Friday, February 10, 2006

Subway and the Coase Theorem

I've been thinking recently about why I sometimes buy sandwiches from Subway. Subway sandwiches are rather expensive compared to the substitute lunches available to me from the Student's Union shop, the West Cornwall Pasty company or WH Smiths. While I do enjoy their sandwiches I am not convinced that I enjoy them more to an extent that justifies the extra cost.

It could be that I am irrational; that the amount I spend on sandwiches is small per transaction compared to other items such as rent and I, therefore, simply ignore the cost when buying sandwiches. I have an alternative explantion:

I would suggest that this is an example of the Coase Theorem in action: The Coase theorem is that externalities will occur at their socially optimal levels regadless of the legal system in the absence of transactions costs. This results from the ability of those suffering from the externality to pay those who would like to produce an externality not to if they value its cessation more highly than the 'polluter' values the action which creates the externality.

The classical example is that of a railroad which occasionally creates sparks which destroy the fields of farmers either side of the railroad. In this case if the farmer values his crops not being destroyed highly enough he will pay the railroad owner to reroute or upgrade his equipment to prevent the damage. If he values the cessation of risk highly enough he will pay the train owner to cease his service. In this example it can be seen that the socially optimal amount of externality is produced, the amount which prioritises the interests of those who value the result of the decision most. None of this requires the use of legal property rights.

Subway bake their bread instore. This may have some function in terms of freshness but it has an externality in that the smell of bread baking makes me desirous of Subway sandwiches and less happy on my walk past the store on the way into university. Now, I have no legal rights to my own space, free from unwanted pleasant odors. For this reason I have to take the Coasean route and, as the transactions cost is relatively low, pay Subway to end the desire for sandwiches by sating it.

Wednesday, February 08, 2006

Oil Prices and the UK economy

Today BP announces yet more profit and yet more money for shareholders. The statistic quoted of the amount this means for UK pensions funds doesn't only make the point Lord Browne is trying to make about the positive effects of oil income that our Chancellor of the Exchequer is currently attempting to discourage through the tax system by increasing the costs of investment in the North Sea. Browne has also, inadvertently, pointed to the fact that Gordon Brown is more of a problem for the pensions system than his initial tax raid suggested and to the flaw in his excuses for new weaknesses in the UK economy.

In attempting to shift the blame for falling growth to the oil price Brown was making little economic sense. When the oil price rises this is a huge problem for the US which heavily imports oil but this is not the case in the UK. When the oil price rises it has a distributional effect in the UK as it costs motorists money but it also increases the income of our oil companies which, in turn, pay money to organisations like pension funds; on balance the effect is close to zero as we have only just become net importers of oil. Redistributing money from the motorists to pensioners and other investors isn't inherently harmful, pension funds are hard up, and cannot be the explanation for major changes in growth rates. The reason for past oil related shocks was that they crashed genuinely oil dependent economies and this crash hurt us; this cannot be the case now when the US is doing so much better than we are. Labour reductions in labour market flexibility and increases in the size of the state are a better way to explain falls in growth rates but are less convenient for the Chancellor.

Tuesday, February 07, 2006

The US Budget plan

The Washington Post has a fairly decent summary of the financial fiction that is the US budget plan. The simple truth is that tax cuts are the easy part of a small government fiscal agenda. This administration has proven very capable of cutting taxes but has failed comprehensively on the more important challenge of controlling spending, which has risen drastically over the President's period in office. While the new budget is supposed to herald a new austerity it does so only by comparison with the profligacy of the President's earlier years. Even if such fictions as the clampdown on tax evasion do realise significant gains in revenue (as reported in the link above Goldman Sachs don't buy these figures) the reality is that the US will be in deficit for some time to come.

The simple truth is that spending is somewhat like calories - where it comes from is only so important. This can be summed up by the Ricardian Equivalence theorem, proposed by Robert Barro, which argues that the choice of financing spending with borrowing or taxation is equivalent; people know they will have to pay eventually.

Of course there are differences, taxation tends to cause unpleasant changes in marginal incentives to work, save, report your earnings accurately or stay in the country but deficits have their own set of unique, micro, harms in their inexorable effects on interest rates and inflation. However, in lieu of a complete analysis of the size of these harms, it seems sensible to assume that in the aggregate there are increasing harms for each additional dollar borrowed or saved, as taxation moves along the Laffer Curve and cumulative deficits increase as a portion of GDP. As the US has been borrowing a lot recently it is likely to become an increasingly damaging option and may even lead to the kind of financial reckoning that would have everyone forget Iraq as the Bush legacy.

Monday, February 06, 2006

Musicians Union condemns 'Miming'

Reuters report that the Musicians Union has urged artists to own up to miming in live sets. This is supported by an opinion poll showing 71% public opposition to miming artists and the assertion that people, Europeans and Americans in particular, can see straight through miming and will be turned off. The Union wants to reward those with the skill to perform a genuine live show.

The weakness in this logic is spectacular. If audiences really could tell when an artist was miming and a massive majority opposed miming and felt it hurt their experience of the music this would create a commercial imperative to avoid miming. The need for artists to 'own up' as the Union wants them to implies that a great many audiences cannot tell or do not care to discover who is miming. While this may imply an information asymettry live entertainment is valuable to most people for the experience so what you don't know probably can't hurt you.

The Musician's Union is historically one of the worst promoters of leftwing idiocy going. The Guardian offers a concise history of some of its worst moments failing to distribute session income or recognise the leaks in its boycott of Apartheid-era South Africa. It also prevented American musicians playing in the UK in the mistaken assumption this would lead to a rise in bookings for British musicians, of course the real effect was to shrink the market and hurt the chances of infant industries such as the British jazz community which relied on contact with the Americans to improve.

The Union's finest hour, however, came with its attempt to have the synthesiser banned on the grounds that it would hurt the interests of live musicians. The comparison made in a Radio 1 debate at the time to banning electric guitars as they would hurt the interests of acoustic guitarists remains apt. Cliff Richard led the Musician's Union attempt to hold back the tide of technological progress; thankfully he failed.

Sunday, February 05, 2006

Danish Cartoon crisis continues

The row over the cartoons becomes uglier day by day with embassies burning in Syria. Surely the blame for this has to be aimed at Assad and his nasty regime; I doubt these protests took place without his consent.

The Financial Times describes how the different sides of the British political divide have responded to this crisis with Jack Straw pretending that Christians would have been as unpleasant were Jesus similarly insulted (in fact I think we're beginning to understand that the response to Jerry Springer: The Opera was remarkably tame; phone-ins and threats of picketing) and that this crisis is due to Western insensitivity rather than Muslim hypersensitivity. David Davis and Dominic Grieves have shown more spine and called on police to arrest those calling, specifically, for murder.