they would provide at a lower price at a higher price, and is the area above the red line but below the blue one in the above graph.
The total area of consumer and producer surplus is maximized at equilibrium, which you can simply take my word on, work out by moving things around on the graph, or figure out mathematically with integrals or somesuch. For the moment, we will simply move over this point and continue on, with one exception: the loss of surplus as a result of moving away from equilibrium is called dead-weight loss, and will be referred to later.
When a market contains an externality of some type, what is really occurring is a divergence between social and private demand or supply. That is, the fact that the transaction in question has some impact on others is not factored into the demand and supply of individuals, but it is factored into the demand and supply preferred by society.
As an example, the social supply curve for a good whose production involves pollution is lower than the private supply curve, as the cost of the pollution is spread over everyone affected, not only those involved in the transaction. In an unfettered market, the equilibrium reached would then be one of personal utility maximization, as opposed to social utility maximization.
On the graph, this boils down to have two supply curves, rather than one - one social, one private. We can treat the social supply curve as the 'true' demand curve, while the private one is considered to be maladjusted. It can then be said that the equilibrium point created by the private supply curve creates dead-weight loss from the point of view of society, whose supply curve is different. This results in a net loss of utility for society as a whole.
This problem cannot be fixed within the confines of the market.
Let me say that again: the problem cannot be fixed simply by changing the market in some way. The only way to cause a convergence of the social and private supply curves is for some external agency to make it happen, usually through taxation or direct regulation. Regardless, the entity that performs this service in the vast majority of cases is the government.
Externalities then represent one instance in which the market will reach a socially non-optimal equilibrium without some attempt by an outside agency to bring private demand and supply in line with social demand and supply.
And that was significantly easier to write than my last post. Hopefully it was easier to understand, as well, but we shall see. Even more hopefully, I'll probably be back to updating once or twice a week over the next few weeks!
Comments, questions, suggestions, and other nonsense should be left below. I appreciate any feedback you have for me, as this is written for the rest of you just as much as it is for me.
Thursday, February 23, 2012
Competitiveness in Markets
My last post ended with no real conclusion and only one interesting result, as has been pointed out by multiple people. This post is going to rectify that, as I will begin a discussion as to when competitive markets are desired and when alternatives are actually more useful.
I'm sure some of you are already thinking something involving the idea that a market is always in the best possible condition when it is competitive. However, there are a number of reasons why competitive markets do not always maximize social utility.
The theory of capitalism is ultimately based around a simple principle - voluntary exchange. A voluntary exchange is one in which both parties agree to the exchange. This agreement is made only if both parties believe they benefit from the exchange. As all exchanges in a truly free market are voluntary, every exchange within a truly free market should, ideally, increase the utility of both parties involved.
This, of course, glosses over a trio of important points. First of all, the fact that both parties may not have equivalent knowledge about the exchange. In an instance where knowledge is not distributed equally, it is possible for a voluntary exchange to be one that is not beneficial to both parties.
Secondly, there exist a class of market failure called externalities, as described back towards my first few posts. An externality is a cost or benefit of an exchange that falls upon individuals not directly involved in the exchange.
Pollution is the class example of a negative externality, as the cost of pollution is shared by many individuals not involved in the process of creating pollution or buying the goods manufactured by said process. For positive externalities, higher education is generally used as an example, as many people benefit positively from a more educated populace but have nothing to do with the education process or the positions that are filled because of it.
Third, common property goods and public goods are not allocated properly in a free market. Public goods are non-exclusive and non-rival; that is, someone else's use of a public good does not reduce the amount of it available nor prevent someone else from using it. Common property goods are only non-rival; that is, you cannot prevent someone from using them but the use of the good reduces the amount of it that is available. Lighthouses are an excellent example of public goods, while publicly available. grazing land is the class example of a common property good.
We'll come back to some of these problems later, as my final point in this series of posts will be to determine when markets are performing optimally and how to get them to that point.
For now, let us assume that we are examining a market in which everyone has access to all information and there are no externalities. Moreover, this market is in no way related to a common property or public good.This market obviously does not exist, but these assumptions allow us to ignore some general problems and focus specifically on the competitiveness of the market.
As such, in this market any voluntary exchange will always result in a net benefit for the parties involved. This means that, generally speaking, a market holding to these conditions would provide the greatest benefit to society when the most transactions occur.
In addition, a truly competitive market would offer indistinguishable goods at the same price to all buyers, with the number of firms and buyers being to the point that no single transaction causes a change in price, no matter how large. The more competitive the market, the closer it resembles this model.
Our third and final consideration is that of economies of scale. In a market that possesses economies of scale, it is cheaper to produce goods when you produce a large number then when you produce a small number.
Now, let us examine a market for good N. Let us say that efficient production of N for a single firm falls between A and B. Let us say that there exist M different significant differentiations of good N, and that the demand for each is N1, N2, N3, ... , NM. Finally, let the total demand for N be D.
A voluntary transaction will occur if and only if both parties believe they benefit from the transaction; simply breaking even is not enough, as there is then no motivation to perform the transaction.
Let us say that there exist no significant differentiations for good N. N1 then equals D. If D < A, then either no N is produced or there is significant scarcity rent that drives up the prices for N. If A<D<B, the socially optimal number of firms producing N is one, and will be X if X*A<D<X*B.
In simple terms, the optimal number of firms in this market is the number that produce as close to the total demand for good N while staying mostly within the bounds of efficient production.
This can be extended to markets with differentiation simply by treating each differentiation of N as its own market.This is justified because each significant differentiation of N is more or less attractive to a subset of the individuals who have a desire for N and, as such, the existence of each distinct differentiation increases the possibility for voluntary exchanges.
Treating each as its own market leads us to the same conclusion as when we have no differentiation for each one, so we can simply treat a market with differentiation as a composite of markets without differentiation, with one difference - all goods within a differentiable(This analysis leaves out the idea of rent-seeking behavior, which we will examine at a later point. This behavior sets in through the use of monopoly power to create barriers to entry and other such cases, and significantly changes the solutions given here.)e market provide the same service, and therefore we can substitute between them.
This means that slack from one company can be taken up by another to reduce scarcity rents and still providing opportunities for voluntary exchange.
Still, the same overall conclusion holds, even if the exact numbers are not the same. We will not go through the math here, as it is very long and does not add anything useful in addition to the short mathematical section above.
From here, we can then say that the optimal number of firms and production of firms in the market for N is almost never the same as in the model for a competitive market.
We then conclude that competitive market structures are not always socially optimal.
This is contrary to the beliefs of many people, I'm sure, but I welcome the discussion, controversy or what-have-you.
(This analysis leaves out the idea of rent-seeking behavior, which we will examine at a later point. This behavior sets in through the use of monopoly power to create barriers to entry and other such cases, and significantly changes the solutions given here.)
As I move on from here, I'll be taking time to examine other peculiarities of markets, i.e. several of the things that are assumed to not be present in this examination of competitiveness. I will, hopefully, reach a conclusion as to what can be done to move a market closer to its socially optimal form by the end of the next few posts.
Anyways. Questions, comments, suggestions, complaints, and whatnot are all welcome. Especially suggestions, so I don't run out of things to talk about. Should be able to dump them below fairly easily.
I'm sure some of you are already thinking something involving the idea that a market is always in the best possible condition when it is competitive. However, there are a number of reasons why competitive markets do not always maximize social utility.
The theory of capitalism is ultimately based around a simple principle - voluntary exchange. A voluntary exchange is one in which both parties agree to the exchange. This agreement is made only if both parties believe they benefit from the exchange. As all exchanges in a truly free market are voluntary, every exchange within a truly free market should, ideally, increase the utility of both parties involved.
This, of course, glosses over a trio of important points. First of all, the fact that both parties may not have equivalent knowledge about the exchange. In an instance where knowledge is not distributed equally, it is possible for a voluntary exchange to be one that is not beneficial to both parties.
Secondly, there exist a class of market failure called externalities, as described back towards my first few posts. An externality is a cost or benefit of an exchange that falls upon individuals not directly involved in the exchange.
Pollution is the class example of a negative externality, as the cost of pollution is shared by many individuals not involved in the process of creating pollution or buying the goods manufactured by said process. For positive externalities, higher education is generally used as an example, as many people benefit positively from a more educated populace but have nothing to do with the education process or the positions that are filled because of it.
Third, common property goods and public goods are not allocated properly in a free market. Public goods are non-exclusive and non-rival; that is, someone else's use of a public good does not reduce the amount of it available nor prevent someone else from using it. Common property goods are only non-rival; that is, you cannot prevent someone from using them but the use of the good reduces the amount of it that is available. Lighthouses are an excellent example of public goods, while publicly available. grazing land is the class example of a common property good.
We'll come back to some of these problems later, as my final point in this series of posts will be to determine when markets are performing optimally and how to get them to that point.
For now, let us assume that we are examining a market in which everyone has access to all information and there are no externalities. Moreover, this market is in no way related to a common property or public good.This market obviously does not exist, but these assumptions allow us to ignore some general problems and focus specifically on the competitiveness of the market.
As such, in this market any voluntary exchange will always result in a net benefit for the parties involved. This means that, generally speaking, a market holding to these conditions would provide the greatest benefit to society when the most transactions occur.
In addition, a truly competitive market would offer indistinguishable goods at the same price to all buyers, with the number of firms and buyers being to the point that no single transaction causes a change in price, no matter how large. The more competitive the market, the closer it resembles this model.
Our third and final consideration is that of economies of scale. In a market that possesses economies of scale, it is cheaper to produce goods when you produce a large number then when you produce a small number.
Now, let us examine a market for good N. Let us say that efficient production of N for a single firm falls between A and B. Let us say that there exist M different significant differentiations of good N, and that the demand for each is N1, N2, N3, ... , NM. Finally, let the total demand for N be D.
A voluntary transaction will occur if and only if both parties believe they benefit from the transaction; simply breaking even is not enough, as there is then no motivation to perform the transaction.
Let us say that there exist no significant differentiations for good N. N1 then equals D. If D < A, then either no N is produced or there is significant scarcity rent that drives up the prices for N. If A<D<B, the socially optimal number of firms producing N is one, and will be X if X*A<D<X*B.
In simple terms, the optimal number of firms in this market is the number that produce as close to the total demand for good N while staying mostly within the bounds of efficient production.
This can be extended to markets with differentiation simply by treating each differentiation of N as its own market.This is justified because each significant differentiation of N is more or less attractive to a subset of the individuals who have a desire for N and, as such, the existence of each distinct differentiation increases the possibility for voluntary exchanges.
Treating each as its own market leads us to the same conclusion as when we have no differentiation for each one, so we can simply treat a market with differentiation as a composite of markets without differentiation, with one difference - all goods within a differentiable(This analysis leaves out the idea of rent-seeking behavior, which we will examine at a later point. This behavior sets in through the use of monopoly power to create barriers to entry and other such cases, and significantly changes the solutions given here.)e market provide the same service, and therefore we can substitute between them.
This means that slack from one company can be taken up by another to reduce scarcity rents and still providing opportunities for voluntary exchange.
Still, the same overall conclusion holds, even if the exact numbers are not the same. We will not go through the math here, as it is very long and does not add anything useful in addition to the short mathematical section above.
From here, we can then say that the optimal number of firms and production of firms in the market for N is almost never the same as in the model for a competitive market.
We then conclude that competitive market structures are not always socially optimal.
This is contrary to the beliefs of many people, I'm sure, but I welcome the discussion, controversy or what-have-you.
(This analysis leaves out the idea of rent-seeking behavior, which we will examine at a later point. This behavior sets in through the use of monopoly power to create barriers to entry and other such cases, and significantly changes the solutions given here.)
As I move on from here, I'll be taking time to examine other peculiarities of markets, i.e. several of the things that are assumed to not be present in this examination of competitiveness. I will, hopefully, reach a conclusion as to what can be done to move a market closer to its socially optimal form by the end of the next few posts.
Anyways. Questions, comments, suggestions, complaints, and whatnot are all welcome. Especially suggestions, so I don't run out of things to talk about. Should be able to dump them below fairly easily.
Saturday, February 18, 2012
Non-Competitive Markets
This post is inspired by one of my friends, who asked me why it is that banks require you to pay fees and all sorts of other things, while credit unions generally do not.
Now, I'm not an expert when it comes to banks and other financial institutions. That's not what I'm interested in. However, I know the signs of a market that is not competitive when I see them. Or, at least, assuming that the above statement is correct and the services provided by a bank and a credit union are substitutes, the overall market is not competitive one.
Hence, this post is going to talk about what causes a market to become not competitive. Fairly soon I'll also have a post up talking about whether or not a non-competitive market is necessarily a bad thing, but for the moment we will leave issues of social surplus and equity in our other pants.
A market in perfect competition is the economic version of a perfect gas. That is, it doesn't exist, but it has a lot of nice properties that are theoretically important. Perfectly competitive markets have a large number of buyers and sellers, and all goods in the market are perfect substitutes for one another. No business makes a profit, and social surplus is maximized. There are a number of other minor and major theoretical details that aren't particularly important here.
What is important is to understand the criteria that define a competitive market. First, goods should be perfect substitutes. The further from perfect substitutes goods in the same market are, the less competitive the market is as a whole. The most important case in which goods are not substitutes is when product differentiation occurs, usually in the case of certain goods being better or worse. Brands and brand loyalty are also a good example of this.
The second condition is that there must be a large number of buyers and sellers. The obvious opposite case is a monopoly, a market with only one seller. There are also monopsonies, markets with only one buyer. Both show how important this particular condition is for determining if a market is competitive.
Non-competitive markets come into existence because businesses want to make a profit. In a truly competitive market, no profits are made. Again, many theoretical reasons that we will skip here, but the main important one is that, as a result of the large number of buyers and sellers and lack of product differentiation, no business can sell a good at anything more than cost without having zero customers.
Transitions from competitive to non-competitive occur, then, because businesses want to make money which, I think, is a fact we can all agree on. They go about doing this in many different ways, but they are all aimed at either positive differentiation of their own product or reducing the number of other businesses in the market.
Regardless, it can then be said that the inexorable profit seeking activity of business people is what causes a market to become less competitive, something I think some of you will find quite surprising.
Anyways. Some further examination of competition will be in order later this week. Questions, comments, suggestions, and your least favorite word in the English language can all be left in the comments section if you so wish.
Now, I'm not an expert when it comes to banks and other financial institutions. That's not what I'm interested in. However, I know the signs of a market that is not competitive when I see them. Or, at least, assuming that the above statement is correct and the services provided by a bank and a credit union are substitutes, the overall market is not competitive one.
Hence, this post is going to talk about what causes a market to become not competitive. Fairly soon I'll also have a post up talking about whether or not a non-competitive market is necessarily a bad thing, but for the moment we will leave issues of social surplus and equity in our other pants.
A market in perfect competition is the economic version of a perfect gas. That is, it doesn't exist, but it has a lot of nice properties that are theoretically important. Perfectly competitive markets have a large number of buyers and sellers, and all goods in the market are perfect substitutes for one another. No business makes a profit, and social surplus is maximized. There are a number of other minor and major theoretical details that aren't particularly important here.
What is important is to understand the criteria that define a competitive market. First, goods should be perfect substitutes. The further from perfect substitutes goods in the same market are, the less competitive the market is as a whole. The most important case in which goods are not substitutes is when product differentiation occurs, usually in the case of certain goods being better or worse. Brands and brand loyalty are also a good example of this.
The second condition is that there must be a large number of buyers and sellers. The obvious opposite case is a monopoly, a market with only one seller. There are also monopsonies, markets with only one buyer. Both show how important this particular condition is for determining if a market is competitive.
Non-competitive markets come into existence because businesses want to make a profit. In a truly competitive market, no profits are made. Again, many theoretical reasons that we will skip here, but the main important one is that, as a result of the large number of buyers and sellers and lack of product differentiation, no business can sell a good at anything more than cost without having zero customers.
Transitions from competitive to non-competitive occur, then, because businesses want to make money which, I think, is a fact we can all agree on. They go about doing this in many different ways, but they are all aimed at either positive differentiation of their own product or reducing the number of other businesses in the market.
Regardless, it can then be said that the inexorable profit seeking activity of business people is what causes a market to become less competitive, something I think some of you will find quite surprising.
Anyways. Some further examination of competition will be in order later this week. Questions, comments, suggestions, and your least favorite word in the English language can all be left in the comments section if you so wish.
Sunday, February 12, 2012
Individual Impact of Substantial Government Debt, Part Five: Conclusion
This should be my last post on this topic, so hopefully it clears up the majority of questions related to it. You can probably get through it without having read the previous four posts, but the reasoning behind the assumptions made here can be found there.
Anyways. Here goes...
Government debt effects the individual negatively in one of two ways.
The more common affect is increased inflation. This occurs as the money supply expands and confidence in the financial stability of the government drops. While inflation is not necessarily a bad thing, and is even healthy for the economy at low levels, this can become a problem when it pushes inflation upwards well in excess of economic growth.
The second affect is that of financial instability. As the government has an incredibly stable cash flow in the form of taxes, this usually has zero impact on the individual beyond the ordinary impact it has on the value of the currency. However, in cases where paying off interest becomes prohibitive to the government's functioning, reduction of services and the potential of insolvency are both issues that affect the individual in a number of major ways, which I will not elaborate here.
(If you want to examine what happens when a government declares bankruptcy, take a look at Greece.)
The ideal positive impact of government debt is that the individual stands to gain from the additional services that the government provides as a result of deficit spending.
From here, we can then attempt to answer a rather important question: when is it a good idea for the government to run a deficit?
First and foremost, the problem is one that must be examined dynamically, rather than statically. Therefore, impacts of deficit spending will be examined in the future as well as in the present.
Now, let us say that there is a service the government must run a deficit to provide. Let us further assume that the service is a net benefit to society, as, at least in my opinion, the government should be offering no services that do not have a net positive benefit to society.
If the service is one that will be provided through a number of payments over a year or even a few years, deficit spending can be the proper thing to do. It obviously depends on the magnitude of the benefit of the service provided, but there is no theoretical reason as to why deficit spending could not be a good decision in this scenario.
On the other hand, if the service is one that necessitates a certain amount of funding every year over an arbitrarily long period of time, deficit spending leads, eventually, to a debt that the government cannot handle. Even small amounts of regular deficit spending will eventually cause the interest payments on the debt to eat into the budget, requiring additional deficit spending which, in turn, yields higher interest payments. This is obviously not sustainable over the long run.
We can then say that if the service requires capital every year to continue to be provided, either the service should not be provided at all, taxes should be raised to accommodate higher necessary spending, or other services should be cut to fit the necessary budget within current tax revenues.
These two scenarios are the extreme cases, so it can be said that they may never occur. However, from them we can come to a conclusion as to when the government should decide to run a deficit, and it can be stated in a single sentence...
Governments should run a deficit only when providing a beneficial service that requires only a few infusions of capital over a short period of time.
So, yeah. Hopefully the conclusion makes some amount of sense. A lot of the reasoning is in the other posts, so I advise you read those before asking any questions.
Also, I will not pretend that the conclusion holds in all cases, as there are very few economic laws that do, let alone little ideas like this one.
Anyways. I have a few ideas for my next few posts, but if any of you can think of something in particular you'd like to see me discuss, just leave a comment and I might get around to it. Eventually. Maybe.
Anyways. Here goes...
Government debt effects the individual negatively in one of two ways.
The more common affect is increased inflation. This occurs as the money supply expands and confidence in the financial stability of the government drops. While inflation is not necessarily a bad thing, and is even healthy for the economy at low levels, this can become a problem when it pushes inflation upwards well in excess of economic growth.
The second affect is that of financial instability. As the government has an incredibly stable cash flow in the form of taxes, this usually has zero impact on the individual beyond the ordinary impact it has on the value of the currency. However, in cases where paying off interest becomes prohibitive to the government's functioning, reduction of services and the potential of insolvency are both issues that affect the individual in a number of major ways, which I will not elaborate here.
(If you want to examine what happens when a government declares bankruptcy, take a look at Greece.)
The ideal positive impact of government debt is that the individual stands to gain from the additional services that the government provides as a result of deficit spending.
From here, we can then attempt to answer a rather important question: when is it a good idea for the government to run a deficit?
First and foremost, the problem is one that must be examined dynamically, rather than statically. Therefore, impacts of deficit spending will be examined in the future as well as in the present.
Now, let us say that there is a service the government must run a deficit to provide. Let us further assume that the service is a net benefit to society, as, at least in my opinion, the government should be offering no services that do not have a net positive benefit to society.
If the service is one that will be provided through a number of payments over a year or even a few years, deficit spending can be the proper thing to do. It obviously depends on the magnitude of the benefit of the service provided, but there is no theoretical reason as to why deficit spending could not be a good decision in this scenario.
On the other hand, if the service is one that necessitates a certain amount of funding every year over an arbitrarily long period of time, deficit spending leads, eventually, to a debt that the government cannot handle. Even small amounts of regular deficit spending will eventually cause the interest payments on the debt to eat into the budget, requiring additional deficit spending which, in turn, yields higher interest payments. This is obviously not sustainable over the long run.
We can then say that if the service requires capital every year to continue to be provided, either the service should not be provided at all, taxes should be raised to accommodate higher necessary spending, or other services should be cut to fit the necessary budget within current tax revenues.
These two scenarios are the extreme cases, so it can be said that they may never occur. However, from them we can come to a conclusion as to when the government should decide to run a deficit, and it can be stated in a single sentence...
Governments should run a deficit only when providing a beneficial service that requires only a few infusions of capital over a short period of time.
So, yeah. Hopefully the conclusion makes some amount of sense. A lot of the reasoning is in the other posts, so I advise you read those before asking any questions.
Also, I will not pretend that the conclusion holds in all cases, as there are very few economic laws that do, let alone little ideas like this one.
Anyways. I have a few ideas for my next few posts, but if any of you can think of something in particular you'd like to see me discuss, just leave a comment and I might get around to it. Eventually. Maybe.
Tuesday, February 7, 2012
Individual Impact of Substantial Government Debt, Part Four: The Economy
To examine what government does to the economy, we must first examine what a large amount of debt does to a corporation.
In many cases, large amounts of debt do nothing significant, as individuals are still confident in the corporation's ability to maintain interest payments over long periods of time. On the other hand, large amounts of debt can also cause panic among investors, driving down stock prices and requiring higher interest rates to secure capital through the use of bonds.
For the government, we would ideally hope that the first case is the one that holds. Largely, it can also be shown that this is the case that holds. However, there is one major difference - deficit spending by the government causes inflation. Here's why.
Deficit spending by the government both reduces overall confidence in the government's finances and, generally, increases the supply of money available to the economy.
Considering that currency can be thought of as the government's version of 'stock,' and inflation is the devaluation of currency, a lack of confidence in government finances obviously increases inflation.
Additionally, increasing the money supply is both theoretically and empirically linked to greater inflation. The Quantity Theory of Money does a great job of explaining why this is the case, but I will leave it to you to Google it and find out more if you so wish.
As such, we can definitely say that government deficit spending will increase inflation when all other things are held constant (HAEC - holding all else constant, is an acronym I'll probably be using in the future). So, HAEC, government deficit spending will increase inflation, although the degree to which it will is not well understood.
To be clear, inflation is not necessarily a bad thing in moderation. To be even more clear, inflation equivalent to the growth rate of the economy can even be considered healthy. As such, this is a negative drawback only when inflation is increased to an unhealthy point as a result of government deficit spending.
Other effects of deficit spending on the economy are largely small and, in many cases, highly dependent on the manner of both the spending and the method of acquiring funds. For instance, the sale of additional government bonds and the general upward trend in the interest rates on those bonds over time as confidence in the government's finances decreases has an impact on the market for bonds.
However, these are all largely small impacts, and we shall ignore them as they have very little impact on the average individual.
Anyways. Apologies for not getting this up over the weekend, but I have been busier than expected. My next post will, hopefully, wrap this topic up quite nicely, but we shall see. If you have any ideas for other topics to discuss or questions or random comments, feel free to leave them.
In many cases, large amounts of debt do nothing significant, as individuals are still confident in the corporation's ability to maintain interest payments over long periods of time. On the other hand, large amounts of debt can also cause panic among investors, driving down stock prices and requiring higher interest rates to secure capital through the use of bonds.
For the government, we would ideally hope that the first case is the one that holds. Largely, it can also be shown that this is the case that holds. However, there is one major difference - deficit spending by the government causes inflation. Here's why.
Deficit spending by the government both reduces overall confidence in the government's finances and, generally, increases the supply of money available to the economy.
Considering that currency can be thought of as the government's version of 'stock,' and inflation is the devaluation of currency, a lack of confidence in government finances obviously increases inflation.
Additionally, increasing the money supply is both theoretically and empirically linked to greater inflation. The Quantity Theory of Money does a great job of explaining why this is the case, but I will leave it to you to Google it and find out more if you so wish.
As such, we can definitely say that government deficit spending will increase inflation when all other things are held constant (HAEC - holding all else constant, is an acronym I'll probably be using in the future). So, HAEC, government deficit spending will increase inflation, although the degree to which it will is not well understood.
To be clear, inflation is not necessarily a bad thing in moderation. To be even more clear, inflation equivalent to the growth rate of the economy can even be considered healthy. As such, this is a negative drawback only when inflation is increased to an unhealthy point as a result of government deficit spending.
Other effects of deficit spending on the economy are largely small and, in many cases, highly dependent on the manner of both the spending and the method of acquiring funds. For instance, the sale of additional government bonds and the general upward trend in the interest rates on those bonds over time as confidence in the government's finances decreases has an impact on the market for bonds.
However, these are all largely small impacts, and we shall ignore them as they have very little impact on the average individual.
Anyways. Apologies for not getting this up over the weekend, but I have been busier than expected. My next post will, hopefully, wrap this topic up quite nicely, but we shall see. If you have any ideas for other topics to discuss or questions or random comments, feel free to leave them.
Thursday, February 2, 2012
Short Post and Apologies
Considering that my last post ended with me stating that my regular update times would be Tuesday, Thursday, and some time on the weekend, it feels rather bad to fail on the very first day...
Regardless, I'm not going to be posting anything long today, as I am quite busy. However, I do have a picture that, I believe, will yield some interesting thoughts. It also relates to the topic I am currently on, which is always a plus.
So, here's a picture, I hope you enjoy it, I'll be posting again tomorrow or the next day to make it up to you.
Regardless, I'm not going to be posting anything long today, as I am quite busy. However, I do have a picture that, I believe, will yield some interesting thoughts. It also relates to the topic I am currently on, which is always a plus.
So, here's a picture, I hope you enjoy it, I'll be posting again tomorrow or the next day to make it up to you.
Tuesday, January 31, 2012
Individual Impact of Substantial Government Debt, Part Three: The Government
Before going into exactly what impact that government debt can have on you as an individual, we first need to look at two other things: the impact on the government and the impact on the economy. Much of the impact in these two categories may have little to no impact on specific individuals, but examining the whole situation will give us all a better idea of what is happening.
The easier of the two impacts to examine is the impact on the government. It's actually quite straight forward.
As discussed earlier, there is no immediate drawback to the government being financed by debt rather than by taxes. The two are simply different methods of obtaining funding. The drawback is eventual financial instability.
When talking about corporations, the decision as to whether or not debt is a good way to finance business operations usually comes down to the sorts of cash flows you can expect in the future.
For instance, an ice cream shop has seasonal revenue. It only makes money during part of the year, and shuts down operations during the rest of the year. Debt is generally a poor way to finance business activities when your cash flows are periodic or uncertain, as the possibility of not being able to pay interest at some point is very important in your decision making process.
On the other hand, if you have steady revenue and are confident that this will continue to be the case, debt is a great method of financing activities, as the financial instability created by having the debt is greatly lessened when you know, without a doubt, that you can pay the interest and, eventually, repay the entire loan. Obviously guaranteed revenue is something that can never truly be obtained, so this is a best-case scenario. Right?
Not exactly. The government has the best possible example of constant, assured revenue that I can think of. Ever year, individuals WILL pay taxes, because the government has the ability to punish them if they do not. To draw an analogy, imagine if McDonald's could imprison you if you purchased a meal from, say, Burger King. You'd be much more likely to go to McDonald's, right?
The only risk associated with taking on debt for the government is the cyclical nature of the economy. During a recession, less taxes are paid, decreasing the overall revenue of the government significantly, greatly increasing the likelihood that they will be hard-pressed to meet requisite interest payments.
What this essentially means is that the United States federal government is incredibly secure when it comes to using debt as a method of financing their activities. The economy in the United States is generally quite strong, and even during recessions the possibility of failing to take in enough taxes to meet interest is remote. More importantly, even if such were the case, the government has the authority to simply print more money to meet obligations.
As such, direct negative impacts on the government as a result of being financed by debt are, essentially, zero. For them, the most they have to really worry about is the inconvenience of having to allocate money to pay off interest every year.
What I'm saying, then, is that the government has no incentive to not finance activities through the use of debt. We can then say that if the government having substantial debt causes negative impacts elsewhere we have a problem, as the government has no incentive to stop using debt as a method of finance until we give them one.
And that's all said and done. I'm sure things are a bit broad at the moment, but we'll be getting down to what debt means to the individual in the next few posts.
Also, for those who care, it looks like my regular update schedule will be Tuesday/Thursday and, if I can manage it, something on the weekend.
The easier of the two impacts to examine is the impact on the government. It's actually quite straight forward.
As discussed earlier, there is no immediate drawback to the government being financed by debt rather than by taxes. The two are simply different methods of obtaining funding. The drawback is eventual financial instability.
When talking about corporations, the decision as to whether or not debt is a good way to finance business operations usually comes down to the sorts of cash flows you can expect in the future.
For instance, an ice cream shop has seasonal revenue. It only makes money during part of the year, and shuts down operations during the rest of the year. Debt is generally a poor way to finance business activities when your cash flows are periodic or uncertain, as the possibility of not being able to pay interest at some point is very important in your decision making process.
On the other hand, if you have steady revenue and are confident that this will continue to be the case, debt is a great method of financing activities, as the financial instability created by having the debt is greatly lessened when you know, without a doubt, that you can pay the interest and, eventually, repay the entire loan. Obviously guaranteed revenue is something that can never truly be obtained, so this is a best-case scenario. Right?
Not exactly. The government has the best possible example of constant, assured revenue that I can think of. Ever year, individuals WILL pay taxes, because the government has the ability to punish them if they do not. To draw an analogy, imagine if McDonald's could imprison you if you purchased a meal from, say, Burger King. You'd be much more likely to go to McDonald's, right?
The only risk associated with taking on debt for the government is the cyclical nature of the economy. During a recession, less taxes are paid, decreasing the overall revenue of the government significantly, greatly increasing the likelihood that they will be hard-pressed to meet requisite interest payments.
What this essentially means is that the United States federal government is incredibly secure when it comes to using debt as a method of financing their activities. The economy in the United States is generally quite strong, and even during recessions the possibility of failing to take in enough taxes to meet interest is remote. More importantly, even if such were the case, the government has the authority to simply print more money to meet obligations.
As such, direct negative impacts on the government as a result of being financed by debt are, essentially, zero. For them, the most they have to really worry about is the inconvenience of having to allocate money to pay off interest every year.
What I'm saying, then, is that the government has no incentive to not finance activities through the use of debt. We can then say that if the government having substantial debt causes negative impacts elsewhere we have a problem, as the government has no incentive to stop using debt as a method of finance until we give them one.
And that's all said and done. I'm sure things are a bit broad at the moment, but we'll be getting down to what debt means to the individual in the next few posts.
Also, for those who care, it looks like my regular update schedule will be Tuesday/Thursday and, if I can manage it, something on the weekend.
Friday, January 27, 2012
Individual Impact of Substantial Government Debt, Part Two: Aside Into Corporate Finance
This post largely consists of an important aside before moving on to things of actual relevance. It deals with the idea of treating the government and its finances as a corporation.
The idea is actually quite a useful one. People who pay taxes can be treated as shareholders, while those who buy bonds or otherwise lend money to the government would be considered holders of debt. Revenue is generated, but the government would usually be considered a non-profit, as it never pays direct dividends to its shareholders, only indirect through provision of services.
From the field of finance, then, comes the idea of whether or not there is a large difference between a corporation financed mostly by debt and one financed mostly by shareholder equity.
The short answer is, there isn't. Being financed by debt provides a tax shelter and being financed by shareholder equity provides financial stability, but the two models are equally appealing, albeit to different sorts of corporations. You can certainly find more about this particular aspect of finance somewhere on the Internet.
More importantly this means that, holding all else constant, the only consequence that impacts the government directly as a result of being financed by debt is the possibility of financial instability.
There are many other indirect results, but I will get to those in a later post.
Moving along slowly when it comes to this topic, but I want to make sure I cover as much as possible. Apologies to anyone who doesn't find it interesting.
The idea is actually quite a useful one. People who pay taxes can be treated as shareholders, while those who buy bonds or otherwise lend money to the government would be considered holders of debt. Revenue is generated, but the government would usually be considered a non-profit, as it never pays direct dividends to its shareholders, only indirect through provision of services.
From the field of finance, then, comes the idea of whether or not there is a large difference between a corporation financed mostly by debt and one financed mostly by shareholder equity.
The short answer is, there isn't. Being financed by debt provides a tax shelter and being financed by shareholder equity provides financial stability, but the two models are equally appealing, albeit to different sorts of corporations. You can certainly find more about this particular aspect of finance somewhere on the Internet.
More importantly this means that, holding all else constant, the only consequence that impacts the government directly as a result of being financed by debt is the possibility of financial instability.
There are many other indirect results, but I will get to those in a later post.
Moving along slowly when it comes to this topic, but I want to make sure I cover as much as possible. Apologies to anyone who doesn't find it interesting.
Wednesday, January 25, 2012
Individual Impact of Substantial Government Debt, Part One: Statistics
As stated at the end of my last post, I'm going to write a short series of posts about the impact of substantial government debt on the individual as the result of requests by a pair of my readers.
Every investigation of something first involves understanding exactly what you're investigating. As such, this post is all about statistics on the government debt of the United States Federal Government.
Our first question, then, is whether or not the debt of the U.S. Federal Government can be considered 'substantial.' I think by general consensus of U.S. citizens it can be considered such, but it would be a worthwhile exercise to determine exactly why.
As of this writing, the current national debt of the United States is at or around USD 15 trillion. You can check some more exact statistics here: http://www.usdebtclock.org/. This number can be corroborated at slightly higher or lower numbers all over the Internet, including at various sites run by government officials or government agencies.
The number seems pretty large, right? It's certainly more wealth than even the wealthiest people in the world possesses; for reference, the wealth of Microsoft CEO Bill Gates peaked at just over USD 100 billion.
However, to truly do any real comparison, we have to look at two things - ratio of debt to the GDP of the United States and similar ratios for other nations around the world. Some quick results...
The last known census data on the United States GDP put it at around USD 14.5 trillion in 2010. Some examination of Internet statistics for which there is no strictly empirical foundation show estimates of current GDP at about USD 15 trillion. This means that the ratio between the national debt and the GDP is about 1.0.
For some other developed nations, take a look at this rather revealing graph: http://en.wikipedia.org/wiki/File:Dept.svg.
From this, we can see that the United States has one of the highest debt to GDP ratios among the developed nations represented on this graph. It also has the largest total debt during the time of the last entirely reliable study in 2010, pulling ahead of Japan by USD .6 trillion.
I think we can then all agree that the debt of the United States Federal Government is substantial. It can also be seen that it is rising rapidly: the debt has increased by an estimated USD 6 trillion over the course of 2011 and early 2012. Considering that this is about two thirds of the total debt at the start of 2010, we can also consider the current upward trend in national debt to be substantial.
Now that we have a firm grasp on the problem, the next few posts will be about the possible impact of this on individuals. This analysis will attempt to be general enough so that it will hold in all developed nations with substantial government debt, but some portions of it will more than likely be specific to the United States and its citizens.
Anyways. I hope you have found this moderately enlightening. Until next time, folks!
Every investigation of something first involves understanding exactly what you're investigating. As such, this post is all about statistics on the government debt of the United States Federal Government.
Our first question, then, is whether or not the debt of the U.S. Federal Government can be considered 'substantial.' I think by general consensus of U.S. citizens it can be considered such, but it would be a worthwhile exercise to determine exactly why.
As of this writing, the current national debt of the United States is at or around USD 15 trillion. You can check some more exact statistics here: http://www.usdebtclock.org/. This number can be corroborated at slightly higher or lower numbers all over the Internet, including at various sites run by government officials or government agencies.
The number seems pretty large, right? It's certainly more wealth than even the wealthiest people in the world possesses; for reference, the wealth of Microsoft CEO Bill Gates peaked at just over USD 100 billion.
However, to truly do any real comparison, we have to look at two things - ratio of debt to the GDP of the United States and similar ratios for other nations around the world. Some quick results...
The last known census data on the United States GDP put it at around USD 14.5 trillion in 2010. Some examination of Internet statistics for which there is no strictly empirical foundation show estimates of current GDP at about USD 15 trillion. This means that the ratio between the national debt and the GDP is about 1.0.
For some other developed nations, take a look at this rather revealing graph: http://en.wikipedia.org/wiki/File:Dept.svg.
From this, we can see that the United States has one of the highest debt to GDP ratios among the developed nations represented on this graph. It also has the largest total debt during the time of the last entirely reliable study in 2010, pulling ahead of Japan by USD .6 trillion.
I think we can then all agree that the debt of the United States Federal Government is substantial. It can also be seen that it is rising rapidly: the debt has increased by an estimated USD 6 trillion over the course of 2011 and early 2012. Considering that this is about two thirds of the total debt at the start of 2010, we can also consider the current upward trend in national debt to be substantial.
Now that we have a firm grasp on the problem, the next few posts will be about the possible impact of this on individuals. This analysis will attempt to be general enough so that it will hold in all developed nations with substantial government debt, but some portions of it will more than likely be specific to the United States and its citizens.
Anyways. I hope you have found this moderately enlightening. Until next time, folks!
Monday, January 23, 2012
The Environment and Economics
It occurred to me recently that it might not be immediately obvious to all people why the environment is an important issue in economics and, more specifically, why environmental policy is an important issue from an economic perspective.
For the economy, the environment is a resource. It provides a steady stream of benefits, both in the form of natural resources and in the form of recreation and other benefits, such as natural beauty. These benefits can, at least theoretically, be treated the same as ordinary goods, like television; in fact, the branch of environmental economics deals entirely with placing a market value on the non-market goods provided by the environment.
The problem with environmental goods that makes them different from more normal goods is that they exist outside the market, hence the term non-market good. This means that any effect to the environment that occurs during the production or sale of a non-market good is not incorporated in the price of that good. This is referred to as a negative externality, as there are negative effects of market goods that exist outside the market.
These negative externalities are what make environmental policy important. Think of it this way - without regulation, corporations can create a fairly sizable amount of pollution without it having any effect on the price of the goods they produce. This means that they have no incentive to not create pollution. Since pollution obviously has a negative impact on society by removing the or lowering the benefits provided to us by the environment, this creates a serious problem.
The purpose of environmental policy is to ensure that businesses are required to pay for the negative externalities that they create in the form of pollution. The purpose of environmental economics is to find the optimal amount of regulation and remuneration to society to provide for the most efficient use of the possible benefits that the environment can grant.
This may seem a somewhat cynical view of the environment and why we protect it, but, ultimately, economics is a human science that deals solely with human benefits, human concerns, and human preferences. This means that understanding and maximizing the human benefit of any resource, such as the environment, is the sole concern of economics.
Now that that's out of the way and, hopefully, the last post makes a bit more sense, I'm moving on to another topic! By request of a few individuals, I'm going to take a while and a few posts to write about the impact of large national debt on individuals and the economy. Let us hope you all find it interesting.
For the economy, the environment is a resource. It provides a steady stream of benefits, both in the form of natural resources and in the form of recreation and other benefits, such as natural beauty. These benefits can, at least theoretically, be treated the same as ordinary goods, like television; in fact, the branch of environmental economics deals entirely with placing a market value on the non-market goods provided by the environment.
The problem with environmental goods that makes them different from more normal goods is that they exist outside the market, hence the term non-market good. This means that any effect to the environment that occurs during the production or sale of a non-market good is not incorporated in the price of that good. This is referred to as a negative externality, as there are negative effects of market goods that exist outside the market.
These negative externalities are what make environmental policy important. Think of it this way - without regulation, corporations can create a fairly sizable amount of pollution without it having any effect on the price of the goods they produce. This means that they have no incentive to not create pollution. Since pollution obviously has a negative impact on society by removing the or lowering the benefits provided to us by the environment, this creates a serious problem.
The purpose of environmental policy is to ensure that businesses are required to pay for the negative externalities that they create in the form of pollution. The purpose of environmental economics is to find the optimal amount of regulation and remuneration to society to provide for the most efficient use of the possible benefits that the environment can grant.
This may seem a somewhat cynical view of the environment and why we protect it, but, ultimately, economics is a human science that deals solely with human benefits, human concerns, and human preferences. This means that understanding and maximizing the human benefit of any resource, such as the environment, is the sole concern of economics.
Now that that's out of the way and, hopefully, the last post makes a bit more sense, I'm moving on to another topic! By request of a few individuals, I'm going to take a while and a few posts to write about the impact of large national debt on individuals and the economy. Let us hope you all find it interesting.
Friday, January 20, 2012
Environmental Policy: Why It Doesn't Work
Economics is involved with a lot more than just decisions involving money. In fact, it can be used to examine any decision in which one is considering utility and trade-offs, which, realistically, is nearly everything.
Here I'm going to discuss a bit about why environmental policy as instituted by a democratic or semi-democratic government will never yield optimal results from the viewpoint of society as a whole. A more in-depth discussion of this can be found in a paper by Kennedy called "Rethinking Sustainability."
I have been unable to find a link to an online copy, for which I apologize.
Regardless. The paper itself deals with the idea of present value of future benefits. This refers to the idea that, in the decision-making process of anyone, we always prefer to be given the same thing now than at some point in the future, with the preference being more and more weighted to the present the further in the future we look.
As an example, imaging I were to offer you $1,000 now, or $1,000 in ten years. You would take the present, guaranteed $1,000, possibly after thinking for a short while, and there are many reasons this is done, uncertainty and impatience being the main ones.
For any individual, the degree to which we prefer things now to things in the future can be thought of as the rate that we discount future values in the present, or the discount rate.
Now, consider the difference between the way an individual discounts the future, and the way an insurance company discounts the future. For the individual, his own death is a catastrophe, both to himself and to his family. This is why he buys life insurance. To the insurance company, the death of the individual
It is then the case that we say the insurance company discounts the future of the individual at a lower rate than the individual does. More generally, the individual always discounts the future more than any larger entity, with society as a whole being the largest possible entity with which economics concerns itself.
That is, the individual prefers things now to a degree that is not the most beneficial to society as a whole.
Now, let's apply this same logic to the environment. Obviously, the environment provides us with benefits. Benefits in the future are worth less to us than benefits now. We also know that the individual discounts the future more than society does. This means that any individual or collection of individuals will always take more from the environment than is optimal for society as a whole.
This is a fairly common idea, and the common solution is that the government should step in and prevent individuals and corporations from taking too much from the environment, be it in the form of adding pollution or removing natural resources.
However, in a democratic or semi-democratic government, the government is beholden, at least somewhat, to the preferences of the ordinary individual citizen. This means that, in any case where the government attempts to discount the future at the much lower rate that is optimal for society, the average individual will see such an action as contrary to their own needs and oppose it, therefore rendering the democratic government incapable of doing so over any appreciable length of time.
Kennedy suggests one solution in the form of education about the environment and why it is worth protecting. I present another in the form of changing expectations about government - that is, making people understand that the government is there to make appropriate decisions to benefit them, not to represent them.
I'm sure some of you have your own ideas about what, exactly, can be done about the situation.
Regardless of how you feel about the issue, the bit about discounting the future is very important and I am fairly sure will come up in a number of future issues I'm thinking about discussing.
Anyways. Hopefully this was interesting. If you have any ideas about things I should talk about, please let me know.
Here I'm going to discuss a bit about why environmental policy as instituted by a democratic or semi-democratic government will never yield optimal results from the viewpoint of society as a whole. A more in-depth discussion of this can be found in a paper by Kennedy called "Rethinking Sustainability."
I have been unable to find a link to an online copy, for which I apologize.
Regardless. The paper itself deals with the idea of present value of future benefits. This refers to the idea that, in the decision-making process of anyone, we always prefer to be given the same thing now than at some point in the future, with the preference being more and more weighted to the present the further in the future we look.
As an example, imaging I were to offer you $1,000 now, or $1,000 in ten years. You would take the present, guaranteed $1,000, possibly after thinking for a short while, and there are many reasons this is done, uncertainty and impatience being the main ones.
For any individual, the degree to which we prefer things now to things in the future can be thought of as the rate that we discount future values in the present, or the discount rate.
Now, consider the difference between the way an individual discounts the future, and the way an insurance company discounts the future. For the individual, his own death is a catastrophe, both to himself and to his family. This is why he buys life insurance. To the insurance company, the death of the individual
It is then the case that we say the insurance company discounts the future of the individual at a lower rate than the individual does. More generally, the individual always discounts the future more than any larger entity, with society as a whole being the largest possible entity with which economics concerns itself.
That is, the individual prefers things now to a degree that is not the most beneficial to society as a whole.
Now, let's apply this same logic to the environment. Obviously, the environment provides us with benefits. Benefits in the future are worth less to us than benefits now. We also know that the individual discounts the future more than society does. This means that any individual or collection of individuals will always take more from the environment than is optimal for society as a whole.
This is a fairly common idea, and the common solution is that the government should step in and prevent individuals and corporations from taking too much from the environment, be it in the form of adding pollution or removing natural resources.
However, in a democratic or semi-democratic government, the government is beholden, at least somewhat, to the preferences of the ordinary individual citizen. This means that, in any case where the government attempts to discount the future at the much lower rate that is optimal for society, the average individual will see such an action as contrary to their own needs and oppose it, therefore rendering the democratic government incapable of doing so over any appreciable length of time.
Kennedy suggests one solution in the form of education about the environment and why it is worth protecting. I present another in the form of changing expectations about government - that is, making people understand that the government is there to make appropriate decisions to benefit them, not to represent them.
I'm sure some of you have your own ideas about what, exactly, can be done about the situation.
Regardless of how you feel about the issue, the bit about discounting the future is very important and I am fairly sure will come up in a number of future issues I'm thinking about discussing.
Anyways. Hopefully this was interesting. If you have any ideas about things I should talk about, please let me know.
Thursday, January 19, 2012
Economics and Politics
Economics is often called the dismal science, a term coined by Thomas Malthus.
In general terms, this comment is interpreted to mean that economics often gives no real solutions to the problems it investigates. For instance, an in-depth understanding of welfare theory will bring you no closer to being able to solve the problem of maximizing the total utility of society as a whole.
This is where politics comes in. Politics deals with the government, a non-market force with the ability to affect the market. Hence, it is often from whence attempts to solve economic problems come, either directly or indirectly.
As such, while the main thrust of this blog is in the field of economics, a large portion of it will also be devoted to politics and how it relates to economics.
Just thought you should know, in case it matters.
Also, if any of you have ideas as to what I should write about or questions to ask, please feel free to put up a few comments. I shan't complain.
In general terms, this comment is interpreted to mean that economics often gives no real solutions to the problems it investigates. For instance, an in-depth understanding of welfare theory will bring you no closer to being able to solve the problem of maximizing the total utility of society as a whole.
This is where politics comes in. Politics deals with the government, a non-market force with the ability to affect the market. Hence, it is often from whence attempts to solve economic problems come, either directly or indirectly.
As such, while the main thrust of this blog is in the field of economics, a large portion of it will also be devoted to politics and how it relates to economics.
Just thought you should know, in case it matters.
Also, if any of you have ideas as to what I should write about or questions to ask, please feel free to put up a few comments. I shan't complain.
On Social Welfare
For those of you transitioning over from the short-lived previous location of my blog, welcome!
The following is a link to a short article from Tumblr that provides the basis for my first real post: http://communismkills.tumblr.com/post/16120904596/not-oddly-enough-all-arguments-in-favor-of-social
In this post, the writer expresses the opinion that social welfare programs have no real economic basis, and that all arguments for the creation of such programs are based on the idea of 'equity,' i.e. that people deserve certain things at the cost of other people, and it is cruel or unethical to deny them these things.
However, economics does provide a sound foundation for the creation of social welfare programs based on the redistribution of wealth from richer individuals to poorer individuals. This foundation is based on the idea of diminishing marginal utility.
Diminishing marginal utility is one of the key ideas in the economic field of utility theory, and it states that you get more satisfaction out of possessing the first unit of something than any later units. For example, the first slice of pizza you possess is much more useful to you than the hundredth, as, barring some odd occurrences, you will be incapable of consuming that hundredth slice of pizza before it goes bad.
The same idea applies to money. Say you have two people: one with $100,000,000 and one with only $1,000. The richer of the two cares less about losing or gaining $1,000 than the poorer one. Imagine the difference between doubling your wealth and lose 1/1000 of your wealth, and the concept is grasped.
It can then be said that a redistribution of wealth can raise the overall utility of society; thought it may lower the utility of richer individuals, it will raise the utility of poorer ones by more than the utility lost, at least in theory.
It may be that there exist no cases or individuals for which such a redistribution can occur, but the theoretical possibility of such a redistribution still exists.
In related news, this is my first real post! Hooray?
The following is a link to a short article from Tumblr that provides the basis for my first real post: http://communismkills.tumblr.com/post/16120904596/not-oddly-enough-all-arguments-in-favor-of-social
In this post, the writer expresses the opinion that social welfare programs have no real economic basis, and that all arguments for the creation of such programs are based on the idea of 'equity,' i.e. that people deserve certain things at the cost of other people, and it is cruel or unethical to deny them these things.
However, economics does provide a sound foundation for the creation of social welfare programs based on the redistribution of wealth from richer individuals to poorer individuals. This foundation is based on the idea of diminishing marginal utility.
Diminishing marginal utility is one of the key ideas in the economic field of utility theory, and it states that you get more satisfaction out of possessing the first unit of something than any later units. For example, the first slice of pizza you possess is much more useful to you than the hundredth, as, barring some odd occurrences, you will be incapable of consuming that hundredth slice of pizza before it goes bad.
The same idea applies to money. Say you have two people: one with $100,000,000 and one with only $1,000. The richer of the two cares less about losing or gaining $1,000 than the poorer one. Imagine the difference between doubling your wealth and lose 1/1000 of your wealth, and the concept is grasped.
It can then be said that a redistribution of wealth can raise the overall utility of society; thought it may lower the utility of richer individuals, it will raise the utility of poorer ones by more than the utility lost, at least in theory.
It may be that there exist no cases or individuals for which such a redistribution can occur, but the theoretical possibility of such a redistribution still exists.
In related news, this is my first real post! Hooray?
Hello Thar
Hello, random people.
My name is Bryan. Also, I like the color purple. That’s the only things you really need to know about me.
I’m creating this blog specifically as an outlet for writing and discussing impartial economic views of opinions and current events. Hopefully I can keep things simple, but I will probably fail, as I do at many things.
I’ll do my best to keep updating as I can, because if no one else cares, at least I do.
My name is Bryan. Also, I like the color purple. That’s the only things you really need to know about me.
I’m creating this blog specifically as an outlet for writing and discussing impartial economic views of opinions and current events. Hopefully I can keep things simple, but I will probably fail, as I do at many things.
I’ll do my best to keep updating as I can, because if no one else cares, at least I do.
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