Russ Roberts

Munger on Shortages, Prices, and Competition

EconTalk Episode with Mike Munger
Hosted by Russ Roberts
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Mike Munger of Duke University talks with EconTalk host Russ Roberts about the limits of prices and markets, especially in the area of health. They talk about vaccines, organ transplants, the ethics of triage and what role price should play in allocating. The discussion concludes with a discussion of how markets respond to price controls, particularly minimum wages.

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0:36Intro. [Recording date: October 14, 2009.] Housekeeping: Last week, asked what would happen to the size of coffee if a per-cup tax was put on coffee, Willingham podcast; hints have been added. Archive of all podcasts available on EconTalk. On Twitter at EconTalker.
1:42Price signals. Email from listener, Caleb: use of prices in allocating scarce stuff, particularly in area of vaccines. If you have a potentially life-saving vaccine, do we really want to let the market set the price? Often isn't enough vaccine to go around. Are we limited by the physical rules of the world around us or can we make up an alternative world? If we can make up an alternative world, where people always do what "we" think is the right thing and were altruistic, we might not want to have price. Might want to have people working for the public good, with full information and with all the right incentives and resources to do their job. A lot of medical people think we live in that world. Maybe economists live in their own world. Suppose we don't have enough and we are worried about how to allocate stuff and how to choose a system where there is more stuff to allocate. If you look just at how do we allocate stuff we have, seems that price isn't fair. The rich are going to get more; violates moral intuition. Do rich really get more? True that market can price some out of the goods, but that's not always true. Even if it were true, wealthy people would have some advantage. What people ignore is the importance of the responsiveness of the amount of stuff we have to the mechanism we choose for allocating it. We can allocate by price; people could queue up--first in line get it; could use lottery; could use authority--scientists have studied this and they think person A needs it more than person B. Could use personal preference, favoritism--probably bad idea but a lot of the schemes we actually choose end up increasing the amount of favoritism that somebody who's going to hire someone--in context of the minimum wage--or local official in face of a shortage; or set up a rent-seeking contest, making whether you get it depend on the amount of time and effort you put into making the application. Ditch-digging contest--if you want the scarce thing, you have to dig as big a ditch as possible. Part of the reason people don't like price is that it's impersonal. Price does two things--it allocates, some choose not to buy it, like luxury cars, the nth pair of shoes, or a vaccine. What non-economists focus on is that price also redistributes between buyer and seller within any transaction. My loss as a buyer looks like your gain as a seller; so it looks like a 0-sum game--though it's not. If the transaction is going to take place, that if is very important. If it does not take place the buyer will be worse off. Can change the buyer into a non-buyer, particularly if the shortage is unnecessary--meaning if we used a different scheme there would be more of this stuff. Vaccines: notorious shortages in the United States--when people want to have a vaccine, it always comes in late, there's not enough. It's true that it's not very expensive, cheap once you actually get it. But long line you have to wait for. Like buying sausage in Poland or the Soviet Union--had to check and see if your local butcher actually had meat that day; most days they don't. On a good day, the butcher has meat; people run down, stand in line, and the first few in line can buy meat, at the state-sponsored price which is ridiculously low. The reason there may not be much in the front window is that he's selling it out the back; don't know that we have a black market in vaccines in the United States; confident that we would if H1N1--the swine flu--became much more virulent. People from the former Soviet Union coming to the United States would often carry large amounts of cash. Why? Response: What if there is a TV? Usually no TVs in Soviet stores, but if there were, you wanted to be sure had a lot of cash on hand that day.
10:21In the case of vaccines: isn't the problem just a physical problem? The reason there's a shortage is that it takes a while to produce it. Might be true. But the fact is that in the last two years three large manufacturers have left the business--can't make profits or guarantee the employment of their workers. Physical problem--maybe government should buy these companies as well as General Motors (GM)--but that misses the point. If for some reason it's not profitable for the private sector to produce this, there must be some reason we are not compensating or giving signals to the private sector about the value of these vaccines that is not getting through. Most people feel it's really valuable right now, really want one. Two vaccines now--regular flu and H1N1 vaccine--possible confusion or conflation. Walgreen's has given twice as many flu vaccines as it did last year, just for the ordinary flu--which season doesn't start till December. Flu can kill you if you are old, young, or frail. Worries people. Total of 600 deaths from swine flu so far; we have 36,000 deaths every year from flu in the United States. Many other vaccines crucial and important. We've taken the profit out, basically said that if you come up with a better vaccine you can't profit from it an inordinate amount; government is the major purchaser of these vaccines, which is another non-market aspect. Won't let price be what the market can bear; thus frequent shortages. Too important to let the market do it; put the Motor Vehicle Department in charge of it will all of their efficiency and politeness. Why should government be better at doing it? Heart of the matter--we have a sense that it's wrong to use the profit motive at all as a way of organizing production that's involved in serving really desperate needs. Emotional aspect discussed in other podcast. Story: talking with doctor about swine flu; she remarked that she'd be getting her shot soon--probably better that doctors get vaccinated sooner because they come in contact with people who have it. But with regard to profit motive, she said: I wouldn't trust a vaccine that was made by somebody trying to make a quick profit or take advantage of people. Captures a lot of the emotional and philosophical view about desperate situations. Of course, she charges for her services; if you go to her with your child and said you don't think you want to pay her today because you wouldn't trust her--with child really sick--she'd be horrified to be told she was distrusted. Would she be an even better doctor at no price. Fundamental truth to her observation: we'd like to rely on love and affection and decency as a way to get stuff done, but that's not working for the swine flu. She needs to cover the average cost--medical school--but she might be happy to help people free at the margin. But shortages occur at the margin; vaccines are physical things. Big asymmetry of information. Went to drug store, got flu vaccine; someone unknown, put a needle--don't know where it's been--into a bottle and injected arm. Crazy! Great--only $5 instead of having to make appointment with a doctor and pay $100; displacing some of the monopoly and entry barriers, because now there are all sorts of things that physicians' assistants can do.
18:31At a point in time there is only a limited physical amount of vaccine available, not enough to go around at the price being charged. Do we want our society to decide who lives and dies based on how much someone is willing to pay? Greg Mankiw example, NY Times column. Suppose there is a Dorian Gray pill--every day you take it, you don't age; and a year's supply costs $150,000 dollars. Would we want to allow that pill to be bought and sold by the marketplace? The premise is that there aren't enough of these pills to go around; and in paper, Mankiw supposes that you can't much change the amount. If you could subsidize it and make it so that there was enough to go around, that would be different. What would be the alternatives? Could do it by authority? Who are the people who are smartest, who would contribute most to society? Maybe the prettiest. Not Matt Holliday, missed fly ball in the outfield; true Cardinal Fan. Could have a lottery. Or could have price. If we used price, objections because it would create a two-tiered society. Might take a vote and outlaw the pill. About to do that in health care. Liver transplant costs about $1.2 million before you go through all of it. We obviously can't do that for everybody. Some wealthy people who have gilt-edged health plans probably can get a liver transplant. What if 70-year old? Germany or England impossible legally to get a liver transplant. Laws can only control what's legal. Vaccines: are we going to let people make their own choices knowing that they can make bad choices? Disagree: not good example. Characterized Mankiw's example in a certain way. Kind of example that makes for a good high school biology or ethics discussion in religious schools: four people on a boat, only enough water to save one: who gets it? Should give it to the youngest--he would live the longest and hence benefit most. Or to most valuable person, most beautiful, smartest, best carpentry skills, best artist, best parent--arguable. Learn from those conversations. Whoever could pay the most for it, and then compensate, giving money elsewhere. But it's the wrong question: if you are in a rowboat, and you only have enough water for one, people do brutal things or honorable things--and it's a moral dilemma. But the way people pose the moral dilemma is a false way of posing it. Does it correspond to anything in economic life, in a market system? For example, when cars were first invented, only rich people had cars. Could have said early on that it isn't right that rich people are scooting along in these vehicles while poor people are on horses or on foot; we can't allow a two-tiered system. Took 60 years, two generations--everybody has a car. Not everybody can have a Lexus. Eleven-year old wants a Ferrari. To say it's not fair if rich people get the Farraris and poor people don't--that is true--but poor people get Hondas, really nice, get you from A to B just as successfully. Incentive for person making the Dorian Gray pill to sell it to lots of people at a lower price.
28:06Two different things Mankiw's example might illustrate. First, suppose there is not enough of the stuff. Then we have to decide if we are going to ration it by price, need, or something else. Second, suppose the amount of the stuff responds sharply to the way that we allocate it. Then: are we going to let price or command cause the increased supply? Top-down or bottom up. People trust command more than price. Go to the pill: unrealistic, artificial to say there is not enough and we can't make any more. Liver transplant example: is that not a perfect counter-example to claim that it doesn't correspond to anything in real life. An economist is someone who believes as a matter of moral good that the infant mortality rate should be positive--some children when born should died because it is too expensive in terms of the opportunity costs to keep them all alive. We'd have to give up education for other children, etc.--just not worth it. Health care is always rationed; the idea that it should be free is insane. Suppose you will live another 20 years and you will die for sure now without some operation--how do we decide how to allocate that. We can afford it; but we wouldn't like to. We could afford to give everyone a liver transplant who wants one, but what would we have to give up? That's what "afford" means. Could afford to give kid a Ferrari--just a skinflint--sell house, could afford it. Choose not to afford it. We choose not to give liver transplants to everybody. Liver transplant is more important--people say the reason we can't let market decide for liver transplants is they are more important. Other way around. Want market, economies of scale that come with liver transplants. Why are liver transplants so expensive? We don't let people pay for livers. We bury so many good livers--some would be donated in exchange for funeral donations and college education for kid. Also expensive because of complexity of operation involved. It's not that we don't allow any liver transplants. We just subsidize some kinds, but not others. If a 90-year old person is rich, he can go somewhere else and buy one. Artificial shortage. Other argument: could look for non-top down ways. Acquisition of the liver; and to whom does it go. Letting the market handle more of the compensation from whom the liver is harvested--allowing them to sign a contract saying the compensation after unlikely event of death would go to heirs. 100% likely; but at a time when a good donor, so between the ages of 25 and 55 for non-drinker. Under that situation there is a moral hazard problem--both the heirs and sometimes the doctor are over-eager to advance the time of death. Monte Python skit along those lines. It's happened in poor societies and bad systems of justice--can get people murdered for their body parts. Black market now in these organs because we have not gotten our act together. Doctors want to get access to those organs--discretionary authority, power in the hands of individuals. Livers now are so precious; more likely to pull the plug. If there were more of a market in it we wouldn't be so likely to pull the plug.
37:31Other kinds of price restriction--minimum wage. Discussed in a previous podcast in other countries that use more command and control. Classic Alchian and Allen example: out of print textbook--article in Concise Encyclopedia of Economics on Econlib: Why would the people who run the Rose Bowl not try to make as much money as possible? 100,000 seats, more than that many people want to go. Why not raise the price of seats? Many answers to this problem. Rock concerts. Suggestion: might want to have excess demand for those tickets: People who are selling the tickets don't get the difference in price, but if you keep the price low they themselves get the benefit of being able to allocate them. Like political power of old kings to give away treasure. Tom Hazlett. FCC decided to give away portions of spectrum based on an application. Rent-seeking may dissipate some of that value in a way you don't recover through money. Chinese officials: terrible problems with price ceilings. Rice is really expensive, so let's put a ceiling on it; then everybody can afford it. Problem is: that creates a shortage. Can give out coupons. The local official gives out too many coupons--inflation in coupons--and can give them out with discretion or give them out through a black market. Who do people blame? The lazy farmers--not producing enough rice. People fundamentally misunderstand the minimum wage. It's a floor, but it creates a difference between the market price and the price that people are allowed to transact, so a lot of transactions don't take place. Get paid more if you have a job than you would without the minimum wage. But what if you don't have a job? Creates a reserve army of unemployed. Whole bunch of people looking for this job. Employer looks around and decides who to hire based on other criteria. Standard way to teach about a price floor like this--say the wage for a particular low-skilled person. In the absence of the minimum wage, say you make $5/hour; but it's $7.25 with minimum wage, so there are not many of those jobs. Orson Scott Card: That's good because those are crummy jobs, jobs that people can't make a living on. A bunch of people are hurt, say the economics-trained supporters, but some people are making $7.25, so they are better off. Utilitarian: add up the gains to the people who get to keep the jobs, take away those who lost the $5, and now it's an empirical question: What's the elasticity of the demand for low-skilled labor? How responsive to price? What if it's not very many fewer? What if thousands get a raise and only one person loses a job? Plus social safety net available. Blind application of supply and demand. Barzel, how competition takes place. On a different margin. Price is one way people compete. When wage is artificially high, more people want to work--excess supply. Normally that pushes wages down; but that's illegal; assume no black market, though plenty of that. Created a reserve army of people who would like to work at $7.25. Not just waiting outside. The beneficiary who is employed at $7.25 is in a position to be exploited by his employer and often exploits himself: how hard you work, how many breaks you get, split shift, pay for own uniform, do you get training on the job--mentoring, get better at what you are doing. All of that will be reduced. Plus some of these businesses that were close to failing will fail. It's not just that your employer will take advantage of you, but you realize that if you lose your job it will be a lot harder. Pushes down non-monetary compensation.
50:20Like hydraulics: if there is this surplus, it gets pushed to some other margin. Regulating airline prices in the 1960s--couldn't lower your price, so they started competing on the kinds of meals they offered, sandwiches, then steaks; lunch was large sirloin steak between two tiny slices of bread, called a sandwich. Also competed by offering more flights for connecting cities, meaning more seats available. Stewardesses more attractive, seats more attractive. But that mix was not the mix the consumer wanted. The guy employed at minimum wage would prefer being treated better at lower wage. Not true for every single worker; some employers will be just as pleasant, won't fire anybody, won't substitute machines for people; but maybe not true now when times are hard-pressed. Ironic: employer who responds to the incentives is an exploiter, barks at workers, no benefits, no health care, no ride to work if living nearby; will fire at the drop of a hat. Then people say that's what happens with greedy employers--yet it's the law. Flip side: you're going to tell me that in the absence of the minimum wage that people making $5 an hour are going to get health care benefits and friendly employers? At the margin, it has to be true. Workers will exploit themselves in the presence of the minimum wage. Two economists talking in their fantasy world about competition. Is that naive? Faith-based economist? If you close off one margin, we do see people to compete on other margins. Munger worked minimum wage job for two summers; wouldn't have been able to find a job had it been higher--a "living" wage of $10-$14/hour. Couldn't have worked way through college. Raising the minimum wage means some people who are economically marginal are able to find a foothold, develop work skills, and maybe move to something else. Some don't, but big increase between $7.25 and $5. Most would understand the effects if it were $50/hour.
57:41If you artificially price stuff, you will see quantity responses. Interesting: non-quantity responses, hidden aspects. Rent-control apartments: landlord slow to fix the toilet, doesn't paint, you fix things yourself, chooses people on discriminatory ways even if it's against the law. What would non-economists think? It happens at the margin, not sure of margins. Willing to bet that most listeners have never thought about competition on margins other than wage before. Just raising the question: this is a possible cost of minimum wage, prices on rice or apartments--let's try to take that into account.
59:31[Note recording date is October 14, 2009.] Last week, Elinor Ostrom and Oliver Williamson awarded Nobel Prize in Economics. Ostrom: empirical work studying tragedy of the commons and how groups of people have responded to that challenge through non-monetary cultural norms, voluntary agreements. Standard way economists look at the tragedy of the commons is: It's going to be ruined. Species will go extinct, grass will be eaten to a nub, so we need government. Garrett Hardin's conclusion: only government can solve this. Ostrom asked: Is it true? A type of work disdained by most economists--she does case studies. Munger: That's why I'm in a political science department. Russ: And so is she. She saw what different people did in different situations. Maybe this matters. Card and Krueger: minimum wage increases employment; skeptical, also skeptical of empirical work in other direction. Hard to tease out such small effects. Recent jump in teenage unemployment is suggestive. Would be useful to look at the non-quantitative measures. Can't run a regression. Useful to see how those have changed. Useful to see how competition actually works, as opposed to saying supply and demand cross, therefore we're done. Talk to employers, workers; natural experiment. Some of what Card and Krueger would like to exploit: sent out a survey, tried to control for other factors. On a more sociological style, case-study basis. What might you uncover? City of Santa Fe raised their "living wage" to something dramatic, from something like $7/hour to $14/hour. Interviewed people: what would you do with the money? No one asked if they thought they might lose their jobs over this. Would be interesting to go back to those folks and ask how their lives have changed. What happens in a poor neighborhood when housing prices go up? You get gentrification. Why wouldn't that happen when the minimum wage goes up--you get job gentrification? People who before wouldn't have applied now apply and crowd out all the residents of this neighborhood who used to live in this low wage neighborhood. Not true that things stay static. Illustrates essence of economics: And then what? Attributed to Thomas Sowell? Can't hold everything else constant. Understanding economics improves your imagination. Improving your imagination improves your economics. Can see the hidden stuff you'd miss otherwise. The Seen and the Unseen.

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COMMENTS (74 to date)
Bo Zimmerman writes:

Wow. I found the infant mortality point to be quite profound. Intellectually, I get how things are best understood in sharp contrast, by the elimination of external factors, but, wow. I'll never think about utilitarian arguments the same way again.

Nathan writes:

The point that Russ and Munger did not appreciate is that fear about the profit motive in vaccines has to do in part with _understanding_ incentives.

If someone can put water in my arm and charge me two hunded dollars telling me it is a vaccine he makes a lot of money. We hear about things like this happening in China a lot recently. This incentive does not exist if the price is controlled.

The answer of course is that companies that did this would get caught and punished by the market. But what about the people who are harmed in the meantime? (An appeal to 'oh that is illegal' is not valid. If you think government can prevent bad behaviour efficiently why can't it provide vaccines efficiently).

I think that many people find denying someone something because 'there isn't enough' is less morally repugnant than allowing rivate firms to harm people in the short run. They may be wrong about the ultimate welfare of many, but it is a sentiment that is easy to understand.

Tony G writes:

Nathan,

Why couldn't your argument be applied to products other than vaccines? What about nutritional labelling on vitamins? Could a business just gring up a bunch of chalk, label it as healthy calcium and sell it? Should we thus start controlling the price of vitamins? And what about lean beef? I couldn't tell you the difference between 80% lean and 90% lean and a butcher could easily deceive me. Should we start controlling the price of beef to eliminate the incentive to lie about fat in beef?

Alternatively, since the price of a vaccine is controlled, and I realize I couldn't make a lot of money selling it, wouldn't I have an incentive to substitute water for such vaccines as a way of compensating my bottom line for the artificially low price?

Deception is a universal problem, and I'm not sure how controlling prices would prevent such deception and fraud.

Jason Woertink writes:

If organ sales were allowed I wonder if people would take better care of themselves in order to preserve the value of their organs.

Mort Dubois writes:

Oh boy, where to start. Here:

"Under that situation there is a moral hazard problem--both the heirs and sometimes the doctor are over-eager to advance the time of death."

Your analysis ignores the real and ongoing value to the doctor and hospital of a slowly dying patient. That's an ongoing revenue stream, happening right there in front of you. Sometimes you guys need so step back from your theories and take a look at what is actually happening. My son needs the laptop, so I'll have to add to this comment later.

Mort

Russ Roberts writes:

Mort,

I don't think doctors only care about revenue. They are human. The chance to save a young life puts them in a very awkward position. I'm sure there's pressure on the doctor in that situation. Looking forward to the rest of your comment.

Blackadder writes:

If someone can put water in my arm and charge me two hunded dollars telling me it is a vaccine he makes a lot of money. We hear about things like this happening in China a lot recently. This incentive does not exist if the price is controlled.

Not sure why price controls would make the incentive to do this go away. It's cheaper to use water regardless, and if there are price controls you can't compensate for the higher cost of using real vaccine by charging a higher price.

Mike Munger writes:

Blackadder anticipated my response: at a low enough price, the ONLY thing you will get is water. Or, the only thing you will get is some ineffective vaccine.

On the other hand, Nathan clearly has a point. The question is not whether IN FACT the injections will be water, or maybe even dirty water. The question is whether people BELIEVE that the injections are just water.

Because of the lemons problem. If people do not trust a private medical system, or if they do not trust a private vaccine delivery system, then they won't for the service. And then only quacks and fakes will be doctors.

Licensing and brand names are the way we try to get around this.

So, I think Nathan has a point, when he claims that people trust government more. But WHY?

The Tuskegee syphilis experiments were government funded, and actually carried out by the US Public Health Service. In fact, there are many examples, both in the US and abroad, where the government acts in a way that is negligent or malign.

What recourse do citizens have? Much less, because of sovereign immunity: the state can simply pass a law saying that it cannot be sued. No private company has the same immunit.

So, though Nathan is right that many, not all, and maybe not most, people trust the government more. Because they think that the profit motive taints the process.

Mort, I do hope you get that laptop back. Kids today are SO demanding.

Anonymous writes:

28:06 "Germany or England impossible legally to get a liver transplant."

British NHS does do liver transplants.

From http://www.nhs.uk/Conditions/Liver-transplant/Pages/Who-can-use-it.aspx

Due to the small number of available livers, each liver transplant case is carefully assessed.

The assessment procedure is based on two factors:
your risk of dying if you do not receive a liver transplant, and
the likelihood of the transplant being successful and you surviving after the procedure.

There are a number of scoring systems that healthcare professionals use to assess the clinical need and urgency for a liver transplant. One of these is known as the model for end-stage liver disease (MELD).

Germany does do liver transplants:

Abstract from http://www.ncbi.nlm.nih.gov/pubmed/14628232:

As in other western countries the major challenge of liver transplantation in Germany is to expand the number of liver transplantations in respect to the increasing disparity of qualified patients on the waiting list and the still static availability of brain death donor organs. The problem of death on the waiting list has become overt since the German transplantation law has been installed, which has changed the former center-oriented to a patient-oriented allocation weighting waiting time over medical urgency criteria.

shawn writes:

prior to listening to the podcast, from the comments I'd say that Klein's "demand for and supply of assurance" paper is relevant.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=467802

Mike Munger writes:

Oh, golly, Anon! That needs some work, dude.
Consider the following two statements:
1. Germany has a lottery.
2. I am going to win the German lottery.
Now, I could do what you did, and document that statement #1 is correct. Here is a web link: http://www.lotto.de/
But #2 is simply NOT correct, for almost everyone who wants to win the lottery.
Likewise, the fact that liver transplants are not technically ILLEGAL in Germany has very little to do with my successfully obtaining one. The fact is that almost no one gets a liver transplant in the German system. The Brits? FUHGEDDABOUDIT!
Oh, and Shawn, before reading Klein's paper, I'd say that you are probably right.

Jonathan Dumas writes:

How Did the $8.50 Citywide Minimum Wage Affect the Santa Fe Labor Market? A Comprehensive Examination: http://www.epionline.org/study_detail.cfm?sid=91

Russel talks about the Santa Fe minimum wage rise and wonders what happens.

Here is a report summary (with link to full report). Dr. Aaron Yelowitz's conclusions are that
-unemployment went up for low-skill workers,
-the mix of low-skill employees changed, and
-the number of hours worked in low-skill jobs fell.

Shai writes:

There were several points you missed in your discussion this week. I find those puzzling, considering those can completely change the economic analysis.


First, regarding vaccines:


The fundamental observation is that the value of a vaccine to the market is very different from the sum of its values for individuals. There is a very significant interaction term: the value of a vaccine is dependent on whether your neighbor had one. One factor is still captured by the direct chance of infection: vaccines only lower the probability of contracting a disease; I derive a direct utility from your vaccination.


Another, more important factor is that transmission is complicated. Vaccinating people with a high chance to transmit a disease can be hundreds of times more effective (on the population level) than vaccinating at random. Maintaining a healthy population of medical doctors is more critical (during a wide-spread outbreak) for market productivity than maintaining a healthy population of lawyers, even if they have comparable income levels. This means that "expert" or "authority" based methods of vaccine dispersal make a huge difference for the overall public-health benefit to the market.


As for lemon effects with vaccines-- unlike selling someone a lemon car (the classical example of information asymmetry), selling someone a bad flu vaccine is something you are very unlikely to get caught at. Without a very strong regulatory mechanism auditing the public health outcomes of the vaccines actually distributed (which I think nobody is doing...), there would be no way to find out. If more people catch the flu than expected in some region, in a particular flu season, the common explanation is that there was a different strain of flu dominant there. I severely doubt anyone checks for the alternative of a poorly produced (or "watered down") vaccine, since this research is quite costly.


I think all these points were completely missed in your discussion. Can you suggest how the unseen hand can resolve any of them?

Shai writes:

There were several points you missed in your discussion this week. I find those puzzling, considering those can completely change the economic analysis. (this is part 2 of a multi-part post)

Second, regarding healthcare, liver transplants and "Dorian Gray" pills:

Rather than infant mortality, the example I like is this: give me an economic reason not to shoot granny when she gets sick. There is no utility derived by anyone, including her, if she's in a nearly vegitative state, slowly drooling herself into the grave. Considering that most of us wouldn't condone shooting vegitative grannies, this tells me that other forces are acting on the market. One of the failings of economics, in my view, is in taking into account that as a society we value certain things that aren't well represented by their monetary value. The most acute problems appear in valuing things that are far removed in time -- such as the value of basic science research, preventive healthcare, education, ecosystem services and care for the elderly.

Liver transplants are a perfect example of where a properly structured market (e.g. an "insurance pool" incentive for people to be donors) could make a large change in supply. Once the elasticity of supply allows the number of transplants to go up, we might get better at doing them. I am very suspect of the incentives right now-- I think doctors and hospitals make more money by doing a few private and exclusive transplants than they could by making more transplants more cheaply. Maybe these private procedures, which they have some discretion in scheduling, allow hospitals to better maximize the profit from their operating room facilities? In any case, the key issue regarding the chance of the market to work, as you rightly pointed out, is the elasticity of supply.

Let us take, the opposite extreme, the "Dorian Gray" pills along the lines of the classical Sci-Fi novel "Dune" -- where the supply of the "geriatric spice" is highly limited, and exploited to the full rate of production. One major problem you ignored in your discussion of such longevity treatments is that they would tend to sharply increase the wealth disparity. Wealthy people would live forever, amassing more wealth and more power; the Great Equalizer Death would no longer cut them down to size, and force the power and resources they amassed to be redistributed. One can easily imagine why many people fear an outcome where the Bernard Madoffs of the world could live forever: would he really have taken the fall for his misdeeds if he had that chance? I think many people feel that the wealthy are already too powerful in our society.

How can the market fix these problems?

Adam writes:

There is no utility derived by anyone, including her, if she's in a nearly vegitative state, slowly drooling herself into the grave.

Seeing as utility is an entirely subjective valuation that varies from individual to individual, this is a rather erroneous statement wouldn't you say?

As for your response to the "Dorian Gray" pills--that was dealt with in their analysis. Professor Roberts pointed out that it in no way mirrored anything in the real world. In the real world, firms that had such a pill would have every incentive to improve on it and cut costs so that they could make more money by selling it to a much broader base of consumers. That is how innovation works, in a competitive marketplace.

Mike Munger writes:

Shai makes TWO very good points, but it is important to keep them separate.

First, it is absolutely true that if I noticed my wife cleaning the bathroom, and I went in and said, "Good job, honey!" and tipped her a $20, I would get the mop right up side of my big head. It would probably leave a mark.

There are all sorts of relationships and arrangements where markets are NOT important, and where direct monetary incentives are inappropriate.

Same with birthdays: if I give my wife a new vacuum, or a gift card, it is going to be a very cold and lonely evening for me. She expects a little box, with something very shiny, even though (actually, because) it has no direct economic value or purpose.

On a larger scale, one might imagine using money to control access to power, and to live forever. Maybe not Dorian Gray pills, but something like the "Masters of the Universe" self perception of Bernie Madoff, or the goofballs at AIG. People might WANT to use money as the only metric of value, but they should be prevented from cheating and stealing. Yet there is no one to put the mop up side of the Bernie M's head, at least not until it was too late.

Second, there are MANY situations that markets could, in fact, fix and fix quite well.

How can we tell the difference, and how can make the boundary secure?

Those are good questions, Shai!

Bill writes:

Your discussion about price caps producing shortages brought to mind another problem I've wondered about.

Broadband service is not provided to rural areas (such as mine) because the population density is not enough to justify the investment required. Our Telco has said that under 20 houses per mile leads to a poor ROI. In our area it's more like 10 houses per mile. This makes some sense, even to a non-economist.

But why don't Telcos just charge more for providing Broadband in such areas. Someone who lives far from a product source might reasonably expect to pay extra for delivery, for example. But, it seems that there is just one price for DSL, and if it's too costly to deliver it, it's just not available at all.

This appears to be similar to what I would expect if the government had capped the price: a low price, but short supply. Does this happen even in a market economy?

I suspect I'm oversimplifying the problem. Maybe the higher charge would lower the adoption rate and the ROI. Perhaps there are reasons why the Telcos don't actually want to sell more of that (DSL) product, such as high maintenance costs. Maybe different prices for different locations would look like price gouging to some.

Mads Lindstrøm writes:

Hi

Another great podcast :)

Personally, I am not worried about moral issues concerning monetary rewards for becoming a donor, but is it really necessary or desirable?

If America (and other contries) change donor-acceptence from opt-in to opt-out, we would properly see a huge increase in number of donors. From http://www.washingtonpost.com/wp-dyn/content/article/2008/04/06/AR2008040602262.html :

"In Austria, France, Hungary, Poland and Portugal, more than 99 percent of people consent to donate. In the United States, the consent rate is 28 percent. In the United Kingdom, it is 17 percent; in Germany, 12 percent.

Why the dramatic difference? Because countries such as France and Poland make organ donation the default choice. Others make not donating the default. Either way, most people go along with the default option."

I am not suggesting that people should fill out 117 forms to opt-out of donor programs. It could be as simple as, when you get your drivers license you need to say yes/no to becoming a donor, and the yes-box is pre-selected. The box could be right there on the drivers license.

Russell writes:

It was mentioned in this podcast that flu vaccine is notoriously in short supply come flu season and that several manufacturers of flu vaccine have left the business because they can't be profitable. I am unclear about what forces are in place that would allow these two things to happen at the same time. Any answers?

Mike Munger writes:

Russell: You would always expect shortages AND firms leaving the industry in the face of price ceilings. And we have price ceilings for vaccines.

Further, you would expect firms to leave the industry if the regulatory costs of bringing a vaccine to market are prohibitive.

Combine prohibitive regulation, and strict price ceilings, and it is obvious why shortage and industry shrinkage go together. In fact, the second "causes" the first, but both are actually caused by the regulatory policies.

And the regulatory policies are "designed" to protect the public. Do you feel protected?

Mike99 writes:

- Why do people trust the government more? Look around for the last 20 years, but, especially the last 8. Rampant Business FRAUD. You people talk like markets work all-the-time. When corporate-democracy takes over, and regulators and politicians are captured, like the last 8 years, nothing works except short term greed. Consumers fall under tremendous risk of Bankruptcy, from Corporate Fraud.

Insurance? Are we insured for any large loss anymore?

- Why not discuss the more likely solutions to gov-business and marketing anti-virus. Cost Plus, say 20% profit margin. No price gouging and inspection of the final product should be sufficient to get as much antivirus in the market as needed.

- About Unemployment. I used to believe your BS about the Demand curve, then I saw New Jersey business ABSOLUTELY REFUSE to raise wages when no one would take $5 hour minimum wage jobs. They Simply BELLY-ACKED. Let me type that in again: They absolutely Refused to Raise Wages. They were, however, more then willing to pay public transit fare's for employees of up to 100 miles away. They did not fill positions, they ran their businesses, in their own words "understaffed".

Which leads me to believe Economics is a profession where AHoles Justify being AHoles. Is that too strong?

There are other Economic studies that show raising the minimum wage does NOT increase unemployment.

Myth and Measurement:
The New Economics of the Minimum Wage
David Card & Alan B. Krueger

Other things the demand curve doesn't measure, motivation and productivity of a work force with wage increases. The Multiplier Effect, whereby low wage workers, getting an increase, spend that money in the community and increase economic activity so that the REGION benefits. And those now higher wage workers may actually HIRE other community members to do things like, cut the lawn, and babysit.

Then, there's buying power. If a worker needs to work 12 hours to earn $40 to buy a Nintendo DS game cartridge, you've got a Very Unhappy Worker.

I'm tired of the Economics profession being hijacked by the Anti-worker sociopath manager pulling out the demand curve and saying this proves everything, where, in fact, it proves nothing.

You might say there's a Laffer Curve for minimum wage, with the demand curve being INVALID.

Gary writes:

Wonderful podcast. No comments yet on the min-wage stuff, so how about some anecdotal jib jab:

I used to work in a mixed union/non-union environment. The union members were over-paid and, as a result, never quit. Although the union and management staff got along well, management treated the non-union group much better. Comped lunches, expensive training, the best computers, business trip perks, better banter, the most interesting work assignments, etc. It became clear to me that compensation includes many things besides just the pay and benefits.

I'm tempted to say that those union workers would have been happier had they got paid less but worked in a better environment. But if so, why did they take the job?

Organ Grinder writes:

One of your previous guests -- Cass Sunstein -- had a novel of idea for dealing with a shortage of organs: just take them. It is in his book "Nudge" (co-authored with Richard Thaler).

Pay for them? No, that would be too expsnsive.

Ask for them? No, that would be too inconvenient and people might say no.

Just take the organs and call it "mandated choice," which should make you feel much better about your decision. Not to worry about this though because anybody with such an idea would never get into a position of power. Whew!

And to think that Sunstein considers hunting immoral!

Russ Roberts writes:

Shai,

Because there are external effects from vaccines that might justify a subsidy to a vaccine. It does not imply that the government should not allow vaccine makers to profit from discovering or selling the vaccine.

On lemon effects--there are many problems of asymmetric information in life. Markets work to reduce that problem and often succeed--witness the thriving used car market. Somehow we manage to buy and sell used cars. Brand name helps which is why CarMax thrives.

In the case of medicine, brand name plays a similar role. Your point about randomness is excellent. But the idea that the vaccine might be watered down seems unlikely to me because of the reputational costs. And I don't know of any evidence it has ever happened. But it's an interesting observation.

agnostic writes:

Perhaps another example of competing on other margins when the government blocks price competition -- the new aesthetic age that Virginia Postrel talks about in The Substance of Style.

We all like pretty things, and we've been making the most mundane things pretty for tens of thousands of years. But starting in the 1990s, there really has been an explosion in aesthetic competition among product sellers, hotel chains, etc.

I'm not sure what sector it would've started in, but all it would've taken was something like the regulated airlines case. Firms start competing on the margin of aesthetic quality, and that awakens the desire for pretty stuff in consumers. And once they get a taste of pretty stuff in that initial sector, they start demanding pretty stuff in other sectors -- now that you've been to a stylish restaurant, why shouldn't your toothpicks also be designer?

The initial sector that would've set off the aesthetic conflagration would have to have been one that the government could have put a price floor in. That's easiest if it's part of the government -- maybe public parks or libraries?

If all parks are competing for public funds, they presumably can't compete on price -- "Hey, fund us, we'll only ask for 10% of what those other parks are asking for!" There's some minimum amount of the budget that year that will go to parks, so you couldn't offer to take less than that. So they'll compete on other margins, like aesthetics -- "Hey, fund us, we're going to install a European arcade for yuppies rather than another garish jungle gym for rugrats!" And if you lived in a family-friendly state, you'd compete in just the opposite way.

Another example (this is fun) is grant proposals. You can't compete with other requesters by asking for a lower amount of funding -- it can only go so low. It's just like the minimum wage case where the requester will exploit themselves, kiss the grant office's ass -- or at least flatter the reigning ideology of the granters -- because after all, there's the reserve army of the unfunded right behind you in line.

And people in the grant office will act more like scumbags than they would if they had freedom over the amount they could grant. This makes the prediction that grant officers who control programs with the greatest minimum award size will be greater scumbags than those who control programs with the smallest minimum award size.

The common pattern in these examples is a funding contest with a floor on the award size that's above what the average contestant would be happy to win.

agnostic writes:

You know, maybe that's a better way to investigate the effects of a minimum wage -- look at grants. With the minimum wage, there isn't nearly as much variance from one place to another or from one time to another. If the input variable doesn't vary that much, it can't explain much of the variation in outcomes.

But the minimum award size for grants varies by orders of magnitude -- could be hundreds, thousands, even millions of dollars. And the sample size would be pretty big.

Possible outcome variables to measure among grant winners of varying award size:

- Free-floating level of anxiety or fear (personality test, cortisol level, etc.)

- Degree of adherence to the grant office's ideology (e.g., did a dietary study conclude that sheer number of calories was more important than the quality of those calories in predicting obesity)

- Level of obsequiousness when the winner corresponds with the awarder (say, how formal the salutation and concluding remarks are in emails)

Etc.

Steve Hemingway writes:

There are about 600 liver transplants done in the UK each year. It has proved politically impossible to ration care on a rational basis. Producers - especially medical consultants (specialists) - are fantastically influential in running the National Health Service. They like to do complex expensive operations so they can build their reputation, publish, and be in a position to apply for jobs in the USA.

Even though the NHS has, to a very close approximation, monopsony power in setting wage rates for medical staff in the UK, you might be surprised to discover that in UK general practitioners are now amongst the most highly paid in the world (around USD 700K pa). This is a testament to the lobbying power of these professionals. I am not sure what the relative pay rates for hospital doctors are. I think it is lower, but this may be a consequence of a very high proportion indeed being trained overseas, particularly in the Indian subcontinent.

An interesting observation of the impact of incentives on supplier behaviour concerns my mother. UK GP's are paid by number of patients on their roll, whether they receive treatment or not. My mother, a few years ago, managed to go for 31 years between visits to her local GP surgery. At no point in that period did she receive any communcation from the GP, although the surgery was receiving (a large number of) tax pounds for each one of those 31 years. In contrast my vet, who is paid per item of service, insists that I bring my cat and dog for a medical checkup every year.

McJob writes:

Let's use the example of a single company, McDonald's, which operates in many different countries in many different labour markets. The actual job in each country is essentially the same, as is the end product. However the hourly wages vary greatly. I can get a much higher wage in Australia than I can in America. I am probably also treated much better by my employer in Australia than in America. But according to the podcast, I am being exploited, I am being forced to work harder, and I will be fired at the drop of a hat. I find all of this is to be untrue (don't you realise it costs money to fire someone and to re-hire and re-train someone else?). I am much better off working at McDonald's in Australia than I am in America in pretty much every conceivable way.

And then countries like Norway, Denmark, and Sweden don't have actual minimum wage laws as far as I know but wages are collectively bargained at a national level (instead of between a company and a union) which creates an effective minimum wage. Most developed countries have a minimum wage.

Then you have many developing countries that don't have minimum wage laws. I think these countries are more likely to have sweatshops and to abuse their workers.

Maybe I just don't get it, but I don't see how having a reasonable minimum wage is a bad thing. I think your analysis of the effects of the minimum wage is too simplistic, applies only to your theoretical economic fantasy world and is focused on the short term and fails to account for the complexity of human behaviour and the real world long term effects.

Now, back to the topic of harvesting livers...

Ward writes:

It seems to me that the part of the discussion on how min wage's effects are seen "at the margin" is really the crux of the problem. Politicians always promise change across the board not at the margin so somebody who could be hurt by higher min wage will still vote for the candidate promising it. Nobody sees himself as existing at the margin. Seems like a behavioral economics problem. Maybe Cass Sunstein should think about that before he saves my deer and steals my liver.

Gary writes:

McJob, the funny thing is that the McDonald's restaurants in Australia serve a much higher quality product than the McDonald's restaurants in America. The burgers are bigger, the meat is superior, and the interiors of the restaurants are often nicer.

The arguments Mike and Russ were making depended on holding other things equal and looking at marginal effects. Comparing Australian and American McDonald's restaurants won't get you there.

christoph writes:

I'd like to know if someone knows more resources about the allocation of organs in the different systems. The "transcript" above states that it is legally impossible to obtain a liver transplantation in the UK and in Germany. They sure do liver transplantations in both countries but as Mike Munger said, the numbers are so few that it basically amounts to a lottery.

The OPTN (http://optn.transplant.hrsa.gov/latestData/rptData.asp) website states that a lot more transplantations are done in the U.S. Still there are waiting lists. So is the difference that fundamental or is the US just running a better lottery with higher chances for their customers?

Are there any examples of legal organ markets somewhere in the world?

Mads Lindstrøm writes:

Gary writes:

"Maybe I just don't get it, but I don't see how having a reasonable minimum wage is a bad thing. I think your analysis of the effects of the minimum wage is too simplistic, applies only to your theoretical economic fantasy world and is focused on the short term and fails to account for the complexity of human behaviour and the real world long term effects."

Maybe Russ and Mike exaggerates a little. But you must admit that, everything else being equal, the cost of treating employees poorly are smaller if you have easy access to new employees. You have easier access to new employees with higher minimum wages. Thus it also seems likely that more people will treat people poorly with high minimum wages, than with low minimum wages.

I realize that you may also see my argument as "too simplistic". But then say why the effect I am describing is wrong. Or maybe you agree, but thinks other effects are much more important. Then describe those. You argument above is so general that nobody can really debate you. Be specific.

Gary writes:

"And then countries like Norway, Denmark, and Sweden don't have actual minimum wage laws as far as I know but wages are collectively bargained at a national level ..."

Being Danish, I can verify that is true, at least for Denmark. In theory you could start a company outside the bargaining system, but in practice it is very difficult.

Gary writes:

"Then you have many developing countries that don't have minimum wage laws. I think these countries are more likely to have sweatshops and to abuse their workers."

But what are the cause and what the effect here?

Gary writes:

Mads Lindstrøm, I didn't say any of those things.

I was the one making the point that McDonald's is a lot more diverse across regions than it often gets credit for. They adapt to every market they enter.

Mads Lindstrøm writes:

Gary writes:

"Maybe I just don't get it, but I don't see how having a reasonable minimum wage is a bad thing. ..."

In my own country Denmark, minimum wages, keeps some groups permanently on well-fare. And the longer you are unemployed, the harder it gets to land a new job. Some of the currently permanently unemployed might one day be able to earn a very good living, but they need to start somewhere. If they do not get the chance with a low paying job, they will keep being on well-fare, and thus never achieve their full potential.

It is very unhealthy for individuals and society to have people permanently unemployed. They start feeling as outcasts and are thus more likely (than the average citizen) to become criminals (thats my theory at least, but they are statistically more likely to break the law).

Society also misses on the valuable work the unemployed could have done. It is lost resource, which we do not get back.

Gary, I can fully understand you desire, that nobody should live under a certain minimum. But I think there is better solutions than minimum wage. Or at least I think minimum wage should be a last resort.

Mads Lindstrøm writes:

Sorry Gary. Sorry for both times. I meant McJob.

Ted writes:

While I agree that we as a society cannot afford, as Prof. Munger stated, to bring the infant mortality rate down to zero, I would be interested in your thoughts as to how this logic plays out in your discussion of the rationing of liver transplants.

I assume that both the U.K. and Germany have public health insurance, and that the reason that liver transfers are so few is that there is a limited pool of resources to provide health care for their respective citizens, necessitating some agency to decide which procedures are the most beneficial, according to some derived algorithm of human wellness. I assume that this algorithm places more value in common, everyday treatments and checkups than on hugely exspensive procedures, and allocates resources accordingly.

Now I understand that it is probably much more efficient to allow "the market" to "decide" which procedures are cost prohibitive and which are effective, thus allowing proper signalling to channel necessary resources and growth into needed sectors; however, I also sympathize with the notion that basic health care should be available to all of our nation's citizens. The current debate treats this matter as a zero sum game. Single payer plans may lead to the loss of great (though exspensive and thus already limited)medical treatments and also efficiency in health care growth, but it would also empower millions with new access to sustained, basic medical care. So which does our society care about more? Is this even the right question? Is there a way to preserve proper signalling and great care, while also providing basic universal health services?

We are aghast at the true costs of bringing the infant mortality rate to zero, but what are the true costs of allowing a system in which liver transplants are plentifully available to the few well enough insured, and on the flip-side, what is the true cost of dedicating so much taxed income to a new government entitlement program?

Damian writes:

@Bill - your question about broadband in rural areas is interesting. It reminds me of water projects built in CA by the US Bureau of Reclamation. Frequently, the USBR would build the projects first, and contract for the water after it was built. Because the vast majority of the cost of capital intensive water projects was sunk, the Bureau and the farmers were essentially bargaining over repayment of the variable costs, and we (the general taxpayer) got stuck with the rest of the bill for the dam, canal, etc.

It could be that broadband companies recognize that if they built the infrastructure, they could not sustain a high enough price without consumers deciding not to pay their bills, and at the margin (after construction), the companies only need to recover marginal costs and so likely would cave in a bit. They could contract to avoid this somewhat too I suppose, but they may find it difficult to sign contracts for more than a year or two, especially given how fast technology changes.

But perhaps these issues are irrelevant, and charging a high enough price still isn't feasible because satellite internet or some other form of wireless access competes.

Damian writes:

I understand the points made about the min wage in the podcast. In CA, the minimum wage is very high- $8 in CA, $9.79 in San Fran, and perhaps even more interesting, waiters earn the minimum wage too, in addition to tips. I was amazed to learn that because most other states allow waiters to be paid something like $2.54/hr understanding that tips make up (at least) the difference.

But those high levels seem almost trivial compared to the massive union contracts that cripple our government. Public transit employees here in the bay area make obscene amounts of money. BART station agents earn (last I checked) $27/hr. AC Transit bus drivers are closer to $30. Each, of course, also has great health benefits and a fat pension, etc. And of course, BART employees wanted to strike recently because they were asked to give back a little. Turns out managers wanted to be able to stop paying workers overtime when there was no reason to, and to stop paying workers for not working.

With these massive salaries, there are massive waiting lists (3 years just to get an application read?), but in contrast to what you mentioned about exploitation on the job, these workers, once employed, actually must do a pretty bad job before their union lets them get fired. So in this case, it seems like the incentives to work harder and for the employer to skimp in other ways is absent, and getting a job in these agencies is akin to winning a small lottery.

I'd love to hear a podcast describing more of these government-union relationships and how they develop. CA seems to give away such fat contracts, and only rarely do they end up biting the pols that sign them (City of vallejo filing for bankruptcy, Gov Gray Davis getting recalled are two examples). But usually, the taxpayer just gets stuck with higher taxes because costs went up.

Mike Munger writes:

Ted: Those are good questions.

The "cost" of bringing down the infant mortality rate is not money. It is the opportunity cost of the resources that would be dissipated.

Same with liver transplants. I did NOT mean to say that everyone should get liver transplants. Rather, I was going for two much simpler points:

1. Liver transplants might be like Mankiw's "Dorian Gray" pill. Too expensive for everyone, or even most, people to have one. We have to ration everything else; of COURSE we have to ration health care.

2. However, if we allow payments for livers harvested from people killed accidentally, then the cost of liver transplants would fall dramatically. Letting the market work would HELP those who are middle class. The current system is the one that restricts access to health care so that only the very wealthy can get liver transplants.

Damian writes:

Here is a sad/weird video . Perhaps, because we don't allocate the vaccine by price, some are worried that it won't go to those that 'need' it. Is it possible this is a fake video designed to discourage people that don't really need it from getting vaccinated?

Dr. Duru writes:

Another fascinating discussion - I even felt compelled to read ALL the commentary posted here so far.

Anyway, I would have liked to hear you (Munger and Roberts) go through the entire vaccine example from start to finish with no sidetracking. I believe I understand the economic principles involved as stated, but I did not hear a complete examination of the practical implications of a market-driven vaccination program. (Shai in particular had some good comments on this).

For example, I was a bit surprised to read Prof. Roberts suggest (imply?) that a (government?) subsidy might be justified in order to make sure the full public health benefit of vaccines is realized when a critical vaccine becomes too expensive for a wide swath of the population. When firms know the government will subsidize the market, don't they have less incentive to find ways to reduce prices? Or do you assume competition will take care of that? What if the capital costs of R&D and production are extremely high and limit the market to just a few well-capitalized firms?

If subsidies are justifiable here, maybe a mandate that health insurance companies cover vaccination costs would work even better? (Oh wait, not everyone would have health insurance, at least not in today's world! So a government subsidy would act like a mini-universal coverage plan).

Again, I would love to hear the entire market-driven vaccination case presented from beginning to end with more exploration of its implications for public health and the well-being of the population as a whole.

Bill writes:

Damian-

Your description of the Federal water projects seems analogous to what the government is trying to do with the "Broadband stimulus," the $7+ billion that is being allocated to expansion of broadband services. Taxpayers are underwriting infrastructure enhancement, but consumers of the services will pay the operating costs with their subscriptions.

An alternative might have been for some system of increased pricing for subscribers in rural areas that included some amortized cost of the infrastructure. Perhaps the price would drop when the infrastructure was paid for.

I have no objection in principle to the government financing the infrastructure. It just hasn't worked very well. Many rural, and even some urban neighborhoods, are without any broadband service at all.

As far as competition from satellite and others, satellite is at least $70/month, and wireless $60. I pay $80/month for satellite broadband that is inferior to basic $20/month dsl service. So, I would be willing to pay a lot more than $20 for dsl. But, as I said originally, it's either available for $20, or not at all.


Bill

Mike B. writes:

You both called for more analysis of other margins in other disciplines, e.g. case studies in sociology or anthropology in areas where the minimum wage has changed.

I certainly agree with that, but think that those disciplines do a fair amount of such analysis. What often is missed in my opinion is economists stopping on the opposite side: other margins aren't considered when the market is "working" only when the market is "controlled". This ignores that these "margins" (that world of social behavior not mapping onto price alone - rather a lot of stuff) are really still in effect even when the market is working perfectly well. It is never asked to what degree price _does_not_ predict outcomes in a full market economy.

Corruption happens even when markets are working correctly, that is why government gets involved.

So I completely agree with your point that when you control price, you'd expect other margins to become more strongly used. But I require evidence that when price is left free people don't continue to use those other margins.

McJob writes:

Gary:

The problem I have is that empirically, I don't think it is practical to hold the other things equal and look at the marginal effects. For me the arguments apply to a theoretical model but are not really testable in the real world. Trying to predict human behavioural response is problematic, I just didn't like the tone of that part of the conversation, I felt a bit too much arrogance and not enough skepticism.

Mads:

So what is the alternative to minimum wage? I think eliminating minimum wage might create more problems than it solves. I see it as a kind of balancing act, wages that are too low increases the gap between the rich and poor and makes it more difficult for the poor to move up and creates social instability. Wages that are too high causes the company to go out of business. But I'm not confident that the market would set a fair wage because many people do not have full information, and this will make them more likely to be taken advantage of. Maybe not so much in Denmark but more so in America because the average Danish is more educated than the average American...

I think that the extremely rich are more likely to be criminals but the permanent unemployed outcasts are more likely to get caught (for example, Goldman Sachs) The rich make the rules which lets them get away with whatever they want.

Any tips on how I can move to Denmark and be permanently unemployed? That sounds very appealing...

Damien:

Everything is relative and depends on what you are used to and expectations. You say $8 in CA is high, I think it is low. It is difficult to earn a living at that wage. In Australia an entry level job will pay around A$16 per hour + superannuation which is a personal retirement fund at 9% of your earnings (not like the ponzi scheme called social security) plus there are penalties for things like working on Saturday Sunday and Public Holidays. Plus the purchasing power of that $8 that is earned in the US is devaluing quickly because of the collapsing exchange rate.

Shai writes:

As Dr. Duru pointed out, Russ side-stepped the main point of my question.

The recurring premise (article of faith?) of many economists, and libertarian economists in particular, is that markets are smarter than governments. I pointed out that the model with respect to which Russ and Mike were having their discussion of vaccines was highly flawed -- so flawed that I cannot imagine that an optimum is reachable through the market method they propose. Whether vaccines should or should not be subsidized is a minor side-issue.

The main issues are interaction effects in the value of the vaccine -- i.e. "why I selfishly want the neighbour's kids to be vaccinated", and the importance of network structure in the propagation of infection and therefore in the selection of who to vaccinate.

I honestly don't understand how a market could be structured to address these issues through prices. It would be nice if Russ, Mike (or someone else) offered such a suggestion.

Robert writes:

While I enjoyed most of this podcast, I was disappointed to hear Munger describe the UK and Germany as having "single payer systems". In both countries it is legal to buy private health care. I don't know much about the German system, but I know many of us in the UK do choose to have private health insurance rather than rely on the public system.

I would hope economists like Munger and Roberts would be careful to understand public healthcare systems they wish to criticise, particularly at the moment when defending free market healthcare in the US is important. It hurts the cause if even economists sound like they don't understand the government systems they oppose.

Seth writes:

Phenomenal podcast - and I have 36 minutes to go. I like the phrase "moral intuition". I like the construct of "our world or another world" and like attacking the immortality pill question at the premise. Many arguments should be attacked at the premise, but we too often accept the premise and essentially agree to play on their turf and give them home field advantage.

Nathan writes, "But what about the people who are harmed in the meantime?"

The answer isn't "oh that is illegal". The answer is that in "our world" there are always trade-offs, no matter how you try to avoid them.

We recognize that people will be harmed by criminal activity. We hate it.

But, the question is, what's the trade-off? Does the net harm done to these people outweigh the net harm done to society when we aren't able to get a helpful vaccine distributed widely?

Do price controls or a freer market effectively achieve the objective of widely available vaccine and limited criminal activity? While price controls appeal to our "moral intuition" (as mentioned in the podcast), in "our world" they limit the availability of the vaccine and increase the incentive for criminal activity.

Russ Roberts writes:

Shai (and Dr. Duru)

Markets don't produce optimal outcomes. Neither do governments. Real world outcomes are imperfect.

So indicting market solutions as sub-optimal is uninteresting unless you can tell me why I should believe the government would do a better job.

You make the interesting point that individuals deciding whether to get vaccinated are likely to ignore the benefits their vaccination will produce for others in the form of a lower probability of getting the disease. This creates a theoretical case for a subsidy, a lower price than would exist in the free market.

But that is not the same thing as a government that makes it illegal to charge "too much" for a vaccine. Various state attorneys general have done this in situations when there is a shortage. Such restrictions have played a role, perhaps a decisive role in discouraging the pursuit of profit in the production and distributions of vaccines.

Both a subsidy and a price control lower price. The former could be optimal. The latter is not. They are not the same thing.

Shai writes:

Russ,

My use of the term "optimal" was perhaps excessive, and I certainly accept the argument that subsidy and price control set up different incentives, and that with respect to my first point (the benefits of having others vaccinated) a subsidy might be a reasonable market solution.

The greatest argument for highly regulated control of who gets vaccinated when vaccines are scarce is the second argument I presented. The same number of vaccine doses, applied to the individuals most likely to transmit the disease, can stop an outbreak, where vaccination based on wealth might not. How can a market based approach be brought into line with this reality?

It is true that in the longer term, more expensive vaccines mean more money for making vaccines and increased production. However, you were discussing the case of a hypothetical shortage. Are you proposing that allowing an outbreak, simply to let market forces adjust production up, is the best course? Or is there a market friendly way to direct the vaccines to better choices of patient while still reaping the benefits of market pricing driving up production?

Right now, no public official would dare have it on their record that an outbreak occurred because they didn't give doctors the authority to control who gets vaccines -- and those people may not be able to pay a market price.

Russ Roberts writes:

Shai,

If you are worried about an outbreak and you want certain people to get vaccinated, you can subsidize those people. You can give them a price break. You can give them charity. But that is a separate policy from holding the price down artificially.

Yes, a price control makes it more affordable to everyone. Unfortunately, there is less to go around because you've killed the incentive for production.

Randall writes:

Russ,

Your podcast on health care reform and this one on shortages have been exercises in pulling the punch. Let me state my position up-front, the problem with health care is a supply issue supported by the union of doctors and enforced by the federal government.

Simple and obvious - and you should know this, Russ, because Milton Friedman discussed it in “Free to Choose” and laid out the details in “Capitalism and Freedom”.

Professor Munger claimed that the cost of a kidney transplant ran $1.5 MM because of restrictions on organ donations. No! Even though the restrictions reduce the number of organs available, the (monetary) cost is still zip. The problem with these restrictions is that they cause many people to die prematurely because of an unnecessary shortage of organs. The restrictions do not increase the monetary cost. If you got a breakdown of materials and services on the bill, the kidney cost would still be zero. The cost is in the clip-clip, sew-sew and follow-up treatment. The cost is in the service. And the service cost is high because of the medieval guild system of medical care (Capitalism and Freedom, UCP, 2002, p 150) that our government enforces.

Russ, your hesitation about the motives of your pediatrician, Dr. Kindly, put me in apoplexy. What was going on? Maybe Smith was in your head but your mouth was blithering something about average costs. Do you have the Stockholm Syndrome? Come-on, remember why the butcher does his job – well the same goes for Dr. Kindly. Only she is part of an organization that pledges to train no one other than their offspring and restrict medical school enrollments in order to keep the prices for their services high. This is done, so the organization claims, to prevent medical doctors from being susceptible to corruption. (How’s that working?) Professor Friedman discusses this, and I thought you were aware of it.

I am going long here so I will cut-off. But many I believe that of our societal and international problems would be resolved by a dismantling of this government enforced union monopoly on medical services.

Milli Pritchett writes:

Russ and Mike,
I am a pregnant woman in Salt Lake City, Utah. This weekend our health department had a mass H1N1 flu shot clinic, with 7,000 shots to give out, in 4 clinics. It started at 7am. I knew my chances were pretty small when I saw the night before people were already lined up. When I got there at 7am, I wasn't hopeful, seeing what looked like 4,000 people lined up. I went and stood at the back of the line and started to wait. After about twenty minutes one of the Health department people came up to our group and said there was no point in waiting as they would run out of the vaccine about 1,000 people ahead of me. Some people started arguing with the guy, I just left. (I later on learned that 45,000 people lined up outside one of the clinics).
One of the main concerns and problems in this to me was that it was free. It seems to me that had they charged at least 20 dollars a person, half those people maybe would not have even been there. There are people that aren't in the high risk groups getting the shots, just because they are free. I thought about it, and I would have paid and still would pay about 200 dollars for the shot. Maybe, next time I will think ahead and offer that amount to someone in line ahead of me...

Eric writes:

Grand Slam Podcast!!! Podcast batting average .406

Listening fairly regularly for about a year. First time visiting the comment section.

Where’s the coffee!?!? :-)

Mike Munger writes:

Milli: I'm sorry you had to do that. And I hope your baby is well and strong.

Now, I can see why they want to give the vaccine away, because they want everyone to have it. But. there. is. not. enough. And they ration by arbitrary means (who got in line first, not who is pregnant and actually needs the vaccine).

Eric: I think you may have had enough coffee, already. Anyone with that much punctuation, and emoticons, tends to be pretty big on triple espressos. But we are VERY glad to have you here on the Russ and Mike show!

Russ Roberts writes:

Milli,

I checked into your story and found this video: http://www.youtube.com/watch?v=rpr2Ku9mYn8

Also spoke with the Salt Lake Valley Health Department. Pregnant women were one of five groups that were supposed to get priority and receive the vaccine on Saturday:

* Pregnant women
* Those who live with or care for children younger than 6 months of age,
* Health care and emergency services personnel with direct patient contact,
* People between the ages of 6 months and 24 years,
* People ages 25 through 64 years with chronic health disorders such as asthma, chronic obstructive pulmonary disease (COPD), diabetes, chronic cardiovascular disease and those with compromised immune systems.

People who lined up had to fill out a form vouching for their status in these groups. But it was on the "honor system." No one had to prove they were pregnant or asthmatic or worked with infants.

So either there were too many priority people or too many people who claimed priority.

Maybe, just maybe, it would have been better to charge something instead of giving it away.

BTW, it was a CDC program administered locally.

Bogwood writes:

My main problem with pricing is the short term/long term question. There are disappearing resources (peak everything) which will disappear regardless of price. Price should be signaling a transition into substitution but the substitution takes decades. We are programmed for the short term, very little long term element in the price. At a higher price, vaccines and organs would be available quickly. Glaciers supplying the fresh water will never come back at any price.

Charlie writes:

It seemed missed in the podcast that competition on margins other than wage actually erodes the dead weight loss and social cost of the minimum wage. If competition across those margins were perfect or near perfect, minimum wages would be close to costless. It seemed from the podcast that Russ was drawing more concern about the minimum wage from competition on other margins, but, in fact, it should give him cause to worry much less about the destructive aspects of minimum wage laws.

Mike Munger writes:

Charlie, you may be right.

But one of the problems of rent-seeking is that the rent is not transferred, but dissipated.

So, a job with a wage rate (say) two dollars/hour over the market wage for a person of that skill level. Both the worker and the employer would prefer the market wage, and decent treatment. But b/c of min wage, you get the following effects:

1. Reduced overall employment
2. Those lucky enough to find work are abused, and afraid
3. Employers face deadweignt losses from overpaying low skill workers.

NO ONE, no one, is benefitted, and everyone would be better off without the minimum wage.

Now, if you are right (and you could be, if competition on other margins has zero transactions cost), then the only effect is #1 above. The workers are paid the right amount, but have to work extra hard to keep the job. And the employer gets extra effort out of the worker, just to the point where the minimum wage is justified. I'm just not sure that the "other margin" competition is this costless. Russ and I both think that much of the "other margin" competition comes in the form of abuse and rent-dissipation (you have to kiss the boss's .... um... shoe, to keep the job).

Ben Kriechel writes:

I am a little disappointed not to see any reaction on the questions and comments on the liver transplants. England and Germany obviously do liver transplants. And yes, the relation of demand to supply in those countries -- as in all other countries -- for (liver) transplants shows heavy signs of undersupply.

Why this is called a lottery in Germany and / or England but not in the U.S. is unclear to me. As far as I know transplants are granted according to the match of the transplant with the patients need and compatibility. Next to that the issue of costs can kick in. Here the market comes into play in the U.S., less so in Germany and the U.K. So maybe that is why there is no problem in the U.S.: there are so few liver patients with sufficient coverage that there is no undersupply of livers? For Germany the case is known to me: regardless of your insurance you can have a liver transplant. I.e. whether you have a (more expensive) private insurance or are part of the public insurance, both pay for the cost of the transplantation.

Coming back to the undersupply of liver or other organs: the question is how we can improve that situation? Maybe the or better a market would help; but as far as I know there is no (legal) market for organs. Here is where we should have the discussion going how we can use incentives / markets to improve the situation on the supply side.

Tony G writes:

A stunning confirmation of an aspect of this podcast: I posed the question to my political economy class of whether a pharmaceutical firm should be allowed to make profits on vaccines. This was after they had read about patents and copyright laws and the incentives that are created by them (or in the absence of them). The students understood that by limiting the profits, or by prohibiting patents on drugs, there would be little incentive to invest in research or development of new drugs.

Nonetheless, a fair number of students still argued that it is wrong for pharmaceutical companies to make a profit on drugs or vaccines because it is really important to society to have these things. I then asked them whether rock stars, MLB players (Holliday excluded) and other entertainment figures should be prohibited from the high rents they make on their unique skills. Amazingly, the same students said that it was no problem that they received a lot of money for their activities because what they do is not as important for society.

To summarize: Several of my students argue that if some activity is deemed very important to society nobody should profit from it. However, if the activity is frivolous, it is more than acceptable for people to reap big gains.

(We did not discuss how people determined what is "important" to society and what is "frivolous.")

Thomas writes:

Russ, Mike,

Thanks for another really good discussion.

I think I understand your arguments. Perhaps you would like to step out of your comfortable theoretical environment and lock horns in a real world debate. This is not intended as a bluff.

You might be aware of the recently released Nimrod Review:

http://www.official-documents.gov.uk/document/hc0809/hc10/1025/1025.pdf

which outlines the (complex) circumstances surrounding the deaths of 14 UK service men a few years ago - an 'avoidable incident'.

Would you suggest to these people's families that they shouldn't fuss so much? Was it their fault for choosing such a dangerous job? Would you support the creation of the markets which now exist in the military sphere and the work they have done to build these planes?

If you are saying there is a value to be placed on a life, do you have hyperlinks to show how such calculations are created? I presume you have quantified your bold assertions.

How would you put a price on your own children? Presumably you would not; I know I wouldn't. My point is simply that there are some things which are non-transferable and which have to be absolute. Without this, life is merely trade offs.

Correct the quote where it is wrong: "we must not think with the same mind about society as a whole as we do about the family in which we live". So how do we define the boundary between family and society - please talk about this; you have been conveniently quiet about it. It's a self-fulling prophesy to believe you cannot change the world in which you live.

Markets are amoral, families, good ones, are moral; talk about the difference and the transition between the two. Margaret Thatcher said "there is no such thing as society, only families and individuals" - is this what you think?

And if you still 'feel right' in your assertions, perhaps you should think a little harder. If this is what an economist is, then for the 1st time, perhaps I don't want to be one.

Seriously, what's the calculation for the valuation of a life (it's a question I have asked myself before)? Do you really believe what you have said?

How much would you pay to save your own life? How much to save the life of a loved one?

Tough questions :) (always the most illuminating)

Keep up the good work, and thanks again for all the great podcasts.

Russ Roberts writes:

Thomas,

I have talked a few times over the last few years about the differences between families and strangers. See the podcast with Zelizer: http://www.econtalk.org/archives/2007/02/viviana_zelizer.html which has some of that.

But I don't understand how your critique of economics or the challenge of putting a monetary value on life (or the offensiveness of such a calculation) changes anything. Public policy--the legal environment, basically, has made it hard to make a profit developing, producing, and selling vaccines. You see the result all over the country. Something people desperately want can't be had. So we have the wonderful world of free vaccines and the horrible world where there is very little vaccine available.

Even if you're a fan of society (whatever you happen to mean by that), how does it help society to have so little of something that is so precious? We'd all like a world where the most important stuff is plentiful and cheap. That, by the way, is the world of food. That world is distorted by government subsidies, but much of it is essentially market transactions for something that sustains life. And it works beautifully.

Free vaccines, paid for by the government works very poorly.

Epzen writes:

I'm a great fan of the podcast and I am generally a supporter of policies that are based on concepts of supply and demand.

However, Prof Munger needs to do more research before he starts using healthcare examples to justify his position.

I am a Canadian physician who has worked in intensive care and emergency medicine for the last 18 years. I have never seen a patient in Canada's publicly funded health care system refused a liver transplant for monetary reasons. I have no doubt that that is also the case in the UK. The rate limiting factor in organ donation is the number of people willing to donate and it is not a matter of financing within the public system. His concepts of offering payment for organs was interesting and practicable although disturbing.

In the 18 years that I have worked within the Canadian system, I have never seen a patient with an immediate life-threatening illness not get treated with the very best of care for financial reasons (cancer care could be improved but the care is still very good). I'm sure there are isolated examples that people can site as any human process is not perfect, however, the system generally provides outstanding care to anyone with a life-threatening illness. This is reflected in Canada's lower infant mortality and longer lifespan as compared to the United States. The system does however fail miserably in providing timely service to people who do not have life threatening illnesses as seen by our long waits for joint replacements.

In regards to vaccines the current shortage of swine flu vaccine has more to do with an underestimation of how fast the swine flu virus grows in eggs. As a result, our own system has made a decision to first immunize those people who are most likely to die from swine flu as well as health care workers. Eventually, there will be enough vaccine available for anyone who wants it. I don't see any evidence that a fully private system would have been able to change the situation as even a private system would not have anticipated the slow growth of the virus in eggs. Morally, I think giving the vaccine to those most in need is appropriate and supply and demand would not have resulted in a more equitable distribution nor would it have done so any faster.

Mike Munger writes:

We seem to be talking a bit at cross purposes.

For Dr. Epzen: Listen to yourself. Saying "cost has nothing to do with it" and then "there aren't enough donors." The only reason there aren't enough donors is that we don't pay them. Now, one can object that it is WRONG to pay, and that may be right. But I was not making a point any more complex than that the supply of organs is far too low because we insist that they be free.

As for vaccines, it is just true that many firms have left the industry. Consider:
http://www.john-goodman-blog.com/vaccine-%E2%80%9Cpublic-option-plan%E2%80%9D-has-produced-shortages-of-vaccines/

http://www.marginalrevolution.com/marginalrevolution/2004/10/vaccines_the_sh.html

larger historical overview http://www.medscape.com/viewarticle/504779

I know that I could not see firms that are not there, and neither can you. But the fact is that "firms that are not there" is the reason for the shortage. And the firms are not there because they can't make a profit.

Thomas: One of us has this backwards. I would NEVER say that I have some insight into the proper price for a human life. In fact, I don't know what is the proper price for an orange!

What I do know how to do is infer the de facto price that has been placed on a human life, ex post. That is, I can tell you how much a person values his/her OWN life, or (in your example) how much a government values the human beings in the military. A famous, but now dated. review article was this: "The value of human life: a review of the models." J Linnerooth - Economic Inquiry, 1979.

Do you want to know what the "value" of your life is, in purely economic/earning power terms is? Right here: http://www.calculatorplus.com/insurance/human_life.html (I'm worth about 3 million, assuming no inflation)

You could do this for endangered species also, as Don Coursey showed. http://www.econlib.org/library/Columns/Courseyvalue.html

The point is that economists are TERRIBLE at saying what values should be. We have NO CLUE. We can tell you, though, that if you choose a certain car seat, and not a more expensive one, for your child, that you are valuing (given the probability of a crash) your child's life at a certain level X. And if we calculate the average of all the X's, we get a measure of the overall value of a child's life, in the (implied) view of the population.

So, for the "avoidable incident," I would say that the government undervalued those lives, given the actual value of those young people. I literally cannot imagine what you mean by saying, "those people should not fuss so much." The only reason they HAVE to fuss is that sovereign immunity protects the government from the obviously justified wrongful death tort suit. Government is FAR more likely to do this kind of damage, because the state is immune from suit. If this had been a commercial airliner, then the families would have gotten paid. In fact, in a market setting, there WOULD be a remedy. The only problem is that here the government has decided to pass a law sheltering itself from liability.

As for selling my children, no. But I am rich. Suppose I had three children, all starving, and someone offered me $100,000 for the oldest child, a girl. And suppose I know for sure that she is going to sold into prostitution, if I do this?

That whole scenario is an ETHICAL question, not an economics question. The dilemma faced by the father, a three way "Sophie's Choice," is entirely outside the bounds of voluntary exchange. Not surprisingly, economics has nothing to say about it.

You are attempting a rather clumsy reductio ad absurdum, going from my claim (most things do have implied costs, inferred from observable behavior) to your conclusion (everything SHOULD have a price attached, and we can precisely value extreme ethical situations). And then you claim that since I reject the second claim then the first one must be false. Nonsense. The two claims are simply unrelated.

Phillip writes:

min 37:31

This digression really got me thinking. Recently, we have heard that the economy may be turning around. Annualized GDP growth is up 3.5%, Ford posted a near $1 Billion profit this past quarter, manufacturing output is up, existing home sales are up, and I think I heard durable goods orders are up, as well. Someone should check the Baltic dry index (of course, many of these economic up tics are due to various stimulus policies that will result in some level of inflation and may cause an even deeper recession in the coming years). Despite these indicators, unemployment remains high and is predicted to increase before it subsides.

I have heard unemployment is a lagging indicator, which I don't really buy. Job growth turned downward in the Fall of 2007 just before the Dow hit 14000. My point is, I would like to see a study that isolated the recent increase in the federal minimum wage as well as the extension of federally funded state-unemployment benefits. It would seem that these two federal policies restrict employment opportunity on the front end and encourage continued unemployment on the back end. How would such a study be conducted? Any thoughts?

Thomas writes:

Mike,

All I want to do is to draw attention to your comment "An economist is someone who believes as a matter of moral good that the infant mortality rate should be positive--some children when born should die because it is too expensive in terms of the opportunity costs to keep them all alive".

I agree with you that this is a true statement, today. However, as often stated on the show economics is not about static situations, it is about, largely, technological innovations over time (. . . "and then what") which radically change our living environment.

In my view, it would be far better to amend the definition of an economist to more fully recognise future scenarios (ie where the costs of zero infant mortality approach and may eventually reach zero cost). The defintion at the moment as you stated it is only looking at today's technology and costs.

I don't know if you think this is too pedantic on my behalf! If not, I'd be impressed if you could come up with a better definition. Here's my best effort "An economist is someone who believes as a matter of moral good that the infant mortality rate should be positive--some children when born should die because it is too expensive in terms of the opportunity costs to keep them all alive, at the moment, but works to explain better how resources should be allocated in society so that, over time, technology may advance, costs of health care may fall and infant mortality might become a thing of the past".

Having experienced the pain of friednds who have lost a young child, I think this is a more palletable definition. Perhaps you haven't. You need to recognise that your statement is deliberately emotive. A focus on how things might become is more useful than "life's nasty brutish and short" and, implied, it always will be.

Perhaps I'm being too picky, but a focus on how we make the future better has always been at the core of economics for me, so I think any definition of an economist needs to be too?

Epzen writes:

I don't buy your arguments Mike. The reason there are not more organ donations are twofold. First some medical centers are not as aggressive as others in asking families to donate. The other factor is families are not comfortable with it based on their personal values.

I think it is a minority of the population that would go against their values on such an issue for monetary reasons. I could be wrong but you're going to have a hard time convincing me otherwise. I feel your pain because sometimes people don't follow my medical advice:).

I have no doubt that some medical centers would be more aggressive in asking for organ donation if more money came their way. So from that angle I would agree a market in organs would increase supply although I don't think you would be able to convince the medical profession that it was appropriate (which I know you are not arguing markets always makes good ethics).

This vaccine shortage is a mystery for me as I have never seen it as neither myself nor my family has ever had a problem getting a vaccine. We walk into our public health office and get them. Free of charge and have a nice day. The exception of course is the swine flu which has nothing to do with the number of vaccines ordered but with the unsuspected slow growth rate of the virus (although it wouldn't surprise me if we find out someday that someone was on holidays when it was time to order them).

I'll keep listening to EconTalk and who knows maybe you'll be preaching to the choir someday.
And as much as I disagreed with you, I did enjoy the podcast.

Russ Roberts writes:

Epzen,

A couple of thoughts. It sounds like you're a doctor. I'm sure there are many things about your job that you like and get great satisfaction from. If your salary were to fall by 10%, you'd probably stay in medicine. But how about 50%? Or 90%? Would that make a difference. I suspect it would. So the point about the donating of organs is that maybe it would take a large amount of money to get a lot of people to donate. That doesn't change the argument.

On the swine flu vaccine, I don't think the physical time necessary to grow the vaccine has much to do with it. For example, I was told tonight by a nurse that the mist version of the vaccine can grow very quickly but there just aren't enough of the misters, the delivery system that gets it into your nose. Do you think that shortage would persist if there were a market for vaccines instead of the government being the main buyer and seller (or give awayer.)?

Epzen writes:

In talking to families about the end of life issues, I get the sense that these values are deeply ingrained in the human soul. I'm not so sure money would change the matter. It might for some people but for most it would not.

Mike mentioned the example of selling one's daughter into prostitution for money. No amount of money and no circumstance would ever allow me to do that. That would be the case for most people. End of life issues are in the same category as the feelings we have for our children. Certainly, there are warped individuals out there but the vast majority of humans have deeply ingrained core values to which markets would have minimal effects.

Markets are powerful and often the best solution. However, I still don't buy the argument they are always the best solution.

Government does many great things. I have excellent roads. My water supply is cheap and of high quality and it is entirely government supplied (although perhaps I would be more intelligent and better looking if my water supply didn't come from the government).

However, that is not to say that I didn't agree with much of what was said in the podcast. My original posting was more in frustration with the public health examples. It perhaps was more like an argument in marriage where you think you are arguing about one thing but you are really arguing about something else. Now I will stop beating this to death and let you or Mike have the last word. Many thanks to you and Mike for an interesting podcast and discussion.

Epzen writes:

I know I promised to stop beating this to death but a thought occurred to me which I'm wondering if Russ or Mike would comment on. I'd be interested to know how they would see the situation from an economists point of view.

Markets don't remove shortages, they merely provide a relatively efficient method of distributing a scarce resource. People decide for themselves whether they wish to commit their own scarce resources (e.g. money) to a particular area and sometimes they just don't have the resources to purchase a desired object (e.g. not everyone can afford to buy a Porsche).

In regards to vaccines, suppose we were dealing with a deadlier virus like smallpox with a mortality of 30% but could even reach as high as 50-60%. To prevent the spread of such a disease it would be necessary to rapidly and quickly vaccinate as many people as possible. The swine flu has provided a depressing example of how we might fair. In any case, would it be your position that the market would be the best way to allocate the resource? If you were the President of the United States would you tell the CDC to rely on the market knowing some of the population could not afford the vaccine (and would therefore die) or would you choose a non-market allocation (e.g. hitting the entire population where the virus is currently the most active knowing some people in less active areas who could afford the vaccine might die)?

Chris writes:

Prof Roberts and Munger,

Are there studies evaluating response to unexpected events by regulated and un/less regulated firms?

I am interested in the time dimension. Higher prices encourage more production. Do the possibility of higher future prices from and event incentivize firms to be more prepared for a massive increase in demand for their products? Is this recognized by many?

I think some believe the sequence of events is:
1st: Unexpected event occurs
2nd: Firms respond by attempting to maximize profits (adding emphasis on how evil they are)

This misses the time before unexpected event occurs. Firms decide production capabilities accounting for the possibility of demand shocks. Restricting the price they can charge will limit their ability to profit from a positive demand shock and will provide less incentive for investment.

Russ Roberts writes:

Epzen,

It is easy to confuse a shortage (people want more of something than there is available) with a small quantity. In the current situation, we have both. The artificially low prices the government has imposed on both suppliers and consumers means that there is not much available AND people want more of it than is available.

When there is a fixed amount of something, letting prices adjust merely allocates the good to those willing to pay the most. There are pluses and minuses to that. But the real issue (and this gets to Chris's comment) is the incentives for the future. We might be upset that some people can afford something in short supply while others cannot afford it. But if we always stop prices from working in those situations, we create the seeds of future shortages.

In a modern economy, where supply chains are relatively dynamic, price increases can be relatively small in the face of crises because suppliers can move product around very quickly and large price increases are not always necessary to compensate suppliers for stocking inventory and so on.

But the bottom line for me in the current mess is straightforward. The government has removed the profit mechanism from the vaccine business. The result is chronic shortages and a product that is in short supply. This is not a good outcome.

Michael writes:

Just to correct Steve Hemmingway above...

Re: Even though the NHS has, to a very close approximation, monopsony power in setting wage rates for medical staff in the UK, you might be surprised to discover that in UK general practitioners are now amongst the most highly paid in the world (around USD 700K pa).

Indeed, that is very surprising, but false. A figure from 2007 puts the average GP salary at £118k. It is true that they have increased significantly over the last few years thanks to inflationary investment and a change to payment methods (far from being paid just for registering payments their payments are also based on many factors de jour, such as performing diabetes checks etc.).

Anyway, one thing that really amazes me as an Economics graduate and proponent of the free market - that the NHS performs as well as it does. By % of GDP and many performance measures it holds up surprisingly well; although that isn't to say there aren't problems.

Having a system available to all and 'free' at the point of use does have a real external benefit that shouldn't be forgotten.

It also looks like we are heading back towards a system of 'fundholding' where the money follows patients and a GP could refer a patient to any specialist they wanted rather than only having the local unit as a choice (a system Labour foolishly removed in 1997).

The NHS is far from perfect but private healthcare is available and they do at least make good use of CBA via NICE (National Institute of Clinical Excellence).

Stephen writes:

600 liver transplants in the UK on the National Health Service per year - http://www.nhs.uk/conditions/liver-transplant/Pages/Introduction.aspx.

In the US in 2005 it seems like there were 6500 - http://www.liverfoundation.org/education/info/transplant/.

The main issue in both countries seems to be the number of donated livers, much more than the cost of the operation.

To be honest I have always enjoyed listening to EconTalk as the participants tend to be measured in their statements, but disappointingly as soon as healthcare is the topic wild and unsubstantiated statements are made that would be more at home on talk radio....

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