No, Brexit Won’t Free the U.K. From EU Regulations

British industries from aerospace to telecommunications still need to follow Brussels’s rules to retain access to vital European markets

By Anu Bradford. She is a professor at Columbia Law School and the author of “The Brussels Effect: How the European Union Rules the World.” One economic concept it mentions is "economies of scale." Excerpts:

"EU consumers currently buy almost half of what the U.K. exports, and the EU is a top export destination for many British industries—including aerospace, automobiles, chemicals, financial services, food manufacturing, pharmaceuticals and telecommunications. So all of these industries will need to remain closely aligned with EU regulations to preserve their access to the European market"

"The EU doesn’t even need the British government to commit to a regulatory alignment as part of any future trade deal between Brussels and London. All the EU needs is to demand that companies doing business in the union abide by its rules. Global companies often voluntarily standardize their operations around the most stringent regulatory standard out there—frequently the EU standard—since complying with that standard will typically ensure access to all markets. Economies of scale and other benefits of uniform production make it unlikely that these firms would set up two production lines, one for the EU and another for the rest of the world.

Even multinationals and U.S. companies that benefit from a much larger and less regulated home market often adjust their global business practices to EU rules. Facebook, Google and Microsoft have global privacy policies written with Brussels in mind. Twitter and YouTube have echoed the EU’s definition of hate speech globally, pledging to delete material on their platforms that the EU would deem unacceptable even when such speech might be protected by the U.S. First Amendment."

"CHS Inc., the giant U.S. farm cooperative, has refused to sell seeds or buy grain from U.S. farmers if they contain traits of genetically modified organisms banned in the EU."

"Mr. Johnson’s government will also wind up continuing to emulate many of the EU rules it most despised, including those on data privacy. Pro-Brexit voices have long criticized the EU’s data-protection rules for impeding innovation and undermining British firms’ competitiveness. But the EU’s General Data Protection Regulation will set the terms moving forward, or data flows between the U.K. and the EU will halt."

"Ironically, Brexit will probably strengthen many EU regulations, leaving U.K. companies to face an even more heavily regulated marketplace in the coming years. London will no longer have a say over EU regulations, removing an important pro-market voice from the table where those regulations are written."

Economies of Scale (Increasing Returns to Scale) = A situation in which long-run average total cost declines as the firm increases its level of output. The percentage increase in Q is greater than the percentage increase in TC.

You could be paying higher insurance premiums than someone with the same driving history, car and background because of price optimization

See Your habits may be costing you by Kayda Norman of Nerdwallet.

The price optimization the article mentions sounds like what economists call "price discrimination." That is explained below. In the article, it sounds like the unwillingness to shop around means that your demand is less elastic and those customers get charged a higher price.

Excerpts from the article: 

"some insurers jack up prices based on seemingly unrelated data — like your magazine subscriptions or what groceries you buy.

Even if you have a clean driving record and have stayed loyal to your insurance company for the past 10 years, you could be paying higher premiums than someone with the same driving history, car and background. Why? Price optimization.

Price optimization is the practice of charging higher rates based on the likelihood that a person will not shop around for a lower price. Insurers create algorithms based on all kinds of personal data, including loyalty to other service providers and shopping behavior, but not your driving habits. This is a separate formula from other common auto insurance rate factors like age, neighborhood, gender and the type of car you drive.

Factors can run the gamut from your magazine subscriptions, the number of phones you buy and your web browsing history. This means a company's most loyal customers may be most affected by this practice."

"Price optimization is illegal in 20 states"

"Because companies use different algorithms to determine rates, price optimization can affect anyone who doesn't compare insurance rates often."

"The reason they can charge you $1,000 and another person $2,000 is because the person paying $2,000 doesn't know about the $1,000 company out there"

Charging different prices to different groups of customers based on their ability and willingness to pay (a discount) is price discrimination.

Why price discrimination raises profits

1. If a firm can get a higher price from some customers than others they increase their profits.
2. If a firm can lower the price for others who might not have bought the product to begin with, they also increase their profits.

Necessary Conditions for Price Discrimination

1. The firm must face a downward sloping demand. Monopolies do but firms in perfect competition do not (their demand, also their MR line, is flat).

2. The firm must be able to readily (and cheaply) identify buyers or groups of buyers with predictably different elasticities of demand (senior citizens have a more elastic demand and will shop around more since they have more time so restaurants might give them a discount). The more elastic the demand, the greater the change in quantity demanded for a given change in price.

3. The firm must be able to prevent resale of the product or service. If a student can buy a movie ticket for $6 while everyone else pays $8, the firm will lose money if the students turn around and sell their tickets for $7. So the theater can prevent resale by checking student IDs to make sure people holding the lower price ticket really are students.

#2 might be the key here for Amazon. The lower income customers will be spending a bigger share of their budgets on Amazon products and services. One of the determinants of elasticity is how much of your budget you spend on the item. As this goes up, your demand becomes more elastic (that is, quantity will change more for a given change in price). You are affected alot more by a change in the price of cars than a change in the price of donuts. So if the price of cars doubles, the quantity demanded will fall much more than if the price of donuts doubles.

And when firms can price discriminate, as explained above, they will charge lower prices (offer discounts) to those groups with higher elasticities. The number of substitute goods and the amount of time consumes have to adjust to price changes also affect elasticity.

NCAA Takes Another Court Hit on Athlete Compensation: The Ninth Circuit ruled that the organization’s restrictions violated federal antitrust law

By Brent Kendall, Louise Radnofsky and Laine Higgins of The WSJ.

One of the chapters that students like to read from the book The Economics of Public Issues is the one about the NCAA being a cartel. All the schools agree not to pay the athletes. Those athletes generate alot of revenue for the schools but get paid very little. For the best players, the difference can be a a million dollars.

Excerpts from the article:

"A federal appeals court dealt another blow to the National Collegiate Athletic Association’s efforts to keep tight limits on compensating student-athletes, ruling that the organization’s restrictions violated federal antitrust law.

“NCAA limits on education-related benefits do not play by the Sherman Act’s rules,” the Ninth U.S. Circuit Court of Appeals said in a ruling Monday.

The decision, by a unanimous three-judge panel, said the NCAA unlawfully limited competition for student athletes by adopting a cramped view of the kinds of compensation the athletes could receive related to their education.

"The decision marks the latest instance in which judges have rejected the NCAA’s antitrust defenses of its old ways of doing business. At the same time, the courts have declined to give the athletes unrestricted remuneration.

Courts previously struck a blow against NCAA amateurism rules in a case brought by former UCLA basketball player Ed O’Bannon over the use of his likeness in a videogame, a case that made it easier for athletes to be compensated for the full cost of attending school.

The current case was filed by former West Virginia University running back Shawne Alston and other former Division I athletes who argued that the NCAA’s rules violated U.S. antitrust law by artificially depressing their compensation. The athletes won a decision from U.S. District Judge Claudia Wilken in 2019 that the NCAA could no longer limit compensation and benefits as tightly.

The appeals court’s ruling, written by Chief Judge Sidney Thomas, affirmed Judge Wilken’s decision and allows college athletes to receive compensation for the cost of educational materials, such as laptop computers or musical instruments, or be guaranteed access to paid-for graduate or vocational school."

"The Ninth Circuit, however, didn’t go as far as the athletes wanted, declining to dismantle NCAA restrictions on compensation that aren’t connected to education-related benefits.

One member of the panel, Judge Milan Smith, said the courts should do more to protect college athletes from an NCAA that he described as a “cartel” that makes billions of dollars from their labor.

The NCAA was eyeing an onslaught of legislation from states, led by California, when it announced a once unthinkable reversal of position last fall and said it would move to allow college players to make some money from name, image and likeness rights."

Related posts:

Cost of attendance stipends in college sports 

How The Economics Of College Sports Might Be Distorted

Comparative Advantage

When I covered this recently in one of my classes, a student told me that when he took a high school economics class that the teacher said that there were cases where one country would not benefit from trading with another in a two good example.

This is just flat wrong, as I explain in the example below. If it takes country A less time to make both goods than country B, country A can still benefit by trading with country B.

From the OECD:

"The mathematician Stanislaw Ulam did not have a high opinion of the social sciences. He once challenged Paul Samuelson, Nobel laureate in economics, to name one social science proposition that was both true and non-trivial. Samuelson nominated comparative advantage: “That this idea is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them.”"

See Comparative advantage: Doing what you do best.

So here is a post from 2018.

Yesterday I posted a link to the new PBS series "First Civilizations" which had an interesting episode on trade. Last year was the 200th anniversary of David Ricardo's important idea called "comparative advantage." It explains how two nations can benefit from trade even if one country seems to be better at making all products than the other.

The Washington Post even had an article about it last year. It's the 200th anniversary of the most counterintuitive idea in the social sciences by Daniel W. Drezner, a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.

Trade can benefit both sides. Otherwise, why make the trade? For example, if you have bread and no water and I have water and no bread, if I trade some water to you for some of your bread, we both gain or are better off.

It might seem like if one country is "better" at producing all goods than another, they have no room for trade. But even then, the seemingly more advanced country will still gain from trade.

Here is an example that comes from  David Ricardo himself. Comparative advantage is when you can produce a good at a lower opportunity cost than others face (in a two good example, it is impossible to have the comparative advantage in both goods).

Suppose it takes 40 labor hours to make a barrel of wine in England and 2 hours to make a yard of cloth. In Portugal, those numbers are 10 and 1, respectively. So it looks like Portugal is "better" at producing both goods since it takes them less time to make wine and less time to make cloth.

The labor hours numbers means that if England wants a barrel of wine, it would have to give up 20 yards of cloth (since 40/2 = 20-if you don't produce a barrel of wine, you save 40 hours of labor and you can make 20 yards of cloth in that time).

In Portugal, if you want to trade a barrel of wine, you can get 10 yards of cloth. Not spending 10 hours making wine allows them to make 10 yards of cloth.

So Portugal has the comparative advantage in wine since less cloth is given up there (10 yards) than in England (20 yards) for every one barrel of wine produced. That is a lower opportunity cost.

England would only give 1/20 a barrel of wine to make cloth while Portugal gives up 1/10 a barrel. England has the  comparative advantage in cloth.

How can the two countries gain from trade? What if England trades 15 yards of cloth to Portugal for 1 barrel of wine?

Both countries gain. England is better off since they only give up 15 yards of cloth to get that barrel of wine when normally they have to give up 20.

Portugal gets more cloth (15 yards instead of 10) for that 1 barrel of wine they trade. They are better off, too (even though it takes them less time to make each product than in England). 

Remdesivir and Type I & Type II errors

I use the book The Economics of Public Issues in my micro classes. Chapter 1 is called "Death by Bureaucrat." It discusses how the Food and Drug Administration can make either a Type I error or a Type II error.

Type I error: The FDA approves a drug before enough testing is done and when people take it, there are harmful side effects.

Type II error: The FDA tests a drug longer than necessary to stay on the safe side. But people might suffer because the drug is not yet available. 80,000 people died waiting for Septra to be approved.

The FDA would rather make a Type II error because the public can blame the FDA if a Type I error occurs.

Remdesivir might be a treatment for Covid-19. But if it, or any other drug, shows some promise, how long do we keep testing it before we allow patients to take it? Could people who would otherwise be saved die while testing is going on?

See Inside the NIH’s controversial decision to stop its big remdesivir study by Matthew Herper of STAT. Excerpt:

"The drug maker Gilead Sciences released a bombshell two weeks ago: A study conducted by a U.S. government agency had found that the company’s experimental drug, remdesivir, was the first treatment shown to have even a small effect against Covid-19.

Behind that ray of hope, though, was one of the toughest quandaries in medicine: how to balance the need to rigorously test a new medicine for safety and effectiveness with the moral imperative to get patients a treatment that works as quickly as possible. At the heart of the decision about when to end the trial was a process that was — as is often in the case in clinical trials — by turns secretive and bureaucratic.

The National Institute of Allergy and Infectious Diseases has described to STAT in new detail how it made its fateful decision: to start giving remdesivir to patients who had been assigned to receive a placebo in the study, essentially limiting researchers’ ability to collect more data about whether the drug saves lives — something the study, called ACTT-1, suggests but does not prove. In the trial, 8% of the participants given remdesivir died, compared with 11.6% of the placebo group, a difference that was not statistically significant. 

A top NIAID official said he had no regrets about the decision. 

“There certainly was unanimity within the institute that this was the right thing to do,” said H. Clifford Lane, NIAID’s clinical director. “While I think there might’ve been some discussion, [because] everyone always tries to play devil’s advocate in these discussions, I think there was a pretty uniform opinion that this was what we should do.”

From the standpoint of the agency, he said, the study had answered the question it was designed to answer: The median time that hospitalized Covid-19 patients on remdesivir took to stop needing oxygen or exit the hospital was, at 11 days, four days shorter than those who were on placebo. “How many patients would we want to put at risk of dying,” he asked, for that last little bit of proof? Remdesivir, he noted, was not a home run, but is probably better than nothing.

Steven Nissen, a veteran trialist and cardiologist at the Cleveland Clinic, disagreed that giving placebo patients remdesivir was the right call. “I believe it is in society’s best interest to determine whether remdesivir can reduce mortality, and with the release of this information doing a placebo-controlled trial to determine if there is a mortality benefit will be very difficult,” he said. “The question is: Was there a route, or is there a route, to determine if the drug can prevent death?” The decision is “a lost opportunity,” he said.

Peter Bach, the director of the Center for Health Policy and Outcomes at Memorial Sloan Kettering Cancer Center, agreed with Nissen. “The core understanding of clinical research participation and clinical research conduct is we run the trial rigorously to provide the most accurate information about the right treatment,” he said. And that answer, he argued, should ideally have determined whether remdesivir saves lives.

The reason we have shut our whole society down, Bach said, is not to prevent Covid-19 patients from spending a few more days in the hospital. It is to prevent patients from dying. “Mortality is the right endpoint,” he said.

Most experts contacted by STAT expressed opinions that fell between Nissen and Lane, believing that the decision was a difficult case, with several defending the NIAID."

Joseph Schumpeter And Me

Jeffery S. McMullen of Indiana University published an article in the academic journal "Business Horizons." It is titled

"Are we confounding heroism and individualism? Entrepreneurs may not be lone rangers, but they are heroic nonetheless."

At the end of the post is a link to this article.

McMullen cites a paper I wrote in the 1990s and mentions my name in the same sentence as Joseph Schumpeter, an important economist from the 20th century.

Click here to read a short bio of him

A few years ago I wrote a post called "My Favorite Economist Is Joseph Schumpeter."  Here it is

""Why is this blog called The Dangerous Economist? Back in the early 1990s, I wrote a paper called "The Creative-Destroyers: Are Entrepreneurs Mythological Heroes?" It compares the entrepreneur in capitalism to the hero in mythology. I was never able to get it published in an academic journal. One referee even said the idea was dangerous. I doubt much harm would have befallen the U.S. economy had this paper been published. It is now online at

Creative Destroyers

A shorter version is at

Shorter Version

If you clicked on the link about why I chose this name for my blog and then these articles and read them you would have discovered some of the things that I list below and they would have pointed you to Schumpeter.

The process whereby innovations occur was called "Creative Destruction" by Schumpeter in his book Capitalism, Socialism, and Democracy. "Creative Destruction" was

"The opening of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U. S. Steel illustrate the same process of industrial mutation if I may use that biological term-that incessantly revolutionizes the economic structure from with in, incessantly destroying the old one, incessantly creating the new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in" (p. 83).

In his book The Hero with a Thousand Faces, Joseph Campbell described the action of the hero with

"The standard path of the mythological adventure of the hero is a magnification of the formula represented in the rites of passage: separation-initiation-return: which might be named the nuclear unit of the monomyth. A hero ventures forth from the world of common day into a region of supernatural wonder: fabulous forces are there encountered and a decisive victory is won: the hero comes back from this mysterious adventure with the power to bestow boons on his fellow man. "(p. 30)

Campbell (1968) also has a section called "The Cosmogonic Cycle" which "unrolls the great vision of the creation and destruction of the world which is vouchsafed as revelation to the successful hero" (p. 38). The connection to Schumpeter's theory of creative destruction is clear. A successful entrepreneur simultaneously destroys and creates a new world, or at least a new way of life. Henry Ford, for example, destroyed the horse and buggy age while creating the age of the automobile. But even more to the point is the fact that the hero finds that the world "suffers from a symbolical deficiency" (p. 37) and that "the hero appears on the scene in various forms according to the changing needs of the race" (p. 38). The changing needs and the deficiency may directly correspond to the changing market conditions or the changing desires for products. The entrepreneur IS the first person to perceive the need or opportunity for market profits.

Joseph Campbell's book inspired George Lucas to make the Star Wars movies."

Link to the article by Jeffery S. McMullen of Indiana University. March 2017 Business Horizons.

The full text of the article is at the link.

Here is the paragraph where he mentions my name.

"While such mythological heroism –— either super or mundane –— has long ruled the box office, it appears to be out of vogue in scholarly research on entrepreneurship. This is ironic, given that modern entrepreneurship theory is deeply rooted in such a narrative. Cyril Morong (1994), for example, demonstrates how the entrepreneur of Schumpeter’s theory maps onto the hero’s journey as described by Joseph Campbell. In his Theory of Economic Development, Joseph Schumpeter (1934) clearly taps into the ethos of existentialism, arguing that the entrepreneur is motivated by the joy of creating, the dream of founding a private kingdom, or the will to conquer. These motives give Schumpeter’s entrepreneur the courage necessary to bear uncertainty and impose his will –— much like a Nietzschean übermensch –— onto his social system by introducing innovative new combinations of resources. In doing so, the entrepreneur transforms the economy and, by extension, society. Thus, one of the most in fluential theories of entrepreneurship conceives of the entrepreneur as a mythological hero Are we confounding heroism and individualism? Entrepreneurs may not be lone rangers, but they are heroic nonetheless." 

Here are the last three paragraphs.

"Are entrepreneurs lone rangers? No, but that does not mean that entrepreneurship occurs without heroic individualism. Like entrepreneurship, true heroism is interdependent by its very nature. Even if an entrepreneur were somehow able to go it alone, his or her success would still depend on customers as well as other possible stakeholders (e.g., employees, investors, suppliers, distributors, etc.). Similarly, it is difficult to imagine how anyone could be heroic without a somewhat intimate knowledge of and concern for others’ welfare. Entrepreneurs must bear the costs of their actions before they receive the benefits, which only come if the costs the entrepreneurs incur ultimately benefit someone else.

Therefore, before we declare the heroic entrepreneur a myth, perhaps we should consider the term ‘myth’ as literally as Campbell has. Any innovative act exhibits an element of uncertainty and thus requires a corresponding degree of courage. Although this may only be a moment’s adrenaline rush, it is more likely an extended ride on an emotional rollercoaster that exhausts as well as elates. It is a hero’s journey of existential import and consequence. If this is true, then extraction of heroism from entrepreneurship is misguided, as it would do nothing to correct for scholars’ undersocialization of the entrepreneurial act. Instead, it would merely neglect the courage and sacrifice required from individuals like Elon Musk, who may not act alone, but nonetheless must act if entrepreneurship is to occur.

Ignoring this fact is not only likely to produce bad science but also may affect practice via bad policy. To the extent that policymakers erroneously believe heroism is unnecessary, they are likely to underestimate the costs entrepreneurs must incur not just to succeed, but also to try at all. Lack of sympathy about such sacrifices would likely shape institutional (dis)incentives. Thus, to deny that entrepreneurship is a heroic act is to neglect the need to reward its success and to forgive its potential failure. For these reasons, it may behoove scholars, policymakers, and practitioners alike to think twice before throwing out the baby of heroism with the bathwater of individualism."

Why Did The Value Of The Dollar Rise More Than 20% From July 2014 To March 2015?

Although this is a post from 2017, I talked about exchange rates this week in micro.

But first, on Jeopardy on Monday, they had a category titled "STARTS WITH "Z"." One clue was

"Literally meaning "golden", it's the basic monetary unit of Poland"

The correct question is "What is złoty?"

Yet not one of the three contestants even rang in. No one knew. A little disappointing since I am 75% Polish.

How to pronounce it? One site says "zuh·laa·tee." Another says "zwa-ti." You pronounce the ti like ti in tin but you drop the n. It seems like the accent is on the second syllable. See ItsEwelina.

Now on to exchange rates.

On June 30, 2014 , the Trade Weighted U.S. Dollar Index: Major Currencies (DTWEXM) was 75.7 (the index starts in 1973 at 100, so the dollar was lower in value compared to other major currencies in 2014 than it was in 1973).

See Trade Weighted U.S. Dollar Index: Major Currencies (DTWEXM) from the St. Louis Federal Reserve Bank.

But by March 16, 2015, it was at 93.1, just about a 23% increase in value.

Why did the dollar rise? Here is what The Economist magazine said:

"The principal reasons for the greenback’s rapid strengthening are simple to grasp. With Europe and Japan stuck in the doldrums, and China and other emerging markets slowing, America’s economy looks relatively strong. The IMF expects it to grow by 3.6% this year. The Federal Reserve has already begun to tighten monetary policy, by stopping its programme of asset purchases, and is now preparing the ground to go further. This week the Fed altered the wording it uses to describe its plans (see article), giving itself room to raise interest rates later this year—the first rise since 2006. With American monetary policy tightening, and other central banks still loosening, investors can make higher returns from dollar-denominated assets. In capital floods, and up the dollar goes."

See Mismatch point: The rise of the dollar will punish borrowers in emerging markets.

Here is another view from Andrew Hecht. He is an international commodity trader, an options expert and analyst.

"There are many reasons that the dollar has appreciated over recent months. The U.S. economy is still the largest in the world. Despite demographics, the U.S. remains the strongest economic nation in the world. The U.S. remains a powerful nation even though less than five percent of the world's population live within U.S. borders. The dollar is the reserve currency of the world. Many other nations hold dollars as a key part of their reserves due to the political and economic stability in the United States. Dollar strength has been the result of moderate growth in the U.S. economy. While European growth remains lethargic, the nation that experienced the highest degree of growth in recent years, China, has seen its growth rate slow. The Chinese economic has shifted from heavy manufacturing to a consumer based economy. As the size of the Chinese economy swells, it becomes harder to grow on a percentage basis as it has in the past.

Think of it this way, it is easier to make a seven percent return on one million dollars than it is to make a commensurate return on one trillion dollars. The sheer size of the Chinese economy makes the percentage growth rate seen in years past almost impossible to sustain. Therefore, Chinese economic growth has slowed on a percentage basis.

Relative strength of the U.S. economy, when compared to those of Europe and China, is a positive factor for the dollar.

A bear market in commodity prices has also been supportive for the dollar. The U.S. is a major consumer of raw materials and lower prices amount to stimulus for the American economy. At the same time, the currencies of nations that depend on commodity revenues have suffered because of lower prices. Canada, Australia, Brazil, Russia, South Africa as well as other commodity producing nations have seen their currency values depreciate alongside raw material prices.

Another positive influence for the dollar is the relative rate of interest paid on the U.S. currency when compared to other currencies. For the first time in nine years, the U.S. central bank raised short-term interest rates in the United States in December 2015. The Federal Reserve also stated their intention that rates will continue to head higher in the months and years ahead. Short-term interest rates in the U.S. went to zero in the aftermath of the housing and global financial crisis in 2008. Growth in the U.S. economy no longer supports such accommodative monetary policy. As the dollar has offered the opportunity for capital growth, in terms of its appreciation versus other currencies since May 2014, higher interest rates add additional support in that they increase the yield on the currency for holders."