Supply Side Restrictions in Healthcare

John Cochrane highlights how “certificate of need” regulations place supply-side constraints on the healthcare market. 

Externalities vs. Transaction Costs

After listening to Terry Anderson on Russ Roberts’ Econtalk this week, I am reminded of an important distinction between externalities and transaction costs. Too often it seems that the term ‘externality’ is used on its own to describe a situation in which an efficient outcome cannot be reached because multiple parties are impacted by a particular action. What ‘externality’ really means in this context is that transaction costs are too high to reach private solutions that internalize the cost of the externality. Importantly, the presence of an externality is not the problem itself. The problem is that impacted stakeholders cannot reach a coordinated solution on their own (often due to an inability to negotiate) and, as a result, an efficient allocation of resources occurs. This difference between ‘externality’ and ‘transaction costs’ underlies the Coase theorem and should be remembered when diagnosing problems that require regulatory solutions. It is not enough to say that an externality exists and, therefore, some type of intervention is required.

Smart House Devices and the Insurance Industry

Forbes profiles SmartThings

“SmartThings, the firm he founded a year after the Colorado trip, is now doing a brisk business selling a $100 hardware hub with a smartphone app and cloud service that connects thousands of gadgets. It also sells more expensive kits crammed with third-party sensors and devices for home security, temperature control and water detection.”

Just as cars have sensors that activate upon certain malfunctions, SmartThings provides the opportunity for your home to give warning signals in order to mitigate damage. The cost of insurance is integrally connected to the expected cost of damage. In a world where catastrophic damages can be limited through either warning signals or automated responses, the cost of insurance should fall accordingly. It may not be long before home insurance companies begin to offer cheaper coverage bundled with smart home system installations. 

Cash for Clunkers Auto Industry Impact

NBER: Mark Hoekstra, Steven Puller, Jeremy West argue that Cash for Clunkers was a net negative on the auto industry due to countervailing policy goals of the program. 

“Cash for Clunkers was a 2009 economic stimulus program aimed at increasing new vehicle spending by subsidizing the replacement of older vehicles. Using a regression discontinuity design, we show the increase in sales during the two month program was completely offset during the following seven to nine months, consistent with previous research. However, we also find the program’s fuel efficiency restrictions induced households to purchase more fuel efficient but less expensive vehicles, thereby reducing industry revenues by three billion dollars over the entire nine to eleven month period. This highlights the conflict between the stimulus and environmental objectives of the policy.”


Corporations as Board Members

Stephen Bainbridge and Todd Henderson in the Stanford Law Review

Edmund Phelps on Inequality

FT: Corporatism versus Capitalism

Ryan Anti-Poverty Reform Plan

Yuval Levin discusses

Ezra Kelin

And Tyler Cowen

Ryan proposes a broad set of reforms including an expansion of the EITC and the creation of “opportunity block grants”. The central theme of the plan is reducing poverty through incentive-based aid delivery mechanisms instead of rigid command-and-control programs. There is a mix of reactions to the plan overall but the plan importantly moves the conversation away from the cost of anti-poverty efforts to the structure and benefits of alternative aid models. 

It’s Consumption Not Income

Scott Sumner argues that consumption is a much more reflective variable than income when evaluating the level of economic inequality in society. Accordingly, a progressive consumption tax is more effective than income tax as a response if the goal is to limit inequality.

A progressive consumption tax is somewhat difficult to imagine, however, as standard consumption taxes are regressive in theory. I am not sure exactly what Sumner has in mind for a progressive consumption tax but one such scheme was explored by economist David Bradford. His idea was to tax a business’ cash flow at a flat rate and wages at a progressive rate (X Tax). In doing so, the non- distortionary benefits associated with a consumption tax or VAT are preserved.





NCAA Antitrust Hearing Underway

Antitrust Today Recap

“[P]laintiffs’ economist Roger Noll, a professor emeritus at Stanford University, developed the framework for plaintiffs’ rule of reason antitrust case.

Noll characterized the NCAA as a cartel that implements a price-fixing agreement among its member schools, and harms competition in two markets: (1) the higher education services market in which schools compete for the best athletic prospects; and (2) the sub-market of the collegiate licensing market, in which broadcasters and video game developers compete for licenses to make commercial use of athlete’s names, likenesses, and images.”

Ongoing debate on Lucas and Sargent’s 1979 Keynesian piece

Simon Wren Lewis: Rereading Lucas and Sargent

Krugman: Stagflation

John Cochrane: Revisiting Lucas and Sargent

Robert Waldmann

Mark Thoma


Get every new post delivered to your Inbox.