Category: Economics 10e: Ch 09

When did you last think about buying a new car? If not recently, then you may be in for a surprise next time you shop around for car deals. First, you will realise that the range of hybrid cars (i.e. cars that combine conventional combustion and electric engines) has widened significantly. The days when you only had a choice of Toyota Prius and another two or three hybrids are long gone! A quick search on the web returned 10 different models (although five of them belong to the Toyota Prius family), including Chevrolet Malibu, VW Jetta and Ford Fusion. And these are only the cars that are currently available in the UK market.

But the biggest surprise of all may be the number of purely (plug-) electric cars that are available to UK buyers these days. The table below provides a summary of total registrations of light-duty plug-electric cars by model in the UK, between 2010 and June 2016.

Registration of light-duty highway legal plug-electric cars by model in the UK between 2010 and June 2016

Model

Total registered at the end of(1)

Registrations by year between 2010 and December 2013

2Q 2016

2015

2014

2013

2012

2011

2010

Mitsubishi Outlander P-HEV

21 708

16 100

5 273

 

 

 

 

Nissan Leaf

12 837

11 219

6 838

1 812

699

635

 

BMW i3

4 457

3 574

1 534

NA

 

 

 

Renault Zoe

4 339

3 327

1 356

378

 

 

 

Mercedes-Benz C350 e

3 337

628

0

 

 

 

 

Tesla Model S

3 312

2 087

698

 

 

 

 

Volkswagen Golf GTE

2 657

1 359

0

 

 

 

 

Toyota Prius PHV

1 655

1 580

1 324

509

470

 

 

Audi A3 e-tron

1 634

1 218

66

 

 

 

 

Nissan e-NV200

1 487

1 047

399

 

 

 

 

BMW 330e iPerformance

1 479

 

 

 

 

 

 

BMW i8

1 307

1 022

279

 

 

 

 

Vauxhall Ampera

1 267

1 272

1 169

175

455

4

 

Volvo XC90 T8

813

38

 

 

 

 

 

Renault Kangoo Z.E

785

740

663

 

 

 

 

Porsche Panamera S E-Hybrid

475

395

241

 

 

 

 

Volvo V60 Plug-in Hybrid

410

337

232

 

 

 

 

Peugeot iOn

405

374

368

26(2)

251

124

 

Mercedes-Benz B-Class Electric Drive

303

162

0

 

 

 

 

Mitsubishi i MiEV

252

251

266

1(2)

107

125

27

Smart electric drive

215

212

205

3(2)

13

 

63

Citroën C-Zero

213

167

202

45(2)

110

46

 

Kia Soul EV

193

145

20

 

 

 

 

BMW 225xe

163

 

 

 

 

 

 

Volkswagen e-Up!

154

142

118

 

 

 

 

Mercedes-Benz S500 PHEV

125

157

14

 

 

 

 

Volkswagen e-Golf

123

114

47

 

 

 

 

Chevrolet Volt

119

122

124

23(2)

67

 

 

Renault Fluence Z.E.

79

70

73

7(2)

67

 

 

Ford Focus Electric

22

19

19

 

 

 

 

Mercedes-Benz Vito E-Cell

22

23

23

 

 

 

 

Mia electric

15

15

14

 

 

 

 

Volkswagen Passat GTE

1

 

 

 

 

 

 

BYD e6

0

0

0

50(2)

 

 

 

Total registrations

66 374

47 920

21 504

3 586

2 254

1 082

138

Notes: NA: not available. Registrations figures seldom correspond to same sales figure.

(1) Registrations at the end of a period are cumulative figures. (2) CYTD through June 2013.

Source: Wikipedia, “Plug-in electric vehicles in the United Kingdom”

In 2010 there were nly 138 electric vehicles in total registered in the UK. They were indeed an unusual sight at that time – and good luck to you if you had one and you happened to run out of power in the middle of a journey. In 2011 this (small) number increased sevenfold – an increase that was driven mostly by the successful introduction of Nissan Leaf (635 electric Nissans were registered in the UK that year). And since then the number of electric vehicles registered in the country has increased with spectacular speed, at an average rate of 252% per year.

There is clearly strong interest in electric vehicles – an interest likely to increase as their price becomes more competitive. However, they are still very expensive items to buy, especially when compared with their conventional fuel-engine counterparts. What makes electric cars expensive? One thing is the cost of purchasing and maintaining a battery that can deliver a reasonable range. But the cost of batteries is falling, as more and more companies realise the potential of this new market and join the R&D race. As mentioned in a special report that was published recently in the FT:

The cost of lithium-ion batteries has fallen by 75 per cent over the past eight years, measured per kilowatt hour of output. Every time battery production doubles, costs fall by another 5 per cent to 8 per cent, according to analysts at Wood Mackenzie.

There is no doubt that more research will result in more efficient batteries, and will increase the interest in electric cars not only by consumers but also by producers, who already see the opportunity of this new global market. Does this mean that prices will necessarily fall further? You might think so, but then you have to take into consideration the availability and cost of mining further raw materials to make these batteries (such as cobalt, which is one of the materials used in the making of lithium-ion batteries and nearly half of which is currently sourced from the Democratic Republic of Congo). This may lead to bottlenecks in the production of new battery units. In which case, the price of batteries (and, by extension, the price of electric cars) may not fall much further until some new innovation happens that changes either the material or its efficiency.

The good news is that a lot of researchers are currently looking into these questions, and innovation will do what it always does: give solutions to problems that previously appeared insurmountable. They had better be fast because, according to estimates by Wood Mackenzie, the number of electric vehicles globally is expected to rise by over 50 times – from 2 million (in 2017) to over 125 million by 2035.

How many economists does it take to charge an electric car? I guess we are going to find out!

Articles

Information

Questions

  1. Using a demand and supply diagram, explain the relationship between the price of a battery and the market (equilibrium) price of a plug-in electric vehicle.
  2. List all non-price factors that influence demand for plug-in electric vehicles. Briefly explain each.
  3. Should the government subsidise the development and production of electric car batteries? Explain the advantages and disadvantages of such intervention and take a position.

I admit it, the title of my blog today is a little bit misleading – but at the same time very appropriate for today’s topic. Nancy Sinatra certainly wasn’t thinking about emigration when she was singing this song – it had nothing to do with it, after all. It is, however, very relevant to economists: Indeed, there are many economics papers discussing the effects of skilled immigration on host and source economies and regions.

Economists often use the term ‘brain drain’ to describe the migration of highly skilled workers from poor/developing to rich/developed economies. Such flows are anything but unusual. As The Economist points out in a recent article, ‘[I]n the decade to 2010–11 the number of university-educated migrants in the G20, a group of large economies that hosts two-thirds of the world’s migrants, grew by 60% to 32m according to the OECD, a club of mostly rich countries.’.

The effects of international migration are found to be overwhelmingly positive for both skilled migrant workers and their hosts. This is particularly true for highly skilled workers (such as academics, physicians and other professionals), who, through emigration, get the opportunity to earn a significantly higher return on their skills that what they might have had in their home country. Very often their home country is saturated and oversupplied with skilled workers competing for a very limited number of jobs. Also, they get the opportunity to practise their profession – which they might not have had otherwise.

But what about their home countries? Are they worse off for such emigration?

There are different views when it comes to answering this question. One argument is that the prospect of international migration incentivises people in developing countries to accumulate skills (brain gain) – which they might not choose to do otherwise, if the expected return to skills was not high enough to warrant the effort and opportunity cost that comes with it. Beine et al (2011) find that:

Our empirical analysis predicts conditional convergence of human capital indicators. Our findings also reveal that skilled migration prospects foster human capital accumulation in low-income countries. In these countries, a net brain gain can be obtained if the skilled emigration rate is not too large (i.e. it does not exceed 20–30% depending on other country characteristics). In contrast, we find no evidence of a significant incentive mechanism in middle-income, and not surprisingly, high-income countries.

Other researchers find that emigration can have a significant negative effect on source economies (countries or regions) – especially if it affects a large share of the local workforce within a short time period. Ha et al (2016), analyse the effect of emigration on human capital formation and economic growth of Chinese provinces:

First, we find that permanent emigration is conducive to the improvement of both middle and high school enrollment. In contrast, while temporary emigration has a significantly positive effect on middle school enrollment it does not affect high school enrollment. Moreover, the different educational attainments of temporary emigrants have different effects on school enrollment. Specifically, the proportion of temporary emigrants with high school education positively affects middle school enrollment, while the proportion of temporary emigrants with middle school education negatively affects high school enrollment. Finally, we find that both permanent and temporary emigration has a detrimental effect on the economic growth of source regions.

So yes or no? Good or bad? As everything else in economics, the answer quite often is ‘it depends’.

Articles

Questions

  1. ‘The brain drain makes a bad situation worse, by stripping developing economies of their most valuable assets: skilled workers’. Discuss.
  2. Using Google, find data on the inflows and outflows of skilled labour for a developing country of your choice. Explain your results.
  3. ‘Brain drain’ or ‘brain gain’? What is your personal view on this debate? Explain your opinion by using anecdotal evidence, personal experience and examples.
  4. Referring to the previous question, write a critique of your answer.

The annual Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, normally known as the Nobel Prize in Economics, has been awarded 49 times since it was founded in 1969. Many well-known economists have been recipients of the award. This year it had been awarded to Richard Thaler for his research in behavioural economics. The award recognises his work in integrating economics with psychology.

Richard H. Thaler has incorporated psychologically realistic assumptions into analyses of economic decision-making. By exploring the consequences of limited rationality, social preferences, and lack of self-control, he has shown how these human traits systematically affect individual decisions as well as market outcomes.

In total, Richard Thaler’s contributions have built a bridge between the economic and psychological analyses of individual decision-making. His empirical findings and theoretical insights have been instrumental in creating the new and rapidly expanding field of behavioural economics, which has had a profound impact on many areas of economic research and policy.

Instead of making the assumption that people are rational maximisers, behavioural economists look at how people actually behave and respond to various incentives.

For example, people may be motivated by concepts of fairness and be prepared to make personal sacrifices for the sake of others. Such concepts of fairness tend to depend on the social context in which choices are made and can be influenced by the way choices are framed.

Also people may not weigh up costs and benefits but use simple rules of thumb, or heuristics, when making decisions. This might be an example of rational behaviour when time or information is limited, but the use of such heuristics often becomes engrained in behaviour and the rules become just habit.

People may also suffer from a lack of willpower or ‘present bias’. They may spend more than they can afford because they cannot resist the temptation to have a product. They may overeat because of the short-term pleasure it brings and ignore the long-term effects on their health.

Understanding how people make choices and the temptations to which they succumb can help policymakers devise incentives to change behaviour to achieve various social goals.

One type of incentive is nudging. A well-known example is people’s choice about whether to become an organ donor in the event of their death. If people are required to opt in to such a scheme, they may never get round to doing so. However, if they are required to opt out if they do not want to participate, many more people would thereby be donors and more organs would become available.

Another form of nudge is making desirable things fun. A well-known experiment here was encouraging people to use the stairs rather than the escalator when exiting a subway by making the stairs like a musical keyboard. See here for more examples.

The UK government set up a Behavioural Insights Team – also known as the Nudge Unit (now independent of government) to find ways of encouraging people to behave in their own or society’s best interests.

But it is not just governments which use the insights of behavioural economists such as Thaler. The advertising and marketing industry is always examining the most effective means of influencing behaviour. A classic example is the loss leader, where consumers are tempted into a shop with a special offer and then end up buying more expensive items there rather than elsewhere.

Firms and advertisers know only too well the gains from tempting people to buy items that give them short-term gratification – such as putting chocolate bars by the tills in supermarkets.

Understanding consumer psychology helps firms to manipulate people’s choices. And such manipulation may not be in our best interests. If we are being persuaded to buy this product or that, are we fully aware of what’s going on and how our tastes are being affected? Would we, by standing back and reflecting, make the same choices as we do on impulse or out of habit?

And governments too can seek to manipulate people in ways that some may find undesirable. Governments may try to influence us to follow their particular political agenda – as may newspapers. Certainly, during election or referendum campaigns, we are being nudged to vote a particular way.

It is important then for us to understand when we are being nudged or otherwise persuaded. Do we really want to behave in that way? Just as it is important, then, for governments and firms to understand individuals’ behaviour, so too it is important for individuals to understand their own behaviour.

Articles

Richard Thaler’s work demonstrates why economics is hard The Economist, RA (11/10/17)
Nobel in Economics Is Awarded to Richard Thaler The New York Times, Binyamin Appelbaum (9/10/17)
The Making of Richard Thaler’s Economics Nobel The New Yorker, John Cassidy (10/10/17)
Nobel prize in economics awarded to Richard Thaler The Guardian, Richard Partington (10/10/17)
Richard Thaler is a controversial Nobel prize winner – but a deserving one The Guardian, Robert Shiller (11/10/17)
What the mainstreaming of behavioural nudges reveals about neoliberal government The Conversation, Rupert Alcock (17/10/17)
This year’s economics Nobel winner invented a tool that’s both brilliant and undemocratic Vox, Henry Farrell (16/10/17)
How a critic of economics became the disciplines Nobel-winning best friend The Guardian, Tiago Mata and Jack Wright (25/10/17)

Podcast

How Richard Thaler changed economics BBC, More of Less, Tim Harford (14/10/17)

Questions

  1. For what reasons may individuals not always weigh up the costs and benefits of purchasing an item?
  2. Give some examples of the use of heuristics in making consumption decisions?
  3. Is the use of heuristics irrational?
  4. Explain how people considering that they have behaved fairly is influenced by the social context of their behaviour?
  5. Find out what is meant by the Dictator Game and how it can challenge the assumption that people behave selfishly. How is the ‘dictator’s’ behaviour affected by the possible payoffs?
  6. Thaler suggested that Brexit could be an example of behavioural economics in action. Find out what he meant by this. Do you agree?
  7. Give some examples of ways in which the government can nudge people to persuade them to behave in socially or individually desirable ways.
  8. Find out what is meant by the ‘endowment effect’ and how it influences people’s valuation of items they own.
  9. Why may nudging by governments be undemocratic?

Earlier this week FIFA, the world governing body of football, announced plans to expand the World Cup from 32 to 48 teams starting in 2026. It is fair to say that this has been met with mixed reactions, in part due to the politics and money involved. However, for an economist one particularly interesting question is how the change will affect the incentives of the teams taking part in the competition.

As a result of the change in the first stage of the competition, teams will be play the two other teams in their group. The best two teams in the group will then progress to the next round with the worst team going home. This is in contrast to the current format where the best two teams from a group of four go through to the next round.

Currently, in the final round of group matches all four of the teams in the group play simultaneously. However, an immediate implication of the new format is that this will no longer be the case. Instead, one of the teams will have finished their group matches before the other two teams play each other. This could have important implications for the incentives of the teams involved. To see this we can recall a very famous match played under similar circumstances between West Germany and Austria at the 1982 World Cup.

The results of the earlier group games meant that if West Germany beat Austria by one or two goals to nil both teams would progress to the next round. Any other result would mean that Algeria progressed at the expense of one of these two teams. The way in which the match played out was that West Germany scored early on and much of the rest of the game descended into farce. Both teams refused to attack or tackle their opponents, as they had no incentive to so (see here for some clips of the action, or lack of!).

There is no evidence to suggest that West Germany and Austria had come to a formal agreement to do this. Instead, the two teams appear to have simply had a mutual understanding that refraining from competing would be beneficial for both of them.

This is exactly what economists refer to as tacit collusion – a mutual understanding that refraining from competition and keeping prices high benefits all firms in the market. Much like the fans who had to sit through the farce of a game (you can hear the frustration of the crowd in the video clip linked to above), the end result is harm to consumers who have to pay the higher prices or go without the product.

For this reason governments use competition policy to try to stop situations arising in markets that make the possibility of tacit collusion more likely. One way in which this is done is by preventing mergers in markets where tacit collusion appears possible and would be facilitated by the reduction in the number of firms as a result of the merger. The equivalent for the World Cup would be preventing a change in the format of the competition.

An alternative approach is to tinker with the rules of the game in order to make collusion harder. FIFA seems to have some awareness of the possibility of doing this as it is suggesting that it may require all tied games to extra-time and then a penalty shoot-out in order to determine a winner. Clearly, this would go at least some way to alleviating concerns about tacit collusion in the final group matches because coordinating on a draw would no longer be possible. In a similar fashion, competition authorities can also intervene in markets to change the rules of the game (see for example the recent intervention in the UK cement industry).

Therefore, more generally, the World Cup example highlights the fact that variations in the structure of markets and the rules of the game can have significant effects on firms’ incentives and this can have important consequences for market outcomes. It will certainly be fascinating to see what rules are imposed for the 2026 World Cup and how the teams taking part respond.

Articles

World Cup: Fifa to expand competition to 48 teams after vote BBC News (10/1/17)
How will a 48-team World Cup work? Fifa’s plan for 2026 explained The Guardian, Paul MacInnes (10/1/17)
The Disgrace of Gijón and the 48-team FIFA World Cup Mike or the Don (12/1/17)

Questions

  1. What is the difference between tacit collusion and a cartel?
  2. Why does a reduction in the number of firms in a market make collusion easier?
  3. What other factors make collusion more likely?
  4. How does competition policy try to prevent the different forms of collusion?

Many or us make New Year’s resolutions: going on a diet, doing exercise, spending more time studying. But few people stick to them, even though they say they would like to. So how can people be motivated to keep to their resolutions? Well, the experiments of behavioural economists provide a number of insights into the problem. They also suggest various incentives that can be used to motivate people to stick to their plans.

Central to the problem is that people have ‘time inconsistency’. They put a higher weight on the benefits of things that are good for them in the future and less weight on these benefits when they have to act now. You might strongly believe that going to the gym is good for you and plan to go next Monday. But when Monday comes, you can’t face it.

Another part of the time inconsistency problem is the relatively high weighting given to short-term gratification – eating chocolates, watching TV, spending time on social media, staying in bed. When thinking about whether you would like to do these things in, say, a couple of days’ time, you put a low weight on the pleasures. But thinking about doing them right now, you put a much higher weight on them. As the well-known saying goes, ‘Hard work often pays off after time, but laziness pays off now’.

So how can people be motivated to stick to their resolutions? Behavioural economists have studied various systems of incentives to see what works. Some of the findings are as follows:

•  People are generally loss averse. To get us to stick to New Year’s resolutions, we could devise a system of penalties for breaking them, such as paying 20p each time you swear!
•  Given people’s time inconsistency, devising a system whereby you get treats after doing something you feel is good for you: e.g. watching TV for 30 minutes after you’ve done an hour’s revision. Rewards should follow effort, not precede them.
•  Having simple clear goals. Thus rather than merely saying ‘I’ll eat less’, you devise a meal plan with menus that meet calorie and other dietary goals. Rather than saying, ‘I’ll exercise more’, you commit to going to the gym at specific times each week and doing a specific amount of each exercise.
•  Ritualising. This is where you devise a regime that is feasible to stick to. For example, you could always write a shopping list to meet your dietary goals and then only buy what’s on that list; or you and your flatmates could have a rota for household chores.
•  Social reinforcement. This is where people have a joint plan and help each other stick to it, such as going to the gym at specific times with a friend or group of friends, or joining a support group (e.g. to lose weight, or give up drinking or smoking).
•  Avoiding temptation. For example, if you want to give up chocolate, don’t have any in the house.
•  Using praise rather than criticism. People generally respond better to positive incentives than negative ones.

Behavioural economists test these different incentive mechanisms to see what works best and then to see how they can be refined. The testing could be done experimentally, with volunteers being given different incentives and seeing how they respond. Alternatively, data could be collected on the effects of different incentive mechanisms that people have actually used, whether at home or at work.

The advertising and marketing industry analyses consumer trends and how people respond to pricing, quality, display, packaging, advertising, etc. They want to understand human behaviour so that they can ‘direct’ it in their favour of their clients. Governments too are keen to find ways of encouraging people to do more of things that are good for them and less of things that are bad.

The UK government’s Behavioural Insights Team looks at ways people can be ‘nudged’ into changing their behaviour, see the blog A nudge in the right direction?

But back to New Year’s resolutions, have you made any? And, if so, have you thought about how you might stick to them? Have you thought about the incentives?

Podcast

Dan Ariely talks “Payoff” WUNC 91.5: North Carolina Public Radio, Dan Ariely talks to Frank Stasio (3/1/17)

Articles and blogs

50 New Year’s Resolution Ideas and how to Achieve Each of Them Lifehack, Ivan Dimitrijevic (31/12/16)
5 New Year’s Resolutions You Can Keep (With The Help Of Behavioral Science Research) Forbes, Carmen Nobel (3/1/17)
The science behind keeping your New Year’s resolutions BT, SNAP PA (30/12/15)
The Guardian view on New Year resolutions: fitter, happier, more productive The Guardian, Editorial (3/1/17)
The Behavioral Economics of Your New Year’s Resolutions The Daily Beast, Uri Gneezy (5/1/14)
The psychology of New Year’s resolution The Conversation, Mark Griffiths (1/1/16)
Apply Behavioral Economics for a Better New Year Wharton Blog Network, William Hartje (16/1/14)
The Kardashians Can Help Your New Year’s Resolutions Huffington Post, John Beeby (29/12/16)
Using economics to score with New Year resolutions The Hindu, Venky Vembu (4/1/17)
Be It Resolved The New York Times, John Tierney (5/1/12)

Goal-setting site

stickK ‘Set your goals and achieve them!’

Questions

  1. Explain what is meant by time inconsistent behaviour. Is this the same as giving future costs and benefits a lower weighting than present ones (and hence having to discount future costs and benefits)?
  2. Give some examples of ways in which your own behaviour exhibits time inconsistency. Would it be accurate to describe this as ‘present bias’?
  3. Would you describe not sticking to New Year’s resolutions as ‘irrational behaviour’?
  4. Have you made any New Year’s resolutions, or do you have any plans to achieve goals? Could you alter your own personal incentives and, if so, how, to make it more likely that you will stick to your resolutions/goals?
  5. Give some examples of ways in which the government could ‘nudge’ us to behave in ways that were more in our own individual interests or those of society or the environment?
  6. Do you think it’s desirable that the advertising industry should employ psychologists and behavioural economists to help it achieve its goals?