Sunday, February 28, 2010

The Value of Common Resources

In this week’s class, I found the “Paradox of Value” very interesting. Water is more valuable than diamonds, but diamonds cost more. The idea seems to contradict itself, and although it is easy to see why water is more valuable to us, I understand why this concept baffled economists.

To explain the Paradox of Value, we need to look at the difference between total utility and marginal utility. Total utility is the total amount of utility received over every unit purchased, while marginal utility is the additional utility gained from consuming one more unit. Basically, total utility is your overall utility and marginal is just in the context of only one more of a unit. But how does this relate to water and diamonds? It’s simple: Even though water has a low marginal utilty, it has a higher total utility than diamonds…therefore water is more valuable.

I began thinking about the irreplaceable value of water, even though it is cheap. It seems the most valuable things that are essential to human life happen to be for the most part, common resources. Water, trees and plants, and air all all goods that we cannot really prevent someone from consuming, yet each use reduces the amount available in the future. This made me think of the concept of the “Tragedy of the Commons.”

In conclusion, why is it the most valuable resources, way more valuable than the most expensive clothes or cars, are basically being squandered and overexploited as if they were useless? I think that people should take a deeper look at the “Paradox of Value” and remember what is truly essential to life before they go overusing precious resources for an larger profit strictly in the short run.

Saturday, February 20, 2010

Externalities in everyday life

We’ve been learning about externalities recently in class. An externality is something that affects a third party not directly involved with a transaction. Externalities can be either negative or positive, last week we focused more on positive externalities, and so will I in this week’s blog because who enjoys the negative ones anyway?

Externalities can be beneficial! A positive externality is one in which a third party not directly involved with a transaction gets some benefits of that transaction! We got several examples in class: vaccines, a neighbor with well kept grass, knowledge spillovers, and network externalities including the internet. This got me thinking about everyday positive externalities in my own personal life. I thought of some examples. First, my mom is paying someone to redo the kitchen. I personally have not contributed any money to the renovations, yet I will still enjoy the benefits of the kitchen once it is finished. We also just purchased Netflix, which means my friends can get the benefit of watching movies with me without actually paying or being involved directly in the transaction. I also have a friend of the family who recently bought a beautiful house in Georgia, and my family will get to go visit and stay with them. This is another positive externality for me because I did not have direct involvement with the transaction of purchasing the house. I have many examples of positive externalities in my own life.

I know positive externalities in the context of the economy as a whole can result in an undersupply of goods, and are still considered inefficient because they can result in a deadweight loss to society, but on a more personal scale we deal with our own personal positive externalities on a daily basis. Feel free to share some of yours!

Sunday, February 14, 2010

Asymmetrical information

In class last week, we discussed the idea of market failures, when certain forces intrude on the market to bring about inefficiency. One of the failures I found particularly interesting was asymmetrical information. Asymmetrical information is a market failure that results when one party in the exchange knows more information than the other party.

We learned that used cars sales are almost always an exchange where asymmetrical information occurs. This really made me think about last year when my boyfriend and I were in a car accident, and he only had $5,000 to get another car. We looked around and visited used car sellers for weeks, and every car we looked at was of course in "perfect" condition according to the car salesman. We would even test drive some cars that had obvious problems running, yet the car salesmen never thought it was that much of a problem. We eventually did find a car, which only need minor changes. My other friend, on the other hand, was not so lucky. He bought a newer used sports car which was really nice for $15,000, which according to Carfax had only been in one minor fender bender. A year later when my friend needed money and went to resell the car back, he learned that the car actually had permanent frame damage from the car accident and was basically worthless. So even Carfax doesn’t always reveal the true condition of a car.

I do agree that when buying a used car, it’s almost guaranteed you will know a lot less than the salesman, and you’re lucky if he tells you the truth. This got me thinking even more, there are a lot of situations where this occurs! Accountants, financial advisors, and assistants can also know information that others are unaware of. Even today, I went to the Flea Market to buy a knockoff purse, and one of the peddlers kept trying to overcharge and convince me that one of the bags was real Prada, I thought she was full of it. I then realized, I knew nothing about where these bags came from, if they were stolen, real, fake, or how much they were actually worth and there was no way this lady was going to tell me! I did buy one, by no means do I think it was real, but I do know I may have been a victim of asymmetrical information today!

Sunday, February 7, 2010

Minimum wage...is it really efficient?

I personally have only ever had two jobs in my life, and I was paid above minimum wage at both. Yet, when I hear that the minimum wage has gone up, I always automatically think that it’s a good thing because people can make more money per hour, duh. But as for the questions in class, is minimum wage efficient, is it fair economically and/or ethically? For these questions, I didn’t have any immediate answers or feelings one way or the other. To find out more information, I read an article titled “Minimum Wage and Fairness,” by Michael D. LaFaive.

Is minimum wage efficient? In class, the professor said most economists will tell you no, because the government is intervening on the employer/employee transaction. From reading “Minimum Wage and Fairness,” LaFaive argues that the market itself should determine the wage based on competition and the skills of a worker. For example, if a workers’ skills are only worth $6.00 to an employer, having to pay them $8.00 is basically just a bonus. Raising the minimum wage, LaFaive says will also exclude the poor and the young, because the demand for these two groups falls when their “price” goes up. BUT this idea conflicts with the argument we heard in class that unemployment has never gone up when the minimum wage went up. However, I myself have noticed it’s becoming harder and harder for my inexperienced friends to find work these days. This leads me to believe perhaps businesses are sticking with their skilled employees and paying them above minimum wage, regardless of their age, rather than taking a chance on someone else even if they will accept a lower wage. In my work places, even the young were paid above minimum wage for their skills, so I guess my employers decided their young workers in fact were worth the extra money.

In the midst of all this chaos and questions of fairness and efficiency, I can’t help but think of the many people I know who are paid “under the table.” I’m originally from Philadelphia and we have tons of mom and pop places and few huge corporations. LaFaive argued in his article, “ If a minimum wage is set by government at $5 an hour, but a worker's skills are valued by an employer at $3 an hour, the difference between the two is effectively an hourly bonus that many "mom and pop" shops simply can't afford.” This rings true in my life. I know many friends back home who are paid under the table and have been for quite some time, regardless of the state of the minimum wage.

Taking in all the different sides of the arguments as well as my own life experiences, I would have to say no, the minimum wage is not efficient, nor is it really fair. I think the business and their employees should be able to decide the wage and in a lot of the cases the businesses ARE deciding, no matter what the government says, so what’s the point really? I think the minimum wage really does encourage more people to resort to accepting an illegal wage and it hasn’t really helped out the people that do desperately need that extra dollar.

Bibliography
http://www.mackinac.org/article.aspx?ID=674