On the Pulpit, Rabbis Earn More Than Christian Clergy

Normally, Corrections avoids old articles.  However, Jewish Daily Forward article "On the Pulpit, Rabbis Earn More Than Christian Clergy" (September 15th, 2010) wonders aloud why rabbis are paid, on average, more than christian clergy. It comes to no firm conclusions. Indeed, Corrections spent some time thinking on the curious problem: Catholics and Protestants appear to be paid between $25,000 and $40,000, while Reform and Conservative Rabbis appear to be paid between $137,000 and $147,000. A rather large gap.

Corrections came to the weak conclusion that the story was about opportunity cost and relative wealth status. However, the same publication came out, two weeks later, with the article "Rabbi Searches Are Tough, but Are They Illegal?" (September 29th, 2010). This article mentions nothing about pay, and merely describes the theological implications of a cartel of Rabbis:

The RA requires synagogues to enroll exclusively in its search process, filters the selection of candidates the congregations may interview, and prohibits candidates and congregations from finding each other directly. Any Conservative rabbi who seeks a pulpit outside the RA’s centralized process, and any congregation that interviews candidates from other movements, will be penalized.

It bespeaks either a deep ignorance of economics or a willing deception of their readers that the Forward did not connect the two. To note that Rabbis have a firm cartel with punitive powers on the one hand, then wonder why Rabbis are paid so much on the other is ludicrous.

Cartels artificially limit supply to raise prices. It utterly clear to Corrections that the Rabbinical Assembly is a cartel of Rabbis that artificially constricts supply and raises wages. The Rabbinical Assembly's cartel also possibly increases quality above what the market would demand to further drive up price, though there is no evidence for this either way (merely a likely possibility). A depiction of what the Rabbinical Assembly is practicing may be found graphically below (click to enlarge).

Value of College Degree Is Growing, Study Says

New York Times article "Value of College Degree Is Growing, Study Says" (September 21st, 2010) gets the correlation/causation distinction correct. However, it doesn't give the clear causal reasons why better educated and wealthier people eat more healthily and exercise more: while people often face the same price of an activity, they often face different shadow prices, the relevant price for making decisions.

The report, first issued in 2004 and updated in 2007, also described social benefits: those with a bachelor’s degree, it said, are more likely to volunteer, vote, exercise and have health insurance and pensions. They are also less likely to smoke, be obese or have low-birth-weight babies. It did not assert that a college education, by itself, was responsible for all those differences.

'Correlation is not the same as causation,' Ms. Baum said. 'But that said, the people who have done careful statistical analyses, controlling for demographic characteristics like income and family background, have overwhelmingly concluded that there’s some causation here, that some things that happen to you in college, for example, would make you more likely to adopt healthier behavior.'

Better educated and wealthier people have more incentive to live longer because their time is worth more. Take Kevin Murphy's shadow price of a cheeseburger example (briefly mentioned at the end of this interview). Eating unhealthy cheeseburgers shortens your life, but you gain happiness from them. The time of a low-wage person should be valued by that low-wage person as their wage (or outside wage, if the two are only approximately equal). While state-dependent utility disclaimers apply, the thrust of our argument will be robust to secondary and tertiary corrections.

Let us imagine that the time a rich person is willing to give up for an extra hour of his life is $200, but a poor person is only willing to give up $100. Then if a cheeseburger takes an hour off of an individual's life (for instance), then the true cost to a rich person is $204, while the cost to a poor person is $104. The shadow prices the two individuals face are different. Unhealthy decisions cost rich people more because they value their lives more.

When people decide to become educated, they induce themselves to have different marginal utilities and therefore make different decisions due to facing different shadow prices--a cheeseburger is more expensive for a rich person.

Who Should Provide Anesthesia Care?

New York Times article "Who Should Provide Anesthesia Care?" (September 6th, 2010) discusses the ability of a nurse to deliver anesthesia without supervision. It brings in the American Society of Anesthesiologists without properly discussing their stake in government regulation requiring anesthesiologists to supervise nurses.

The two studies — hotly disputed by the American Society of Anesthesiologists — essentially concluded that there is no significant difference in the quality of care when the anesthetic is delivered by a certified registered nurse anesthetist or by an anesthesiologist. The studies were paid for by the professional association for the nurses, a potential conflict of interest, but were conducted by researchers at respected organizations.

The Times notes the conflict of interest of nurses, but not of anesthesiologists.  As Corrections sees it, anesthesiologists have a readily identifiable conflict of interest, while it isn't immediately clear that nurses do, upon further inspection.

The American Society of Anesthesiologists has motivation to artificially constrict supply of anesthesiologists to raise their own wages.  It may do so by raising the quality of new anesthesiologists (more than patients would prefer), reducing the number of residents trained in anesthesiology, or encouraging a general suppression in the number of doctors through the American Medical Association. Their strategy is depicted graphically below (click to enlarge).  They price as monopolists, reducing quantity and increasing price.

One might say nurses have a similar motivation--if nurses can do more, demand for nurses rises, and nurses are paid more.  However, Corrections posits that unlike doctors, there is a vast reservoir of possible nurses; nurses are elastically supplied.  If their wage increased, new nurses would train and bring their wage back down.  Corrections depicts this possibility graphically below (click to enlarge).

Economic grounding gives Corrections reason to believe that while anesthesiologists have a conflict of interest influencing their argument, nurses do not.  This grounding offers a re-statement of a rule of thumb: when an organized group is pushing for governmental regulation, they're likely to be "pulling one over" on consumers.  

Some interesting economic side notes are that it would be possible for anesthesiologists wages to increase because of this (for the same reason that if a law that requiring them to build their own cars, or walk to work, was abolished, they'd have more free time to do the things they are paid a large amount for).  This counterintuitive result, that anesthesiologist wages could increase, while the wages of nurses would not is an interesting curiosity, but not likely given opposition by the American Society of Anesthesiologists.

Second, we note that either way, consumers should be better off (even were nurses and anesthesiologists were worse off).  The reason behind this is that they may prefer a different cost-quality combination for anesthesiology than they can get being constrained by government regulation--unconstrained maximization is always greater than or equal to constrained maximization.  

The gulf tragedy doesn't negate the fact that oil is a green fuel

Los Angeles Times editorial "The gulf tragedy doesn't negate the fact that oil is a green fuel" (June 15th, 2010) suggests that ethanol production causes more expensive food. Whether or not this is true isn't immediately clear to Corrections.

Ethanol production steals precious land to produce inefficient fuel inefficiently (making food more scarce and expensive for the poor).

An increase in the demand for ethanol likely an increase in the demand for, example, corn. Normally, one might associate an increase in demand for corn with an increase in the price for corn. However, if the supply of corn is perfectly elastic, we should expect that price will not rise. This situation is depicted graphically below (click to enlarge).



The idea of the above diagram is as follows: corn is supplied and sold to the highest bidder. If we are to have corn going to both corn feed and to ethanol production, then the prices must be the same--otherwise a corn producer would sell it to the higher bidder--law of one price holds. Therefore, price is set by combined demands and corn supply--price is projected back to individual demands and determines quantity.

This assumption as a long-term assumption is not necessarily absurd. We might add that productivity growth is endogenous and inputs into agricultural production have not risen over the last 60 years, while output has risen 150% (it is 250% of what it was in 1948, for the same inputs). We imagine that not only might land use be easy to scale, so might productivity. Data from the USDA on output, productivity, and inputs are displayed in the figure below (click to enlarge).

We Might Decide to Fly

New York Times editorial "We Might Decide to Fly" (June 3rd, 2010) suggests that government regulation may improve the flying experience for consumers. Perhaps, but consumer surplus will fall.

The Obama administration’s new consumer protections for beleaguered airline passengers — including higher compensation for travelers bumped from oversold flights and prominent disclosure of all service fees — are much needed.

The airline industry is widely considered competitive, so airlines do not make profit, but instead charge each consumer the cost of providing his seat on the airlplane. If the government increases this cost, by requiring them to invest resources into making sure fewer customers are bumped from flights, for example, then the airlines will have no choice but to pass this cost increase directly to consumers. As shown in the graph below, total consumer surplus--the sum of benefit that all consumers receive from flying, will decrease from the entire shaded triangle to the yellow shaded triangle.

Even if we allow for the argument that airlines have some monopoly power, regulation may harm consumers more than it helps them. This is because monopolies also pass some portion of any cost increase to consumers. The amount of this increase depends on the response of demand to price changes. Again, as depicted below, consumer surplus will decrease. This will overwhelm the gains in service to consumers, due to the mechanics of monopoly profit maximization.

The More, The Better

Wall Street Journal book review "The More, The Better" (March 24th, 2010) discusses the book "The Next Hundred Million", by Joel Kotkin. It gives Kotkin's hypothesis, that come 2050, the U.S. will be vastly better off than its European and Asian counterparts, both of whom are aging or projected to age greatly while the U.S. stays relatively young.

For Mr. Kotkin, population growth translates into economic vitality—the capacity to create wealth, raise the standard of living and meet the burdens of future commitments. Thus a country with a youthful demographic, in relative terms, enjoys a big advantage over its global counterparts. In the next four decades, Mr. Kotkin observes, "most of the developed countries in both Europe and Asia will become veritable old-age homes" because of stagnant population growth. And the economies of these countries, already devoted to a vast welfare-state apparatus, will face crushing pension obligations—but without the young workers to defray the cost.

Corrections largely sees Mr. Kotkin as correct about the implications for the welfare states of Europe and a mis-formed age structure in China due to its one-child policy. However, Corrections does not see youth and population as the driver of economic vitality, but only a relatively small portion of it. What matters for international comparisons, Corrections conjectures, is human capital. In the world today, there are relatively few technological state secrets that allow one state to be wealthier than another. Natural resources and human capital, instead, are the drivers of per-capita wealth.

As displayed graphically below, Corrections has used Robert Barro and Jong-Wha Lee's dataset from "International Data on Educational Attainment: Updates and Implications" (WP 2000) to construct a graph of the populations and educational trends of four different regions of the world: Advanced Countries, East Asia/Pacific, South Asia, and Transitional Economies. The data can be found here. Note that a drop in population for Transitional Economies is due to the exit of several countries of the Soviet Union and a move of East Germany from transitional to Advanced after German reunification.

The phenomenon Corrections wishes to point out is the difference between population, (click to enlarge) proportion of population at an educational level (click to enlarge), and total population with a given education (click to enlarge). A discussion of the graphs follows their display.







Corrections suggests that while the population of the West and advanced economies has slowed in growth and has been shrinking, the total population with higher education has been rising. Insofar as population shrinkage hampers specialization, then Corrections can recognize the process through which population shrinkage suggests a declining GDP. However, in the case of advanced economies, we expect per capita GDP to grow dramatically, as institutions (such as Universities) shrink less quickly than population, and human capital per capita rises. Corrections could see Europe as being subjected to these forces positively.

California's quality-blind layoffs law harms teachers and students

Los Angeles Times article "California's quality-blind layoffs law harms teachers and students" (March 24th, 2010) while making a valid point, misunderstands optimal hiring practices. It suggests schools, rather than retaining teachers who have been employed the longest, should only keep the best teachers.

After all, if layoffs are unavoidable, you would think that it would be in the interest of everyone to keep the best teachers and cut those who are least effective.

Corrections agrees that length of tenure is suboptimal. However, only hiring the best is similarly suboptimal. While the problem of optimal hiring given a fixed budget and discretely heterogeneous population can take on the dimensions of a Knapsack Problem requiring a dynamic programming solution, Corrections suggests that the essence of the problem is quite simple: hire the best teachers per dollar, which may or may not be the best teachers.

Imagine there are six types of teachers, as displayed graphically below (click to enlarge). Teachers quality is denoted by number of boxes--teacher price and quality units per dollar are also displayed numerically. Then, let us say that we have $1260 dollars. We could hire 105 Type I Teachers, 140 Type II, 180 Type III, 252 Type IV, 420 Type V, or 1260 Type VI (we could also hire a combination of the teachers--our point is robust to allowing this). We would then get 630, 700, 728, 756, 840, or 1260 units of quality by hiring each type. We can see that we are best hiring the worst teachers, because they are the cheapest teachers per unit of quality. While the Times is correct that firing based on tenure is poor decision making, it is not correct that schools should hire the best teachers if they want the highest quality education possible.

Half Empty: A little shopping trip of huge proportions

Philadelphia Inquirer article "Half Empty: A little shopping trip of huge proportions" (February 28th, 2010) makes an argument that doesn't quite add up for Corrections. The Inquirer argues that Costco has a clever marketing concept because once in the store, customers are unable to resist buying things they do not desire.

The prices are remarkable, or at least they seem remarkable since you have to buy everything in very large multiples. The marketing concept is pure genius, since the Costco folks know that beginners will go down every row looking for deals, inevitably buying something of no use.

If this was the case, Corrections would expect that customers would choose to avoid the store if they had addictive or dynamically inconsistent behavior. Furthermore, that new customers would have heard of the addictive shopping and would avoid the store just as old customers do.

In reality, Corrections expects that Costco could possibly make its money by bundling a good, forcing a consumer to buy a little more than he would have preferred, sacrificing some of his consumer surplus for a higher quality good (equivalent here to a larger pack of goods).

What goes into chicken

Los Angeles Times editorial "What goes into chicken" (January 4th, 2010) succumbs to a knee-jerk anti-market reaction in analyzing the practice of injecting salt water and other broth-like substances into chicken going to market. The Times's scorn is evident:

According to Kenneth McMillin, a professor of meat science at Louisiana State University, plumping of some kind or another has been around a long time, but has gained popularity in the last three or four years. When growers bred chickens for higher meat production -- more muscle, less fat -- they also brought a dry, less tasty bird into the market. Overcooked, it could be nearly inedible. Besides, chicken that's nearly a fifth water is much cheaper to produce. That's how we've ended up buying chicken with enhanced breasts (and everything else).

The selling of processed chicken to supermarkets is a competitive industry. We do not expect a deliberate lowering of quality. Any customer-harming "tricks" that the LA Times alludes to are to quickly be competed out of practice, both within the chicken-producing industry, which provides substitutes, as well as the meat and food-product industry, broader substitute goods.

Indeed, Corrections conjectures that we can, using only data on change in supply and change in price, help interpret what has happened in the chicken market.  We first display the four possibilities of price and quantity movement in the market (click to enlarge). It is important to note that all quantities and prices are in real chicken terms.  Therefore, the could be read as "1 lb. of real chicken", e.g. the total real chicken an individual buys for a real price, which could be read as "dollars to buy 1 lb. of real chicken".  This will be addressed below.

This, in turn, gives us four possible graphs (really eight, as the diagram explains).  We draw four without loss of generality when taken concurrently with the subsequent table (click to enlarge).

We interpret each of these four possibilities economically using partial identification of linear demand curves in the table below (click to enlarge).  Note that a delta followed by a letter should be read "percent change in."  So, for example, delta Q would be "percent change in quantity demanded."

The last table may be somewhat opaque for non-economists, and the interpretations of Corrections for the above table's four possible outcomes is displayed in the table below (click to enlarge):

Corrections conjectures that rather than casting acrimonious aspersions on business, the Los Angeles Times would do better by at least giving a cursory glance at the facts.  Corrections recognizes that arguments based on  time series alone are flawed.  A more careful analysis would include the prices and quantities of substitutes, as well as GDP (income) growth.  Nonetheless, a time-series alone can also inform:

According to the Consumer Price Index, since November 1999 to November 2009, unadjusted, processed poultry prices have increased by 18%.  Inflation has been about 30% over the same time period.  This means real poultry prices have declined.  Similar numbers can be obtained for 2007, (12% and 29%, respectively).  Furthermore, from the USDA Food Availability Data shows nominal per capita chicken consumption to have grown by 31% from 1997 to 2007, the most recent data.

It is left to understand these numbers in real terms.  We are interested in the change in plumping, not in the fact that plumping occurs.  Assuming that plumping is around 18% (as the article suggests),  and that the majority of this plumping has been enacted only recently, then we conclude that we have observed real prices decreasing and real quantity demanded increasing.  More explicitly, real chicken per chicken has fallen by up to 22% (ie: plumping has increased by as much as 18%), but the number of chickens bought has increased by more than that (by 31%), and price has decreased.  If plumping has increased by even less than 18% over the period 1997-2007 (which seems quite likely), we conclude that per capita chicken consumption has increased, while real prices have decreased.

From the above table (decrease in real price, increase in real quantity) we can conclude that we see an ambiguous quality change, while making chicken cheaper to make.  Noting, beyond the above table, that real prices have not fallen a great deal, while quantity has risen significantly, we could conclude that plumping has likely caused an increase in demand for real chicken, while certainly making chicken cheaper to make (prices move a small amount downward, while quantity moves more dramatically).  The claim of the L.A. Times that quality has been reduced remains without evidence at best, and contradicted by cursory analysis at worst.  The claim that chicken is cheaper to make is confirmed.

Unhealthy habits are what's killing us

CNN.com article "Unhealthy habits are what's killing us" (December 28th, 2009) appears to misunderstand that total utility of life comes from both quality of life and quantity. Furthermore, Corrections notes that higher rates of early death for minorities appears as a natural outcome of maximization, rather than a product of irrationality or a failure of willpower.

So if the U.S. health system does such a good job saving its middle-aged and elderly sick, why do Americans die comparatively young?

Answer: because Americans are much more likely to get sick in the first place.

And that likelihood owes very little to the health care system and a great deal to the bad choices American individuals make.

If you eat too much, exercise too little, drink too much, smoke, take drugs, fail to wear a seat belt or ignore gun safety, there is only so much a doctor or hospital can do for you.

Corrections does not see bad health and dying early as a bad decision. Total happiness comes from both quality and quantity of life. Individuals enjoy eating, drinking, smoking, and consuming drugs. The author begs the question whether or not Americans are actually making the right choices.

CNN.com has one additional observation that is not contradictory to a rational-individual hypothesis. Specifically, that minorities often engage in self-destructive behavior at higher rates than whites.

Acting on this information won't be easy: It violates too many taboos. Americans understandably treasure their right to make their own choices, including the choice to super-size it. And many are uncomfortably aware that self-destructive behavior is most often found among the poor and among minorities: Black women are more than three times as likely as white women to be severely obese.

This may be a rational discrepancy. If minorities also have lower wages, then their foregone earnings from dying early are less. The shadow cost of unhealthy behavior is lower--we should therefore expect higher rates of early death, coming not from irrationality or dynamic preferences, but from rational maximization.

Heath Cuts With Little Effect on Care

New York Times article "Health Cuts With Little Effect on Care" (December 29th, 2009) offers poor partial equilibrium analysis of Richmond health care. Specifically, it makes inferences from data on local rationing of health care to the impact of a global rationing of health care. This is improper in the presence of control group substitution, the search for alternative treatment by individuals denied it by an experiment (in this case, natural).

Since 1996, the Richmond area has lost more than 600 of its hospital beds, mostly because of state regulations on capacity. Several hospitals have closed, and others have shrunk. In 1996, the region had 4.8 hospital beds for every 1,000 residents. Today, it has about three. Hospital care has been, in a word, rationed.

And

The quality of care in Richmond is better than in most American metropolitan areas, according to various measures, and it continues to improve. Medicare data, for example, shows that Richmond hospitals do a better-than-average job of treating heart attacks, heart failure and pneumonia.

The New York Times is broadly examining the impact of a natural experiment in medical care. It implicitly compares a forced change in hospital bed capacity, using a difference-in-difference model. Specifically, the article examines how the difference between American metropolitan hospitals and an unconstrained Richmond changed when Richmond become constrained.

However, it is important to note that individuals living in Richmond who may have been made worse off (implicitly, the control group in this natural experiment) had the capacity to seek out-of-area hospitals that were not limited by (control group substitution). We could therefore observe an increase in Richmond health statistics due to this local prohibition, while observing a decrease in health due to a global prohibition.

Corrections notes that these observations are predicated on the premise that the New York Times is doing proper analysis to begin with. Observations about hospital care rates alone, neglecting individuals that never went to the hospital, would obviously be severely flawed. The claim that quality of care is better when not considering the quantity, which the New York Times appears to do, is an additional and fatal flaw.

A Stimulus That Could Save Money

New York Times article A Stimulus That Could Save Money (November 17th, 2009) cites a McKinsey & Company report that neglects the most fundamental economic thinking to argue that increasing home efficiency will reduce energy use.

The bottom line is that cash for caulkers would be trickier than cash for clunkers — yet would have the potential to do far more good. McKinsey, the consulting firm, estimates that households could reduce their energy use by 28 percent over the next decade. In terms of greenhouse gases, that would be the equivalent of taking half of all vehicles in this country off the road.

Corrections notes that far from decreasing energy use, the sign of an impact of increased efficiency on energy use is indeterminate. People don't want energy as an end consumable product; energy is purchased as an input into producing heat, light, or other consumable amenities. The real product they are purchasing, then, is heat and light. Therefore, we can write the "price" of a unit of heat as the price of electricity multiplied by how much electricity is required per unit of heat.

Therefore, we can see that a doubling of energy efficiency (halving the number of units of electricity per unit of light) is the same as halving the price of electricity. In other words, we may think of this "cash for caulkers" idea as reducing the effective price of light.

This is the point at which McKinsey & Company's analysis stops. They examine energy use as "business-as-usual", assuming "no material change in consumer utility or lifestyle preferences" (page 23 of the above report). Using our above analysis, we can say it is ludicrous to say that light use will remain the same if the price of electricity for light is reduced. As light is a normal good, we will observe light use increasing as price decreases. The remaining question is whether or not, when we halve the "price" of light, energy consumption more than doubles or not. If it increases by a factor greater than two, we should see energy use increasing.

The New York Times took McKinsey's mistaken assumption that consumption of light and heat would remain the same in the face of a decrease in their effective price, and concluded that the price of energy may decrease. In fact, from the Slutsky identity, it can be easy for energy use to increase, given that light and heat are normal goods, and the share of income spent on them is not low.  The possibility for the consumption of light to more than double after efficiency is doubled is depicted graphically below (click to enlarge), along with the possibility for it to increase by less than a factor of two.

Mathematically, the percentage change in heat consumption given a percent change in the effective price of heat will be determined by the Hicksian Elasticity of substitution (negative), the share of income spent on heat consumption and the income elasticity of heat (greater than zero). If our LHS is less than negative one, we will see our predicted increase in energy consumption.

As a final point, we can add that we expect energy companies, as monopolies, to be pricing on the elastic part of the demand curve for energy in general. Monopolies never price on the inelastic portion of a demand curve. To the point that prices are set by the government for energy companies, it is important to note that the more inelastic price is, the more companies have an incentive to lobby and change price, and our suggestion that energy should already be priced on the elastic portion of the demand curve remains intact.

10 years after its implementation, One Florida defies its critics

Miami Herald article "10 years after its implementation, One Florida defies its critics" (November 13th, 2009) may be correct in its noting that the critics of ending affirmative action were wrong, it fails to provide adequate evidence.

A decade after Gov. Jeb Bush announced his controversial plan to end race-based university admissions, the number of minority students statewide has risen, according to a Miami Herald/St. Petersburg Times review of enrollment figures.

`That certainly flies in the face of those who were predicting Armageddon all those years ago,' said universities chancellor Frank Brogan.

However, as the article notes, the number of minorities in Florida has also risen. It is unclear from the article if the ratio of the proportion of minorities in college to minorities in state and the proportion of whites in college to whites in state has similarly risen.

Additionally, the article notes that there has been an increase at some colleges but not in others. An increase at minorities at poorer schools with a decrease in minorities at better schools would be relevant.

Finally, we should note that the report fails to have any attempt at a proper counterfactual. If college minority representation around the country went up 25%, while at Florida it only rose by 15%, then it is possible that ending affirmative action was indeed a catastrophe.

The Herald's failure to report the ratio of minority proportion in college against minority proportion in state, the total quality units of minority education (rather total units), and a proper counterfactual gives it little latitude to conclude the ending of affirmative action did not drastically harm minorities. They do, perhaps, have latitude to condemn critics of ending affirmative action if their predictions were off-base.

Roll Your Own Tax Rate

New York Times editorial "Roll Your Own Tax Rate" (November 21st, 2009) misunderstands the idea that individuals are much better off, in general, when they are left free to choose their own utiility-maximizing bundle.

Obviously the new law is in urgent need of a no- nonsense amendment to bring roll-your-own under proper federal controls and full taxation. The companies plead they merely found a way to save their industry from taxes so prohibitive as to force them to close. That’s not a bad idea, given the public health findings about lethal smoking.

The editorial misses the same things doctors miss when they assume that the sole objective of individuals is to lengthen their life. Maximizing happiness over time involves both quantity of life and quality. If individuals were interested solely in lengthening their life, then they would not listen to music while driving, or, if a passenger would always take the back seat, which is safer. The marginal increase in safety is simply not worth the sacrifice.

Why would we assume that cigarettes are any different? Knowledge? Addiction? The 1997 National Survey indicates that individuals who smoke overestimate the risk level of lung cancer. The idea that individuals are not forward-looking when it comes to addiction is belied by a plethora of empirical evidence: individuals drop consumption of cigarettes now in response to a future tax increases (American Economic Review: Becker, Grossman and Murphy 1994).

The only option left for criticism is that we smoke because our social group lowers our overall utility but increases our marginal utility from smoking--a dubious proposition in the long run, given the physical and monetary cost of smoking and endogeneity of social groups.

STDs Continued Record Increase in 2008

Time magazine's news article "STDs Continued Record Increase in 2008" (November 16th 2008) neglects to mention a mitigating factor in its article on the rise of sexual spread diseases.

Sexually spread diseases continue to rise, with reported chlamydia cases setting yet another record in 2008, government health officials said Monday.

Specifically, that the cost of being infected by sexually transmitted diseases like chlamydia has gone down, as new, better vaccines and treatments have been advanced. A more appropriate measure would be a "quality-adjusted" sexually transmitted disease increase--society may have more AIDs cases than it did in 1990, but those with AIDs are certainly better off than their predecessors.

Costs Surge for Medical Devices, but Benefits Are Opaque

New York Times article "Costs Surge for Medical Devices, but Benefits Are Opaque" (November 4th, 2009), offers a subtle but fundamental misunderstanding of the manner in which profit maximization will take place. Speaking on defibrillators, the Times quotes a doctor who argues that companies may produce deliberately short-lived products as a ploy to make higher profits:

The federal government could also play a more aggressive role in making sure it is getting better value for its money, he added. A case in point — requiring that makers of heart devices use batteries that last longer than five years, the period of time when patients must now undergo an additional, potentially dangerous operation to have a costly device replaced.

Dr. Maisel said, “Why would you build a better light bulb that lasts longer if it is going to reduce your profits?

This thinking is wrong. Planned obsolescence should not take place. Given two technologies, firms will produce using the technology that is cheapest per unit of quality good.

Take Dr. Maisel's lightbulb. If I am offered a choice between a "good" lightbulb and a "bad" lightbulb at two different prices, which will I pick? To be specific, but with no loss of generality, let's say I'm offered two lightbulbs that last for year each rather than one lightbulb that lasts two years. I will purchase the cheaper lightbulb, as defined as the cheapest lightbulb per unit time. If the two-year lightbulb is priced more than twice as expensive as the one-year lightbulb, then I will only purchase the one-year lightbulb. The "worse" lightbulb. If the two-year lightbulb is priced less than twice the one-year lightbulb, then I will only purchase the two-year lightbulb. This is because I am not purchasing a lightbulb when I go into the store, I am buying light for a specific period of time. The price I am willing to pay is not a function of number of lightbulbs, but of dollars per unit time.

In economics, we will often see scenarios in which monopolists deliberately reduce quantity produced to raise price and lower profits. Dr. Maisel and the Times are in error in extending to the conclusion that a monopolist will deliberately reduce quality.

This is because a monopolist knows that the price they can charge is determined only by the price they charge per unit time provided by the good they are selling. A consumer doesn't care about how much a good took to produce, only what they get out of it and the price charged. Therefore, a profit-maximizing monopolist will choose the cheapest means of producing per unit time, as that choice has no impact on consumer behavior (purchasing more or less), just on profits. That is to say, only prices (price per unit time) and quantities (total light per unit time) come into the consumer's decision, not cost to make. A monopoly will doubtlessly reduce quantity of lightbulbs, but the choice of quality is a concern of cost minimization, and they will always arrive at the efficient technology.

It is precisely for this reason that even monopolists will produce the best, cheapest technology they can--they will charge the same price for it, but will get greater profit from producing a better product.

The Times is wrong on the economics of lightbulbs and defibrillators.