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,
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.
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
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
What caused the rapid rise in gas prices in early 1996?
Farm Prices One and
-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
and Grapefruit Crop Should Set Record in Florida (New York Times,
Seven years after a two-day freeze over the Christmas weekend devastated
the Florida citrus crop, growers in the state are expecting their biggest
Is this called gouging?--Energy Cost
Study Critical of Public Agencies Too (Los Angeles Times, April 11,
An organization funded by electric power retailers claims that power
wholesalers, including public agencies have manipulated the market and
are making excess profits.
Part II: Market Intervention and Public Policy
Experiment 3: Sales Taxes
"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
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."
When Smoke Gets in Your Eyes
Sharply Criticizes Proposed Tobacco Deal--- Agency Says Profits Would Exceed
Penalties Included in Settlement
A tobacco-industry spokesman, Scott Williams, rejected the FTC's report,
saying it is "highly speculative and misses the point, which is that the
price increases in the settlement are designed to maximize the reduction
in underage tobacco use." He said the report "is based on assumptions that
are at best inaccurate," such as the FTC's calculation that cigarette makers
routinely pass on more than 100% of the cost of tax increases.
Tax Breaks May Raise Tuition - What
are the real impacts of proposed programs to subsidize college tuition?
Arbor News, 12/11/96 summary).
Experiment 4: Prohibition
Experiment 5: Minimum Wages
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.
Got Milked? - Byzantine Method of Pricing
Milk Won't Be Simplified Anytime Soon
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
Part III: Imperfect Markets
Experiment 6: Externalities
Only in LA? - Actress Julie Newmar
and Others Struggle With Noisy Leaf Blowers
(Wall Street Journal,
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
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
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
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 -
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
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
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
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,
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
(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
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
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
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
Playing Monopoly with Real Money - Toys
'R' Us Loses FTC Ruling With Marketing Implications
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
How do financial aid packages resemble airline pricing?
More on Price Discrimination and Financial
Aid - The New Economics of Higher Education ( New York Times,
"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
Can there be such a thing as too many good
Experiment 8: Entry and Exit
There's No Business Like Show Business
- Why These 'Angels' Invest Thousands on Broadway
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.
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
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.
(Video) Phones: Then and Now - A history of video phones with nice
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
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,
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
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,
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.
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
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
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
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 , email@example.com