Market Power

The Deadweight Loss of Halloween

Each October 31st in the US, little rapscallions and rug rats dressed as witches, demons, and other spooky nasties go door to door to screech "trick or treat" in hopes of getting candy. Without fail, said rapscallions and rug rats receive some candy they don't like (like the year-old Lemonheads and other tricks treats I tossed out last night).  This phenomenon associated with gift-giving is hardly unique to Halloween.

Joel Waldfogel examined the deadweight loss of Christmas in his AER article from 1993:  the social loss that arises when the amount by which spending on a gift exceeds the recipient's value.  You see, I may have been willing to pay as much as $5 for that, well, thing given to me by my late aunt Bertha, but she spent $10 on it.  The $10 represents the opportunity cost of the resources used in making that thing, so Bertha's giving me the gift, in effect, made society poorer. 

Part of the difference is explained by sentimental value.  That thing was worth only $5 to me, but the fact that my dearly departed Aunt Bertha gave it to me is worth $2 to me and her giving it to me was worth another $1 to her.  So the total value is $8, meaning the loss to society is only $2. 

But there is no such value with Halloween candy because it is largely given to kids by total strangers.  Suppose I go to old man Withers' house (he runs the haunted amusement park) and he gives me Baby Ruth candy bars.  Since I don't like coconut, I wouldn't be willing to spend anything to get one.  And because I don't give a rat's patootie about Old Man Withers and he doesn't give a rat's patootie about me, there is no sentimental value.  The difference is pure deadweight loss.

Yesterday I asked a parent what he and his three kids were doing for Halloween.  He said that his kids don't want to go trick or treating.  Instead, they want to go to Old Country Buffet.  My first thought was, WTF?  OCB?  OMG!  Y R U going 2 OCB?  But at least there won't be any deadweight loss.

Here are two posts (one here, the other here) from last year on the deadweight loss of Halloween. 

Leave it to an economist to point out the bad things in life!

Halloween Cartoon

Via Doc

Trade, Capitalism Links

Here are two links I found over at Instapundit this morning

1. Obama's protectionist rhetoric has quieted since the primaries, but his record tells a much different story.
2. A "non-socialist alternative" to capitalism.  Central planning by any other name is still central planning

Markets Impose Discipline

So, you don't think that the market provides sufficient discipline to keep management in line.  So, you think corporations are just Enrons waiting to happen.  You think we need ever more governmental oversight of accounting practices.  Well have I got a paper for you (via Craig Newmark).  Here is the abstract from "The Costs to Firms of Cooking the Books" from the Journal of Financial and Quantitative Analysis (Sept. 2008)... ungated version here:

We examine the penalties imposed on the 585 firms targeted by SEC enforcement actions for financial misrepresentation from 1978-2002, which we track through November 15, 2005, The penalties imposed on firms through the legal system average only $23,5 million per firm. The penalties imposed by the market, in contrast, are huge. Our point estimate of the reputational penalty—which we define as the expected loss in the present value of future cash flows due to lower sales and higher contracting and financing costs—is over 7,5 times the sum of all penalties imposed through the legal and regulatory system. For each dollar that a firm misleadingly infiates its market value, on average, it loses this dollar when its misconduct is revealed, plus an additional $3,08, Of this additional loss, $0,36 is due to expected legal penalties and $2,71 is due to lost reputation. In firms that survive the enforcement process, lost reputation is even greater at $3,83, In the cross section, the reputation loss is positively related to measures of the firm's reliance on implicit contracts. This evidence belies a widespread belief that financial misrepresentation is disciplined lightly. To the contrary, reputation losses impose substantial penalties for cooking the books.

Who's Better for the Economy: Obama or McCain (or you, if you could run)?

The ever-interesting Ironman at Political Calculations has created a metric that you can use to see the effect that the candidates' tax proposals, or yours, would have on the decision to earn and invest.

The Best Defense of Theory Evarrrr

From Don Boudreaux:

One participant, however, caused me to wince.  This participant was a U.S. Representative from North Carolina, the Hon. Brad Miller.  He began his remarks by pointing out that he was the only non-academic speaking at the seminar.  Upon hearing this remark, I guessed correctly what he'd say next.  It went something like this:

Unlike academics, I don't see things with theories.  I see things with my eyes.  And I trust my eyes.

Ah yes, the practical man, unhampered by the blinders of theory, refusing to drink of the inebriating elixir of abstract thought.  He looks at the world as it is, straight on, seeing plainly what the theories of woolly headed academics only cause to be misperceived and misconstrued.

The setting was not one conducive to a debate on epistemology or methodology, so I kept my mouth shut -- but had I opened it, I would have simply asked the Hon. Mr. Miller what he sees when he stands outside and looks at the relationship of the sun to the earth.  Surely he sees the sun revolving around a perfectly still and stationary earth.  He also sees a flat earth.

Were he consistent, he would proudly claim membership in Flat-Earth Society, and wear a lapel button proclaiming that Galileo was wrong.

Chase Coffman - the Best Tight End in the Big XII, if Not the Nation

Tiger fans have had the pleasure of watching Chase Coffman play at Mizzou for four years.  He's a big kid with exceptionally good hands and is surprisingly athletic.  He has hurdled numerous players over the past couple of years, has planted numerous would-be tacklers, and has made two spectacular one-handed grabs in the past two games.  This past weekend's TD catch against Colorado was nothing short of amazing.

Here's a clear picture of the touchdown catch that appeared in the Columbia Daily Tribune.

What a grab.  Here's Chase hurdling a Colorado defender (Jalil Brown).  Brown is not crouching down much at all.

When I teach my kids to catch, I always tell them to catch it "just like Chase."  That means for them to catch it with their hands not their body. 

Was MLB Colluding Regarding Barry Bonds?

Was MLB colluding by not offering Barry Bonds a contract?  Dennis Coates at TSE notes news reports

After being found guilty of collusion several times in the 1980s and 1990s, including being assessed millions of dollars in damages, one would think MLB owners would be very careful about colluding again. Yet it seems the MLBPA thinks that may be why no team made a bid for Barry Bonds. The Sports Network reports the story.

Report: MLBPA to file grievance over potential Bonds collusion

New York, NY (Sports Network) - The Major League Baseball Players Association has reportedly found evidence that team owners acted in collusion to keep former Giants slugger Barry Bonds from playing in the majors this season.

MLB.com cited Bonds' agent, Jeff Borris, in stating that it's not if a grievance will be filed but when, and that the union has agreed with the commissioner's office to delay the filing of such a grievance until an unspecified time.

Baseball's all-time home run leader at 762, Bonds sat out the entire 2008 season and asked the union in May to consider filing a grievance after he was unable to find a home as a free agent. A 15-year stint with San Francisco ended in 2007 when the team informed him he would not be returning.

Bonds is still in the midst of defending 14 counts of perjury and one obstruction of justice charge in a case with ties to his alleged use of performance-enhancing substances brought against him by the federal attorney's office in San Francisco.

Here's a link to the TSN story.  Back in July, I noted:

I've been thinking about this as well.  Why won't anyone give Barry Bonds a contract?  Bernie Miklasz  thinks the Cardinals could use him, and he would probably be cheap (likely due, mostly, to the lack of interest).  He wonders a. if there isn't some collusion going on and b. if those with the Cards who say they don't want him are a little hypocritical.

I thought it was odd that no team found him valuable at all.  Surely he would be worth at least the minimum contract.  Then again, as unpopular as he's become in the downside of career, maybe he wasn't worth the minimum.

Lordy, Lordy... Look Who's 40

Today is my wife's 40th birthday.  Next year is our 20th wedding anniversary and we dated for a year before that.  She's now spent over half her life with me.  Poor thing! Happy birthday from your husband and your boys.

 

 

FAIL! - Blackouts in Venezuela - It's a Knowledge Problem

From Yahoo! News:

Despite having some of the world's largest energy reserves, Venezuela is increasingly struggling to maintain basic electrical service, a growing challenge for leftist President Hugo Chavez.

The OPEC nation has suffered three nationwide blackouts this year, and chronic power shortages have sparked protests from the western Andean highlands to San Felix, a city of mostly poor industrial workers in the sweltering south.

Shoddy electrical service is now one of Venezuelans' top concerns, according to a recent poll, and may be a factor in elections next month for governors and mayors in which Chavez allies are expected to lose key posts, in part on complaints of poor services.

The problem suggests that Chavez, with his ambitious international alliances and promises to end capitalism, risks alienating supporters by failing to focus on basic issues like electricity, trash collection and law enforcement.

"With so much energy in Venezuela, how can we be without power?" asked Fernando Aponte, 49, whose slum neighborhood of Las Delicias in San Felix spent 15 days without electricity -- leading him to block a nearby avenue with burning tires in protest.

It's a knowledge (and incentive) problem.  Markets are inherently complex animals and their functioning depends on an inordinate amount of information and bits of coordination to piece that information together.  Even the smartest person in the room can't possibly possess the proper amount of information to "get things done" by himself.  That, along with not having the proper incentives, is why central planning fails to provide non-public goods.