A great example of "deadweight loss" are restrictions on surge pricing for ride share companies. No surge pricing to get drivers on the road=no ride home from the ballgame for me.
Great explanation of deadweight loss. I’d add the concepts of fixed costs vs. variable costs as a contributing factor to why suppliers decrease quantity with a price cap.
* Fixed costs: Costs a supplier pays regardless of quantity sold
* Variable costs: Cost per-a-unit of production
In the Popeyes example
* Fixed: Lease, maintenance, wages of a minimal crew
* Variable: Ingredients, wages of additional workers at busy times
With the price ceiling, Popeyes could find that sales after 10 PM doesn’t provide enough revenue to offset the costs of the minimum crew needed to operate a store. They could also find that some locations should be closed since they don’t bring in enough revenue to cover their fixed costs regardless of hours of operation.
It occurs to me that a lot of ways of cutting inflation would be really destructive. Price controls on basic consumer items that are produced in competitive markets would certainly cut inflation, but would also result in constant shortages. A rationing system would also cut inflation but only by forcing people to reduce the amount of stuff they normally buy.
There are lots of ways charlatans can screw things up for everybody with daft policies. Price controls and rationing do have a use in certain circumstances, but often when there has been a policy failure elsewhere.
Nov 14, 2022·edited Nov 14, 2022Liked by Milan Singh
Great post!
DWL is a valuable concept. But it's worth being skeptical of the way it's quantified on a supply and demand plot, especially when (though the post does not do this) economists start referring to it as a measure of "welfare."
Willingness-to-pay is a very convenient proxy for welfare, but I think most people would acknowledge that its a pretty bad one. The fact that I was willing to pay up to $100 for an uber ride to the airport yesterday (I actually paid $80) while the homeless guy I passed probably wasn't willing to pay anything for it says basically nothing about how much welfare that uber ride produced. But on the supply and demand plot, my willingness-to-pay gets represented by a point along the demand curve at P = 100, while the homeless man's willingness to pay gets represented as a point a P = 0.
This isn't a profound or novel insight; plenty of economists acknowledge the issues with market valuations of welfare. But I think it's worth having in a comment here given all the people likely to see this post.
"And to understand those concepts, you need to understand a really basic supply and demand chart with the price of widgets on the vertical axis and the quantity of widgets sold on the horizontal axis. The line for demand slopes down, and the line for supply slopes up "
Ok, as a scientist and math minor, this kind of graph abuse is what makes economics basically incomprehensible to me and everyone else. You're not using "chart" to mean the same thing we do - you can't, because a graph with "price on the vertical axis" and "quantity on the horizontal axis" can't have two lines. There's only one line: price, as a function of quantity. That's what it means for the chart to have axes - they define your dependent and independent variables, and the line you graph in the coordinate space is the relationship (the function) between the axes.
You're doing something else with your chart, clearly, but since it's so radically different from how data is typically charted and you don't explain how to interpret it, it's incomprehensible and that's where I fall off the rest of your post.
Hopefully, Milan is taking the wheel today so Matt can research an epic post about Congressional politics.
It looks like the Republicans will have 220 or 221 House seats in the next Congress. They’ll have alot of fun with oversight and may even embarrass the Biden administration. Progressive legislation will be DOA. However, a dozen of the Republican members will be from suburban NYC or LA, so I’m not really sure there will be government shutdowns. The really intriguing question is whether a vital center can develop. Can the NY Republicans get together with Spanberger and Murkowski and Manchin and actually fix some problems? Or will McCarthy use the gavel to keep centrist legislation from getting to the floor? (I expect very little legislation to pass, but my confidence isn’t high). Do the moderates have an actual policy agenda beyond not being crazy? The answers to these questions will all be personality driven, and I don’t pretend to understand the House Republican zeitgeist.
The essay seemed to end abruptly. Allow me to expand on the Land Value Tax (my own interpretation, hardcore Georgists out there may differ somewhat).
The 19th century journalist Henry George, in his book “Progress and Poverty”, proposed the Single Tax, also known as the Land Value Tax.
Essentially, no income or sales tax, only a tax on the value of land (not a “property” tax; buildings would not be taxed, only the land they sit on).
Advantages?
- Simple to define and enforce. The tax would be “x” percent of assessed land value, no exceptions. You can try to hide income but you can’t hide land.
- Progressive and pro-growth. The wealthy own most of the high-priced land and would pay a disproportionate share of the taxes, but the marginal tax on both income and consumption would be zero – a win-win for liberals and conservatives.
Henry George, who had a somewhat socialist view of land and natural resources, believed that the money you earn from your business, labor or profession belongs to you 100%, but the value of your land is due not so much to your own efforts but to the value of the surrounding community and is therefore fair game to be taxed to support that community.
Nice. If you want to have some fun, try applying basic Econ 101 principles like this supply and demand chart to various transactions in the healthcare system. Then ask yourself at what point and why the predictions of the usual Econ 101 behavior break down in our healthcare system, and why, and how you could redesign the system so that Econ 101 predictions do apply, while also protecting equitable patient access to standard of care treatments.
If you follow all the logic all the way through, my prediction is that, 9 times out of 10, you'll end up concluding that the best healthcare system is one with multiple, vertically integrated provider/insurers that complete with each other for patients.
Is the supply of land really fixed? Inheritances can be refused ('disclaimed') and people presumably would if the value of a piece of land became negative - perfectly possible if it came with some costly obligation to manage historical pollution, maintain a road etcetc and the underlying value was low) then land could be abandoned to the government. And I believe governments can withdraw from territory to create 'terra nullius' - nobodies land, which would reduce the supply. And then there's the operations of nature in terms of erosion and deposition, sea level rise due to man-made climate change...
This was a good explainer - I would however be really curious to hear if any reader of this blog had actually never heard of DWL. As Milan states in the by-line - it literally is in every Econ101 course.
> "former Bush CEA chair Greg Mankiw advocates for a gas tax of over $2 to fully account for pollution externalities, traffic congestion, and damage to roads."
Finally, someone who gets it. Although it should be higher now to keep up with inflation.
Sorry, I was delayed in responding to this because I blacked out after reading "Candy apples (which are delicious) . . . ." (Being old enough to remember when candy apples were a much bigger thing, I feel very comfortable saying they are not, in fact, delicious).
That said, as someone with a bachelor's in economics, I would say that this is a good article; nice job, Milan!
A great example of "deadweight loss" are restrictions on surge pricing for ride share companies. No surge pricing to get drivers on the road=no ride home from the ballgame for me.
Great explanation of deadweight loss. I’d add the concepts of fixed costs vs. variable costs as a contributing factor to why suppliers decrease quantity with a price cap.
* Fixed costs: Costs a supplier pays regardless of quantity sold
* Variable costs: Cost per-a-unit of production
In the Popeyes example
* Fixed: Lease, maintenance, wages of a minimal crew
* Variable: Ingredients, wages of additional workers at busy times
With the price ceiling, Popeyes could find that sales after 10 PM doesn’t provide enough revenue to offset the costs of the minimum crew needed to operate a store. They could also find that some locations should be closed since they don’t bring in enough revenue to cover their fixed costs regardless of hours of operation.
1) Thought I knew what deadweight loss was.
2) Read the joke. Didn’t get it.
3) Wondered if if I didn’t know what deadweight loss was.
4) Read the article to confirm that I knew what deadweight loss was.
5) Still didn’t get the joke. 😔
Nothing quite like having a college freshman explain something they just learned in a college freshman class to you.
It occurs to me that a lot of ways of cutting inflation would be really destructive. Price controls on basic consumer items that are produced in competitive markets would certainly cut inflation, but would also result in constant shortages. A rationing system would also cut inflation but only by forcing people to reduce the amount of stuff they normally buy.
There are lots of ways charlatans can screw things up for everybody with daft policies. Price controls and rationing do have a use in certain circumstances, but often when there has been a policy failure elsewhere.
Great post!
DWL is a valuable concept. But it's worth being skeptical of the way it's quantified on a supply and demand plot, especially when (though the post does not do this) economists start referring to it as a measure of "welfare."
Willingness-to-pay is a very convenient proxy for welfare, but I think most people would acknowledge that its a pretty bad one. The fact that I was willing to pay up to $100 for an uber ride to the airport yesterday (I actually paid $80) while the homeless guy I passed probably wasn't willing to pay anything for it says basically nothing about how much welfare that uber ride produced. But on the supply and demand plot, my willingness-to-pay gets represented by a point along the demand curve at P = 100, while the homeless man's willingness to pay gets represented as a point a P = 0.
This isn't a profound or novel insight; plenty of economists acknowledge the issues with market valuations of welfare. But I think it's worth having in a comment here given all the people likely to see this post.
"And to understand those concepts, you need to understand a really basic supply and demand chart with the price of widgets on the vertical axis and the quantity of widgets sold on the horizontal axis. The line for demand slopes down, and the line for supply slopes up "
Ok, as a scientist and math minor, this kind of graph abuse is what makes economics basically incomprehensible to me and everyone else. You're not using "chart" to mean the same thing we do - you can't, because a graph with "price on the vertical axis" and "quantity on the horizontal axis" can't have two lines. There's only one line: price, as a function of quantity. That's what it means for the chart to have axes - they define your dependent and independent variables, and the line you graph in the coordinate space is the relationship (the function) between the axes.
You're doing something else with your chart, clearly, but since it's so radically different from how data is typically charted and you don't explain how to interpret it, it's incomprehensible and that's where I fall off the rest of your post.
Hopefully, Milan is taking the wheel today so Matt can research an epic post about Congressional politics.
It looks like the Republicans will have 220 or 221 House seats in the next Congress. They’ll have alot of fun with oversight and may even embarrass the Biden administration. Progressive legislation will be DOA. However, a dozen of the Republican members will be from suburban NYC or LA, so I’m not really sure there will be government shutdowns. The really intriguing question is whether a vital center can develop. Can the NY Republicans get together with Spanberger and Murkowski and Manchin and actually fix some problems? Or will McCarthy use the gavel to keep centrist legislation from getting to the floor? (I expect very little legislation to pass, but my confidence isn’t high). Do the moderates have an actual policy agenda beyond not being crazy? The answers to these questions will all be personality driven, and I don’t pretend to understand the House Republican zeitgeist.
The essay seemed to end abruptly. Allow me to expand on the Land Value Tax (my own interpretation, hardcore Georgists out there may differ somewhat).
The 19th century journalist Henry George, in his book “Progress and Poverty”, proposed the Single Tax, also known as the Land Value Tax.
Essentially, no income or sales tax, only a tax on the value of land (not a “property” tax; buildings would not be taxed, only the land they sit on).
Advantages?
- Simple to define and enforce. The tax would be “x” percent of assessed land value, no exceptions. You can try to hide income but you can’t hide land.
- Progressive and pro-growth. The wealthy own most of the high-priced land and would pay a disproportionate share of the taxes, but the marginal tax on both income and consumption would be zero – a win-win for liberals and conservatives.
Henry George, who had a somewhat socialist view of land and natural resources, believed that the money you earn from your business, labor or profession belongs to you 100%, but the value of your land is due not so much to your own efforts but to the value of the surrounding community and is therefore fair game to be taxed to support that community.
Nice. If you want to have some fun, try applying basic Econ 101 principles like this supply and demand chart to various transactions in the healthcare system. Then ask yourself at what point and why the predictions of the usual Econ 101 behavior break down in our healthcare system, and why, and how you could redesign the system so that Econ 101 predictions do apply, while also protecting equitable patient access to standard of care treatments.
If you follow all the logic all the way through, my prediction is that, 9 times out of 10, you'll end up concluding that the best healthcare system is one with multiple, vertically integrated provider/insurers that complete with each other for patients.
I thought Matt often criticizes headlines that presume what the reader knows or not, or like “XYZ is more common than you think.”
Good explanation!
Is the supply of land really fixed? Inheritances can be refused ('disclaimed') and people presumably would if the value of a piece of land became negative - perfectly possible if it came with some costly obligation to manage historical pollution, maintain a road etcetc and the underlying value was low) then land could be abandoned to the government. And I believe governments can withdraw from territory to create 'terra nullius' - nobodies land, which would reduce the supply. And then there's the operations of nature in terms of erosion and deposition, sea level rise due to man-made climate change...
"This post is public, so please share the link!"
Deadweight loss.
This was a good explainer - I would however be really curious to hear if any reader of this blog had actually never heard of DWL. As Milan states in the by-line - it literally is in every Econ101 course.
> "former Bush CEA chair Greg Mankiw advocates for a gas tax of over $2 to fully account for pollution externalities, traffic congestion, and damage to roads."
Finally, someone who gets it. Although it should be higher now to keep up with inflation.
Sorry, I was delayed in responding to this because I blacked out after reading "Candy apples (which are delicious) . . . ." (Being old enough to remember when candy apples were a much bigger thing, I feel very comfortable saying they are not, in fact, delicious).
That said, as someone with a bachelor's in economics, I would say that this is a good article; nice job, Milan!