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
You might also be interested in reading about
Nobel prize winners in economics.
Part I: Competitive Markets
- Experiment 1: Supply and Demand
Avoiding Market Shocks.
Utilities Trying New Approaches to Pricing Energy
(NYTimes, 17 July, 2000).
As air-conditioners hum this summer, and experts issue dire warnings
about electricity running short, a growing number of utilities are
varying the price of power based on supply and demand to make
sure there is enough to go around.
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.
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
How much for that Beanie in the window?
More Proof That Grownups Are Nuttier Than Their Kids
The price run-up on these babies would make a commodities trader blanch.
But the 50% surge isn't for soybeans or cocoa beans.
It's the latest crop of Beanie Babies, little toy
animals stuffed with plastic beans that kids -- and
some adults -- crave.
What's the price of gas?
- Current gasoline prices for Chapin, SC
Data from a real market on the price of gasoline in a town. You might
want to do this for your town.
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
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
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.
- 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...
Part II: Market Intervention and Public Policy
- Experiment 3: Sales Taxes
When Smoke Gets in Your Eyes
FTC 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?
(Ann Arbor News, 12/11/96 summary).
"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.
- 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
And you thought that the lab went too far?
- Trade in Endangered Species
- Animal Genocide, Mob Style
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''
Typically states prohibit lenders from charging ``excessive'' interest
on loans. Here is an attempt to remove this restriction.
- Experiment 5: Minimum Wages
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
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
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."
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
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.
Rivalries Grow for Global Fishers,
As Fleets Expand and Hauls Wane
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
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
- On the Internet,
one person's traffic can take up a lot more space
(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
(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
- 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
For 60 years, the animated feature was a Disney monopoly.
Now rival studios are muscling in, led by Fox with a winsome
- 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
- Packing the Planes
Airlines Rely on Technology To Manipulate Fare Structure
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
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
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
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
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.
- Experiment 9: Network Externalities
- 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
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
- Looks Good, but What's Under the Hood?
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
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
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
- 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
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.
Bureau Auctions Home Page.
What Price Camelot?
- An Auction of Jackie Kennedy's Personal Belongings Draws Throngs
Eager to Pay a Premium for History
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
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.
Miller , firstname.lastname@example.org