Environmental Economics

Daily Demand and Supply: Who else ya' gonna call when you have a bourbon-related supply decrease paired with a negative environmental side-effect? We'll be waiting by the phone.

I'm not sure how I missed the original story, but I'm surprised John and I weren't the first call when this happened:

Whiskey barrels were piled in a mountainous heap Wednesday after the rest of a whiskey storage warehouse collapsed in Kentucky, nearly two weeks after part of the decades-old structure came crashing down.

The remainder of the massive structure collapsed at the Barton 1792 Distillery in Bardstown, Nelson County Emergency Management spokesman Milt Spalding said. No injuries were reported in either collapse, he said.

"It is a mountain of bourbon barrels," he said Wednesday.

Environmental and wildlife officials were on the scene to determine if any whiskey spilled into a nearby waterway, he said. The distillery owner Sazerac, a Louisiana-based spirits company, already was facing a state fine stemming from the initial collapse.

 

Daily Demand and Supply: Unintended Consequences

 A tariff on steel imports causes the price of imported steel to increase.  One direct effect is:

The Mid-Continent Nail plant in Poplar Bluff, Missouri, laid off 60 of its 500 workers last week because of increased steel costs. The company blames the 25% tariff on imported steel. Orders for nails plunged 50% after the company raised its prices to deal with higher steel costs.

Maybe not intended, but perhaps predictable.  But following the bouncing ball of unintended consequences leads you to:

 

via GIPHY

UPDATE: I'm adding this to our new "It's easy to win a trade war' category, as soon a John gets around to updating our category list. 

Daily Demand and Supply: Government prevents entire island population from getting crabs*

From NBC.com:

This community voted overwhelmingly for Donald Trump. But now his immigration changes are killing its livelihood — legendary crabs that are a mainstay of the local economy and a regional delicacy.

For decades, Hoopers Island, known for its crabbing industry, has relied on a federal seasonal work program — known as H-2B visas — to keep its businesses humming. This has allowed employers to hire foreigners, mostly Mexican women, to come temporarily to pick crab meat.

But this year, the cap on H-2B visas — and a shift from the first-come, first-served based model to a lottery system that has disadvantaged Hoopers Island seasonal workers — has left the island without 40 percent of the visas they have needed in the past.

The economics here are pretty straight forward.  The number of workers supplied at any particular wage is equal to the number of domestic workers willing to work at that wage, plus the number of H2B (foreign) workers willing to work at that wage.  For example, if the crab-picking wage is $10 per hour, and the number of domestic workers willing to pick crabs at $10 per hour is 100, and the number of H2B workers willing to pick crabs for $10 per hour is 200, then the total number of workers supplied at a wage of $10 per hour is $300.  If the number of H2B visas are cut by 40%, then the number of H2B crab pickers willing to work at $10 per hour becomes 120, and the total number of workers supplied at $10 per hour is now 220.  In other words, restricting the number of foreign workers results in a decrease in the supply of labor to the crab-picking industry.   So what are the effects of a decrease in the supply of labor in teh crab-picking industry?

 

• Wages for crab-picking will increase.  A decrease in supply of crab-pickers will cause the equilibrium price of crab-pickers to increase.  Those crab-pickers who are hired will get higher wages.
• The number of domestic crab-pickers will increase.  At higher wages, the number of domestic crab-pickers willing to work will increase.  Since the supply of foreign crab-pickers has been reduced, a part of the shortage of workers will be filled by drawing new domestic crab-pickers into the crab-picking jobs.
• The total number of crab-pickers will decrease.  As with any decrease in supply, the equilibrium quantity of workers in the crab-picking market will decrease as the supply of workers decreases.  The gain in domestic workers is more than offset by the loss of H2B workers.  

So in the market for crab-picker we will have higher wages for more domestic workers, with fewer H2B workers in the market, and lower total employment among all crab-pickers.  SO if you are a protectionist, this doesn't sound all bad.  We have more domestic workers employed at higher wages.  Right?

Well, sort of.  We also have to think about what else happens.

Right now we have full employment.  With full employment, those domestic crab-pickers have to come from somewhere. The only place from where they can come are other, similar, jobs.  SO another effect is:

• A decrease in supply of H2B workers in the crab-picking industry will decrease the supply of domestic workers in other industries--driving up those wages as well.

But workers getting paid more is a good thing, right?

Sort of, but we have to remember that workers are an input into the production of outputs.  When the price of an input increase, the supply of the output decreases.  This means:

• A decrease in the supply of any output for which wages have gone up will see higher prices and lower quantities produced/consumed.  The decrease in the supply of labor will cause higher crab (and other food goods) prices.

For reference, here's the current price of crabs at a Baltimore area restaurant: 

Males by the Dozen

• Small (5″-5 ¾″) $30
• Medium (5 ¾″-6 ¼″) $48
• Large (6 ¼″-6 ¾″) $68
• XLarge (6 ¾″-7 ¼″) $101
• Jumbo (7 ¼″-8″) $124

Males by the Bushel

• Small $249
• Medium $309
• Large $379
• Lights (picking crabs) $120

Yikes.

 

*I know that's a cheap joke, but I bet John laughed.

 

Daily Demand and Supply: Finding another point on the demand curve for National Parks

Law of demand (for National Park visits):  When prices rise, the number of visitors to National Parks will fall.  

We'll see:

The National Park Service proposes more than doubling the entrance fees at 17 popular national parks, including Grand Canyon, Yosemite, and Yellowstone, to help pay for infrastructure improvements.

 

Under the agency's proposal, the entrance fee for a private vehicle would jump to $70 during peak season, from its current rate of $25 to $30.

The cost for a motorcycle entering the park could increase to $50, from the current fee of $15 to $25. The cost for people entering the park on foot or on bike could go to $30, up from the current rate of $10 to $15.

 

The cost of the annual pass, which permits entrance into all federal lands and parks, would remain at $80.

Daily Demand and Supply: Requisite Natural Disaster Price Gouging Post

When the Super Bowl comes to town hotels increase prices for rooms.  Bars increase prices for drinks.  Restaurants increase prices for food.  

So why when the Super Bowl of hurricanes comes to town would we expect anything less?

When they checked rates online as Hurricane Harvey was strengthening and about to make landfall in Texas, a room with two queen beds was between $120 and $149 a night.

But when a KXAN TV crew from Austin showed up on Saturday to get a room at that same hotel—a Robstown, Texas Best Western Plus, 20 miles from Corpus Christi—the clerk at the front desk quoted a price nearly triple what the crew had seen online: a staggering $321.89 a night, according to KXAN.

The TV crew cried foul, and pushed back against the price. Eventually, the clerk admitted the room rates were much higher than usual. “Weekends start at $149, sometimes we start at $189,” the clerk told KXAN.

“But, why is it so much?” KXAN reporter Wes Rapaport asked of the $321.89 charge.

Why? Econ 101: That's why!

When demand increases, prices rise.  It's that simple.  Without an increase in prices there would be a shortage (the quantity demanded would be greater than the quantity supplied).  The price serves a function:  to ration scarce goods.  As goods become more scarce, the price rises to alleviate the shortage. 

I get it...higher prices are unpopular.  And higher prices during times of need give us all an icky feeling.  But consider the alternative: prices don't rise.  If prices don't we need to find another way to allocate an increasingly scarce resource.  Shortages lead to tensions and tensions lead to bad outcomes (think doorbuster sales on Black Friday).  Rising prices during natural disasters are the worst outcome...except for all of the other outcomes.  How else should we allocate scarce resources other than allowing prices to ration the goods?  

It always strikes me as disingenuous when authorities, concerned with perceptions, step in with superficial solutions. 

Hotels aren’t the only ones guilty of price gouging as Houston grapples with continued rainfall and flooding from Hurricane Harvey, the most powerful storm to hit Texas in more than 50 years. Over the weekend, more than 500 complaints of price gouging were lodged with the Texas attorney general’s office, according to CNBC—including $99 cases of bottled water, gas at $10 a gallon and hotels tripled or quadrupled in price.

"These are things you can't do in Texas," Texas Attorney General Ken Paxton told CNBC in an interview Monday. "There are significant penalties if you price gouge in a crisis like this."

 

Rather than grandstanding how about we address the real issue and find ways to increase supply more quickly--which will hold prices down, increase the number of people served and reduce tensions.  A focus on rapid response and readiness will benefit far more people than legislating against markets. 

Daily Demand and Supply: Sacre Bleu!*

What happens when the people of China decide that butter is yummy?

A sharp increase in global demand has caused the wholesale price of butter to nearly double in Europe. Consumers are paying more too: retail prices jumped nearly 20% in June over the previous year, according to data from Euromonitor.

Federation des Entrepreneurs de la Boulangerie, an industry group that represents French bakers, has described the situation as a "major crisis." It is warning of a sharp increase in the price of croissants, tarts and brioches.

"The price of butter, while certainly volatile, has never reached such a level before," the group said in a statement. "Butter shortages appear to be a real threat by the end of the year."

I'm not a butter policy expert, but I wonder whether this is the correct use of 'shortage?' A shortage occurs when the quantity demanded exceeds the quantity supplied persistently because prices can't rise to alleviate the shortage--usually due to some price policy that prevents prices from rising.  But it appears that butter prices in Europe are rising, so what is being classified as a potential shortage might just be an uncomfortable reality that prices are going to keep rising to prevent a shortage.

 

So why are butter prices rising?

Global butter consumption is rebounding after years of declines, when consumers ditched butter for margarine and other substitutes.

Raphael Moreau, food analyst at Euromonitor, said that consumers are increasingly opting for ingredients seen as natural and less processed, including butter.

The average European ate 8.4 pounds of butter in 2015, the most recent year available, compared to 7.9 pounds in 2010. The average American consumed 5.6 pounds of butter in 2015, up from 4.9 pounds in 2010, according to the U.S. Department of Agriculture (USDA).

At the same time, Chinese demand for foreign milk products is booming. The USDA predicts that Chinese milk imports are expected to jump by 38% this year, with almost all of it coming from the EU and New Zealand.

USDA predicts that global butter consumption will grow an additional 3% this year.

Demand increases cause price increases.

 

And here's some more on the potential shortage:

The next worry is a shortage of butter in Europe.

Butter production slumped 5% in the year to May 2017. Meanwhile, butter stockpiles have plunged 98% in a year, according to the European Commission's Milk Observatory.

"While supplies remain tight and demand has increased, there has been a shortage of butter in the EU, causing prices to soar...

So far no 'shortage,' just market adjustments.

...as buyers try to lock into contracts to obtain stocks," said Michael Liberty, dairy market analyst at Mintec.

Unfulfilled futures contracts might be called a 'shortage.' 

Peder Tuborgh, CEO of U.K. dairy giant Arla, warned the BBC last month that there might not be enough milk and cream to go around at Christmas.

There will be plenty to go around if prices are high enough.

 

*Urban Dictionary: "sacré bleu: A stereotypical french curse that is actually never used by real french people."

I'm not a real french person.

Daily Demand and Supply: Supporting evidence for the standard minimum wage example

The simple minimum wage example in a principles of microeconomics goes something like this:  If the minimum price of labor (wage) is set above the existing equilibrium wage in the market for labor, the result will be a decrease in the quantity demanded for labor (hiring), and an increase in the quantity supplied of labor (more people want to work at higher wages).  The result in a surplus of workers willing to work at the minimum wage (unemployment).  If prices work properly to ration labor, then we would expect wages to fall, but because the price cannot fall below the minimum wage, the surplus of labor (unemployment) is persistent.

An ironic caveat to this simple analysis is that the expected unemployment occurs among the group of people at whom the minimum wage law is targeted--those willing and able to work at the minimum wage. That is, if the simple analysis of minimum wages hold, then minimum wage laws are likely to cause unemployment among the lowest wage workers.

Until now, the empirical evidence on whether minimum wages laws cause unemployment has been mixed at best.  In most studies, the change in minimum wage has been small, and authors have had to rely on comparing labor markets in similar cities that border policy jurisdictions with different minimum wage laws (think difference in minimum wage laws for similar cities in New Jersey and Pennsylvania, both located near the state line).  But with the recent move toward large and geographically disparate changes in minimum wage laws, it looks like we will be seeing more studies examining this question.  

And here's one from Luca and Luca* of the Harvard Business School put out in the last month that seems to support the simple model prediction that minimum wage laws result in decreases in employment:

We study the impact of the minimum wage on firm exit in the restaurant industry, exploiting recent changes in the minimum wage at the city level. The evidence suggests that higher minimum wages increase overall exit rates for restaurants. However, lower quality restaurants, which are already closer to the margin of exit, are disproportionately impacted by increases to the minimum wage. Our point estimates suggest that a one dollar increase in the minimum wage leads to a 14 percent increase in the likelihood of exit for a 3.5-star restaurant (which is the median rating), but has no discernible impact for a 5-star restaurant (on a 1 to 5 star scale).

Seems to be consistent with what we would expect from simple economics.

*I wonder if they live on the second floor?

Daily Demand and Supply: Calculating an elasticity of demand for sugary drinks

From FiveThirtyEight.com:

Philadelphia supermarkets and distributors say beverage sales have dropped 30 percent to 50 percent after the city instituted a 1.5-cent-per-ounce tax on sugary and diet drinks. On one hand, these are the same people who want to get the tax repealed, and we don’t have hard numbers yet, so take this with a grain of salt. On the other hand, the whole point of the tax is to reduce consumption of stuff that will kill you anyway, so … good job?

To measure the responsiveness of consumers to price changes, economist use what is called the 'price elasticity of demand.' In simple terms, the price elasticity of demand tells us whether consumers react a little or a lot when the price of a good changes.  

In technical terms, the price elasticity of demand is equal to the percentage change in the quantity demanded divided by the percentage change in the price.  Because of the law of demand we know that the quantity demanded and the price will move in opposite directions, so the elasticity demand is a negative number.  To confuse everyone, we report the price elasticity of demand as a positive number (the absolute value).  

If the price elasticity of demand is greater than 1, then we say that demand is elastic and that means that consumers are pretty sensitive to price changes. 

If the price elasticity of demand in greater than one, then we say that demand in unit elastic (the percentage change in the quantity demanded is exactly equal to the percentage change in the price).

If the price elasticity of demand is less than one, then demand is price inelastic and that means that consumers are not very sensitive to price changes.  

One reason we care about the price elasticity of demand is because there is a relationship between price elasticities and revenues collected.  If demand is inelastic, an increase in the price will increase revenues.  If demand is elastic, a similar percentage increase in the price will decrease revenues.  The reverse is also true.

This is why we see goods with elastic demand (furniture, groceries, clothing) going on sale more than goods with inelastic demand (gas, liquor).

So what does this mean for the sugary drink example above?

Let's look at the numbers (and make some assumptions).  The tax imposed on sugary drinks is $0.015 per ounce.  For a 12 ounce soda (pop?) that's an increase in the price of $0.18.  To make the math easy let's say a 12 ounce soda costs $0.50 ($3.00 a six pack?) before the tax.  An $0.18 increase in the price is a 36% increase in the price.  That's pretty big.

How much does the quantity demanded react.  If grocery stores are to be believed, the quantity demanded fell between 30% and 50% in reaction to the tax increase.  That means the elasticity of demand is between 0.83 (30/36) and 1.39 (50/36).  

So it looks like demand is slightly inelastic to elastic.

Now we can ask question like:  

• If the goal is to raise tax revenues, will an increase in the tax increase, or decrease tax revenues?
  • Tax revenues will increase if demand is inelastic and decrease if demand is elastic.
• If the goal is to decrease sugar consumption, how effective will an increase in the sugar tax be?
  • It looks like consumers might be price sensitive, so an increase in the tax might be pretty effective at reducing sugary drink consumption

 

 

Daily demand and supply: "Price spikes for jumbo shrimp blamed on Gulf of Mexico dead zone"

Marty presented this at App State back in 2013:

The study's researchers captured the hypoxia effects by reviewing the month-to-month price changes of various market sizes of shrimp. They compared that data to the periods when low-oxygen conditions were present.

In a telephone interview, Smith said researchers have known for years that low oxygen levels in water stresses individual fishery species such as shrimp, including causing them to grow less quickly. "That will concentrate more smaller individuals in the population, and they also tend to aggregate on the edges of the hypoxic areas," he said.

That creates what he calls a "burning building effect" that shrimpers use to their advantage. "The shrimp swim out of the hypoxic area but bunch up just outside, like if you were running out of a burning building to get clear but stay nearby," he said.

Shrimpers tend to fish in those locations as the effects of hypoxia occur. That results in the capture of both the smaller shrimp and the larger shrimp in greater numbers than if they were fishing in the hypoxia-affected areas.

The researchers monitored the price of different market sizes of shrimp between 1990 and 2010, from the largest shrimp category (1 to 15 shrimp per pound) to the smallest (50 to 67 per pound). "The price of large shrimp rises higher because fewer large shrimp are caught when there's a bad hypoxia year, so there's upward pressure," Smith said. "But they can also end up with even more small shrimp, causing the price of small shrimp to go down."

In the past, researchers attempted to measure the effects of hypoxia by tracking landings -- the number of shrimp caught -- at different locations along the coast. But that did not take into account the response of shrimpers to hypoxia: They fish for shrimp where species congregates, outside the hypoxic areas.

The new study looks at the prices of different size shrimp with an understanding of where they're caught and other factors that add to their purchase price. For instance, shrimpers who target shrimp outside hypoxic areas might be using more diesel fuel to reach the location. And when the the response of foreign markets to higher large shrimp prices is added in, hypoxia's effect on prices becomes more clear, Smith said.

via www.nola.com

The paper was published in PNAS. Here is the "significance" paragraph from the abstract page:

Coastal hypoxia is a growing problem worldwide, but economic consequences for fisheries are largely unknown. We provide evidence that hypoxia causes economic effects on a major fishery that was once the most valuable fishery in America. Our analysis is also a breakthrough in causal inference for coupled human-natural systems. Although establishing causality with observational data is always challenging, feedbacks across the human and natural systems amplify these challenges and explain why linking hypoxia to fishery losses has been elusive. We offer an alternative approach using a market counterfactual that is immune to contamination from feedbacks in the coupled system. Natural resource prices can thus be a means to assess the significance of an ecological disturbance.

Here is my favorite part of the paper:

 

 

Daily Demand and Supply: Who will pay for the wall if a 20% import tax is imposed?

On Wednesday, President Trump either did or didn't suggest that Mexico will pay for the construction of a border wall between the U.S. and Mexico through a 20% import tax on all goods imported from Mexico.   Here's how the NYTimes reports it:

President Trump’s decision to build a wall along the length of the United States’ southern border with Mexico erupted into a diplomatic standoff on Thursday, leading to the cancellation of a White House visit by Mexico’s president and sharply rising tensions over who would pay for the wall.

With the conflict escalating, Mr. Trump appeared to embrace a proposal by House Republicans that would impose a 20 percent tax on all imported goods. The White House press secretary, Sean Spicer, told reporters that the proceeds would be used to pay for the border wall, estimated to cost as much as $20 billion.

The White House has backed off the claims a little bit, so it's not clear whether the import tax is a solution, a proposal, a suggestion, a trial balloon or something else...but, regardless of the politics, it can still be used as a teaching point:  Who would really pay for the wall if a 20% tax were levied on all imports from Mexico?

The simple logic of the import tax goes something like this:  Every time Mexico wants to sell something in the United States, Mexico will have to pay 20% of the proceeds to the U.S. government.  The revenues collected from Mexico will be used to pay for the construction of the wall.    Therefore, Mexico is paying for the wall.

But does that logic hold up to economic analysis?  Let's take a look at a series of pictures.