Applications of Economic Principles in the News (2nd Edition)

The newspapers and news magazines are full of stories about economics. This page includes stories involving real-world applications of the principles of economics that we studied with experiments. Seeing the way that economic ideas appear in the news brings the theories to life. Learning even a little bit of economic theory helps to make the news more comprehensible and interesting.

Part I: Competitive Markets

Experiment 1: Supply and Demand

Nice Looking Genes? - Selling Fashion Models' Eggs Online Raises Ethics Issues (NYTimes, 23 October, 1999).: To the horror and disgust of mainstream infertility groups, a longtime fashion photographer has begun offering up models as egg donors to the highest bidders, auctioning their ova via the Internet to would-be parents willing to pay up to $150,000 in hopes of having a beautiful child.
Market Madness? - Profit-making companies are invading areas once thought the exclusive preserve of government. (WSJ, 5/14/98).: Roughly one in 20 federal inmates is now in a for-profit prison, and more than one in eight community-hospital beds is in an investor-owned hospital. Deregulation is shaking up once-drowsy industries like electric utilities, prompting a frantic scramble for dominance. Skilled people in endeavors from singing to software find that, like baseball's free agents, they can command once-unimaginable salaries if they exploit the market.
Water, Water, Everywhere - America's New Drink? Water---Just Water (NYTimes, 1/20/98).: This is water, just water---no sparkle, no fizz, no flavoring, and no guarantee that it's greatly different from what comes out of your tap.
Pay in the NBA - Star's Salaries: Swish! A Run of Huge Contracts Gives the Top Players a Taller Portion of the N.B.A.'s ever Richer Revenues (Time, 7/29/96).: Supply and demand in a market with few substitutes.

Experiment 2: Shifting Supply and Demand

Running on Empty - Fuming over Gas Prices (Time, 5/13/96).: What caused the rapid rise in gas prices in early 1996?
Farm Prices One and Two -Grain Futures Fall After Harvest Estimates (WSJ and NYTimes, September and October, 1996 summary).: Two articles, published one month apart, discuss the effects on the prices of farm commodities of updated government crop forecasts.
Something Fishy - Fishermen in Alaska, Awash in Salmon, Strive to Stay Afloat (WSJ, 9/4/96 summary).: When is the fishing too good?
A Big Thaw in the Orange Supply - Orange and Grapefruit Crop Should Set Record in Florida (New York Times, 12/25/1996 summary).: Seven years after a two-day freeze over the Christmas weekend devastated the Florida citrus crop, growers in the state are expecting their biggest crop ever.
Is this called gouging?--Energy Cost Study Critical of Public Agencies Too (Los Angeles Times, April 11, 2001)

Part II: Market Intervention and Public Policy

"President Clinton's proposed tax breaks to help the middle class pay college tuition may result in little savings to families but a windfall to schools. Critics fear that universities will simply use this as an excuse to raise tuition.; Political Gas Over Gas Tax -Is G.W. Bush better at economics than he is at geography? Economist and columnist Paul Krugman evidently thinks not. (New York Times, 3/15/00) According to Krugman:; "Teachers of economics cherish bad policies. For example, if New York ever ends rent control, we will lose a prime example of what happens when you try to defy the law of supply and demand. And so we should always be thankful when an important politician makes a really bad policy proposal Last week George W. Bush graciously obliged, by advocating a reduction in gasoline taxes to offset the current spike in prices."

Experiment 4: Prohibition

Police Corruption in the Mexican Drug War - Good Guys Gone Bad? A Mexican Anti-narcotics Agent Claims Senior Government Officials are Involved in a Corrupt Sham (Time, 8/12/96).

And you thought that the lab went too far?

Trade in Endangered Species - Animal Genocide, Mob Style (Time, 11/14/94).

This article focuses on the involvement of organized crime in the black market for prohibited trade in wildlife and wildlife products.

Interesting Car Loans - Can markets make ``the mob look good'' (UPI, 1/22/97).

Typically states prohibit lenders from charging ``excessive'' interest on loans. Here is an attempt to remove this restriction.

Experiment 5: Minimum Wages

Got Milked? - Byzantine Method of Pricing Milk Won't Be Simplified Anytime Soon (WSJ, 11/25/97).

Milk drinkers got some good news earlier this month, when a federal judge threw out one of the strangest federal regulations on the books. Known as the Eau Claire rule, it allowed dairy farmers to collect a bonus for their milk based on how far their cows were from the Wisconsin city. But consumers haven't won yet...

Minimum Wage Proposal Debate - The Political Interest: Minimum Wage, Minimum Sense (Time, 2/6/95).

In the 1995 State of the Union address, President Clinton proposed a hike in the minimum wage. This article discusses some of the issues surrounding this idea.

Part III: Imperfect Markets

Experiment 6: Externalities

Only in LA? - Actress Julie Newmar and Others Struggle With Noisy Leaf Blowers (Wall Street Journal, 12/3/97).: Gas-powered blowers long ago replaced rakes and brooms in the well-groomed communities of Los Angeles. Over the past year, however, leaf blowers have become more than just instruments to tend lawns and tidy flower beds: They have become a call to arms, the latest symbol of the city's divisions.
Don't Blow It - What's that quiet? L.A.'s leaf blowers fall suddenly silent (Seattle Times, 7/2/97).: The law prohibits use of the blowers within 500 feet of a residence, and imposes fines of up to $1,000 and jail terms of up to six months for both gardeners and homeowners who violate it. "Many people have the nerve to say gardeners are lazy," Alvarez added. "I dare any City Council member, for one day, to perform the job of a gardener and see if they have time left for Happy Hour."
Permitting Pollution - Certificate Trading Program Reduces Acid Rain Emissions (WSJ, 10/3/97).: Proposed by the Bush administration in 1990 as a novel, market-oriented solution to the problem of acid rain, the trading of what amounts to sulfur-dioxide-pollution permits has led to results that have exceeded expectations. Since its 1994 inception, the trading program, administered by the EPA, has contributed to a 30% drop in sulfur-dioxide emissions from major polluters, the agency says.
Like a Rock - Deadly Crashes Increase Between Cars, Light Trucks (NY Times, 9/24/97).: The number of collisions between a car and a light truck has been rising steadily. While they still make up a minority of two-vehicle crashes, these accidents now account for the majority of deaths in such crashes, and 80 percent of these deaths are in the cars.
Gone Fishing? - Rivalries Grow for Global Fishers, As Fleets Expand and Hauls Wane (WSJ, 11/25/97).: The United Nations Food and Agriculture Organization says 11 of the world's 15 main fishing grounds are seriously depleted. Still, a big expansion of the global fishing fleet continues, with the Southeast Asian nations and China among the most aggressive...Fishing conflicts are among the most visible of a new set of international security and diplomatic concerns caused by environmental degradation and resource depletion.
Too Few Fish in the Sea - After reaping the oceans' bounty with careless abandon, the world struggles to save an irreplaceable food source (Time, 4/4/94).: After providing nearly five centuries of uninterrupted bounty, the Grand Banks have suddenly run low on fish.
Explosive Growth of the Internet - Explosive Growth Clogs The Internet's Backbone (NYTimes, 6/29/96 electronic).: Is the electronic commons being over grazed?
Put Some Tollbooths Along the Information Highway - On the Internet, one person's traffic can take up a lot more space than another's (Providence Journal-Bulletin, 8/21/95 summary).: Can the Internet bear the strain of this high-intensity traffic? Information travels the Internet first-come, first served, so congestion from the new high-intensity uses already delays and interrupts other people.
Peak Load Pricing to Alleviate Highway Congestion - Message in a bottleneck: It's time to start charging rush-hour commuters (US News and World Report, 12/30/96).: [S]ince 1986, car travel has increased almost 40 percent, while highway capacity has barely grown. The author suggests that a possible remedy is "peak-period pricing," which means charging drivers for access to highways during peak times.

Experiment 7: Monopolies and Cartels

Enjoy the Discriminating Taste of Coke - Coke Tests Vending Unit That Can Hike Prices in Hot Weather (NYTimes, 28 October, 1999).: While the concept might seem unfair to a thirsty person, it essentially extends to another industry what has become the practice for airlines and other companies that sell products and services to consumers. The falling price of computer chips and the increasing ease of connecting to the Internet has made it practical for companies to pair daily and hourly fluctuations in demand with fluctuations in price -- even if the product is a can of soda that sells for just 75 cents.
Fortified Profits - U.S. Outlines How Makers of Vitamins Fixed Global Prices (NYTimes, 21 May, 1999).: Every year around August or September, the senior executives from the world's largest producers of vitamins would gather clandestinely for a few days...
One for Oil - Oil Producers Try to Control Industry Supply (WSJ, March, 1998).: A series of stories and tables relating to recent events in the world oil market, as reported by the Wall Street Journal. Will the cartel go bust?
Cartoon Cartel? - There's Tumult in Toon Town (Time, 11/17/97).: For 60 years, the animated feature was a Disney monopoly. Now rival studios are muscling in, led by Fox with a winsome Anastasia.
Window Browsing - Why the Justice Dept. Is Wrong By WILLIAM H. GATES (WSJ, 11/10/97).: If you asked customers whom they would rather have deciding what innovations go into their computer--the government or software companies--the answer would be clear.
Packing the Planes - Airlines Rely on Technology To Manipulate Fare Structure (WSJ, 11/3/97).: Computers allow airlines to constantly tell each other about fare changes, tamping down the chances that any one will gain even a momentary price advantage. And an obscure mathematical science known as "yield management" empowers airlines to project almost precisely how many last-minute business travelers will show up willing to pay whatever it takes to get on a given flight.
Playing Monopoly with Real Money - Toys 'R' Us Loses FTC Ruling With Marketing Implications (WSJ, 10/1/97).: An administrative judge at the Federal Trade Commission upheld charges that Toys "R" Us Inc. illegally pressured manufacturers to deny popular toys to warehouse-club discounters.
Diamond Cartels Are Forever? - De Beers' Luster Threatened: De Beers Faces New Threats to its 60-Year Control of Diamond Production (Reuter, 11/6/96).: Though De Beers has been able to maintain a diamond cartel for the past 60 years, serious threats are now emerging.
Straighten Up and Fly Right - Branson Starts Aerial War by Embarrassing Crandall (WSJ, 6/27/96 summary).: "Raise your g----- fares 20%. I'll raise mine the next morning. You'll make more money and I will too."
Super Mark-Up to the World - The Fix Was in at ADM: A Record $100 Million Fine for Rigging Prices May Add Up to the End of the Andreas Family Dynasty (Time, 10/28/96).: The agribusiness giant pleads guilty to conspiring to fix prices for the livestock feed-supplement lysine and for citric acid, an additive found in products from cosmetics to soft drinks.
Discriminating Financial Aid - Colleges Manipulate Financial-Aid Offers, Short-changing Many (WSJ, 5/1/96 summary).: How do financial aid packages resemble airline pricing?
More on Price Discrimination and Financial Aid - The New Economics of Higher Education ( New York Times, 4/22/97).: "You need to charge what your market will bear, while keeping a vigilant eye on affordability," said Williams, whose company is one of a burgeoning group advising colleges on how to get more bang from a scholarship buck.

Part IV: Firms and Technology

Experiment 8: Entry and Exit

There's No Business Like Show Business - Why These 'Angels' Invest Thousands on Broadway (WSJ, 10/17/97).: Two commandments of smart investing are to never let emotion interfere with your decisions, and never bet on a business you know nothing about. But if those rules were always followed, there would probably be no such thing as "angels," the old-fashioned slang term for well-heeled backers of New York musicals and plays.
Amid Brewpub Binge, Sobering Tales - Eager entrepreneurs are pouring into the booming brewpub business--and some have wound up with hangovers (WSJ, 2/6/96 summary).: 190 new brewpubs opened in the U.S. in 1995. This was nearly as many as the total number that had opened in the previous 3 years. But, dozens of others are closing and many others are struggling.

Can there be such a thing as too many good beers?

Americans have finally learned that there is more to beer than watery old Bud. But how many new microbreweries with cute names can the industry support? (NYT, May, 30, 2000)

Experiment 9: Network Externalities

Web Phones - The Internet: Access Avenue for Videoconferencing.: The affordability of multimedia personal computers, the expanding use of local- and wide-area networks, and the emergence of digital audio and video technologies that make possible transmission of voice and images over existing computer networks are key developments that now allow videoconferencing (VC) systems to become mainstream.
Yesterday's Technology Today - Video phones finding niche after 40 years in development .: The video phone concept is actually more than four decades old, but new low-cost technologies are providing the Air Force a rare opportunity to permit families and deployed airmen to be able to see, as well as talk, to one another.
Picture (Video) Phones: Then and Now - A history of video phones with nice pictures.
When the Best Isn't Good Enough - What Ever Happened to... WordStar? .: One of the most interesting stories in the history of computing surrounds the dominant word processor of the late 1970s and early '80s: WordStar.

Experiment 10: Measuring Productivity

Experiment 11: Comparative Advantage

Car Wars - Looks Good, but What's Under the Hood? (Time, 7/10/95).: The auto-and-parts agreement concluded by U.S. and Japanese negotiators in Geneva last week, just barely in time to head off a possible transpacific trade war, looks beneficial to both sides.

Part IV: Information, Auctions, and Bargaining

Experiment 12: Adverse Selection

Lemon Law Facts: Some information on the Pennsylvania Lemon Law from a commercial site.
Like an Adversely Selected Rock - Some Insurers to Increase Rates for Large Vehicles. (NYTimes, 10/17/97).: Alarmed by research showing that sport utility vehicles and pickup trucks are inflicting unusually costly harm to cars and their occupants in collisions, some big insurers are raising liability rates on the oversize vehicles in what could amount to the largest overhaul of liability coverage since the rise of no-fault laws a quarter-century ago.
English Annuities in the Late 1700's - Not Dying to Have One.: In the late 1700's, the English government wanted to raise some money by selling life time annuities. What was wrong with their plan?
No Need to Kick the Tires - Say Goodbye to Haggling: Fixed-Price Superstores are Taking Over the Used-Car Business (Time, 2/19/96).: Nine of the nation's biggest and most powerful automobile dealership owners announced plans to create a chain of Driver's Mart superstores, manned not by commission agents but by salaried "sales consultants" offering "pre-owned," "nearly new" and "off-lease" autos at nonnegotiable, uniform prices. Driver's Mart plans to sell the reconditioned cars complete with warranties and 30-day return policies.
Edmund's Selection of Used Vehicles - How much is that used car worth?: Dive into some real world data and see if you can spot adverse selection in action. A prediction of the theory is that cars that are sold recently after being purchased have a higher chance of being lemons, and thus should command relatively lower prices. If you are interested in buying a used car, see the bargaining section below for some helpful links.

Experiment 13: Auctions

Air Rush - The FCC Auctions (San Diego Daily Transcript).: Billions of dollars and the future direction of telecommunications will be at stake when the Federal Communications Commission auctions off broadband licenses in two weeks.
Is Air Free? - Battling for a Slice of Thin Air (Time, 12/7/94).: For the past few weeks, the giants of the telecommunications industry have engaged in a high-stakes game of corporate musical beds that left some of the most eligible partners sleeping alone and created some awfully strange bedfellows. The immediate cause of all this was an obscure bit of rulemaking from the Federal Communications Commission. The FCC for the past four months has been selling off slices of the broadcast spectrum.
What Price Air? - The FCC Readies an Airwave Auction by Boning up on Game Theory (Business Week, 3/14/94).: In the past, the agency awarded licenses free of charge, either through lotteries or hearings. This time around, it intends to hold its first-ever auction. To make sure the sale goes smoothly, the FCC has enlisted the help of experts in game theory.
Wireless Telecommunications Bureau Auctions Home Page.
What Price Camelot? - An Auction of Jackie Kennedy's Personal Belongings Draws Throngs Eager to Pay a Premium for History (Time, 5/6/96).: The setting was the U.S. showroom of the auctioneer Sotheby's; the occasion, the public sale of 5,914 personal items belonging to the estate of Jacqueline Bouvier Kennedy Onassis. And the outcome was not only a bewildering binge of conspicuous consumption but a perverse tribute...

Experiment 14: Bargaining

Escalation in a Legal Battle - How a $909 Dispute Generated $100,000 in Legal Fees (WSJ, 3/23/94 summary).: You may have thought that the escalation auction in class, where your instructor auctioned a $1 bill to the highest bidder, but made the top two bidders pay for it was amusing, but contrived. Could anything like this ever happen in the real world? Listen up! (It's just this kind of incident where the actions of 95% of the lawyers give the other 5% such a bad reputation!)
Bummer of '94 - As Owners and Athletes Argue About Money, a Bitter Strike Interrupts What Looked to be a Season of Shattered Records (Time, 8/22/94).: Never before has the naked power struggle between players and owners seemed so heedless and self-destructive. And there is an unquantifiable loss. The pastoral joys of baseball, joys that no other sport can match, have dissipated.
How to Buy a New or Used Car - A Real-World Guide to Bargaining Over a New or Used Car.: This guide teaches you all the skills you need to be a great car buyer. The name of the game is money, and you can save a lot of it by buying a car right.
Used Car Purchasing Scenarios - Part of an interactive course on how to effectively shop and negotiate for a used vehicle.: Two helpful secenarios that will be a great help when you go into the "Lion's Den" to negotiate for that "new" used vehicle.

John H. Miller , miller@zia.hss.cmu .edu.