The Second Best Theory of Tortilla Prices

I don't think that Tim Haab at Environmental Economics subscribes to the Econ-Atrocities, but by happy coincidence he's written a blog post that would fit perfectly in the series. His topic is the Mexican government's response to serious inflation in the cost of tortillas, which are a primary staple of the Mexican diet, and poor Mexicans (of which there are plenty) are getting hit by these price hikes like a punch to the gut. Should the Mexican government pursue a policy of price caps for tortialls? The "Theory of the Second Best" offers an interesting angle of analysis. I'll let Tim explain it himself, but as a teaser here's a bit of his conclusion:

If the price cap is a response to another inefficient policy, then the price cap may actually improve efficiency. The first best solution would be to remove the policies creating the inefficiently high corn prices. The second best solution might be to create a new policy to counteract the effects of bad policy. That's the Theory of Second Best.

This all makes best sense as part of his full post, so go read it (it's not long, so it won't hurt).

Econ-Utopia: Greenbacks for Green Energy

Econ-Utopia: Greenbacks for Green Energy
By Jonathan Teller-Elsberg, CPE Staff Economist

With Al Gore on Oprah giving his “inconvenient” PowerPoint presentation, new reports of melting ice sheets and rising sea levels, and the release of the British government’s Stern Review, which is the latest major estimate of the economic costs of climate change, the issue of global warming is becoming a part of mainstream politics and kitchen-table conversations. Since the burning of fossil fuels (oil, natural gas, and coal) is the main source of human-caused warming, the need for alternative forms of energy is clear.

Historically, low prices for fossil fuels have meant that renewable energy systems were rarely economically viable. With improvements in technology and production methods, renewable energy has been closing the gap over time. But one thing has almost always been left out of the equation: the long term, hidden costs of global warming from fossil fuel use. These costs might be financial (the cost of building new homes for people displaced by rising oceans), human (the trauma people experience when their way of life is ruined), or something else (the loss of millions of species of life than cannot survive a hotter planet).

In the language of economics, this is an example of a “negative externality,” a cost that is not included in the market price. As a result, the monetary price is “wrong”—in this case, the monetary price of fossil fuels is too low, and so people use more fossil fuel than they would if they knew the “true cost.”

Lately, some governments have taken the question of energy’s true cost to heart, and created incentive plans called “feed-in tariffs” to promote renewable energy. Germany has been at the forefront with its 2004 law, the “Renewable Energy Sources Act.” The law mandates that electric utilities must pay a guaranteed price to anyone who installs a renewable energy system, and that price is guaranteed for 20 years. The price the utility pays is much higher than the price the utility charges for fossil-fuel derived energy that it supplies.

For example, if you put a small photovoltaic (solar electricity) system on the roof of your home and connected it to the electric grid, the German utility must pay you just over 68 cents per kilowatt-hour (kWh) (calculated at the exchange rate on 12/14/2006). Meanwhile, the price you would pay for electricity you get from the utility would be around 20 cents/kWh.

The German government’s logic is that each bit of electricity that comes from a renewable source instead of a fossil fuel has long-term savings built in, because the renewable energy isn’t contributing to global warming. The law turns those long-term savings into cash up front that citizens can use for investing in green power.

As a result, there has been an explosion of interest in alternative energy in Germany. In 2005, some 635 megawatts (1 megawatt = 1,000 kilowatts) of new solar electric systems were installed—enough power to supply the needs of nearly 60,000 average American homes (and the average German home is almost surely more efficient). Spain, Italy, Greece, South Korea and France have all followed Germany’s lead and established their own feed-in tariff systems.

Starting in 2007, residents of California will enjoy a similar incentive to go green; the state’s feed-in tariff guarantees a five year contract paying 38 cents/kWh for newly installed photovoltaic systems. With all that valuable beachfront property to worry about, it’s no wonder that California is leading the way in the U.S. to avoid catastrophic global warming. But the only hope for sufficiently reducing greenhouse gas emissions to save Malibu is that the rest of the country (and world) follow a similar path to make fossil fuels the economic losers that they ought to be.

Sources and resources:

For a taste of the bad news on global warming, see

• BBC News, “Gravity satellites see ice loss” 10/20/2006; “Climate change fight ‘can’t wait’” 10/31/2006; and “Sea-level rise ‘under-estimated’” 12/14/2006


• Gerald Wynn, “Carbon Emissions up One-Quarter Since 1990” 12/8/2006


• Jeremy Lovell, “2006 Set to be 6th Warmest Worldwide: UK Report,” Reuters (via Commondreams.org), 12/14/2006

For Al Gore’s An Inconvenient Truth

• An Inconvenient Truth


• Oprah, “Global Warming 101 with Al Gore” 12/5/2006


• Pew Research Center for People and the Press, “Little Consensus on Global Warming” 7/12/2006
  

For information on photovoltaics, feed in tariffs, and electricity usage, see

• Wikipedia, “Photovoltaics,” accessed 12/14/2006


• Energy Information Administration, U.S. Department of Energy, “U.S. Household Electricity Report,” Table US-1, “Electricity Consumption by End Use in U.S. Households, 2001,” 7/14/2005 (accessed 12/14/2006


• Craig D. Rose, “Solar energy’s day is dawning: State to embark on its biggest-ever photovoltaic project,” San Diego Union-Tribune, 12/10/2006
  

For an overview of renewable energy options for homeowners, small businesses, and communities, The Citizen-Powered Energy Handbook by Greg Pahl.

© 2007 Center for Popular Economics
Econ-Atrocities are the work of their authors and reflect their author's opinions and analyses. CPE does not necessarily endorse any particular idea expressed in these articles.

Econ-Atrocity: The 800-Pound Ronald McDonald in the Room

Econ-Atrocity: The 800-Pound Ronald McDonald in the Room
By Helen Scharber, CPE Staff Economist
Jan. 4, 2007

When your child’s doctor gives you advice, you’re probably inclined to take it. And if 60,000 doctors gave you advice, ignoring it would be even more difficult to justify. Last month, the American Academy of Pediatrics (AAP) issued a policy statement advising us to limit advertising to children, citing its adverse effects on health. Yes, banning toy commercials might result in fewer headaches for parents (“Please, please, pleeeeeeease, can I have this new video game I just saw 10 commercials for????”), but the AAP is more concerned with other health issues, such as childhood obesity. Advertising in general – and to children specifically – has reached astonishingly high levels, and as a country, we’d be wise to take the doctors’ orders.

Advertising to kids is not a new phenomenon, but the intensity of it is. According to Juliet Schor, author of Born to Buy, companies spent around $100 million in 1983 on television advertising to kids. A little more than 20 years later, the amount earmarked for child-targeted ads in a variety of media has jumped to at least $12 billion annually. That’s over $150 per boy and girl in the U.S. And it’s not as though kids only see ads for action figures and sugary cereal; the other $240 billion spent on advertising each year ensures that they see ads for all kinds of products, everywhere they go. According to the AAP report, “the average young person views more than 3,000 ads per day on television, on the Internet, on billboards, and in magazines.” Ads are also creeping into schools, where marketers have cleverly placed them in “educational” posters, textbook covers, bathroom stalls, scoreboards, daily news programs, and bus radio programming.

If advertising to children is becoming increasingly ubiquitous, it’s probably because it’s becoming increasingly profitable. Once upon a time, kids didn’t have as much market power as they do today. The AAP report estimates that kids under 12 now spend $25 billion of their own money annually, teenagers spend another $155 billion, and both groups probably influence another $200 billion in parental spending. Not too surprising, considering that 62 percent of parents say their children “actively participate” in car-buying decisions, marketers are also becoming more aware of the long-term potential of advertising to children (see the “Car makers direct more ads at kids” link below). While they may not be the primary market now, they will be someday. And since researchers have found that kids as young as two can express preferences for specific brands, it’s practically never too early to begin instilling brand loyalty.

But while small children have an incredible memory for commercial messages, they may not have developed the cognitive skills necessary to be critical of them. In 2004, the American Psychological Association (APA) also called for setting limits on advertising to kids, citing research that “children under the age of eight are unable to critically comprehend televised advertising messages and are prone to accept advertiser messages as truthful, accurate and unbiased.” Many people take offense at the idea that we might be manipulated by marketing. Aren’t we, after all, intelligent enough to make up our own minds about what to buy? The research cited by the APA, however, shows that children are uniquely vulnerable to manipulation by advertising. Marketers therefore should not be allowed to prey on them in the name of free speech.

Such invasive advertising to children is not only an ethical problem. The American Academy of Pediatrics cited advertising’s effects on health through the promotion of unhealthy eating, drinking and smoking as the main motivation for setting limits. Children’s health issues certainly merit attention. The Center for Disease Control, for example, has found that the prevalence of overweight children (ages 6 to 11) increased from 7 percent in 1980 to about 19 percent in 2004, while the rate among adolescents (ages 12 to 19) jumped from 5 percent to 17 percent. In addition to physical health problems, Schor argues that extensive marketing has negative effects on children’s emotional well being. In her research for Born to Buy, Schor found links between immersion in consumer culture and depression, anxiety, low self esteem and conflicts with parents. The big push to consume can also lead to financial health problems, as many Americans know all too well, with credit card debt among 18- to 24-year-olds doubling over the past decade.

Not even the staunchest critics of marketing to children would argue that advertisements are completely at fault for these trends. Yet the commercialization of nearly everything is negatively affecting children’s well being in rather profound ways. Why, then, is hardly anyone paying attention to the 800-pound Ronald McDonald in the room? Perhaps it’s because advertising appears to be a necessary evil or a fair tradeoff – maybe little Emma’s school couldn’t afford a soccer team without Coke on the scoreboard, for example. Or perhaps some would argue that parents who don’t approve of the commercial culture should limit their kids’ exposure to it. (See the Kids and Commercialism link below for tips on parenting kids in a commercial culture.) Increasingly invasive marketing techniques make it practically impossible to simply opt out of commercial culture, though. Thus, decisions to limit marketing to children must be made by the country as a whole. Sweden, Norway, Greece, Denmark, and Belgium have already passed laws curbing kid-targeted advertising, and according to 60,000 pediatricians, if we care about the health of our kids, we should too.


Resources

• American Association of Pediatrics, Policy Statement on Children, Adolescents, and Advertising, December 2006


• American Psychological Association, “Television Advertising Leads to Unhealthy Habits in Childen, says APA Task Force,” February 2004


• Jennifer Saranow, “Car makers direct more ads at kids,” Wall Street Journal, November 9, 2006


• David Burke, “Two-year olds branded by TV advertising”


• Center for a New American Dream, Kids and Commercialism


• Juliet Schor, Born to Buy: The Commercialized Child and the New Consumer Culture (New York: Scribner, 2004).


• Center for Disease Control – Facts about Childhood Overweight

© 2007 Center for Popular Economics
Econ-Atrocities are the work of their authors and reflect their author's opinions and analyses. CPE does not necessarily endorse any particular idea expressed in these articles.