Reading Analysis of 'The Use of Knowledge in Society'

What did you find interesting or uninteresting about the piece? Was there something that seemed intuitive or counterintuitive? Explain.
Hayek mentions in this piece that the knowledge problem applies not only to the to the producers of a good, but to the consumers of it, too. In terms of allocation, a consumer may believe that he or she values a particular good more than the other demanders of the same product. This person doesn't know, however, if the next consumer would put the product to better use. In other words, a consumer may believe that their use for a good is superior, but actually has no idea if his/her form of consumption is "better" or more efficient. The information problem extends well into the demand market as well as the supply market. I also find it interesting that society tends to regard people who have an advantage of information that allows them to acquire a good as dishonest. They simply have a comparative advantage in obtaining a certain good over other demanders in that market. Hayek suggests that the other demanders feel contempt for such a person with a knowledge advantage, but I believe it's more jealousy than it is anything else.

Discussion Questions
Why do you think governments still appoint several central planners even though it has been proven to be inefficient time and time again? Do they have another option besides central planning? Why or why not?

Is there a way to economically plan without centrally planning? At what point does the former cross into the realm of the latter?

Annotation
The point of this article was to further discuss the extent of the information problem in markets, and to reenforce the idea that central planning is virtually worthless. There is no possible way that one person has the capacity to make decisions for the whole because there is no feasible way for them to acquire all the knowledge they would need to make choices on that level.

Class Summary 11/30/11

Rent Control


Price ceilings are destructive because they prevent markets from functioning correctly. Rent controls set the price ceiling for possible renters. This causes quantity of apartments supplied to fall, and the quantity demanded of possible spaces to rent to rise. This price ceiling is binding because it results in a shortage. Rent controls cause a new equilibrium price to emerge that is not market-clearing, which isn't good.

Consequences of Rent Controls:

1. There is a reduced availability of apartments, and they're more difficult to obtain.
2. Lower quality apartments are in abundance because landlords have no incentive to improve spaces due to the overabundance of potential renters.
1. By reducing quality, you are effectively reducing quantity.
3. A black market for rental spaces emerges.
4. Apartments can be misallocated since the people who value them the most don't necessarily get them.
5. Rent controls have impacts on other markets.
6. An unfair burden is placed on the landlords.
7. Discrimination and other insidious costs emerge since rentees can afford to be pickier.
8. Monitoring and enforcing the law itself is costly.
1. Over the long-run, supply curves will shift inward.
2. It's destructive because police officers aren't contributing anything else to society--opportunity costs and the broken window fallacy.
3. Even if the police are doing a good job, taxes must be raised, which is costly.

Class Summary 11/28/11

Some Properties of Equilibrium


Decentralized markets are much better off because they allow for experimentation. Government planning doesn't allow for any experimentation, which explains why many government programs fail or are otherwise ineffective. The only way to survive in a complex world is to decentralize decisions. Competition makes us richer because it's unproductive to to tell people to meet goals without any financial incentives.

Four possible problems with centralized planning:

1. It's impossible to determine who is the right or wrong seller without the price system to tell us.
2. Suppose a central planner manages to get the seller right, the allocation problems are immense. How do you determine who values a good the most without prices?
3. It's impossible to determine how much should be supplied without prices.
4. If the quantity supplied is too high, it effectively makes us all poorer.

Reading Analysis of 'The Problem with Price Gouging Laws'

What did you find interesting or uninteresting about the piece? Was there something that seemed intuitive or counterintuitive? Explain.
It was interesting to read that, after all we've learned about the ineffectiveness of price-controlling czars, Tennessee's state government prosecuted gas stations for price gauging. The rise in gas prices was simply a result of the scarcity of oil during that particular time. The businesses selling gas were responding to the increased effort it took them to obtain gasoline by raising the prices. Is it possible that some sellers were dishonest in how big of an increase in cost of opportunities they faced? Yes, but for the most part, these distributors were likely responding to the fact that an increase in scarcity of a good insinuates an increase in price of that particular good in the market. Prosecuting firms for abiding by market "rules" is a bit ridiculous. A similar situation occurred in North Carolina during a storm. Men were arrested for selling ice at a higher price than it was marked at even though no one complained about paying the higher price. Ice was more valuable to the people so they were willing to fork over a little more cash to ensure their stock in the event of scarcity.

Discussion Questions
We learned that both participants of a market, buyers and sellers, work to achieve an equilibrium price for a good. How do natural disasters like the ones described above mess with the equilibrium price of something? How do buyers and sellers react to return to the "right price" of a good? Can they do it on their own or is outside intervention required? What is/are the consequence(s) of outside control?

Why do events such as natural disasters receive special treatment in the light of prices and allocation of goods that are different than the usual workings of the market? Is this "good" or "bad"? Explain.

Annotation
This reading describes the issues that arise because of price gauging laws. The people policing price increases during events of scarcity would need to know an astronomical amount of information in order for these laws to be even marginally effective. There is absolutely no way for them to obtain that level of knowledge, and therein lies the problem with such laws. I'm not suggesting that there should be a total market free for all during natural disasters because people don't always abide by the Silver Rule when it comes to transactions. Suing distributors for a natural economic response during scarcity, however, isn't conducive to the functionality of the market at all.

Class Summary 11/23/11

How Markets Use Knowledge

Say, for example, that new demanders in the titanium market seek 6 billion pounds of titanium at a price of $20/lb. This will cause a shortage of titanium. There are three relevant parties in this situation:

1. Existing users of titanium
2. Suppliers of titanium
3. New users of titanium

In order to deal with the shortage, there cannot be a czar of titanium. A central allocator would have to ask the existing users to use less, the supplier to supply more, and the new users to lessen their demand for titanium. This simply isn't practical because no person has the knowledge needed in order to suggest any of this. A titanium czar would need to know a myriad of things that he or she couldn't possibly ever know. It's likely that even the market participants, of whom these requests are asked of, don't know the answers. The price system does what a czar would want to do.

EWOT Goggles #12

Random economic anecdotes from my Thanksgiving travels:


I never truly notice the 2000+ mile difference between my home in Seattle and Rochester until I sit on my ass for more than seven hours. This aside, airports proved to be a very apt locale to observe economic concepts in action. One of the first things I noticed when I was checking in was the plethora of computerized check-in stations. Some might argue that the introduction of this technology eliminated ticket agent jobs. There was actually, however, an abundance of agents directing people where to go and stepping in when the computers couldn't complete requests. This was especially helpful when, on account of the Continental/United merger, I couldn't use the computer to check in. The check-in technology likely created more jobs upon it's implementation when the computer service jobs are factored in with the front desk agent positions.

Unfortunately, there isn't a direct flight between Rochester and Seattle, so I had the pleasure of connecting in Chicago. The Midwest isn't the most lovely of places, but I would rather fly through O'Hare than a large number of other places. The Midwest region isn't particularly health-conscious, so searching for consumables other than McDonalds-like health level took a bit of looking. When I finally stumbled upon a vendor that sold something with actual vegetables, the line was decently long. The wait signaled the degree of salad scarcity. Regarding allocation of these scarce goods, the price system was of extraordinary assistance because other distribution methods would have probably caused me to miss my flight.

My last economic point on airline travel centers around the "everything's great and no one's happy" concept. Griping was commonplace during the day-before-Thanksgiving travel rush. People were upset about not having open overhead bins above their row, making a fuss about needing to consolidate their carry-ons to meet regulation requirements, and visibly perturbed that United Airlines would suggest that Pepsi was a substitute good for Coke. The fantastic idea that we were able to make a cross-country journey in the span of seven hours was totally lost on all of these travelers. Instead of bitching about the little things wrong with their flight, these people should marvel at the fact that they reached their Thanksgiving destination in a matter of mere hours.

Class Summary 11/21/11

Equilibrium and the Price System


The actions of buyers and sellers are generally completely independent of each other. When the supply and demand curves cross, an equilibrium price is reached and the buyers' and sellers' actions are coordinated. We ask two questions of supply/demand curves:

1. How does each half of the market respond?
2. Whose plans are satisfied?

Surplus: at a particular price when the quantity supplied exceeds the quantity demanded

Shortage: at a particular price when the quantity demanded exceeds the quantity supplied

During a surplus, buyers are satisfied because the price of a certain good or service decreases. Sellers aren't satisfied because they must cut their prices during surpluses. During a shortage, the seller is satisfied because the price of a particular good or service increases. Buyers aren't satisfied because sellers raise their prices during shortages. High prices signify that a good is relatively scarce. When prices are increasing, a shortage is being alleviated. Low prices signify that a good is relatively abundant. When prices are decreasing, a surplus is being alleviated.

Regardless of price fluctuation, there's a competitive plan between buyers and sellers to reach an equilibrium. This is because they don't compete with one another, they work together. Buyers compete with other buyers and sellers compete with other sellers, but buyers and sellers don't compete. 

Equilibrium: a price where buyers and sellers have no incentive to change their behavior; a price and quantity comparison

• "Market clearing" -- spontaneous order
• quantity demanded = quantity suppled --> good!
• "Non-Market clearing" --> not good!