(SUPPOSEDLY) UNSTABLE MARKETS, MARKET OUTCOMES WE DON’T LIKE & WHY WE NEED

OR DON’T NEED TO REGULATE MARKETS.

TWO BASIC IDEAS IN ECONOMICS

• THE “BROKEN WINDOW” FALLACY• “THE LAW OF UNINTENDED CONSEQUENCES”

THE “BROKEN WINDOW” FALLACY

• THE “SEEN” IMPACTS AND THE “UNSEEN” IMPACTS OF BROKEN WINDOWS, DISASTERS, SUBSIDIES, ETC. (SEE The Broken Window)

• EVERYONE SEES THE “SEEN” IMPACTS, ECONOMISTS ALSO SEE THE “UNSEEN” IMPACTS

THE LAW OF UNINTENDED CONSEQUENCES

• EVERY ATTEMPT TO ALTER MARKET OUTCOMES HAS UNINTENDED CONSEQUENCES

AGRICULTURAL MARKETS

• COBWEB THEOREMS – UNSTABLE MARKETS• A CASE OF UNREASONABLE EXPECTATIONS• PRICE SUPPORTS (FLOORS) >> “PARITY (1907)

PRICING” >> SURPLUSES >> ATTEMPTS TO CURB OUTPUT

• “ACREAGE ALLOTTMENTS” AND PAYING FARMERS NOT TO FARM

People in India, Africa, etc., Starve while US Grain Surpluses Rot

WHY NOT EXPORT SURPLUSES?

• EXPORT SUBSIDIES – WHY? – FEED STARVING PEOPLE– BUT POOR INDIAN AND AFRICAN FARMERS DON’T

WANT THE US DUMPING GRAIN IN THEIR MARKETS AND DRIVING DOWN THEIR PRICES

• TO SAVE THE “FAMILY FARM”?• THE “FAMILY FARM” IS A MYTH – YES, THEY EXIST,

BUT THE VAST MAJORITY OF AG OUTPUT IN THE US COMES FROM LARGE CORPORATE AGRIBUSINESSES – AND THEY ALSO GET THE SUBSIDIES.

MINIMUM WAGE LAWS

• UC-IRVINE ECONOMIST STUDIED OVER 100 STUDIES OF THE IMPACTS OF MINIMUM WAGE LAWS – 85% CONCLUDED THAT MINIMUM WAGES INCREASE UNEMPLOYMENT.

• CONSIDER THE DEMAND FOR LABOR, WHO WILL BE AFFECTED?

Minimum Wage Laws Reduce the Gains from TradeAnd INCREASE UNEMPLOYMENT

Quantity

Wage

Supply

Demand forLabor

Qmarket

Market Wage

Qdemanded Qsupplied

MinimumWage

Unemployment

Lost Gains from Trade= Lost Employer Surplus+ Lost Worker Surplus

Lost Employer Surplus

Lost Worker Surplus

MINIMUM WAGE LAWS

PRICE CEILINGS• PRICE CEILINGS LEAD TO SHORTAGES RATIONING• NON-PRICE ALLOCATION SYSTEMS– BRIBERY– QUEING (STANDING IN LINES, WAITING LISTS, ETC.– HIGHER SEARCH AND TRANSACTIONS COSTS – WASTE– DISINCENTIVE INVESTMENTS TO EXPAND PRODUCTION

• RENT CONTROLS – NEW YORK, SANTA BARBARA, BERKELEY, ONTARIO, ETC.– SUB-LEASING, – “KEY CHARGES”, ETC.

Rent Controls Misallocate Investment Resources

WATER WARS• PRICING WATER – THE “MINER’S INCH” – FLAT

FEE FOR AS MUCH WATER AS YOU WANT – COMMON PRACTICE IN MANY WESTERN CITIES– IF THE MARGINAL COST OF WATER IS ZERO,

CONSUMERS USE WATER UP TO THE POINT WHERE THE MARGINAL VALUE IS ZERO – IN OTHER WORDS, THEY WASTE IT.

• BUT PRICING WATER IS CONSIDERED “UNFAIR”, SO WE GET RATIONING – “ODD” AND “EVEN” WATERING DAYS

OTHER EXAMPLES

• THE 2001 CALIFORNIA ELECTRICITY CRISIS– A CEILING PRICE ON ELECTRICITY LED TO

“ROLLING BLACKOUTS”– TO DEAL WITH SHORTAGES, UTILITIES JUST SHUT

OFF POWER TO DIFFERENT SERVICE DISTRICTS ON A ROLLING BASIS

THE MORAL OF THESE STORIES:

• TO ANSWER THE “WHO PRODUCES WHAT, FOR WHOM AND HOW” QUESTION THERE HAS TO BE A WAY TO ALLOCATE SCARCE RESOURCES.

• MARKETS CAN ALLOCATE SCARE RESOUCES EFFICIENTLY MOST OF THE TIME.

• SOMETIMES WE DON’T LIKE THE RESULTS OF MARKET ALLOCATIONS (BECAUSE OF PERCEPTIONS OF “FAIRNESS” OR IDEOLOGY) SO POLITICIANS TRY TO “RIG” THE MARKET TO GET “BETTER” OUTCOMES.

• OFTEN, THIS MAKES THE “PROBLEM” WORSE• BEWARE OF THE “LAW OF UNINTENDED CONSEQUENCES”