ECON 102 Exam 1 MBN

MBN Ch. 4: The Mystery of Wealth

Summary:

• Fundamental political and legal institutions of society are conducive to growth

• These institutions encourage people to make long-term investments in improving land and in all forms of physical and human capital, which raise the capital stock, providing growth

• Common Law vs Civil Law: levels of government intervention

  • Security of property rights is much more important under common law

  • Civil law is more likely to receive unpredictable changes in the rules of the game—the structure of property and contract rights

  • Economic growth was ⅓ higher in common law nations in study from 60s to 90s

  • Long-term economic growth differences are explained through institutions like political stability, protection against violence or theft, security of contracts, and freedom from regulatory burdens

  • To circumvent high mortality rates during the colonization of Africa and South America, settlers focused on extracting metals and cash crops, rather than incentives to promote democratic institutions

• Effects of political and legal change can be accelerated in either direction (Zimbabwe)

MBN Ch. 1: Death by Bureaucrat

Summary:

• FDA bureaucrats decide whether or not certain medicines ought to be for sale in the U.S.

• This dates back to the passage of the Food and Drug safety Act of 1906, which required that medicines be correctly labeled as to their contents, and that they do not contain harmful substances

• This law was expanded in 1938 with the Food, Drug, and Cosmetic Act, which forced manufacturers to demonstrate the safety of new drugs before they could be sold

• The thalidomide ordeal led to the 1962 Kefauver-Harris Amendments to the 1938 Act, which added a proof of efficiency requirement and removed the 180 day time constraint, slowing the approval process and increased the costs of introducing a new drug

• Trade-offs of this are Type I and Type II errors

Type I Error - An error of commission, such as might arise when an unsafe drug is mistakenly permitted to be sold

Type II Error - An error of omission, such as might arise if a beneficial drug is mistakenly prevented from reaching the market 

Lessons From the FDA Story:

1. There is no free lunch.

2. The cost of an action is the alternative that is sacrificed.

3. The relevant costs and benefits are the marginal (incremental) ones.

4. People respond to incentives.

5. Things are not always as they seem.

6. Policies always have unintended consequences so their net benefits are almost always less than anticipated.

MBN Ch. 6: Sex, Booze, and Drugs

The consumption of sex, booze, and drugs bring together a willing seller and a willing buyer, creating an act of mutually beneficial exchange (at least in the opinions of the parties involved). When the government seeks to prevent voluntary exchange, they must decide whether to go after the buyer or the seller. As with sex, booze, and drugs, the government targets the seller, as to prevent several or even several hundred transactions from taking place, which is also more cost-effective.

Risking fines, jail sentences, and avoiding law enforcement adds additional cost to the process, which lowers supply and raises the cost, which one hopes will lower consumption. Consumers of these goods follow the Law of Demand, meaning that the higher the price of a good, the lower the amount consumed. Due to its illegality, people who have a Comparative Advantage in conducting illegal activities will be attracted to the business of supplying (and perhaps demanding) that good. When an activity is made illegal, people who are good at being criminals are attracted to that activity. To enforce illegal contracts, people commonly resort to violence.

Illegal commodities gravitate toward more potent products, as $300,000 worth of heroin is a lot easier to haul than $300,000 of Marijuana. Additionally, when a substance is made illegal, people often resort to more intensive usage, hence why binge-drinking is more common with people under 21. With illegal substances, information costs rise, resulting in degradation of and uncertainty about product quality. The consequences for consumers are often unpleasant and sometimes fatal.

In Nevada, prostitution is legal, and prostitutes register with local authorities and are tested for venereal diseases weekly. Because of this, the spread of venereal disease is almost nonexistent in Nevada, while rates among streetwalkers elsewhere is near 100%. During prohibition, people didn’t know what they were buying, and the inclusion of methyl alcohol in certain mixtures led to blindness and death. Cracking down on prescription painkillers in the 90s has opened the door for the rise of fentanyl, which kills thousands a year. Additionally, the internet has allowed prostitution to thrive more, yet also has dissuaded violence due to the rapid spread of word on the internet.

The government’s efforts to halt the consumption of sex, booze, and drugs have created more overdoses and more disease-ridden prostitutes. When the government attempts to prevent mutually beneficial exchange, even their best efforts are unlikely to be met with spectacular success.

MBN Ch. 8: Kidneys for Sale

8,000 Americans die every year waiting for organs due to a law proposed in 1984, which bans paying for human organs. One can pay a man for his sperm, a woman for her eggs, and both for their blood, but you can’t sell your own organs. Transplants cost excessive money, but are usually paid by Medicare, Medicaid, or private insurance.

Monetary compensation for organs in Iran has been legal since 1988, and in the ensuing decade, Iran eliminated their entire backlog of kidney transplant patients, and has done so without leading to “back alley” donations. Many worry that a system of payment for human organs will yield involuntary donors. However, most horror stories about this occur in places with a lack of market for organs, like China. “Body snatching” is common in the UK and US, but Iran is fine.

This will decrease the medical costs associated with kidney disease, donors and their families will gain monetary wealth, and recipients will have a better quality of life, not having to spend 24 hours a week on a dialysis machine. Thousands will have their lives extended and improved. This will bring more organs to the market, and reduce death among those waiting for transplants. 

Opponents argue that this will exploit poor and disadvantaged people, as they may be more likely to donate organs for financial gain. However, the process is voluntary and intensive counseling is given up to the process. Compensation for donors would greatly increase the availability of transplant kidneys, making all transplant candidates, especially the disadvantaged, better off. 

MBN Ch. 9: Are We Running Out of Water?

Water is the ultimate renewable resource: the act of using it begins the process that returns it to us. Yet, water is scarce, and other resources must be sacrificed to produce clean, usable water. Water is a Scarce Good, meaning that if we want more of it, we must sacrifice more of other things to achieve that goal. About 97.2% of water is ocean water, 2.15% is polar ice, and of the remaining 0.65%, about 0.62% is underground and is not a sustainable source of freshwater. So, our water comes mainly from rainfall. 

Water is an Economic Good, and the distribution and consumption of water are fundamental economic problems, ones that can be solved in markets.

Water Myths:

• The Planet is Drying Up - Water from rainfall returns to the sky in a closed system

• We Can Save Water By Flushing Less and Using Less in Agriculture - Still a closed system

• Water is Different From Other Goods - Consumption of water in ALL uses responds as predicted by the Law of Demand—when the price of water goes up, people buy less of it—as well as the Law of Supply—when the price of water rises, suppliers of water provide more of it to consumers

• Price Controls on Water Protect Low-Income Consumers

• The Ocean is Too Salty to Drink

MBN Ch. 29: The Economics of the Big Mac

The Big Mac is used by economists to help compare the cost of living and the levels of real incomes around the world. Traveling within another country requires that payments be made in the currency of that nation. There is a worldwide market in Foreign Exchange. We convert, via Foreign Exchange Rate tables—found on hundreds of Internet sites—other nation’s average incomes in their own currencies to what they are in U.S. dollars. 

Foreign exchange rates are a function of world Supply and Demand, but the demand and supply of currencies are ultimately determined by the demand and supply of, among other things, Traded Goods. Non-Traded Goods include horses, haircuts, house-cleaning services, and landscaping, and are not involved in exchange across countries’ borders. Purchasing Power Parity creates a type of adjusted foreign exchange rate. Purchasing Power adjustments are difficult to calculate in each country. But not only that, there are also disputes over the best way to do them for each country, leading to doubts about whether the measures really account for differences in the cost of living. This is where the Big Mac comes in. 

Since 1986, The Economist magazine has developed a Big Mac Index, creating a means of comparing the cost of living around the world and also a means of determining how much exchange rates fail to account for non-traded goods. Methods of production and ingredients for the Big Mac are the same everywhere, so we “should” get the same exchange price everywhere. If Switzerland’s Big Macs cost $6.60, when they are $5.00 in America, then Switzerland has a higher cost of living because non-traded goods (like housing) are quite expensive there. Meanwhile, a Big Mac in China is $2.80, meaning that a dollar goes much further in China than America. 

McWages are the cost of hiring workers everywhere to make a Big Mac. If these are divided by the price of a Big Mac, we can discern how many Big Mac equivalents each worker is paid per hour. This is a simple, albeit one-good specific measure of the Real Wage for low-skill workers, that is, the wage adjusted for the cost of living in each nation. They found that low-skill workers in America earn about 2.5 Big Mac Per Hour (BMPH). We see that standards of living vary greatly around the world, but not nearly to the extent that is suggested by exchange rates.