Herd immunity as a public good (2)

    In my past post "herd immunity as a public good", I have explained that vaccination that generates herd immunity is a public good and so economists can analyze the problem, using the theory of public goods. At that time (September 2020), vaccination is a remote issue. Now, the issue is no longer remote. UK and US have approved some vaccines for Covid-19 to be used for common citizens in these countries. Certain problems in relation to herd immunity has also become clear. Let us discuss.
   Recall what is the issue. First, vaccination can prevent widespread infections of a disease. If many people have already taken vaccines, they are immune to an infectious disease. The disease cannot be easily spread in such a society (but it cannot definitely prevent the spread). This is a public good, which is non-rivalrous and non-excludable. A good is non-rivalrous if someone's taking it will NOT diminish its availability for others (such as streetlights). A good is non-excludable if there is no (easy) way to prevent one from taking or enjoying it (like fresh air) within a scope (say, in a city) when the good is already there. Now, herd immunity is both non-rivalrous and non-excludable. If most people are immune to the disease already, it is not easy for you to get infected. Your low risk of being infected will not make others more risky. Others still can enjoy the low infection risk. Also, you cannot prevent others from enjoying this low risk.
   In my past post, I have mentioned that the idea is not free of controversy. Some people (including influential people) believe that vaccination is unnatural, will cause severe side-effects, and does more harms than benefits. At that time, this is only an abstract idea for Covid-19 vaccines. But now, things become more concrete as the first groups of vaccinated citizens appeared and the side-effects are widely reported. Furthermore, soon we also need to assess if and when we should be vaccinated. 

   Recent news reports say that, to attain herd immunity, about 75% of people are required to be vaccinated. But surveys show that only 60% of the people in the US are willing to be vaccinated. Hence, even though vaccines are there, US cannot be rescued from the pandemic if vaccination is purely voluntary! In fact, certain people are not suitable for taking vaccines as they suffer from allergic problem. They can only wait for others to take vaccines, establishing herd immunity so that they will also be safe. But if not sufficient people take vaccines, they cannot be protected in this way. Herd immunity is not only about protecting oneself (those who have taken vaccines) but also for protecting the minority (who are not suitable for vaccines).  

   My past post has already mentioned that voluntary contribution to the public good is less likely in the case of herd community. From recent news reports, we know this is not only a possible situation, but is real. What economists will say then? In economics, normally tax/subsidy or public provision will be recommended for public goods (if voluntary contribution is not likely). In the case of herd immunity (as a public good), the problem may not be simply financial cost (so that a subsidy can reduce the cost of taking vaccines). The one who does not want vaccines may either believe that vaccines are bad for health or they are allergic or unsuitable for vaccines. Giving them some money may not change their minds. For the latter type (allergic), we also should not change their minds. Then, should we consider compulsory vaccinations (public provision of herd immunity)? I doubt this option will be seriously considered at all, especially in places like US. 

   So, people are trapped in the problem that voluntary (non-compulsory) contribution to a public good leads to insufficient provision of the good, and we don't see an easy way out! 

   However, I am not that pessimistic. The point is, people will change their mind. When someone see others who have taken vaccines and do not suffer from a big problem, they may also take vaccines, especially when Covid-19 is such an important death-or-alive issue, and receives so many attentions than any other types of vaccines. However, how to promote the issue and how to convey the messages (that vaccination is not unhealthy) is a key point, and no governments should take it lightly. 

Armchair economist on teaching

   I've recently read an article about economics teaching. It is indeed a chapter in a book called The Heart of Teaching Economics, written by Simon W. Bowmaker. The article is an interview with an economist famously for his popular-economics writing - Steven Landsburg who wrote a famous book called The Armchair Economist. He is also a well known good teacher in economics at The University of Rochester. Let me share with you three Q&As from the article first. My short comments follow after each Q&A. The Q is the question asked by the article writer, and A is the answer given by Landsburg. 

"Q: How do you check your progress and evaluate your own efforts in the classroom?
"A: By watching faces. Of course, we get the teaching evaluations back at the end of the term, and I read those avidly. But I think I know long before the end of the term how I’m doing by being aware of what I see on the students’ faces, and you get a tremendous amount of feedback from that."

I couldn't agree more. Online teaching is currently conducted due to pandemic. My difficulties are anticipated by Landsburg when he made the point well before the current pandemic broke out. I lose their faces. Help me!

"Q: Which intellectual abilities or qualities will your course help students develop?

"A: Number one: an understanding that there is such a thing as intellectual rigor. You can’t just say anything. You have to test your ideas by translating them into some kind of formal apparatus and seeing whether they hold up. Number two: a certain amount of facility with that technical apparatus and with particular ideas, like consumer theory and producer theory. Number three: an understanding that you have to be playful if you’re going to understand anything. You can’t just learn material and parrot it back. You need to think about each problem in a creative and original way. There has to be a willingness to say, 'Alright, what if we change "this" assumption, what if we change "that" assumption?' I’d like them to get a sense that that’s an important way of thinking about not just economics, but probably any subject they’re going to study."

My students will find that this is also my philosophy of teaching, especially when I teach macroeconomics. I try to let them know that the assumptions adopted in each macro model can be relaxed, and they should try assessing what happens if the assumptions are relaxed. Landsburg's saying implies that I am not alone, and the method is actually endorsed by this greater teacher.

"Q: Which are the key ideas at the heart of your course and how do you teach them?
"A: Having worked with supply and demand, and shown that it’s useful, we want to step back and think about where those curves come from. So we do consumer theory for the basis of the demand curve. I spend a lot of time on income and substitution effects, because I think that’s going to be important for them in many other areas. I spend a lot of time on Giffen goods and all of the reasons why Giffen goods are rare. I stress to them that I know no examples of Giffen goods, and I always make a point of saying, 'You might wonder why we spend so much time studying something that we don’t know any examples of. The answer is that we want to figure out why we don’t see any examples.' Not seeing something calls out for an explanation as much as seeing something does."

The regular readers of "hi, economics" know that I also share with this point when I wrote "The law of demand, but why?". I don't emphasize Giffen goods in that post but I completely agree with Landsburg's point about Giffen goods -- economists mention Giffen goods not because we think the good must exist but because we want to know why they do not exist. Of course, recently Giffen goods are found to exist in some very especially occasions. But I also do not think we need to emphasize that the goods exist.

Diminishing returns to cigarette tax?

   I've recently read a newspaper commentary on cigarette tax, using some economics concepts for analysis. You may notice that I have already written an article on cigarette tax, which is exactly a response to an article that uses economics to analyze the issue. In other words, now I encounter another article -- both uses economics and both cast doubts on the usefulness of cigarette tax!
   I do not know whether this is a coincidence or not. I simply wonder: Are there really so many people wanting to use economics to support their arguments? Is it really so indisputable that economics will cast doubts on cigarette tax?
   Anyway, as an economics teacher, I am not really interested in why the coincidence will happen. But I am interested in the economics argument used. As mentioned, the recent article uses some economics concepts to downgrade the use of cigarette tax. Does the article use the economics in a valid way? This is what I am concerned with.
   What the article says? Basically it uses two concepts -- the law of demand and the law of diminishing marginal returns -- to explain what has happened for cigarette consumption in the recent decade. What has happened? The article presents us the data: Cigarette tax has been raised substantially three times in the past 10 years -- 50% in 2009; 41.5% in 2011; and 11.8% in 2014. Meanwhile, the share of cigarette smokers in the entire population declined by only 2 percentage points, in a sharp contrast to the reduction of the share from 23% to 15% attained from 1980s to 1990s.
   The article says that the sharp reduction of smoking rate during 1980s and 1990s can be explained by the law of demand. When price increases, quantity demanded decreases.
    Then, the article says that the market of cigarette can be indeed divided into two blocks: price-sensitive smokers (including new and young smokers, and non-addictive smokers), and price-insensitive smokers (including addictive and long-time smokers). It continues to say that the tax hikes have scared off most price-sensitive smokers, and the effects will be small on the price-insensitive smokers if tax rate is to be raised again. Then, the article says that this is also what is predicted by another economics law -- the law of diminishing marginal returns. What this law means? Using the article's own explanation, the law means this: If the same action is taken, the new action will bring about smaller and smaller extra effect.
   In my view, the article does not explain the meaning of the law of diminishing precisely. But this is not my main point. My point is: can we use this law to explain why smoking rate drops slowly in the recent decade? If you understand what the law means, you cannot but conclude that the law is completely irrelevant to the phenomenon.
   Firstly, the law is about production, not consumption. For the law to be valid, the production activity needs to involve two inputs or more. If two inputs are required to produce a good but only one input increases, eventually the marginal product will decrease. That's what the law means. From this perspective. we can't see how it is relevant to the fact that cigarette consumption decreases slowly.
   Secondly, we have to understand why the law is valid. If we don't understand, then we may be moved by someone's saying like this: although cigarette is about consumption, the same logic may still be applied to consumption, and we should not be so rigid in applying an economic law. However, if we understand why the law is valid, we can clearly get that the law is not applicable in the case of cigarette consumption.
   Then, why? The key point is, again, two inputs or more are involved in producing a good. Since two inputs are required, using one input is not an option. Otherwise, why don't we use only one input? If two inputs are required, this also implies one input cannot perfectly replace another. The difficulty of replacing one input by another also increases when the ratio of one input to another is increased. This is because one input is too few relative to the increasing amount of another input. This is a congestion effect. A typical example is this. Workers and factory workshop are needed for producing a good. If we simply increase the workers, with only the same size of the workshop, sooner or later the workshop gets crowded. Workers find it difficult to move inside the workshop. The additional output by employing more workers is smaller due to the congestion effect.
   Now, is cigarette consumption tax subject to the same congestion effect? The issue is not a two-input or two-factor issue. The issue is not increasing one input or one factor but keeping another unchanged. How can we say diminishing marginal returns applicable to cigarette tax?
   Well, let me be more sympathetic to the article writer. Perhaps the writer means the law of marginal utility (or marginal benefit) instead of marginal return. The former is exactly about consumption while the latter is about production. Perhaps the writer intends to attribute the slowly declining cigarette consumption to the law of diminishing marginal utility (or marginal benefit) but he cited another law by mistakes.
   If this is the case, my first response is: don't try to show off your economics knowledge if you are not really familiar with it. My second response is: this is still not valid. The law about marginal utility or benefit can't help explain why consumption is declining slowly. If we derive smaller and smaller utility or benefit from a good when the quantity consumed of the good increases, other things being equal, we are willing to pay a lower and lower price for the new quantity. This is reflected by the downward sloping demand curve already (but there are some complications involved and we set aside this problem here; interested readers may read my earlier post). But it has nothing to do with the demand curve being steep or flat.
   In fact, in terms of the shape of demand curve, you need a convex demand curve to reflect that situation that the cigarette consumption declines slowly when tax is very high. What is a convex curve? A convex demand curve looks like what you will have if you turn the symbol  (  anti-clockwise by 15 degree -- it is steep when price is high and flat when price is low. While this is a possible shape of the demand curve for cigarette, diminishing marginal utility (or marginal benefit) cannot explain it as mentioned.
   In conclusion, I think the article writer is simply wrong in applying the law of diminishing marginal returns or utility to the case of cigarette tax. The writer is obviously not very familiar with the precise meaning of some economics concepts but still try use it to support his own arguments. On the one hand, I am glad that people try to apply economics to argue as this shows that people think that economics is useful and using economics will enhance the persuasiveness of arguments. On the other hand, I am sad that even elementary economics concepts like the above laws are not well mastered. The road for economics education and popularization is long.

Herd immunity as a public good

   Most economics students at high-school level should have encountered the concept "public good" already. Usually, they will be given examples like national defense, lighthouse, streetlights, fresh air, etc. I recently read some articles in relation to the current pandemic. They discuss herd immunity as a public good. It's timely that we use this example to explain the concept here.
   The "herd immunity" mentioned by the articles refers to vaccination that prevents widespread infections of a disease. It does not refer to an idea that is now proved to be a disaster -- allow more people to get infected by a disease (covid-19) so that a large part of the people in a community gets immunity and will not infect the rest of the society.
   Herd immunity in relation to vaccination is a much better idea than taking the risk to get infected first. But it is still not free of controversy. Some people (including influential people) believe that vaccination is unnatural, will cause severe side-effects, and does more harms than benefits. These accusations are not completely wrong though may be exaggerated in some aspects. Of course, these arguments were formulated before the covid-19 outbreak. They are more about flu, and covid-19 is more dangerous than flu. But these arguments cannot be simply ignored. We need some arguments for vaccination. The articles I read argue for the moral duty of accepting vaccines. They are not economics articles but try to use some economics concepts like public good.
   If many people have already taken vaccines, they are immune to an infectious disease. The disease cannot be easily spread in such a society. This is said to be a public good by the articles. Why? Recall the definition of public good. The good is non-rivalrous and non-excludable. A good is non-rivalrous if someone's taking it will NOT diminish its availability for others (such as streetlights). A good is non-excludable if there is no (easy) way to prevent one from taking or enjoying it (like fresh air) within a scope (say, in a city) when the good is already there. Now, herd immunity is both non-rivalrous and non-excludable. If most people are immune to the disease already, it is not easy for you to get infected. Your low risk of being infected will not make others more risky. Others still can enjoy the low infection risk. Also, you cannot prevent others from enjoying this low risk.
   If herd immunity is a public good, so what? To these article writers, they argue for the moral duty to take the vaccine so that immunity can be established at the community level. If few people take the vaccine, there is no significant effect at the social level though the few who have taken vaccine can protect themselves. But most people, without taking vaccines, will not run on street with a sense of safety. So, people should take vaccines. They should be told to do something good for the community.
   To economists, perhaps we tend to argue for policy supports. From an economic viewpoint, voluntary contribution to a public good will normally lead to under-supply of the good. If taking vaccines involve bearing a private cost (the side-effect of taking vaccines as well as monetary cost), and if others choose to take vaccines already, you are still safe without taking vaccines yourself. You are said to be a "free-rider" in economics. When many want to free-ride on others' providing the good (waiting for others to take the vaccines), the supply of the good will be too low. Therefore, some policy supports are justified, for example, subsidizing the vaccine costs. Of course, like what the article writers do, moral persuasion may also be done.
   Some public goods may be, or may be turned, excludable. For example, people living near Disneyland may free-ride on the fireworks displays sent from the theme park. They can watch the displays remotely but have never paid the theme park entrance fee. The good is non-excludable. But is it? In fact, before Disney builds a theme park, it will find site farther away from residential area and often requires the local government not to build new houses near the theme park. This effectively "excludes" those free riders from enjoying the good without paying. If a public good is excludable, we have a stronger case for voluntary contribution (like what Disney does). But in the case of herd immunity, it is not. So, voluntary contribution is less likely. 

Why do economics students need to read?

   Having written the post "the danger of reading economics books", I would like to write another post to emphasize the importance of reading. I don't want students to be misled by the title of my post: there is a danger of reading books but it does not mean one should not read. 
   However, unlike some academic subjects (e.g. sociology, journalism, philosophy, etc), economics will not require extensive reading. In fact, the situation is similar to science subjects like physics, chemistry, mathematics, etc. The most essential way to master these science subjects is to learn their theories first, not reading the famous papers or books written by famous authors (physics students are never required to read Einstein's original papers). In a way, the reason why economics students are not required to read more is the same as why science students are not required to read more. Nevertheless, I do think that there is a reason why reading (not-for-exam materials) is still important for economics students.
   When I was an undergraduate student, wandering with the various mathematical models, I wondered if I had learned anything from economics. Now, I have taught economics for years, wandering with the various mathematical models, I wonder if I have taught any useful economics to students. (To get some feeling why math is important in economics, read one past post and another.) Yes, sometimes I am puzzled and I believe some of you may also share my feeling. In fact, upon reflection, it is very natural that people would have such a feeling when learning a technical subject like economics.
   To apply technical knowledge to real-world affairs is not that easy and straightforward. The real world is complicated with each event simultaneously affected by a myriad of factors. But we cannot analyze all the factors by our limited intellectual faculties. We have to identify several most important factors and concentrate only on these factors. A good analysis is that, even if few factors are identified, the event can be successfully analyzed (for another perspective of economic analysis, see my past post). However, no one can teach you in every particular case which factors are the most important ones. That is why doing applied economics is sometimes more difficult than learning theoretical economics.

   Classroom teaching of economics equips you with many analytical tools that may be useful in certain real-world cases. Without learning these tools, you have nothing to start with an analysis. But when you should use concept A instead of concept B in analyzing a phenomenon that you encounter cannot be learned in classrooms and textbooks. 
   If you really want to learn how to do applied analysis, there is still a method: read more and practice more. Obviously, as students, reading more about others’ applied analysis is of higher priority than practicing more yourselves. In fact, I believe that the most important reason why students cannot do applied economics right is that they have not read enough. Therefore, reading is important for learning economics (I have also recommended some books; see this, this, this and this post).
   Applied analysis written by economics is now not difficult to find as many economists write blogs. That's not true in the past. The materials were limited. Milton Friedman's and Paul A. Samuelson's newspaper columns were thus many students' only resorts. Now, we have much more choices. The difficulty becomes how to choose the suitable ones for reading. As mentioned in my past post, many writings in the name of economics are nothing but business writings. You have to read this past post for getting some ideas of how to choose. What I want to emphasize is: if you really want to turn the economics that you have learned into useful knowledge for your life, you have to read. 

The lessons of history and economics

   If human beings have learned from past experience, they can make a better future. This seems to be a common sense. The question is: have we? This question is particularly pressing today. Whenever we face a big problem, we might wonder if we could have done better, and what enables us to do better is that we've learned from history. But have we?
   As economists, we are obviously concerned with economic crises. Crises happened before on and off. But have we learned from past experience? In a way, we have. But that depends on the nature of the crisis.
   Consider the last (major) economic crisis - financial tsunami in 2008. It is so severe as to be dubbed "great recession". The term is obviously analogous to the "great depression" that broke out in 1929, the most severe economic crisis in modern time. Both are "great"!
   On the one hand, we may think history has not helped us to prevent another crisis (the great recession) from breaking out. So, it seems that we have not learned from the history. On the other hand, we have learned from the past experience in handling a crisis, once broken out, and mediating the damaging effect of the crisis.
   The well-known programme of "quantitative easing" were launched after the crisis of 2008. This aggressive monetary policy with an aim at preventing the economy from collapsing like great depression really paid off. To see the effect, let us compare. During great recession, unemployment rate peaked at 10% in US, already a horrible figure. But during great depression, the rate peaked at around 25%, a  much worse situation! In 2008, people have done much better than before!
   In fact, one notable event in 1930s is the large scale bank bankruptcies. The result is that money supply not only did not increase but also decreased. Why bank bankruptcies may bring about a reduction in money supply? Answer: in modern economies, we reply heavily on deposits, which are part of the money supply. Banks as deposit-takers are crucial in the deposit creation, and thus money creation, process. Well, if you let banks go bankrupt on a large scale, the process would break down and money likely decreases.
   Most people with some economics background knowledge nowadays know that, during economic bad time, the right move to do is to adopt expansionary monetary policy, at least not to adopt contractionary monetary policy. What happened in 1930s was completely the contrary, however. You may ask: Why people in 1930s let money supply decrease? Is it because they don't know the economics that is common sense today? Well, there is no simple answer to this question as there were various factors simultaneously at work. But one thing is clear. If people in 1930s knew that letting banks bankrupt and money supply decrease would result in such an economic disaster. with hindsight, they will work much harder to prevent the money supply from decreasing and set this as a higher priority in their policy agenda.
   The lesson that people have learned from the great depression is that bank bankruptcy and money supply contraction is not something you afford to ignore. Viewed from this perspective, we can see that adopting quantitative easing after 2008 reflects that people have learned from this past experience.
   In fact, in 2008, the central bank of US (Federal Reserve Board) was chaired by Ben Bernanke, who is an economist and famous for his academic research on great depression. If even he hasn't learned the lesson from great depression, who will?
   Financial tsunami shows that we really can learn something from history, creating a better future, although what is improved is only about handling a crisis, but not to prevent a crisis.
   Now, let's look at two other issues - world wars and pandemics. Both events are disasters. Have human beings learned from the history for these two issues?
   For the former case, there has been no world-scale war so far since the last one (World War II). Wars still happen on and off but so far all these were not large scale wars comparable to what happened during 1940s. Perhaps people have learned some lessons from history.
   For the latter case, today there is exactly a pandemic. Pandemic happened in the past and now. Can such a widespread problem be prevented or better controlled? Have we learned from the history for such kind of issue? For which aspects we have done better and which we haven't? These questions cannot be easily answered. Perhaps the history in future will give us some answers.

Cooking KOLs' economic contributions

   A side effect of the current pandemic is that people spend much more time at home - some jobs are banned and more people work from home. As a result, people watch TV and use social medias more frequently. As the time for staying home is longer and eating out is inconvenient, people also more often cook at home. Cooking KOLs (key opinion leaders) are those who teach how to cook in social medias. Due to the phenomenon above, it is no wonder that they become more popular, and more people become these KOLs.
   Of course, these KOLs have contributed to our economies. They are doing something valuable. As such, there must be a contribution from them. But how is it counted? In GDP, these contributions will be counted if, say, they earn an income from the social media, which will share the advertisement or subscription fee generated from them.
   Thus, pandemic generates new values to GDP. Nonetheless, the new values are generated at an expense: if dinning out is convenient, people may not cook at home and watch the KOLs' cooking shows. So, there must be a loss in GDP associated with these new values. Overall, is there a net gain or net loss in value? It should not be difficult to convince you that a net loss is resulted. The pandemic chilling effects on economic activities are so big that everyone feels it while KOLs' charm may not be felt by many. It is unlikely that the latter can dominate the former in values.
   From an economics viewpoint, the net loss will only be under-estimated by GDP. As mentioned in my past post, specialization and trades enable greater value generation. Retreating from restaurant and returning to self-cooking is actually a reverse process of this value generation. Why do people dine out? Perhaps they are not good at cooking. Perhaps they have a more urgent (and valuable) work to do. If people are allowed to concentrate on the non-cooking job, they can generate more values to the economies than self-cooking. But they can't (due to pandemic). The value lost due to a breakdown of specialization and trade is not simply about revenue reduction of restaurants that exceeds the gain of KOLs' revenue.
   Having said that, the value of KOLs may also be under-estimated if only social media revenues are counted as their contributions. Economists know that GDP is an imperfect measurement of economic values. Notably, any household productions are not counted. Only market activities are counted. For example, a housewife cooks at home, however good, will not be counted in GDP, except for the cost of materials incurred. But when she works for a restaurant as a chef, her products will be counted although she may produce the same food as at home. GDP in itself ignores certain economic values, such as household outputs. In a way, KOLs simply bring certain values to the fore. Some KOLs may already be a housewife and now her social media revenue may simply reflect part of her original economic contribution - not counted in GDP without the media but counted with the media.
   Well, if household output values are ignored in GDP, and now more household production (self-cooking, etc) is made, this simply makes GDP even less accurate as a measurement of the economic values generated in a society. Suppose GDP value is Y, and household output value is H. With pandemic, we know Y decreases, say, to Y'. Meanwhile, household output increases, say, to H'. Then, is overall value increased or decreased by the pandemic? Is Y+H higher or lower than Y'+H' when Y>Y' but H<H'?
   This seems to be a question not answerable without some empirical measurements of H and H'. But I will say, despite not an accurate measurement, the answer should be Y+H>Y'+H'. In other words, the value loss in marketable activities (Y>Y') should outweigh the value gain in household outputs (H<H'). Why? The logic is the same: specialization enables more values to be generated. Of course, someone may be good at cooking. They now produce more H' (>H). They may also enjoy acting as a KOL. But this is not a result of 100% free choice. Pandemic disables some works to be done normally and so they cook more, or even become KOLs. However, if this is a way that he/she thinks that's the best choice for him/her, he/she should have chosen to do so even before the pandemic. Pandemic restricts free choice instead of enhancing it. It prevents the best option, and the highest-value option, from being chosen. That's why I believe overall value must decrease.    

Economic bad time: back to basic

   It has become obvious that the world economies can only be, or will soon turn, bad given the recent outbreaks of pandemic. That's the reason why various emergency economic rescue plans have been recently put forwards all over the world (notably America's US$2 trillion plan). If things are not "bad", you don't need "rescue" plan.
   Why the economies will turn bad? The reason should also be obvious. Pandemic disables normal economic activities to be undertaken. For example, consumption will reduce as shopping outside is more dangerous and in some locations officially banned. Also, working from home is compulsory or at least encouraged. In a way, economic performance is about how many economic activities are undertaken. When things are active (or not), the performance is good (or bad).
   Is this explanation too simple (and naive)? If you think so, perhaps I try to polish it. GDP is the total value of output in an economy. If consumption is reduced, a smaller amount of output will be made to serve the consumers. Furthermore, working from home is likely less efficient in delivering the effects (if this is not true, why don't firms encourage more works from home before the pandemic). Hence, production will decrease even if the demand is the same. All these imply a reduction in GDP, in other words, an economic bad time.
   In fact, this is a typical macroeconomic way of explanation: it simply tells you which variables will change and, in what direction, when an event happens. In a way, there is nothing wrong in it. Just that, perhaps we sometimes want more than this, as an economist (or economic student).
   For example, pandemic affects not only domestic activities but also trades. Global logistics does not shut down but slows down. You might have observed: sometimes the goods on shelves were sold out but they were not restocked as fast as in normal time. The reason why should also be clear. If pandemic makes working not as efficiently as before, it will not simply affect domestic but also foreign trades.
   Now, if foreign trades are affected, and if we stick only to the macroeconomic view above, a contraction in foreign trades (both exports and imports decrease) may not necessarily be a negative factor to GDP, other things being equal. When exports decrease more than imports do, this is a negative factor to GDP. But when exports decrease less than imports do, this is a positive factor to GDP. Hence, other things being equal (e.g. if consumption is not reduced), fewer foreign trades will be good to the economy in the latter case!?
   An economist will say "no". If she or he says "yes", why should we teach so much about the advantage of international trade? We have been taught that trades enable countries to specialize in the industry in which a country has comparative advantage. If trades are forced to slow down, the comparative advantage cannot be (fully) realized. There is a loss definitely. But how this is shown in economic figure? In GDP figures, trade contraction may even be a good news. But this is misleading as discussed above.
   If foreign trade contraction may be misconceived as something good (from a pure GDP perspective), a similar misconception may also occur to domestic trades. Economic theory normally separates foreign trades from domestic trades. The former is an independent topic. The latter is not. Economists discuss market exchanges as a topic, but mainly emphasize the market structure (e.g. perfect competition, oligopoly, monopoly, etc). We rarely mention the advantages of market exchanges, including domestic trades. Then, what's the advantage of (domestic) trades? The answer is basically the same, at least partly the same: comparative advantage. While different countries have different comparative advantages, different individuals (or firms) may also have different comparative advantages. Why we are not all farmers and manufacturers at the same time? You may say: it is impossible because you don't know how to farm. Yes, you don't know but that's because you don't need to learn the skill. Someone else farm and you simply can get what is necessary for you (food) via market exchanges. It is then clear that trades enable people to specialize in what they are good at. You are not good at farming but may be good at computing. That's your comparative advantage, and so you do only computing, not farming. Through trades, both specialists can still get what they need. You can get much more food than farming yourselves while the farmers also benefit from the efficient computing technologies. Both will benefit from trade and specialization.
   Thus, we can see that the benefit of domestic trade is that it enables realization of specialization and the associated gain. Are there misconceptions? In GDP, more domestic trades always increase GDP (as reflected by increases in consumption, investment or public expenditure). So, there seems to be no misconception, at least in GDP perspective. But there is still something missed. The benefit of trade is not really reflected in GDP. The productivity enhancement via specialization is hidden behind the GDP figures. In fact, there are many other economic forces hidden behind GDP or cannot be reflected in GDP. I cannot mention all these. Let me simply emphasize a point: Why are market activities important? Why should we pay so much attention to them? It is often more important to know the reasons behind, instead of simply knowing what happens (e.g. whether GDP increases or decreases).
   During economic bad times, people often pay more attentions to economics. This situation is similar to healthcare: When people are healthy, they forget healthcare issue. But when people are sick, they pay more attentions to health. Now, our economy is sick. Perhaps this is also a time for us to revisit the basic economics to understand what all these mean.

Economics usable in an epidemic

   Due to the Novel Coronavirus, numerous aspects in life are affected. Though the nature of the current epidemic is a health issue, various economic issues appear, such as the shortage of important materials like mask, hand-sanitizer, bleach, etc. There is no lack of discussion about these issues in the society although it is doubtful if all these discourses make economic sense. To assess if arguments are economically sensible, we need to be aware of what economics concepts are used, and if they are properly used. In my view, the key point involved is the functions of market and the failure of market.
   Back to the shortage problem, one mostly wanted material is mask. Some suggested that it should be legally considered to be a "reserved commodities" (like rice), which implies that the supply, pricing and distribution of it should be regulated. Does this idea make economic sense? Perhaps you already have an answer in mind. Let me, however, share with you another idea first.
   I read newspaper and find an analysis made by an economist. I think the analysis makes sense and so share with you here. The point made by this economist is: wearing mask involves externality. In economics, externality refers to some effects, positive or negative, generated from someone on others but the effects are not paid for, unlike what happens for market exchanges. Wearing mask protects the wearer. But it also protects others -- the wearer may also sneeze. If the sneeze-makers have worn the masks, they will not infect others and so protect others too. But others have not paid the wearers for their wearing masks. So, this is a positive externality generated by the wearer.
   Normally, economists think that the thing that brings about positive externality is not sufficiently provided: as the supplier of the good thing is not rewarded by all those who benefit from the external effect, they are not financially encouraged to take account of all beneficiaries' values derived from the effect. That's why the supply should be insufficient. That's why the above economist suggests subsidizing mask provision.
   In principle, I think this economist is right. Positive externality justifies subsidy because the supply is insufficient and subsidy normally increases supply. Furthermore, it at least appears to be a better idea than regulating the suppliers in the time of shortage. Regulation may be of two types: regulating the price and regulating the operation of the business. If price is regulated (to be lower than the free-market level), high-school economics students can already tell the consequences: quantity supplied is lower than, and quantity demanded is higher than, the equilibrium level. There will be shortage. If originally the market is in balance, price regulation creates shortage. If originally the market is already in shortage (why is this possible? think about it), price regulation exacerbates the shortage.
   Meanwhile, regulation of operation effectively makes suppliers more difficult to do the business. Hence, it is likely to reduce supply (though quality of the good may be improved). For readers knowing some basic concepts, the reduction can be reflected as a leftward shift in the supply curve. In contrast, subsidy makes suppliers do the business at a lower cost. It is likely to increase the supply. The supply curve will shift to the right. This is exactly what is needed in a time of epidemic.
   Nonetheless, all these suggestions, subsidy or regulation, may not work in the short term. Prices of masks have increased substantially and the financial incentive for supplier is strong enough. The supply is still insufficient because production (or sourcing) takes time while existing capacity to produce cannot be immediately expanded. For what subsidy can help, it is only for long term: subsidy may encourage more suppliers enter the market and increases the long-term supply. In fact, if long term is considered, even regulation may not be so nonsensical. The regulation, as proposed by some people, may require a sufficient stock to be built up by the major distributors (like what rice distributors do). Of course, whether price regulation is a good idea or not is another matter.
   But the current problem is exactly about short term. In the short term, if supply is fixed and is insufficient, what can we do? Not much. The only thing that may be done would seem to be distribution. Someone may accumulate too many masks while someone have no any reserves. If the "surplus" is given to someone who lack it,  in principle there could be a mutual gain. But the big problem is that, given the uncertain length of the epidemic, no one thinks that they have "surplus".
   Even so, there may still be a scope for trade: someone do have accumulated too many in the sense that the safety margin is too high while someone's safety margin is too low. In principle, there can be a better distribution than what it is. The fact that someone donate part of their own masks reflect that they think that their safety margin is high enough. Therefore, donation and, with some middlemen, re-distributing the masks to the needy people is a way to achieve a better distribution. But another problem appears: who are the truly needy. Those who have too few are the truly needy. But the re-distributor cannot easily know who they are. This is the so-called "asymmetric information" problem: someone know less than other people. In the present case, the donors or re-distributors know less than the donation receivers regarding the latter's personal stock of masks.
   In economics, asymmetric information is big topic but it is generally not taught in high school. This may also be of a good reason because the topic is complicated. The idea is not too difficult to understand but the theory is often mathematically complicated. More important, the solutions to asymmetric information is not straightforward. In the case of mask donation, perhaps we don't have a perfect solution. Perhaps donors and re-distributors can only use some traits that are imperfectly related to truly needy, such as being old or being poor, for their re-distributing job. The elderly and the poor may generally have fewer masks than other citizens but that is not definitely right. The elderly may be a rich person and may have had many masks already. We don't know. But at least we can more easily tell who is old than who has accumulated many masks. Hence, we oft for this imperfect solution. For asymmetric information problem, often we have to accept some imperfect solutions.
   To summarize a bit, epidemic reveals many problems involved in market operation. If market is perfect in every aspect, we don't have shortage and suboptimal distribution. But market may fail sometimes, due to externality and asymmetric information, etc. The solutions of them should be carefully considered. Some proposals may backfire. Some are imperfect but better than none.

On-line shopping on the rise?

   On-line shopping has obviously become more popular. First, this is perhaps a long-term trend, supported by technological change and changes in consumer habit. Second, there is a more recent factor: much fewer people would go to shopping malls in recent months due both to the inconvenient transport and uncertainty involved in demonstrations. The latest development is of course quarantine issue due to coronavirus.
   But one thing is clear: On-line shopping is not as popular in Hong Kong as elsewhere. Taobao makes a big profit in mainland China while Amazon does so in America. However, in Hong Kong, famous on-line retailers are still struggling. Why? Some students of mine had indeed tried to investigate this in their general-education project. They had discussed with me and had done some initial researches. Certain factors were identified. First, logistics or goods-transporting is more expensive in Hong Kong than elsewhere. Second, physical distances between homes and shops are closer to each other than elsewhere. Taken together, people may not think on-line shopping is so attractive.
    Yes, the recent events may change these factors somehow. Going out for shopping may no longer be so convenient as before. But it is unclear whether consumers' habit will be changed permanently. For this, we have to look at some fundamental factors and assess if there are some fundamental changes.
   Recently, I have read a newspaper column that analyzes the financial positions of retailers. The major findings include: The profit rate, or profit-to-revenue ratio, of a famous on-line shop is actually much lower than a grocery shop, which mainly sells goods at physical stores. This is a little surprising as many people may believe that rents of physical stores are high in Hong Kong. Avoiding the high rents, on-line retail may be a lower-cost business. But it is not! Why? On one hand, logistics cost is high and indeed not lower than rental cost. On the other hand, on-line marketing requires more advertisements and promotional discounts to attract customers. I am not a business analyst and have no any expertise in the business models of on-line shopping. But I think this analysis is convincing. Nonetheless, this analyst report describes only the existing situation. The question is: will the problem be overcome in some days?
   As an economist, I notice that logistics cost is a variable cost: it increases if more goods are sold and more delivery services are needed. Meanwhile, rents are a fixed cost: no matter how few goods are sold, the rents have to be paid. Of course, the fixed versus variable cost are only a relative distinction. For example, once a truck is bought, it can deliver few or many goods but the cost is the same. So, before its capacity is reached, it is a fixed cost. Beyond the capacity, if the business still expands, you need one more truck, and this is a variable cost to the firm. For another example, the rent of a store is a fixed cost to the store. But a company running many stores will consider renting more stores if its business expands. Then, from this company's viewpoint, rents are variable, at least over a longer period (where leases may be renewed or ended).
   If the concept is relative, then can we tell which cost is (relatively) variable and which cost is (relatively) fixed? I think we can. In my view, logistics cost is more variable than rent. Let us consider the same time span and the same quantity of goods sold. With a physical store, one can sell (or store) more goods in a given time (e.g. a day) than a truck can deliver. Hence, a company does not need to rent another store for a substantial volume of sale but another truck is needed for some business expansion. Furthermore, the salary of the driver and delivery staff may be directly related to goods sold while the rent is often unrelated to sale.
   If we accept that logistics cost is mainly variable while rent is mainly fixed, then there is another surprising point. This is because people often think that on-line shopping involves a high fixed-cost structure so that economies of scale is a key for its success. The point is: on-line shopping involves an expensive electronic system that handles orders, retrievals of goods in warehouses, and automatic assignments of packaging and delivery jobs. However, once the system is installed, it can handles many orders and jobs. Thus, it is mainly fixed cost. Selling more goods does not increase this cost, and so the average cost of sale is decreasing with sale. This is economy of scale. Furthermore, if the sale volume is high, the on-line retailers can bargain for a deeper discount for goods from suppliers, which promote sales. This is also economy of scale. Due to this belief, many on-line retailers are willing to invest and expand. Their hope is that if they can secure enough sale, scale economy will help them achieve low cost and profit eventually.
   Now, there seems to be a fact inconsistent with this belief. If the dominating cost of an on-line shop is logistics cost, and logistics cost is mainly variable, then the overall cost structure of the company does not exhibit significant scale economy. If this is true (I don't know), these Hong Kong on-line shops cannot hope for a brighter future by expanding sale. Struggling for a longer time does not help!
   Of course, these on-line shop owners are not stupid. Perhaps I miss something. Perhaps only at the moment logistics is the major cost component. Perhaps in future volume sale can bring about more discounts on goods, thus generating a bigger scale effect to outweigh the logistics cost. There may be some rationale for them to keep betting on it. Of course, as a consumer, I wish them every success in future. 

I can't find a clock

   Some years ago, I bought a watch that uses sunlight instead of electricity. Supposedly, it should bring more convenience to me as my past experience is that electric watch stops working every year and I have to seek watch shops for changing the battery, a trouble job to me. However, not only I cannot enjoy more convenience with the sun-powered watch, I have even nightmares.
   The nightmares came when winters came. In Hong Kong, sunlight in winters is not sufficient. Every morning, the watch will stop as power stored cannot enable it to work through the whole night. Hence, the first job when I wake up is to find some light for it until it works again. There is a period for it to slowly recover. You cannot assume that it works immediately whenever you give it light. As such, I have to keep on adjusting its time until it works normally.
   The most inconvenient episode occurs when I had early class at 8:30. I had to wake up very early and even so time was tight for me to do everything and traveled to school. I would worry that if I would be late especially when traffic jam existed. At that time, when I saw my watch to check if time was sufficient. Oh my god! The watch still didn't work! I couldn't assess if I would be late!
   As mentioned, I have to keep on adjusting the watch time when it is slowly recovering. But how can I find the correct time at that moment? I looked for clocks that shops will display when I passed them. To my surprise, it was not easy to find a clock in public areas. My goal to adjust the time for my watch could not be easily achieved!
   Before I bought my sun-powered watch, I paid no attention to clocks on streets. Only when I have bought the sun-powered watch, I notice this fact (and so I think you have never noticed this fact). This phenomenon was indeed not a common phenomenon in the past. I can remember very clearly that when I was a teenager I was not rich enough to have my own watch. As there was no other way to know the time, I had to rely on the clocks displayed by shops on the streets. I could easily find the clocks and the time in the past! These shops indeed served the public in an important way. Now, these displays are rare as you can try to confirm it on streets.
   Why things have been changed? Is it because time is no longer important for people today? I don't think so. Then, why?
   Perhaps you also have the answer already. But as economists, we perhaps want to organize things better, and in cost and benefit terms. The benefit of displaying a clock is to enable people to know the time. There are two types of the people. People working for these shops with clocks displayed of course know the time. Moreover, passers-by like me also benefit from these displays. The workers at these shops have no incentive to benefit the passers-by like me. But it is in their own interests to display the clock for easy observation. If they hide the clock, the workers there also cannot easily find the time. Thus, benefit going to me or the passers-by is a side benefit and an unintended benefit. As such, when the workers or owners of these shops decide to display the clocks or not, they normally will not take passers-by's benefit into account. On the other hand, displaying a clock involves a cost. The shops have to bear the entire cost of the clock. Though not a very big sum, it still affects decisions if the benefit structure from a clock changes.
   The benefit from a clock has indeed changed with popularity of smart phones. Now, almost everyone has a smart phone, which gives everything you wants from a computer and a phone. In addition, it gives you the time. If people can get the time information privately (from their phone) at no extra cost, there is no need for most people for getting it on a sharing basis, namely through a displayed clock. As such, the value of displaying clock is diminishing (if not going to zero). Well, the cost of displaying a clock is low. But still it is not zero. There are three types of costs. First, electricity. But I think this cost is not a factor that triggers abandonment of clocks. It is really too low to be noticed. Second, repairing cost. Yes, clocks cannot work forever. When it can still work, I think the shop owners do not bother to drop it. But if it stops one day, I think they will no longer repair or replace it.
   Third, perhaps unexpected, labour cost. In the past, there were clocks displayed in the classrooms in my university. I do think it is very important to have the clock not only because it enables me to know whether I should stop teaching already but also because it is very useful when tests are held in classroom: students need to know the time, the commonly acknowledged time, not the privately displayed time, to see if the tests will end soon. In recent years, however, the university took away all the clocks from the classrooms. Without a displayed clock, I have to display an electronic clock from the computer. If clocks are so useful, why the university dropped it? My colleague told me that it was because these clocks used batteries and every years the university had to send workers to replace batteries. The university does not want to go through the troubles anymore when time can be got via smartphones. However, obviously it has not properly considered the difference between privately displayed time and publicly acknowledged time.
   In summary, as the benefit of displaying clocks diminishes and the cost of it is non-zero, at some point, clocks are abandoned. The result: I suffer from it. At this point, you may ask: if the benefit of a clock is minimal to most of people, why this does not seem to applicable to me? Some of you may know the answer, I think: I don't use smart phone.