Black Friday doesn't make sense

Black Friday, which occurs today, is an annual event where U.S. retailers have big sales to kick off the Christmas shopping season. But it doesn't make any sense to me from an economics perspective.

The question bugging me (which I don't have an answer to, but perhaps a reader does) is why, if the deals are so good on Black Friday, do stores not offer them on other days? Presumably, retail sales must be dismal leading up to Black Friday — why buy something the preceding Thursday when you know you can get a much better deal the next day? Stores, realizing this fact, should presumably offer their Black Friday bargains before Black Friday in order to get customers into their store. Yet this doesn't seem to happen.

Paying students for good grades

This article in the National Post last week caught my attention. It examines whether it makes sense to pay elementary and high school students for attendance and/or academic performance.

This is a fascinating issue and potentially a very good idea. From an economic theory perspective, this looks like a brilliant concept — people respond to incentives, so dangling a carrot in front of students should motivate them to learn more. Moreover, it's likely very affordable; for kids, money generally goes further than for adults. Paying a potential $50 bonus for good performance over a school year could be a significant incentive for most kids, but wouldn't cost a school board that much. For a class of 30 students, it's a potential liability of $1,500, which is roughly equivalent to a 2.5% wage increase for teachers (and that's assuming every student earns a bonus, which seems unlikely).

Our taxi industry is way too socialist

In Canada, we generally have free markets. But when it comes to taxis, the industry seems to as centrally planned as Soviet Russia, and I don't understand why.

In my hometown of Vancouver, city councillor Geoff Meggs blogged about the shortage of taxis in the downtown core on weekends. It's tough for drunken revellers to find a cab home, apparently. And some taxi drivers are unwilling to take people home to the suburbs. It's definitely a problem, but Meggs' musings about possible solutions are misguided.

A negative externality

When I went to get my suit altered recently, I discovered an unfortunate negative externality.


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The problem with Movember

At the risk of sounding like a jerk, I haven't donated to anyone's Movember campaign this year, and I'm not sure that I will. I'm blaming it on the paradox of choice.

Movember, for anyone out of the loop, is a charitable campaign where men grow a moustache in November to raise money to fight prostate cancer. It's a worthy cause, though I fear that Movember might fall victim to its own success.

New books shouldn't be rare

On Tuesday, Johanna Skibsrud won the Giller Prize, one of the top literary awards in Canada, for her book The Sentimentalists. But if you try to find a copy of her book at your local bookstore, you'll likely have failed.

It turns out that the book is published by a small boutique outfit in Kentville, Nova Scotia, and they are unable to meet the new-found demand for Skibsrud's book in a timely manner. At first, I became angry when I read about this in the Toronto Star. It appeared that the publisher was attributing his slow production to being a small business, "weaving themselves into the life of a community, unlike the Wal-Marts of the world, merely in search of a profit." That spin irked me, because not being able to come anywhere close to meeting demand is a sign of incompetence, rather than a necessary outcome of running a small business. Lots of small businesses are competent enough to meet customer demand.

Can microcredit work in the first world?

Microcredit is extremely helpful in poor, third-world environments, but can it work in the first world?

Microcredit is the practice of giving small loans to entrepreneurs who wouldn't otherwise have access to credit. Usually, people apply for loans in groups, where some group members don't receive their funding until others have paid theirs back. This lessens the risk of default because people experience peer pressure to repay their loans, and because applicants will tend to be more responsible since people won't want to form a group with someone who is unlikely to repay their loan.

Future of journalism: interviewing by proxy?

When I started this blog, I intended it to be about both economics and journalism. However, the journalism focus slipped through the cracks, and this blog has evolved into, more or less, a behavioural economics blog. That being said, this post is solely about journalism.

When journalists hold meetings and bring in guest speakers, one of the most popular topics is "the future of journalism." I hate this topic. To me, it implies that journalism as it is can't survive without a major change, that newspapers will be extinct by the end of the year if they don't completely change what they're doing. The death of print journalism, I think, is over-hyped. Surely the Globe and Mail wouldn't make an 18-year, $1.7 billion commitment to their newly-redesigned product if they thought print journalism was on its way out.

But that doesn't stop all the prognosticating by media types about what they think the future of journalism will look like. So here's my stab at it: interviewing by proxy.

I (happily) let Rogers manipulate my incentives

I received an unsolicited call from Rogers on Saturday. I already have TV, phone and internet service from them, and they were offering me an additional 10% off each service. The only catch was that if I cancelled any of these services within two years, I would be charged a cancellation fee equal to the discount I received on that service, up to a maximum of $100.

At first, I was skeptical. Rogers already had me as a customer. I wasn't threatening to switch to a competitor. Why would they offer me a discount when I was presumably happy and willing to pay the price they were already charging me? I asked the salesman this question, and he gave me some textbook line that the discount is because I subscribe to multiple services.

Harry Potternomics

I like movies based on reality (an aside: I wonder if this is typical of economists?). I never liked Star Wars, am not into the whole vampire trend that seems to have captivated Hollywood, and can't be bothered to read any of the Lord of the Rings or Harry Potter books. I did see one of the Harry Potter movies, but only because a girl I was interested in wanted to see it.

Although I didn't appreciate the movie at the time, I'm now wondering if the Harry Potter series might be worth a read. Eric Gouvin, a law prof in New England, has published what sounds like a fascinating article about the parallels and differences between the banking system in Harry Potter and the banking system in the real world. According to a description of Gouvin's report, "[W]izards do not manage their money supply the way Muggles do by using the slight of hand of fractional reserve banking to create money out of thin air. Instead, the money supply in the wizard world seems stagnant, creating social problems that emphasize disparities in wealth."

I never knew that Harry Potter was so deep. The article is published as a chapter in The Law and Harry Potter — too bad it's not available at my local library.

Halloween game theory on The Office

You know you think too much like an economist when…

I was watching The Office last night, and I knew Oscar was going to win the Halloween contest as soon as he threw in the towel and traded in his disco dude outfit for a "rational consumer" costume. For those who didn't see the episode, a bunch of employees were competing for the highly coveted Wilkes-Barre/Scranton coupon book in a Halloween costume contest, and some employees were taking things a little too seriously in hopes of snagging the big prize. Oscar decided everyone was getting too carried away, so to show how ridiculous he thought the whole thing was, he took off his costume and put on his normal clothes, claiming to be dressed as a rational consumer.

Freakonomics takes on the Bible

Those of you who have looked at my links to favourite blogs will know I am an avid reader of the Freakonomics blog. They produce a large quantity of posts, many of which I never read (I have yet to understand what the Yale Book of Quotations has to do with "the hidden side of everything"), but they have some very well-respected bloggers and their posts are usually non-technical and high quality.

But I have been puzzling for a few days now over a curious post by Daniel Hamermesh about game theory in the Bible. Maybe someone who is more knowledgeable about religion can help me out with this.

Can a pay cut be pareto improving?

Although I greatly enjoy the competitive balance that the NHL salary cap has created in hockey, it seems to me there is one glaring inefficiency. By limiting the amount of money teams can spend, mediocre players with high salaries who would have a job in the NHL based on merit are instead sent to the minor leagues because given the cap, their salary allocation can best be spent elsewhere.

Several overpaid players have been shipped to the American Hockey League this season so their massive salaries don't count against the salary cap: Wade Redden ($6.5 million), Sheldon Souray ($5.4 million), Michael Nylander ($5.0 million) and Jeff Finger ($3.5 million). The NHL club still has to pay their salary, but it doesn't count against the salary cap.

The case for subsidizing hip-hop

A recent working paper by Swedish economist Per Engström, Bling Bling Taxation and the Fiscal Virtues of Hip Hop, makes the bizarre argument that we should subsidize hip-hop music in the interests of efficiency.

Engström starts with a model of taxing what he calls "diamond goods" —goods that have no value except for their costliness. Taxing these goods ad nauseam is an efficient method of taxation, according to this model, because people value the good more as its after-tax price increases.

Engström focuses his analysis on a specific type of diamond good, "bling bling," which he defines as the following:

…the very extreme kind of ornamentation that hip hop artists often display. It could consist of very heavy gold chains with massive dollar signs (euro signs have lately come in fashion since the late fall in dollar price), diamond encrusted ipods, or surgically removing all your teeth and replacing them with asymmetric chunks of diamond adorned gold.

Behavioural economics in industry

I was delighted to find a hidden gem at the back of the Living section of Saturday's Toronto Star, a story about a behavioural economics book co-written by Hewlett-Packard behavioural economist Kay-Yut Chen (the article does not appear to be available online).

The article itself was not earth-shattering, but I was surprised to see that Hewlett-Packard employs a behavioural economist to conduct experiments that could help improve their business. The workplace is a logical place to run economics experiments, but because it's a fairly new field one doesn't hear about companies running their own experiments very often. Charities are one area that has seen the benefit of experimental economics, with several running experiments in recent years in an attempt to learn how to fundraise more efficiently. But for the most part, economics experiments still take place in academic labs (CIRANO in Quebec is probably Canada's most prominent) rather than in the workplace.

Industry seems like it's slowly starting to see the benefits it can reap from economic research. Google poached respected economist Hal Varian from Berkley in 2007 to help them take better advantage of all the data that Google searchers generate, but he's the only example of a prominent economist in a private-sector research position that I can think of. So I was pleased to see that Hewlett-Packard also has an economist. I'll have to pick up a copy of his book.

A conflict between externalities and libertarianism

At the University of Victoria, my alma mater, there are no fraternities or sororities. Last week, students voted to keep things that way.

I like to think of myself as a libertarian. I have no interest in joining a frat myself, but if someone else wants to join one, I wouldn't want to stop him or her. One of my friends was in a fraternity at another university, and the beer-drinking, crazy party stereotypes are a little overblown; they do some good charity work.

So when one of my left-leaning Facebook friends, Shamus Reid, posted on Facebook in support of the ban ("Today, 64.5% of UVic students voted at their students' union's AGM to oppose frats and sororities on campus. I'm proud to own 42.5% of a degree from that fine institution."), I set out writing a snide retort on his wall accusing him of paternalism. It irked me that Shamus sees it as a good thing that UVic is preventing people who want to join a frat or sorority from doing so, just because some students don't like the idea. If you don't like frats, don't join one, I thought, but don't stop someone else from signing up if they want to.

Parking at Scotiabank Place

On Tuesday, I attended Jason Mraz's concert at Scotiabank Place. It was awesome.

What was less awesome was the $9 I paid for a package of M&Ms and a bottled water and the $17 I paid for parking. I anticipate gouging on food and drink at hockey rinks since they have a monopoly and prohibit the bringing in of outside food, but I was surprised to find that the parking lot near the arena charged $17, considering that it was only about five per cent full (the concert was not very well attended).

The Ikea cafeteria (part 2)

I eat at fast food restaurants a lot. Usually, when I'm finished, I'll throw the remnants of my meal in the garbage and stack my tray neatly on top of the garbage can to be collected.

Why do I do this? It would be easier to me to leave my tray on the table for an employee to clean up — it is someone's job, after all. I think I do it for two reasons. First, it's a social norm. Other people do it, so I feel like I should do it. Second, I feel bad for the fast-food employees because they do a tough job for a tiny wage, and I feel a little better about myself if I help them out (although by this logic, I'd start tipping the guy who gives me fries, so maybe my motivation is more due to social norms than outright altruism).

The Ikea cafeteria (part 1)

Having recently moved across the country, I've spent more time than I'd care to admit recently at the Ottawa Ikea. I'll spare blog readers a rant about the challenges of assembling their furniture. What's more fascinating about Ikea is their restaurant: it's really cheap. You can get a (very yummy) hot dog for just 50 cents.

It's a brilliant strategy and I'm not sure why other retailers don't use it as well: cover your costs (or even lose a little money) on food to draw people into the store, in hopes they'll buy pricier items. Ikea isn't getting rich off its hot dogs, but if everyone who buys a hot dog then decides to buy a $100 piece of furniture, their investment in food services is going to pay off quickly.

It's common knowledge that to get kids to buy stuff, all you need is a colourful little toy (cereals and McDonald's exploit this wonderfully). But while most women know that the way to a man's heart is through his stomach, not many retailers seem to exploit this. Costco offers a cheap cafeteria, but it doesn't quite rival the value of Ikea's. Other chains do have food deals (Chapters and Safeway with Starbucks, Home Depot with Harvey's, Walmart with McDonald's), but none are nearly as good value for money as Ikea.

Does anyone have ideas as to why no one seems to be mimicking Ikea's model?

Public vs. private auto insurance

In February, I bought my first car in Ontario — a used 2009 Ford Focus. The dealer took care of the plates, and I took care of insurance.

Since auto insurance is private in Ontario, I searched online for the company that would give me the best price. After a phone call, and a fax that showed I owned the car, the transaction was done and the insurance company sent me proof of insurance papers in the mail.

It was simple. It took very little time. I didn't have to sign anyone or talk with anyone face-to-face.

Census brouhaha

Since everyone else is talking about the census, I figured I would weigh in as well.

I consider myself to be somewhat libertarian, so I appreciate the argument that the census, at least to some extent, is an invasion of privacy. One has to admit that some of the questions might make some people a little uncomfortable to answer (even if they only have to answer it, on average, once every 25 years).

On the other side of the coin, however, replacing the long-form census with a voluntary survey generates data that is of much lower quality. The people who choose not to respond may tend to have similar characteristics, and if the survey no longer picks up their data, the results will be skewed. Even after the voluntary long-form survey is conducted, we won't be able to know how bad the problem is.

The expected costs of releasing sex offenders

An interesting post on a very contentious topic over at The Commons caught my eye. Author Jonathan McLeod weighs into the debate over whether we should change how we pardon sex offenders in Canada. He argues we should use hard numbers rather than emotions to make these decisions. Although like many Canadians I have strong emotions on this topic, the economist in me tends to agree with McLeod.

McLeod then describes some data he found, which suggests that sex offenders are less likely to re-offend than the average criminal. Thus, he concludes that "statistics demand that we offer no special punishment to sex offenders seeking pardons."

But after looking into this a little deeper, I think the data shows the opposite: releasing sex offenders poses more of a cost to society than the average criminal.

Predatory interest rates in Montana

While out grabbing some lunch in downtown Missoula, I was stopped by a gentleman armed with a petition. After having spent five years in Victoria, I was expecting a "save the whales" type of spiel, but he was actually petitioning for a cap on interest rates.

Cross-border taxation

The last North Dakota town along the interstate highway before hitting the Montana border is Beach. Along the highway leaving Beach, there is a billboard reminding Montana residents who purchased cigarettes in North Dakota that it is the law for them to pay the Montana cigarette tax — it urges consumers to "do the right thing" and pay the tax.

It seems that Montana's cigarette tax is almost four times greater than North Dakota's ($1.70 per 20-cigarette pack in Montana vs. 44 cents in North Dakota). Thus, it's not far-fetched to think that some enterprising Montana smokers might stock up in Beach to save the tax.

Big things, small places

One thing I noticed on my cross-continent drive was a tendency for small towns to build really big things to attract tourists. This was especially the case in North Dakota, where there was very little sign of civilization aside from Fargo and Bismarck, the two largest towns.

I spent one night in Jamestown, North Dakota, which claims to be home to the world's largest buffalo sculpture.

How many garbagemen does it take to change a lightbulb?

Missoula, Montana is a bit of a weird place in terms of its economics.

The city seems to lack an understanding of the concept of "diminishing marginal product of labour." It's the idea that each additional worker a business takes on will be less productive than the last.

This makes sense. If I run a pizza shop, I'm not going to be able to do anything with zero workers. The benefit from my first worker is huge — I'll be able to produce pizzas. The benefit from my second worker is still pretty big — now I can do delivery instead of just take-out — but it's not as exciting as adding my first worker. My third worker will allow me to take on more business, but as I start adding a fourth and fifth worker, they'll probably contribute a little less since they'll mostly be standing around except when the shop is really busy. By the time I start adding a sixth and seventh worker, my pizza parlor is probably getting crowded and they might even slow things down.

Cross-continent drive

Last month, I drove from Hamilton, Ontario to Victoria, British Columbia via the United States. It was an interesting four-and-a-half day trip, but my back was sore from all the time spent driving by the end of it.

I got to see a lot of neat small towns along the way. The riverside town of Eau Claire, Wisconsin, made a peaceful lunch stop; the Grand Avenue Cafe serves a mean vegetarian lasagna.

Interest rate puzzle

I have a savings account with ING Direct. When I was checking my account balance recently, I was surprised to see that their interest rate for an ordinary savings account was much lower than their interest rate for a tax-free savings account. Currently, their standard savings account pays 1.2%, while their tax-free account pays two-thirds more: 2%.

I found this baffling. In both cases, an investor puts their money into an account, and ING lends it out to borrowers at a higher rate in the form of mortgages. Whether or not the investor is charged tax by the government shouldn't affect ING's, so I was wondering why the accounts had different rates.

Placebo effect of cigarettes?

Cigarette packages in Canada come with horrifying images and statistics about the damage they can cause to an individual's health. The picture below shows a graphic picture of mouth disease on a cigarette pack with a warning that cigarettes do indeed cause mouth diseases:

How much is your tree worth?

I noticed a very interesting sign tacked to a tree on the McMaster University campus recently:

What the heck happened yesterday?

The financial crisis of 2008 and 2009 was bad, but in some ways I think what happened yesterday was scarier.

In case you missed it, the Dow Jones index plunged about 10% in about five minutes. "About $700 billion of U.S. stock- market value was wiped out in less than 10 minutes," Businessweek reported. $700 billion. That's $1.2 million dollars down the drain every second. The Wall Street Journal reported that shares of companies worth billions of dollars earlier in the day were trading at one cent, while shares of Sotheby's briefly jumped from $35 to $100,000.

Vancouver's astonishingly high living wage

The Canadian Centre for Policy Alternatives released a study on Tuesday pegging the living wage in Metro Vancouver at $18.17. In other words, a family with two kids living in Metro Vancouver would have to have both parents working full-time at $18.17 an hour in order to meet its "basic needs."

Given that the minimum wage in Vancouver is $8 (or $6, if you have less than 500 hours of work experience), it seemed astonishingly high. As a 20-something guy who may one day want to start a family, it's a little bit nerve-racking to think that it'd take a salary of $36.34 per hour just to provide the most basic support to a wife and a couple of kids.

A brilliant (but controversial) idea

This is a brilliant idea. As reported in the Toronto Star, a prof has started a business where university papers are sent to India to be marked. It seems that the Indian markers can do the grading cheaper and more effectively than profs and teaching assistants at certain universities.

It's a great example of how comparative advantage and specialization can make life better. The Indian markers have a comparative advantage marking papers, and the profs have a comparative advantage in lecturing and research. Outsourcing allows the profs to focus on what they're good at and allows the Indian markers to make some money.

NHL draft rules create perverse incentives

It's one of the most basic principles of economics: people respond to incentives. And when it comes to incentives, the National Hockey League creates some pretty perverse ones.

If we want teams to try to win, we should reward winning and punish losing. But the NHL offers a hefty reward for losing. The worse teams do, the more likely they are to get a high draft pick the following summer. A top draft pick can land you a franchise player that can bring success to your team for years to come — a Sidney Crosby or an Alex Ovechkin. It gives teams who don't think they can compete for the Stanley Cup an incentive to tank at the end of the year. Sure, there's a lottery that creates some uncertainty around what team gets which draft pick, but it depends on a rigid formula that ensures teams that lose are still rewarded with high picks.

Dalai Lama blames inequality for suffering

His Holiness the Dalai Lama tweeted a thought-provoking sentence on Twitter yesterday: "Economic inequality, especially that between developed and developing nations, remains the greatest source of suffering on this planet."

It's a loaded statement for 140 characters or less, and I was left pondering whether the Dalai Lama is correct. Certainly it's easy to accept that poverty — a lack of being able to afford basic necessities — can cause suffering. But it's not clear to me that economic inequality — a big variance in individual incomes — also causes suffering. I decided to try and test the Dalai Lama's theory.

First Nations, property rights and mortgages

Andrew Findlay has an excellent article in March's BCBusiness magazine about Canada's First Nations peoples and property rights. It seems like First Nations issues are often shoved under the rug because of their contentiousness, so it's nice to see one of my favourite magazines take this on.

The standard of living for First Nations people in Canada is, on average, far worse than the standard of living for Canadians as a whole. Governments and First Nations leaders have tried numerous strategies to try to narrow the gap, but one strategy that doesn't get much attention is individual property rights. First Nations people in Canada aren't on an equal playing field with other Canadians when it comes to home ownership.

Economic concepts through country music

After 23 years of living in the dark, I recently stumbled upon the joys of country music. Though many country tunes appear to be about the joys of beer, corn, trucks, rain, farms, Southern women, being a redneck and country music itself, one of the things I've noticed is that economic concepts are at the heart of many country tunes.

Here's a look at some basic economic concepts through the eyes of country songs:

Une bonne idée pour la santé

The Quebec government is mulling over an excellent idea that could improve public health care: deductibles.

In Canada, medical care is free, in that you don't have to pay when you go to the doctor. Some provinces (including Quebec, starting on July 1) charge a mandatory tax specifically for health care, but it's either a flat tax or dependent on income. The difference with Quebec's proposal is that it would be based on how much an individual uses medical services.

Illegality of unpaid internships

The New York Times ran a very interesting article on Friday about how state governments are starting to crack down on employers who use unpaid internships as a source of free labour (hat tip to William Wolfe-Wylie). It seems with the recession, businesses are using interns as free labour, which violates minimum wage laws.

I know some companies in Canada offer unpaid internships — they're particularly common in the media industry, where many outlets are struggling financially and there is an overabundance of qualified graduates looking to get their foot in the door somewhere. I wonder if these internships violate minimum wage laws here too.

Thanks, Ontario government, for increasing the cost of pizza

Proponents of increasing corporate taxes and minimum wages often argue that businesses pay for the increases. The logic is that tax and wage increases can't be bad if big, evil, profit-seeking corporations pay instead of workers and consumers. Unfortunately, that's a fallacy.

On Wednesday, Ontario raised its minimum wage by 75 cents, to $10.25 an hour. It now has the highest minimum wage of any jurisdiction in Canada or the United States. So when I visited my local Little Caesars' yesterday evening to pick up a pizza, I wasn't surprised to see a notice saying they have raised the price of their Hot-and-Ready medium pizzas (other than pepperoni) by 50 cents. Coincidence? I think not. Little Caesars' is facing higher costs with the minimum wage increase, so it's passing most of those costs on to the consumer.

Faulty political incentives

A storm is brewing at my alma mater, where student union politicians may override the decision of an electoral officer and boot two candidates who won election to next year's board of directors.

The prospect of partisan politicians disqualifying another party's politicians is creating quite a controversy, and rightly so. But it shouldn't be a big surprise, given the rules in place for dealing with electoral complaints:

Kahneman pokes holes in happiness research

Behavioural economics pioneer Daniel Kahneman is featured in a recent TED talk, in which he discusses problems with measuring happiness.

Corporate charity makes me ill

The Ontario government recently donated $81.2 million to Ford's coffers, according to the Toronto Star. The money will be used for Ford's engine factory in Windsor, and is in addition to $17 million in provincial money and $80 million in federal money given to the engine factor in 2008.

Unfortunately, the article doesn't explain why government is giving away $178 million to a single corporation, other than it will help Ford: "We've been able to bring the Essex engine plant back to life and transform it into a leading-edge facility with a significant role in the company's long-term engine production … plans," Ontario economic development minister Sandra Pupatello told the Star.

Irrationality and hockey tickets

Vancouver newspaper The Province reported over the weekend that despite astronomically high market prices for tickets to the Olympic men's hockey final, many people were planning to hang on to their tickets.

This is somewhat mind-boggling. Olympic tickets were originally sold in a lottery, which means that the people who originally bought the tickets from the lottery paid far less than the market value the morning of the big game (in the neighbourhood of $3,000 per ticket). Personally, if I had a pair of tickets that someone was willing to pay $6,000 for, I'd sell. I love hockey (and it was a great game). But I could do a lot more with $6,000 than with a pair of Olympic final tickets.

Hamburgers and sampling bias

I ate lunch at Harvey's yesterday. The last time I ate there was about three years ago, when their chocolate milkshake made me quite sick. But I got hungry while shopping at the Home Depot, and since there was a Harvey's right in the store, I figured I'd give them another chance. Thankfully, I did not get sick this time (I avoided the chocolate milkshake), but the meal was still pretty disappointing and the service was slow.

While I was eating, I noticed a request for feedback on the receipt. You can complete a survey by going online or calling a 1-800 number. There was an incentive for completing the survey: I'd be entered in a bi-weekly draw for a $500 Harvey's gift certificate.

Supplier-induced demand in Quebec City

I was in Quebec City over the weekend for a reading break vacation with my girlfriend and noticed an interesting phenomenon. I'm not sure if this is common in other cities, but in Quebec City there are women who walk from table to table in restaurants trying to sell flowers to diners. This is a perfect real-world example of supplier-induced demand.

In economics, we generally think of demand as being generated by consumers. People demand products because the good can help them fulfill a want or desire. Supplier-induced demand is the opposite — it occurs when the producer causes us to desire their product. It often comes up in health care, since we often only decide to "consume" different medical services at the advice of our doctor; if our doctor doesn't recommend the procedure, we don't have any demand for it.

Married people can get along (sometimes)

Economics isn't usually very romantic (just ask my girlfriend), but in the spirit of Valentine's Day I thought I'd share an experimental economics working paper probing how married couples interact with each other. It was released in December by three French economists.

The researchers recruited 100 married couples from the Toulouse area and pulled them into their lab to play a prisoner's dilemma game with both their partner and with other people.

The prisoner's dilemma is a game where you choose to either cooperate or "defect" with a partner. If both people cooperate, you get the best possible payout from the game, but if your partner defects while you try to cooperate, you do really badly. Thus, if you don't trust your partner to cooperate, it makes sense for both people to defect, even though you'll be worse off than if you both cooperated.

The Invention of Lying and discount rates

I recently rented The Invention of Lying. I was pleasantly surprised: the scriptwriter must have been an economist at heart because the comedy was loaded with undertones of incentives and game theory.

Spoiler alert: I'm going to give away details of the movie now, so stop reading if you don't want to know the plot.

Do car mechanics try to sell repairs you don't need?

In experimental economics, an easy study to do is run a simple economic game and see if different groups of people behave differently.

For example, I blogged in November about a study that looked at whether government employees are more selfish than the average worker when asked to donate to a charity. Another example: some health economists I know are interested in whether doctors behave differently than other businesspeople because of their Hippocratic Oath.

Where's the logic behind green power?

There was an interesting article on the front page of Wednesday's Hamilton Spectator. It seems the Ontario Power Authority, which is responsible for ensuring Ontario's electricity needs are met, is offering 20-year contracts to homeowners for wind or solar power generated on their properties.

In other words, if you have a solar panel on your roof, Ontario wants to buy your power. What made my jaw drop about the article, however, is the price they're offering: 80.2 cents per kilowatt hour for solar power, according to the article. Apparently, most consumers currently pay between six and 11 cents per kilowatt hour on their electric bill.

More moral hazard

Since I'm on the topic of moral hazard, here's an interesting study from 2009 about the moral hazard of holding health insurance: it'll make you more unhealthy.

In the aptly-titled working paper Does Health Insurance Make You Fat?, Stanford's Jay Bhattacharya and three co-authors looked at results of an experiment where Americans were randomly given different levels of health insurance (or no health insurance at all). They found that people with health insurance tended to gain weight. Private insurance policies increase the average person's body mass index by 1.3 points, while public insurance increases it by 2.1 points.

Hockey visors and moral hazard

In its Feb. 1 issue, The Hockey News makes the case for mandatory visors in the NHL. Currently, visors are optional, but the magazine argues that making them mandatory would cut down on eye injuries.

"The players would benefit from improved safety in the workplace. Mandatory visors wouldn't guarantee the elimination of catastrophic eye injuries, but the evidence suggests it'd be pretty darn close," writes Editor-in-Chief Jason Kay.

Writer John Grigg brings up the very scary eye injury suffered by then-Leafs defenseman Bryan Berard in 2000. In analyzing the current trend of more players wearing visors, Grigg argues: "[I]f current trends continue, the NHL will have fewer and fewer reminders of [Berard's injury]."

Placebo effect of wine

Fellow economics blogger Tim Harford over at Dear Economist has taken on the placebo effect of prices. This is particularly exciting to me because I did my undergraduate honours thesis on this topic.

The placebo effect of prices basically says that as a product's price goes up, it becomes more effective because of some psychological process. Some of the key studies on this topic so far have been in the medical and marketing literatures. The placebo-effect-of-prices topic has yet to gain much attention from economists, so it's nice to see Harford (an economics writer with the Financial Times) is aware of it. It's also fun to see the practical applications of academic research being presented.

I believe the placebo effect of prices is something that deserves a little more attention, because if higher prices do make products work better, this needs to be taken into account when governments and central bankers are considering policies that change prices. Inflation may have a positive effect that we are currently ignoring, for instance, if it makes everything we purchase better. However, the placebo effect of prices is a fairly new area of study, so we are only beginning to understand how it works.

Macro rap

When I was in high school, I considered music composition as a potential career option. But when I got to university, I quickly abandoned that in favour of economics. Little did I know the two fields could actually be combined:

Novel applications of risk assessment

Since the global financial crisis struck, people have been paying much more attention to risk in the financial sector. It may sound dry, but risk assessment can actually be fun when applied to non-financial stuff. Here are two examples I came across recently:

Hidden airline taxes

A couple of months ago I blogged about hidden taxes. I encountered another example of hidden taxes when I went to book a flight from Toronto's island airport to Quebec City to attend the city's winter carnival.

Porter Airlines was having a 30% off sale, so at $66.50 the fare was too good to pass up. Of course, once I clicked through to book the flight, I found that there's an additional $53.38 in taxes. For those keeping track at home, that's an abhorrently massive 80% tax rate.