Friday, December 21, 2012

Tariffs on Sugar-based Ethanol expire and the amount imported increases dramatically. This calls for some graphing and welfare analysis. Who is with me?!?!

There has been a dramatic increase in the importation of Sugar-based ethanol from Brazil since a long-standing tariff on this type of ethanol expired in January 2012.
Imports from Brazil, which distills most of its ethanol from sugar cane, have risen nearly nine fold this year through October, compared with the same period in 2011, according to the U.S. Department of Agriculture. U.S. demand for foreign-made ethanol jumped after an import tariff that had been on the books for three decades expired in January. U.S. ethanol imports are expected to surge again next year, with the vast majority coming from Brazil. ---WSJ
The graphic below shows the percentage increase in the quantity of sugar-based ethanol imported in 2012 from Brazil relative to how much imported in 2011---a 750% increase!
Source: Wall Street Journal
In AP Microeconomics, analyzing the effects of tariffs on social welfare is an important concept.  Let's use this real life example and see what happened in the Market for Sugar Based Ethanol (SBE).

The first graph shows the Domestic Market Price and Quantity in equilibrium BEFORE trade.  We are assuming this economy is a "closed economy" and does not trade (a state of "Autarky").
This second graph shows the World Price of SBE and how it would effect the Domestic market IF it were to open up, or come out of the state of Autarky.  For this lesson, we are assuming the World Price is BELOW the domestic, closed market price but it COULD BE higher. We will save that for another day.
Because "P world" is lower than "P domestic" the quantity supplied by domestic producers decreases to "Qs domestic" (Point "B") BUT at the lower "P world" price the quantity demanded by domestic consumers increases to "Qd domestic" (Point "C").  This is an excellent example illustrating the respective Laws of Demand and Supply--When the price of the good changes (inc or dec) the quantity demanded and/or supplied increases and/or decreases. There is movement ALONG the demand and/or supply curves NOT a shift in either curve! We moved from "A" to "C" along the demand curve and from "A" to "B" on the supply curve.

As it stands right now, Quantity Demanded domestically ("Qd domestic") exceeds Quantity Supplied domestically ("Qs domestic").  If we were to open up to trade, the difference would be made up with imports as shown in this next graph.
Domestic producers would supply a quantity from "0 to Qs domestic" and imports would Qd domestic minus Qs domestic.

Happy people are consumers who get to enjoy more of this good at a lower price--Consumer welfare has increased.  Unhappy people are producers who produce LESS of the good at a lower price-- Producer welfare has decreased. 

Producers will not be pleased about this foreign competition. Producers have A LOT to lose! They will possibly/likely lobby for "something to be done" and that something will probably be the levying of a Tariff on this good through the political process.

As shown in the next graph, assume the amount of the tariff increases the price from "P world" to "P world + tariff" BUT not quite enough to go back to the original equilibrium point "A".
Now, at "P world + tariff"quantity supplied domestically is "Qs 1" and quantity demanded domestically is "Qd 2". 

Domestic producers increase their quantity supplied in response to the higher price (Law of Supply) and Domestic consumers decrease their quantity demanded in response to the higer price (Law of Demand).  Imports are now less than what they were before---Qd 2 minus Qs 1.

Who was helped in this scenario and who was hurt?

First to gain was the Federal treasury in terms of tariff revenue.  To calculate the tariff revenue you would multiply whatever the dollar amount of the tariff is times the quantity of imports--"Qd 2 minus Qs 1".  The RED box shows the area of tariff revenue.

A net loser #1 is the consumer.  They get to enjoy LESS of the good at a HIGHER price than they did before--as the price increases from "C" to "E" the quantity demanded decreased from Qd domestic to Qd 2. The graph below shows consumer welfare loss (Dead Weight Loss) equal to the area of the BLUE triangle.

Net loser #2 is Society as a whole. The "Dead Weight Loss to Society" is represented by GOLD box below.
 Why is this area considered DWL to society and not a gain for producer welfare?

It is because, as a result of the tariff, domestic societal resources are now employed to produce more of this good than otherwise would have been produced absent the tariff.  This is the opportunity cost of the tariff.  Resources are use to make a good that is already available to purchase, albeit produced by a "foreigner".  Economists ask: Could those resources have been used in a more efficient way?

Reason number 10,999 why people hate economists.

This story ends better.  The original focus of was the expiration of the tariff. The result?  Everything snaps back to the graph that shows the domestic economy coming out of Autarky.  Consumer welfare restored, tax revenue to the government gone and reduced producer welfare. 

 Hope this helps understanding the effects of a tariff---when assessed and when rescinded.

Thursday, December 20, 2012

"Maple Syrup National Reservoir Dogs"---I hope things end better for these guys..

In $18 Million Theft, Victim Was a Canadian Maple Syrup Cartel
"...On Tuesday, the police in Quebec arrested three men in connection with the theft from the warehouse, which is southwest of Quebec City. The authorities are searching for five others suspected of being involved, and law enforcement agencies in other parts of Canada and the United States are trying to recover some of the stolen syrup..."

Another take-down by me of an important aspect of the "Fiscal Cliff"---Using the Chain-Weighted CPI as opposed to the CPI....Stay Awake!! This is important

One of the latest proposals to rein in the increasing cost of Social Security is to substitute (an appropos word as you will see in a moment) the currently used "Consumer Price Index (CPI)" with a measure called the "Chain-Weighted CPI" (go HERE for an explanation in full of this measure). First, a tiny explanation of the CPI.

The Bureau of Labor Statistics (BLS) measures changes in the price of stuff by pricing a "fixed market basket of goods and services" that are available in the economy. Consider it a shopping list on steriods.  It lists thousands of goods and/or services  that individuals might on a purchase daily, weekly, monthly, or yearly basis. 

The key point with this measure is that it prices ONLY specific, narrowly defined things on "the list" and records the change in price of the good/service with no regard to any change in consumer behavior towards the purchase of that good/service.  If the price of a pound of hamburger increases 10% the CPI will reflect that change---boom, 10% inflation (note--because one good increases in price does not indicate inflation---just keeping it simple for now).

The "Chain-Weighted CPI" is an additional measure that takes into account consumers choices in purchasing a good/service based on "relative prices" and their ability to substitute other less expensive goods/services for the one that increased in price.  If the price of hamburger increased 10% then a price sensitive consumer can subsitute a less expensive chicken or pork or spam (assume the price of these items did not increase in price at all, or something less than 10%). 

In other words, because of the presence of substitutes the consumer may not have lost as much purchasing power as the CPI suggests they did.

When measured over time, the "Chain-Weighted CPI" tends to record a lower level of inflation than does the CPI.  Why is this important?

Congress is required to adjust Social Security benefits every two years and are indexed to (tied to) the inflation rate recorded by the CPI.  If the CPI increases by 5% in the span of two years, then Congress increases Social Security checks by 5%.

However, if they switch and use the Chain-Weighted CPI, it might show that the inflation rate is only, say, 2%.  Checks would increase by only 2% rather than 5%.  A savings of 3 percentage points, which translates into BIG dollars (keep in mind, I TOTALLY made up these numbers for illustration purposes).

The move would save money but here is the biggest criticism.

Both of these market baskets measure items that senior citizens buy and young people dont buy, and vice versa. Young people buy lots of technology and entertainment that have LOTS of subsitutes.  Older people buy lots of healthcare and medicines that don't have lots of viable substitutes.  The Chain-Weighted CPI might be biased IN FAVOR of the choices available to young people in what they buy, but might be biased AGAINST older people in their purchases.

Both of these measures do not take into account the "real life" weight each demographic puts on the the selected goods/services in the measured market basket.  This specific information is not disaggregated from the whole.

This was a very simple explanation and there is MUCH more to it. For more detailed info vist the link to the Chain-Weighted CPI.  GOOD READIN'!!!!

Wednesday, December 19, 2012

Nice graph showing a major source of wage stagnation in the US--It is all about healthcare costs...

Well, maybe not all, but...The graph below tells part (don't know if it is a big or small part) of the story regarding income inequality and stagnant wages for workers. 

The orange line (+147% to the right--since year 2000) shows the percentage change in employee contributions to maintain their health insurance policies.  The blue line shows the percentage change in the actual cost of those policies (+114%  since year 2000).  The black line shows the percentage change in wages (36% since 2000). The gray line shows the Consumer Price Index percentage change (27% since 2000).

Source: Kaiser Foundation
The employer paid portion of health insurance is considered a "non-wage" benefit .  You pay some of the cost of your health insurance  (it comes out of your wages/salary) and your employer pays some of it (a non-wage benefit to you).  Example: a policy to cover you and your family has a total cost of $5,000.  You pay $100 per month out of your paycheck for the policy ($1,200 per year total) and your employer pays the remaining $3,800 on your behalf.  $3,800--your non wage benefit BUT a cost to your employer to employ you.

The difference between the orange and blue lines represents "cost shifting" of the total cost of employer provided health insurance.  Employees are paying more for health insurance from their wages (that IS clear) since 2000 and employers are either (1) paying less than they did before or more likely (2) passing the increasing cost of providing health insurance to employees in total or in part.

Two ways of looking at this.

(1) Any discretionary income gains that might have accrued to workers in the form of higher wages since 2000 have been absorbed by overall rising health insurance costs.  Employers are held harmless in this situation.

(2) Corporations have been shifting the cost of insurance onto workers and are not carrying more of the burden.  Paying less in non-wage benefits means more money going to the bottom line.

You tell me.  I can't figure it out.
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