Why It Is Hard To Use Cost-Benefit Analysis

In my classes last week and this upcoming week, one of the topics is how government policy affects markets. We would like to see the benefits from a policy be greater than the cotss. Sometimes it is very hard to tell. This comes up in a recent EPA policy as reported on in the Wall Street Journal article EPA Proposes Tighter, Costlier Smog Limits. Here is the intro:

"The Obama administration on Thursday proposed tougher standards for reducing smog in a move it said would save lives and reduce respiratory illness, but businesses said the change would inflict new costs on employers and consumers in a weak economy."

Here is what the new policy will do:

"Under the proposal, the EPA would set the acceptable ozone level in the air between 0.06 and 0.07 parts per million, stricter than the current 0.075 ppm."

What are the costs?

"The EPA estimated that the costs of complying with the new standards could range between $19 billion and $90 billion annually, depending on the final standard. Much of the cost will be in the form of new technologies."

What are the benefits?

"EPA officials and public-health groups claim the new standards would mean fewer visits to the emergency room for children with asthma, and longer lives for people with chronic lung disease -- saving the U.S. $13 billion to $100 billion annually."

So the cost could be as high as $90 billion while the benefits could be as low as $13 billion. There is such a huge range as to what might happen with the costs and benefits. That makes it hard to know if it is a good idea.

A couple of years ago I posted the following:

"Last week in the San Antonio Express-News, Michael E. Kraft, professor of environmental sciences at the Unviersity of Wisconsin-Green Bay, said that "in writing the Clean Air Act, Congress explicitly instructed the agency (EPA) to base its decisions on public health and not economic costs.""

So if we don't base anything on cost, how do we know if the policy is a good idea?

Is Avatar Really King Of The Box Office?

That is the title of an article you can read by clicking on Is Avatar Really King Of The Box Office?.

There is a website called "Box Office Mojo" that adjusts box office revenue for ticket price inflation. You can see their rankings at Box Office Mojo ALL TIME BOX OFFICE. "Gone With The Wind" is still the #1 movie all-time when you take the change in ticket prices into account. When GWTW first came out in 1939, prices were alot lower. The average ticket price was only $0.23. Now it is $7.46. You can read about how they make the adjustments and what prices were in the past at Box Office Mojo: ADJUSTING FOR TICKET PRICE INFLATION.

So the average ticket price is 32.44 times higher than in 1939 (7.46/.23 = 32.44). This actually far outstrips the overall increase in prices. The Consumer Price Index (CPI) was 13.9 in 1939 and it was 214.54 in 2009. So prices across the economy are 15.4 times higher (214.54/13.9 = 15.4). So movie prices have increased at about twice the rate of overall prices.

So we might want to cut GWTW's adjusted box office total of $1,507,252,900 in half. That would leave it a mere $753,626,450. That is still higher than Avatar's $561,317,300 (which only includes U.S. ticket sales but I assume the same is true for GWTW). But GWTW was making money for a long time after 1939, so some of its later box office revenue would have be adjusted downward as ticket prices rose. I just don't know how much of its revenue or ticket sales came early on. My guess is the vast majority. That is usually what happens with movies. They make most of their money early on.

But MOJO says:

"Some movies have been released several times over the decades, and we do account for this. For example, Snow White was released in 1937, but half of its lifetime gross is from re-releases in the 80s and 90s, so each of these releases is adjusted according to the year it earned its money."

So that makes me think that GWTW is still the leader.

Update (1-30-2010): Carl Bialick has an article about this in the Wall Street Journal called What It Takes for a Movie to Be No. 1.

Should People Be Allowed To Sell Their Kidneys And Other Organs?

This came up in one of my classes this week when we discussed a chapter from the book The Economics Of Public Issues. Alex Tabarrok had a good article on this in the 1-9/10-2010 edition of the WSJ, p. W1. It was called The Meat Market. Here are some interesting exerpts:

"Iran has eliminated waiting lists for kidneys entirely by paying its citizens to donate."

"Millions of people suffer from kidney disease, but in 2007 there were just 64,606 kidney-transplant operations in the entire world. In the U.S. alone, 83,000 people wait on the official kidney-transplant list. But just 16,500 people received a kidney transplant in 2008, while almost 5,000 died waiting for one."

"To combat yet another shortfall, some American doctors are routinely removing pieces of tissue from deceased patients for transplant without their, or their families', prior consent. And the practice is perfectly legal."

"The shortage of organs has increased the use of so-called expanded-criteria organs, or organs that used to be considered unsuitable for transplant. Kidneys donated from people over the age of 60 or from people who had various medical problems are more likely to fail than organs from younger, healthier donors, but they are now being used under the pressure."

"Already, the black market may account for 5% to 10% of transplants world-wide."

"Only one country, Iran, has eliminated the shortage of transplant organs—and only Iran has a working and legal payment system for organ donation." (although the payment system works mainly through the government)

"The Iranian system and the black market demonstrate one important fact: The organ shortage can be solved by paying living donors. The Iranian system began in 1988 and eliminated the shortage of kidneys by 1999. Writing in the Journal of Economic Perspectives in 2007, Nobel Laureate economist Gary Becker and Julio Elias estimated that a payment of $15,000 for living donors would alleviate the shortage of kidneys in the U.S. Payment could be made by the federal government to avoid any hint of inequality in kidney allocation. Moreover, this proposal would save the government money since even with a significant payment, transplant is cheaper than the dialysis that is now paid for by Medicare's End Stage Renal Disease program."

Is It Hard For A Successful, Well Educated Women To Find Mr. Right?

This question was raised in a recent Wall Street Journal article called The Right Man Is Getting Harder to Find. It seems like there are just not enough well educated, high income men around. One woman, who is a telecommunications project manager, said "I've found a lot of Mr. Almosts, but I can't find Mr. Right." Here is what happens when she meets a guy:

"When she brings men back to her very nice, four-bedroom home, they often comment about her success. A few flat-out say they're uncomfortable with her salary advantage, education advantage (master's degree), or both."

Here are some interesting facts mentioned in the article:

-There's been a 145% rise in unmarried births among college-educated women since 1980more than twice the increase in such births among women without college educations.

-22% of men with "some college" are now outearned by their wives, up from 4% in 1970.

-In situations where there are fewer women than men, you see long-term monogamy

-nearly 58% of all bachelor's degrees and 62% of associate's degrees are earned by women. (men take advantage of this situation)

-colleges accept some male applicants who are not really qualified to prevent a gender imbalance. (college men seem to take advantage of this situation and like having all those women around)

-80% of the jobs lost in the recession were held by men.

Small Changes In Growth Rates Add Up Over Time

In my macro courses we read a chapter in the book "The Economics of Macroissues." The chapter discussed how nations with common law systems, where property rights are better protected than in nations with civil law systems, have higher growth rates. I pointed out to my classes that even a small difference in growth rates ends up causing a very big difference in per capita incomes due to the annual compounding effect.

Paul Krugman recently mentioned that the per capita GDP since 1980 has grown 1.95% in the US and 1.83% in the EU. But we should also remember that small differences in growth rates compound over time. If per capita income was 20,000 in both the US and EU 29 years ago, the per capita income (or GDP) now would be 35,015 in the US and 33,839 in the EU, a difference of $1,176. Maybe not a big difference. But after 100 years the US income level would be 12% higher. After 200 years it would be 26% higher.

Economists Love Fables And Parables (Or, The Essence Of Economic Analysis)

Nobel Prize winning economist Paul Krugman wrote the following in Slate magazine back in the 1990s:

“Economic theory is not a collection of dictums laid down by pompous authority figures. Mainly, it is a menagerie of thought experiments--parables, if you like--that are intended to capture the logic of economic processes in a simplified way. In the end, of course, ideas must be tested against the facts. But even to know what facts are relevant, you must play with those ideas in hypothetical settings.”

Here is the link to the article the quote is from: The Accidental Theorist. He has a brilliant example of how labor saving technology does not increase unemployment.

University of Rochester economist Steven Landsburg wrote the following in his book The Armchair Economist: Economics & Everyday Life:

“But as Aesop discovered some time ago, the details of reality can disguise essential truths that are best revealed through simple fictions. Aesop called them fables and economists call them models." (p. 34)

And

"Economists love fables. A fable need not be true or even realistic to have an important moral. No tortoise ever really raced against a hare, yet “Slow but steady wins the race” remains an insightful lesson.” (p. 40)

So when you see an economics professor draw PPFs on the board which show the tradeoff between houses and cars or when we draw supply and demand curves, we know that these are "simple fictions." But, by assuming, for example, that there is a society that makes only two goods and has one resource (labor, say), we can learn something important, like the The Law of Increasing Opportunity Cost.

Should We Tax Cosmetic Surgery To Help Pay For Health Care Insurance?

This the question raised in Knives Drawn Over the 'Botax'. The article says:

"Leading makers of antiwrinkle drugs, breast implants and other appearance-related products are trying to derail a proposed tax on elective cosmetic surgery in the Senate's health-overhaul bill.

The proposed 5% levy -- dubbed the "Botax" after the antiwrinkle treatment product Botox -- would raise an estimated $5.8 billion over 10 years."

Some are opposed to it, including plastic surgeons and "companies in aesthetic treatments."

"Botox treatments are by far the most popular procedure, costing an average of $443 in 2008, according to the American Society for Aesthetic Plastic Surgery. The American Medical Association, which also opposes the tax, says it would be the first federal levy on a medical procedure."

Universities Favor Athletes In Admissions

Read Admissions exemptions aide athletes By ALAN SCHER ZAGIER. I saw the article in the 12-31-09 San Antonio Express-News, page 2E.

"The review identified at least 27 schools where athletes were at least 10 times more likely to benefit from special admission programs than students in the general population."

"At Alabama, 19 football players got in as part of a special admissions program from 2004 to 2006, the most recent years available in the NCAA report. The school tightened its standards for "special admits" in both 2004 and 2007, but from 2004 through 2006, Crimson Tide athletes were still more than 43 times more likely to benefit from such exemptions."

"The NCAA defines special admissions programs as those designed for students who don't meet "standard or normal entrance requirements.""

"Texas was one of seven schools that reported no use of special admissions, instead describing "holistic" standards that consider each applicant individually rather than relying on minimum test scores and grade-point averages.

But the school also acknowledged in its NCAA report that athletic recruits overall are less prepared. At Texas, the average SAT score for a freshman football player from 2003 to 2005 was 945 — or 320 points lower than the typical first-year student's score on the entrance exam."

How Recessions Affect Young People

It is too early in the semester to have talked about recessions. But there was an interesting article called Recession may shape young adults' future habits. Here are some exerpts:

Researchers found "...young people who live through recessions tend to doubt their control over their careers. Unlike people who have lived through sweeter economic circumstances, the youth of recessions tend to look at career success as luck rather than a result of personal action."

"Beyond family pressures, unemployment among 16-to-19-year-olds is at an extraordinarily high level of more than 26 percent. Students finishing college face difficult job prospects, with hiring of this year's graduates down 22 percent, according to the National Association of Colleges and Employers."

[when] "...individuals have had low stock market returns for many years, they don't want to take risks in stocks. And bad experiences with stocks early in life "have significant influence even several decades later."

"...Americans aged 22 years to 33 years have shifted toward more conservative financial behavior too. It's influencing everything from investing to job choices: More are seeking job security and strong benefits rather than opting to jump from job to job to further their careers."

Another article, Birth date, business cycles, and lifetime income says:

"...a one percentage point increase in the national unemployment rate is associated with a 6 to 7 percent loss in initial wages. The annual wage loss declines over time, but is still statistically significant 15 years later. Comparing the wages earned by the class of 1982 (a peak unemployment year) with the wages of the class of 1988 (a peak employment year) over the first 20 years of a career, the wage difference resulted in a difference of nearly $100,000 in cumulative earnings in net present value."

Why Do Older People Hate The Imaginarium of Doctor Parnassus?

This is a recently released movie which you can read about at IMDB The Imaginarium of Doctor Parnassus. In economics, we say that tastes and preferences affect demand, but we usually don't talk much about how those tastes or preferences are formed. But at IMDB, people can rate a movie on a scale from 1 to 10. Then you can view the breakdown on how the movie was rated by age and gender categories. And then you can see the breakdown for a given group, like females aged 45+. You can see how many of them gave the movie a 1 or 2, etc. 10 is the best, 1 is the worst. Here is something I just posted at IMDB to get a discussion going about a strange pattern I see in the rankings:

I have not seen this movie. What seems weird is that 102 females age 45+ have voted yet they give it a 3.7? (the overall average is 7.4). Males that age don't rate it very higly either. Why? Why would old people not like this? I look at movie ratings at IMDB occassionally and I don't recall seeing such a huge young/old split before. Please tell me about other movies where this happens. Also, 41 of the Females Aged 45+ gave this movie a 10 while 27 have given it a 1. They either loved it or hated it? I don't see any of the other demographic groups with such a love/hate viewpoint. Seems very strange.

Here is the breakdown as of 1-10-2009

http://www.imdb.com/title/tt1054606/ratings

See user ratings report for:

Votes Average
Males 5,190 7.4 (this means that 5,190 males have voted and the average ranking is 7.4)
Females 1,503 7.2
Aged under 18 400 8.3
Males under 18 228 8.9
Females under 18 171 7.0
Aged 18-29 4,556 7.7
Males Aged 18-29 3,557 7.7
Females Aged 18-29 987 7.9
Aged 30-44 1,357 7.0
Males Aged 30-44 1,118 7.0
Females Aged 30-44 231 6.4
Aged 45+ 368 5.5
Males Aged 45+ 265 5.9
Females Aged 45+ 102 3.7
Top 1000 voters 87 6.3
US users 902 6.8
Non-US users 5,798 7.5

IMDb users 6,993 7.4

http://www.imdb.com/title/tt1054606/ratings-female_age_4

102 Females Aged 45+ have given a weighted average vote of 3.7 / 10

Demographic breakdowns are shown below.

Votes Percentage Rating
41 40.2% 10
9 8.8% 9
15 14.7% 8
6 5.9% 7
3 2.9% 6
5
1 1.0% 4
3
2
27 26.5% 1