PeppercomBlog

Going, Going, Gone?

Posted by Milos Sugovic

The following empirical question was posted as a comment on Free Exchange, an Economist.com blog, regarding the economics of newspapers and their evolving business model:

“I think there is a correlation between falling broadband prices and falling newspaper demand. How much? I would like to know.”

I too wanted to know, especially since we’ve discussed it here and here on Reason Enough, so I went ahead and mined data, graphed it, and did some back-of-the-envelope forecasting calculations. 

Based on a few Datamonitor reports on changes in internet access volumes (instead of broadband prices) and newspaper quantities from 2003 to 2007, I generated the below scatterplot:

The Green (Re)Allocation

Posted by Milos Sugovic

Many Americans have already taken important steps to make their homes energy efficient while those that are dropping the ball would pick up their slack if financial resources permit, according to a recent national survey conducted by Yale and George Mason University. There’s no surprise: Americans are willing and ready for energy efficiency and pollution reduction, especially if it saves them money in the long-run and improves the quality of their lives. 

The most intriguing finding of the survey is that consumers face a natural barrier to going green – the significant upfront financial cost. A reduction in this barrier requires a new set of market instruments, perhaps one where upfront costs are diffused over time like the cost of a cellphone that’s covered via monthly fees (and let’s not forget the government subsidy option either). But assuming this barrier to sustainable consumer behavior is done away with, will the U.S. of A. pollute less? Will CO2 emissions drop to 1990 levels? Probably not.

The consumer wants to reduce emissions demand given the push that’s coming from the new administration, energy prices and declining incomes. But here’s the paradox: an environmentally friendly consumer base reduces a supplier’s pollution level, which creates room for other polluters to “make up” for the reduction and keep national emissions constant. So effectively, nothing really changes.

Being Sensitive to the Price Paradox

Posted by Milos Sugovic

During a recession, firms face a decrease in demand for their goods and services. To compensate for this drop they can charge more and maintain revenues, right? Wrong. If that were the case, we’d see a significant increase in the CPI and PPI over the last few quarters, indicating a 1970s-style stagflation. But the data point to a deflation instead.  

So why don’t prices increase? In layman’s terms: firms can’t charge more because consumers can’t afford more – they’re increasingly sensitive to price changes. But let’s not forget the multitude of microeconomic forces at play behind this simplistic and somewhat incorrect statement.

Yes, the income effect plays an important role. If people are losing jobs or watching their real wage decline, their consumption patterns will change. Usually, and I do mean usually, they’ll demand less of a particular good. But that’s not true for all goods, because the responsiveness of the quantity demanded to a change in income (also called income elasticity of demand) comes into play. For some goods, like instant ramen and spam (even rat meat, according to Freakonomics), demand increases as income decreases, so producers can get away with raising prices. So what was once cheap becomes relatively more expensive. A 99-cent bag of ramen is suddenly $1.09. Counter-intuitive, isn’t it?