Ask an Economist

Question:
Some goods and services are provided by the government (e.g., mail delivery and schools) while others are provided by private business firms (e.g., grocery stores and dry cleaning). Economically, what goods and services would be best provided by the public sector and which are best provided by the private sector?
Answer:

Economists distinguish broadly among three types of goods along the private to public continuum. Purely private goods are purchased and used by individuals and families. Another way of explaining a private good is to say that my use (or...

Question:
What percentage of Iowa's current row-crop farmer prosperity is the result of row-crop agriculture being completely unregulated in terms of water pollution, and therefore able to externalize water pollution costs? Installing new conventional pattern tiling, for example, raises crop yields but sends more polluted water into the drainage outlet (usually a river or lake). The farmer profits from the increased yield but pays nothing for the increased water pollution, which impacts society at large, since most rivers and lakes are public. Has any research been done on this question?
Answer:

The writer of this question understands economics and the market failure associated with externalities very well. Thank you for such an informed and interesting question! The writer is quite correct that the fact that agriculture generates an...

Question:
My friend and I have been engaged in a heated debate over the astronomical purchasing prices of apartments in New York (and even Shanghai, as we live in China) and what causes them to be so high. He believes they are solely based on supply and demand, while I believe there are other factors independent of supply and demand that determine why the prices are so astronomically high. Could you please inform us as to which is the case?
Answer:

As for the high price of apartments in China's big cities, I believe the supply and demand play the main role.

1. The supply in big cities is depressed by the heavy land regulation. There are two types of regulation. First, according to...

Question:
What would be the costs and benefits of returning to the gold standard?
Answer:

Under the gold system, either gold circulates as money, or there is a fixed relationship between the amount of currency in circulation and the amount of gold, given the dollar price of gold. In either case, it means that a valuable resource which...

Question:
Why is the growth of GDP so important? I understand that we want living standards to go up in the aggregate, but if the economy produced the same amount of goods/services per year for, say, three years, would that be catastrophic in itself (i.e., aside from policymakers and economists freaking out about it)?
Answer:

The event that you are referring to is what economists call recessions. During recessions, GDP drops or grows significantly below normal times for a period of usually less than two years. Recessions are dreaded by many but not all economists....

Question:
I read a summary of perfect competition which said that:
1. All market participants have perfect knowledge.
2. Excess profit is only possible in the short run.

If all participants have perfect knowledge, wouldn't all producers instantly know about excess profit opportunities, causing all of them to switch to producing that product at the same time, causing the price to crash and all of them to experience losses? Or, with second-order knowledge, wouldn't they all know that they all knew about the opportunity, and none of them would switch?

Is there a resolution to this perfect market dilemma?
Answer:

"I read a summary of perfect competition which said that: 1. All market participants have perfect knowledge."

An assumption that a market M for a good Q is a "perfectly competitive market" is not a presumption of perfect knowledge...

Question:
I came across a company recently which farms mussels off the coast of a small town in Bulgaria, and I started thinking about its structure in the economy. I know since it produces a homogenous product along with hundreds of other mussel farmers, it must be in perfect competition; however this mussel company also sold locally on top of selling to suppliers. This means it was the only mussel supplier (locally) in the town, and as far as I know that's a monopoly. My question is, what would this company's graphs look like? Would it be more like a perfect competition, or a monopoly? Although it is the only supplier in the town, it sells the mussels at the same price if not cheaper to locals as it does to suppliers, which I know unlike monopolies. Would there be any deadweight loss in a company like this? Is it inefficient or is it more efficient than normal? Consumers can buy mussels from the supermarket, but local supermarkets all get their supply of mussels from this one local company. Please help me understand!
Answer:

The local mussel farm has a cost advantage in supplying in its own town mostly because it saves on transportation costs. Even with that cost advantage, the local firm may not be able to fully exert monopoly power on the local market. It is easy...

Question:
Does the ISU Economics Dept. have a position on whether the Federal Reserve Board should manipulate the federal fund rate to fight inflation? When I was at ISU there was a difference of opinion among professors due to the negative impact on employment.

When the Federal Reserve announces to the world that it’s going to slow down the economy to hold back inflation that has always meant that unemployment will eventually take a hit. In the three cycles since 1989 the unemployment rate starts declining 2.59-3.09 years after the Federal Reserve starts dropping the federal fund rate. The monthly unemployment rate has been falling at a predictable rate within 2.31% since January 2012. For some reason whoever is in the White House gets the blame or credit.
Answer:

As noted, when the Federal Reserve changes the amount of “monetary stimulus” in the economy, it tends to push inflation and employment in the same direction. Lowering the level of stimulus (by raising interest rates) puts downward pressure on...

Question:
What percent of hog firms use forward contracting or options? Why do hog producers not use futures or options?
Answer:

Unfortunately data are not readily available on the percent of hog firms using forward contracting or options. What is readily available through Mandatory Price Reporting (MPR) data provided by USDA’s Agricultural Marketing Service is the volume...

Question:
How many families would be helped by raising the minimum wage?

This week the Congressional Budget Office analyzed the effects of raising the minimum wage to $10.10. They say (Table 4) that it will raise the average income for families in poverty by $300, but also (Table 1) that it will raise the total income for families in poverty by $5 bn.

These two numbers would make sense if there were 17 million families in poverty, but the census says there are only 9.5 million families in poverty. The numbers about families at other income levels have the same issue. Somewhere a number or an interpretation is wrong -- but where?

CBO link: www.cbo.gov/publication/44995

Census link: www.census.gov/hhes/www/cpstables/032013/pov/pov04_000.htm
Answer:

That’s an astute observation. As you say, $5 billion divided by $300 per family in poverty suggests there are about 17 million families in poverty. But the Census data cited in the CBO report indicate far fewer families in poverty. Updating your...

Question:
Regarding the great minimum wage debate, I found a quote attributed to John Boehner that goes something like this: “Employment is like everything else: the more expensive it is, the less you get.” What would be a bumper stickerable argument to counter that? I think Boehner’s point works because it is short, simple, and has economic cred. For my students’ benefit I'd like to find as effective a point to make in support of a higher minimum wage.
Answer:

Are your students economists? If so, it will be difficult to fashion a legitimate bumper sticker in support of the minimum wage. Boehner’s quote is called the “Law of Demand” in economics. You might use:

“Because employers can pay...

Question:
With the debate on whether or not to raise the minimum wage to $15, I think there is another question looming. I previously worked at a large parcel carrier, who paid their new couriers around $15 an hour. The work included:

Lifting boxes up to 150 lbs.
Loading and unloading trucks in a warehouse that can be freezing or sweltering,
Driving a large truck anywhere from 10-150 miles a day,
Customer interaction,
Route planning.

Now if the minimum wage was raised to $15, what would make me choose to work at this parcel company when I could work at a grocery store as a cashier? Wouldn't the new minimum wage increase cascade into other jobs in order to entice people to fill those more difficult positions?

I can see such a large jump in the minimum wage having unforeseen consequences. I would love someone's opinion on this. Thank you for your time!
Answer:

The current federal minimum wage for workers in covered sectors is $7.25 an hour. As you suggest, raising the minimum wage to $15 an hour would motivate many workers who were already being paid $15 in the old regime to seek employment in less...

Question:
Hello, I'm a 42 year old woman from Los Angeles CA. Due to personal reasons I left the state for about 10 years. Now that I'm back, I noticed that things have changed a lot! For example: when I was a young adult, I used to work as a waitress. I remember that most of my co-workers were about the same age and most of us were attending Junior College. However, now I'm 42 years old, I noticed a completely new group of people. Most are mature, in their mid 30s to mid 40s. A lot of them made careers out of working as servers. How does it affect the economy to have more people pursue careers in minimum wage jobs?
Answer:

First, the characterization of foodservice and restaurant workers as a career track is inaccurate. The median age of restaurant workers is 28.4 years, the second youngest sector of our economy (next to retail shoe stores at 24 years). As shown in...

Question:
I wonder what "reduced-form analysis" is, and a non-reduced form would be. To be more specific, I'm reading an article (www.clevelandfed.org/research/review/1996/96-q1-craig.pdf) which states the following:

"Economic data usually influence policy through a reduced-form analysis...Explicit assumptions about behavior that underlie the relationship are not emphasized; rather, the researcher asserts that the “data do the talking.”"

The author later specifies what he means by "reduced-form":

"We use the term in a wider context, where the pattern in the data — not an assumed behavioral structure — forms the point of departure for estimation."
Answer:

A “reduced-form” analysis, also often referred to as “non-structural” analysis, is the most common kind of econometric analysis performed by economists. The other kind, which you called “a non-reduced form,” is customarily referred to as “...

Question:
Using the worst case scenario (Illinois), what are the economic implications of underfunded pension plans?
Answer:

The problem of underfunded pension plans is complex. Some possible economic effects are as follows.

1. Plan beneficiaries will suffer economically in retirement unless they are bailed out by taxpayers. Whether and how much to bail them out...

Question:
Because of QE, the money supply has increased substantially since 2008. Why aren't we seeing more inflation?
Answer:

As noted, the Federal Reserve has significantly expanded its balance sheet from about $800 billion prior to the Financial Crisis, to roughly $4.5 trillion as of November, 2014. The Fed expanded its balance sheet by buying long-term assets and...

Question:
Why are economists and retailers surprised at the 11 percent lower Black Friday sales given the slight rise in the economy? Seems like just because gas is a bit less expensive and overall unemployment, people have still taken a financial hit that cannot be recovered in bank accounts simply by saving a few dollars at the gas pump. Is there an economic theory behind this surprise? I know I save more than most people but the outcome doesn't surprise me. Thanks for any thoughts and for this service!
Answer:

Black Friday is mostly a marketing gimmick to stimulate shopping during an extended weekend of wide-spread idleness, and the weekend’s performance is not a reliable predictor of total holiday spending or the health of the economy. To understand...

Question:
This is a naive question from a fellow economist.

The model of perfect competition among firms is supposed to eliminate economic profits (a.k.a producers' surplus) in the long run. The idea is that such surplus will bring in new firms, pushing the economic surplus down to nothing, so that there are only normal market rates of return on all factor inputs, explicit and implicit.

Why then does this same model not apply to consumers? I have never seen it stated in any econ text that the entry of new consumers will push their surplus down to zero, including their search costs. Is this a serious inconsistency, or is unlimited entry of new consumers simply not a good way to model most markets? (I suspect the latter.) Even if this is so, should not this asymmetry in our most basic model be explicitly noted?
Answer:

Yes, economic theory traditionally has emphasized the role of the entry and exit of firms in dividing market surplus. In microeconomics, free entry and exit of firms is an important part of the assumption of free competition. For macroeconomists...

Question:
I have a vegan friend who believes that the meat and dairy industry and all its affiliates and infrastructure could be phased out of the United States economy without causing it to collapse. In one year. I vehemently disagree. I found a statistic from 2009 by the meat industry saying they essentially make up 5% of the economy. I understand that if we include the dairy industry and all industries that exploit animals, it would be much higher, but let's stick with 5%. Would a sudden loss of 5% of the total US economy, with all those people being left jobless, all those companies going under, and all the ripple effects (Who needs a grill anymore?) (Where did fast food go?) destroy the economy? This is also assuming the animals would be harvested one last time; so there wouldn't be any costs concerning the animals themselves.
Answer:

Agriculture and agriculture-related industries contributed $777.0 billion to the U.S. GDP in 2012, a 4.7% share. The value of U.S. livestock production output (dairy products, milk; meat animals; miscellaneous livestock; and poultry and eggs)...

Question:
I am working on a research project of agriculture cooperatives and their locations across the United States. I have found several sources that list the coops by name and give the main office corporate address, but I have been unable to find a list of cooperative and their operating branches. Does such a list exist?
Answer:

To my knowledge, a publically-accessible national listing of all the agricultural cooperatives and their branches does not exist. However, many states have cooperative associations or cooperative development centers that likely maintain a list of...

Question:
In light of the recent layoffs at John Deere and its suppliers, how does the agriculture sector rate compared to the rest of the economy that seems to be rebounding? How long can we expect sluggish commodity prices?
Answer:

As the layoffs suggest, a large part of agriculture, in this case the crop sector of agriculture, has seen a significant reduction in prices and incomes over the past two years. This drop in prices and incomes can mainly be linked to a surge in U...

Question:
If budgets have to be approved by Congress before they get signed by the President, why does the Congress again have to approve an increase in the borrowing limits?

If govt debt is at $10 trillion, and Congress approves a budget with a budget deficit of $1 trillion, isn't it implied that the administration can implement the budget only by borrowing an extra trillion?
Answer:

Just to be clear, “the debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the...

Question:
A recent Economist article www.economist.com/news/finance-and-economics/21639587-beware-heavily-traded-stocks-drop-pops reports on an academic paper that seems to offer a mechanical rule for beating the stock market by a substantial margin. Is this a disproof of the efficient market hypothesis or is there some trick?
Answer:

Assume that you decide to buy a new cell phone. Are you going to buy iPhone or Xiaomi, some unknown brand? For a typical US consumer, you have about 40% chance to buy iPhone, but almost 0% chance to buy Xiaomi. An iPhone costs you about $600, but...

Question:
Here's what seems like a pretty fundamental one: Why do national government's now borrow exclusively from the private sector instead of from their own central banks and as a result pay high interest instead of essentially none, thereby greatly increasing the burden to the public and the national debt?
Answer:

If central banks are to lend to the government, they would have to print money and that is potentially inflationary. Forward-thinking countries try to control such a temptation by legislating in advance that their central bank be independent....

Question:
When health care spending (or military spending or education) is tallied as a "percentage of GDP," doesn't that GDP figure include that same health spending? If you remove all that double-dipping, what would those percentages look like?
Answer:

Thank you for your question. Indeed, part of the expenditure in health expenditure and defense will count towards total GDP. The reason why the total GDP (including health expenditure or defense expenditure themselves) is used as a denominator to...

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