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.

Learning economics needs math (2)

   I have written a post for introducing why mathematics is needed for learning economics. The post is mainly a record of my response to two science-stream students whom I encountered during a past Orientation Day. Therefore, I made use of the math that science students should have learned in high school. This includes some basic calculus that enables us to identify the maximum value of a function. I want them to know why finding the maximum is useful in economics.
   In another O-Day, I encountered other students who are not from science stream. So, they do not know calculus. But I still want them to know why math is needed in (university-level) economics. What can I do? Well, I decide to use money multiplier to explain.
   Most high-school students should have learned a simple version of money multiplier. So, I can explain: if the central bank gives $100 to the public and the public deposits the $100 in commercial bank, the latter will lend, for example, $70 for earning interest income. But if the businessman who borrows the $70 from this bank deposits the $70 also in a bank (the same or another bank), there is another deposit of $70 created. With the $70 deposit, the bank can lend, say again, 70% of this money out, amounting to $49 to someone. Similarly, this someone will deposit the $49, and banks can make another 70% of $49 as loan. As such, many more new deposit is created. Let us count: in the first step, $100, second step $70, third $49, and so on and so on. High-school students should have learned the way to calculate the infinite geometric series. Thus, $100+$70+$40+... = $100[1+0.7+(0.7)(0.7)+(0.7)(0.7)(0.7)+...] = $100/(1-0.7) = $333.33.
   In this case, both the multiplier effect and the math involved - sum of infinite geometric series - are something that students should have learned in high school. Hence, students, from science stream or not, should be able to understand. Of course, university economics frequently uses calculus while geometric series is not so often involved. As an example to illustrate the relation between math and economics, this is less ideal when compared to the example of calculus. Nonetheless, geometric series is also not rarely used. It is often applicable in economic forces involving chain effects while chain effects are also an important issue in economics. For example, economists mention not only money multiplier effect but also fiscal multiplier effect. The latter is also related to chain effect, which means the first event will trigger the second event, and then third event, and so on and so on. This is true for money creation and this is also true for fiscal spending. Although high-school economics students often have not learned fiscal multiplier effect but they will in university. At that time, they can also appreciate better why math is so important to economics.

Trade war and high-school economics

   Since 2018, trade war has become a globally noted issue. US President Donald Trump initiated the conflict by announcing plans to increase tariffs on a large amount of imported goods from China. Then, it kicked off several rounds of China's counterattacks, US's counter-counterattacks, talks, truces, and then quarrels again, and so on and so on. It is obvious that trade war has become the most important economic news. Economics is certainly useful for analyzing the issue. The question is: armed with economics knowledge at only high-school level, perhaps one may find trade war is too complicated an issue, and will say that the issue is not understandable without more advanced knowledge of economics. Complicated as it maybe, however, I do believe that we can still learn some lessons from it, even if we know only high-school economics.
    From the very beginning, China has insisted that trade wars generate no winners. The flip side of the same coin is that trade is a win-win situation for both countries trading with each other. From an economics viewpoint, this cannot be more correct. Any economics students have learned that trade is mutually beneficial. As we have learned, trades allow countries to specialize in producing goods that they have comparative advantages. This enhances each country's productivity. Hence, all trading countries are better off. Restricting trades is therefore damaging.
   Trump's decision to wage a trade war reflects that he does not think so. He has repeatedly voiced out his concern about the US's trade deficit with China. From an economics viewpoint, this concern is not very sensible. While a company should always worry about its deficit, a country need not always worry about its trade deficit. A deficit to a company means that its sale value is smaller than its expense. A deficit will reduce a company's equity, which means the resource mastered by this company decreases. On the other hand, trade deficit means that a country can enjoy more goods from imports by supplying a smaller amount of export goods to another country. As a result, trade increases the resource that can be used this country, which is better off. Of course, there might still be a worry if we consider trade deficit is a debt of one country owing to another country. But trade deficit is not exactly equivalent to a debt. It is simply that one country (say China) takes up another country's (say US) assets in return for the goods supplied. If the assets (notably financial assets) are attractive, another country (say China) will be happy to hold them.
    At this point, perhaps we have to conclude that Trump must be foolish, failing to understand even high-school level economics. But is he? Let us turn to a point where high-school economics students may often neglect: What does it mean when we say trade allows countries to realize their comparative advantage and so trade is "mutually beneficial"? Does it mean all the people in a country can benefit from trades? If so, we should expect that no one will complaint about trades. But this is obviously not true. Trade protests are very common. In fact, one particular relevant thing is: One reason why Trump won the US presidential election in 2016 is that his anti-trade position has attracted those losers in trade, basically the so-called blue-collar voters. They worked in traditional manufacturing industries but they lost their original high-paying jobs when companies moved to lower-cost countries. They hated trades and so voted for Trump.
   Now, there is a problem: if not everyone gains from trade, why economists say that trade is "mutually beneficial"? You won't say a trade loser benefits from trade! Upon reflection, what economists say may simply mean this: trade increases the total value of products enjoyed in each trading country, and this is good for the country as a whole. Analogously, we may say trade makes the size of the cake bigger. Nonetheless, how to divide the cake is another matter. For example, suppose that before trade the size of the cake is 10 units. For two people to share it, each get 5 units. After trade, the size increases to 15 units. But now one person gets 11 units while another gets only 4 units. Though someone suffers, trade indeed brings about gains on the aggregate level. While it is not wrong to say trade is "mutually beneficial", the conflict hidden in the aggregate picture is not mentioned in this simple term "mutually beneficial".
   At this stage, perhaps we may better understand what is going on. On the one hand, China is right in claiming that there are no winners in a trade war (or trade is mutually beneficial). On the other hand, Trump need not be stupid. On the whole, both China and US benefit from trade, and suffer from trade war. But this benefit (or loss) is at the aggregate level. Some US people benefit from trade. For example, US consumers get higher-quality or cheaper goods from imports. But behind the aggregate picture is that someone loses out. In particular, manufacturing workers lose out in the process. Trade theory says only that the total value of gain from trade is larger than the total value of loss borne by those losers. But it does not say the number of losers must be larger than the number of gainers.
   If the number of angry workers is really large, and they are more willing to vote than those who marginally benefit from trade, their support may affect the election outcome. How crucial these angry trade losers' votes are is not exactly known. But it is likely that the number is really large as reflected in Trump's 2016 campaign, which was a success and made him the President. Of course, when time passes, this situation may change. What we can see from Trump's actions is, however, that he still believes that anti-trade policies will help him win the next election. On the one hand, he wants to get a better term in a trade deal with China. On the other hand, his tariff policies are reducing trade volume. While he may not be able to get the first thing, the second thing may already make certain voters, as losers from trade, happy. Are there sufficient voters who are made happier by the trade war? Will the trade war make Donald Trump be re-elected as president in 2020? We have to wait and see. But one thing is clear: whether one understands trade theory is an issue; whether one will wage a trade war is another issue.   

Economics students studying law

   In Hong Kong, studying law and studying economics require almost completely different skills and almost no one will associate the two subjects together. This does not mean that the two subjects are inherently unrelated. As we can see, the situation is not true in United States where law and economics is a popular dual programme and the two subjects are considered to be closely related. But anyway I teach in Hong Kong and I know most students' focus is not very globally oriented. Hence, I do not expect that, in Hong Kong, I can encounter students who are interested in both subjects. To my surprise, in recent years I encounter three economics students going to pursue legal studies.
   To introduce something basic first, these students all went or are going to pursue a JD degree, which is a common practice for those who have already taken a first degree for studying law. If students have no first degree, studying law requires taking the degree of LLB. The above students take JD because they are all economics students, already with a first degree.
   The first student went to Harvard Law School some years ago and today I guess she has already graduated. I must make clear that I contributed nothing to her admission to Harvard although she was in my economics classes.
   Normally my economics classes are very large and I cannot know most of the students. But I know this student because she had sought my advice over a topic that would be adopted in a student debate. I normally turned down requests from students over these advising issues but it happened that this time I was familiar with, and interested in, the topic, which is about one new policy in urban renewal. I accepted her request. She came to my office together with her debate team members. She asked many questions while her team members mainly took notes. I was impressed by her active attitude. And this attitude paid off. Later, I asked her about the result of the debate. She said they won, and their rival lost as they simply misunderstood some basic facts of the topic. Well, perhaps my major contribution to her debate was that I was a fact-provider.
   Anyway, we didn't contact since then. After some while she graduate, I heard from another colleague (likely the one who wrote recommendation letter for her to Harvard) that she was accepted by Harvard. As I was not this student's referee, I don't know her "secret" method of getting into Harvard. But as far as I know about her, her spirit is good enough as can be revealed in her preparation for the debate. She should be well-deserved for what she got.
    For the second student studying law, I know her better as I was her referee in her applications for the various law schools in US. Actually, before she made up her mind to pursue a law degree, she had ever talked to me about her study in economics. She was obviously very hard-working and motivated student. One thing that troubled her was: She had not yet got an A from me though she got some A- from me. I sort of forgot how I responded to her at that time.
   Later, she decided to pursue a law degree in US partly, or probably, because she was motivated by the successful story of someone getting into Harvard mentioned above. Based on what she heard from some senior students, her applications should be lodged as soon as possible (not to wait until deadline) as offers are often made early and will no longer be given when schools have secured enough students.
   She asked me to write her a letter and I was more than happy to do so. To me, the job is not very straightforward as I am only an economics teacher, not someone familiar with laws. Though I know these law schools will understand this situation, I want to write a more relevant letter for her. Fortunately I am not completely ignorant about laws, and I know that in US law and economics are closely related. I simply wanted to tell these law schools that what she learned in economics could be an asset for her study in law. I also mentioned several famous law-economics scholars in US, whose areas of study have some relevance to my own: Louis Kaplow, Steven Shavell, Richard Posner, and Jules Coleman. I think I at least can show that I am not completely ignorant of legal studies so that these law-school people will not undermine my opinions completely when I recommend students to them.
   After some months of offers and acceptances/rejections, she eventually went to NYU. I must make it clear that her success in getting this offer is 100% due to her quality. If she was not so qualified, she won't get what she want.
   The third student did not intend to go to US but wanted to become a lawyer in Hong Kong. He was also well-prepared for his pursuit. He had made an appointment with me for talking about his plan to study law almost two years before his final year. In fact, he had already talked to an admission offer at a law school. I am not quite sure why he wanted to talk to me as I was not supposed to be a person who knows these things. I was also not his designated academic advisor in the department. Anyway, we talked about the options to become a lawyer in Hong Kong. Fortunately, I am not completely ignorant of these options. I told him what I know but I must say that eventually he dug out what was the relevant information for him. And he eventually decided to take a JD degree upon graduation.
   I am very happy that students studying economics have interests in studying law. As mentioned, most students are not very globally oriented. They may be very interested in economics. This is of course good. But I also want students to acquire a broader perspective as this is what university education (unlike high school) is about. Studying law requires different skill and, by paying some attention to it, you can acquire quite a different perspective of the world or society. One common thing between law and economics is that both emphasizes logical thinking. But economics' emphasis is on the logical rigor enabled by using mathematical models while legal studies' emphasis is on argumentation and persuasion. Economists often forgot that they have to persuade people to accept for what they say. A by-product of this attitude is that their theories are often misunderstood and sometimes ignored. I think economics students have much to learn from lawyers.
   My research interest has only a very small part of overlapping area with legal studies. I am interested in some ideas about justice while this is also an issue concerned by jurisprudence, a course in a typical legal studies programme. In fact, for this very small overlapping area, the economic and legal approaches are also very different, and the latter approach obviously receives much more attentions. It seems that economists also have much to learn from lawyers.

To become a high-school economics teacher

   In recent years, due to various reasons, I got the opportunities to chat to some students wanting to become high-school economics students. I must make clear that I did not give advice to them for how to become a high-school teacher. These students know better than me for how to do that. They talked to me simply because they needed various kind of supports from me, such as writing reference letters for them. In fact, I learned from them for how one can do something to pave the way for their goal: becoming a teacher.
   They all wanted to first study for a Postgraduate Diploma in Education (PGDE) for one year. There is actually a PGDE with specialization in economics. Both HKU and CUHK offer PGDE for economics. I have a student accepted by CUHK and another one accepted by HKU for this programme. To my surprise, this is a competitive programme. Perhaps this is because of the very close relation between securing this Diploma and getting a job as teacher.
   If it is competitive, what things one can do to improve the chance of acceptance? I of course do not have insider or even accurate information. But one student mentioned above was actually well-prepared. He came back to his own high school to act as a student helper, assisting his school teachers for tutoring economics. He also worked for an education page of a newspaper. Furthermore, he has re-taken economics in DSE (the public exam in Hong Kong for high school students) in order to get an even higher grade, which is believed to help him to find a better teaching job. Another student also has an experience as a teaching assistant.
   Before I talked to these students, I already knew PGDE but I did not know the diploma offers special training in economics. I am more curious about this feature. Nonetheless, I was told that the diploma was still mainly about education although there would be a small part for economics. Who teaches this part? It is education scholar with some high-school economics teaching experience. I guess this is a reasonable arrangement as teaching economics in high school does not need the help from an economics teacher at university - university economics teachers normally do not know what is taught in high schools. An education scholar with high-school teaching experience should be more helpful.
   PGDE offers internships: students will get the opportunity to work in high schools for a while. This is of course one important difference between professional training programme and academic programme. From an academic programme, students learn the knowledge of a subject, art or science. There is normally no guaranteed internship as this is not a vocational training. In contrast, for professional training programmes, internships are normally a must. Nurses have to get the opportunities to work in hospitals or they cannot become professional nurses. Hence, it is understandable that economics departments will not offer such guaranteed internships but a PGDE for economics will.
   I am indeed very supportive of economics undergraduates pursuing teaching positions at high schools. I like economics and want the subjects taught well at high schools. For this, we need good high-school economics teachers. Of course, having good teachers is only one step towards good economics education. Another condition is that the economics as what is taught in high school is good. Unlike university economics, there is almost always only one dominating syllabus adopted in high school for teaching in one location because senior-year high-school teaching is mainly for one public examination (DSE in the case of Hong Kong). As such, if the syllabus is not good, even good teachers may not make economics a good subject.
   I indeed also talked about DSE economics with these prospective teachers. One student's view is by and large consistent with my impression (through discussions with other students): In three years, students have not learned a lot in economics. Students can choose either one optional topic: monopoly pricing or international trade. Hence, they may know only either one area in economics as schools may want to save time for teaching and aim at maximizing grades for their students. Nonetheless, in my view, this is too narrow a coverage. Students use three years to learn not substantially more than what students should have learned under the older public exam HKCEE (replaced by DSE), which gave only two years to students.
   My student also told me that the current design of the curriculum is not helpful in nurturing students how to think. To my surprise, he said that students have to be good in memorizing things and must be very careful in order to get good grades. Students with higher or lower grades normally were distinguished by just very small marks. Thus, those with few mistakes made won. To me, as an university economics teacher, this is not a good feature of the syllabus (if what he told me really reflects the true situation). Economics, due to its nature, should differ from other social science subjects by its being more logically oriented and requiring more ability to think in the abstract. If today I were a student of DSE, perhaps I would never be attracted by economics (again, only if my student's description of the situation is correct).
   What's more, my student told me that the trend was to reduce those elements involving logical thinking further in DSE but to incorporate more applications. Although I will never object to applications, when time is limited and we have to sacrifice some aspects, I think, and perhaps many economists will agree, the logical thinking aspect is the more important aspect than application aspect in teaching. Applications are often only finding cases in the real world through Google search in Internet, and students can do this without intensive helps from teachers. But the logical thinking part cannot be easily self-learned without teachers' teaching. If the curriculum does really develop along this direction, I think this is a not a very good news to economics.     
   Having said all these, I still have confidence in my students. They are good students and I expect that they will become good economics teachers, overcoming some hurdles of the syllabus and making the subject interesting and thought-provoking.

With deadweight loss, why should goods be taxed?

   In my past post on cigarette tax, I argue that one should not ignore the purpose of taxing a good when using economics to analyze problems. In fact, policy objective is so important that, when it is ignored, almost all economic analysis on taxes will simply lead to ridiculous results. Sadly, to my understanding, this is exactly ignored in the way we normally teach economics students.
   What normally we will teach economics students (high school students in particular) about tax? Answer: tax burden and deadweight loss. Normally a demand-supply diagram is presented. A tax is levied on the good. Both the buyers and the sellers are said to share some burden of tax. But the consumer surplus and producer surplus are reduced by an amount greater than the total tax collected, so a deadweight loss is said to exist. This analysis is known to be included in DSE, GCE AL, IB etc.
   While this is widely taught, the following question is rarely asked and answered: if taxing goods generates deadweight loss, why should we tax goods from the very beginning? If this question is not answered, students might be misled when learning this analysis.
   Why they will be misled? This is because deadweight loss is also taught in another occasion: monopoly. Students are often taught that monopoly generates deadweight (because it charges too high  a price and produces too low a quantity) when compared to a perfectly competitive firm. In this context, a policy suggestion is often explicitly given: as a monoply generates a deadweight loss, it should be regulated or broken up into smaller firms in order to eliminate the deadweight loss.
   Hence, whenever deadweight loss exists, it should be eliminated, or at least reduced. But should we? Should we eliminate the deadweight loss due to taxation of goods? If so, how to? Well, if we don't tax goods, there will be no deadweight loss. So, the suggestion appears to be to avoid taxing goods. But should we?
   You may answer "yes". But then the government will have no money to spend. What about simply avoiding taxing goods but taxing only income? In fact, students have never been taught in high school that taxing income also generates deadweight loss. If this is true, the method is good enough.
   But what is not taught does not mean it is true. If income tax generates no welfare loss but commodity tax will, it is reasonable that all countries should rely only on income tax. But the premise of this suggestion is of course not true. Taxing income also generates welfare loss: higher income tax induces productive persons not to work so hard as they would rather enjoy more leisure than working hard to earn so little (after tax).
   Another drastic answer may be: eliminating all taxes should be done. Though the government may then have no money to spend, this is a good thing. Some extreme free-market supporters, who hate any government activities, will find this answer good enough. But is it the purpose for us to teach deadweight loss? We don't tell students the purpose of taxing goods but tell them the welfare cost (deadweight loss) of taxing goods. Is it because our hidden agenda is to support minimum government? I don't think this is the teachers' or the curriculum designers' intention. But if we leave the purpose untouched, the unintended consequence will really become in line with free-market advocates' political agenda. In fact, in the same curriculum, we often also teach students the functions of a government, such as providing public goods (e.g. national defense). In other words, we assume some government expenditure must be involved. If so, the question should never be about eliminating all taxes, cutting off the source of revenue. The question should be how to collect taxes.
   Thus, we have to make clear why goods are taxed and why deadweight loss is taught. The answer for the former is obvious: the government need money to finance its expenditure (e.g for public goods). However, its financing, mainly via taxation, almost always generates welfare cost, namely deadweight loss. So, the answer to the second question involves how we should use the concept. In fact, if the benefit of government (e.g. providing public goods) is always lower than the cost of government (deadweight loss), we cannot but support the extreme free-market position: let's avoid asking government to do anything for us. So, the necessary implicit assumption for the existence of a government must be: its benefit is higher than the cost. Then, the question is not to eliminate all the deadweight loss, but choose a way to minimize it. The deadweight loss analysis is useful in the sense that it enables us to judge taxing which good generates more or less deadweight loss. The policy suggestion should be to choose the tax that generates smaller deadweight loss. One should not misunderstand that the analysis of deadweight loss is to justify elimination of it as this simply means elimination of a government.

Why cigarettes ought to be heavily taxed?

   "Smoking is hazardous to your health". I heard this slogan of government, who wanted to persuade people to quit smoking, a long time ago. This is perhaps a justification for various policies to deter people from smoking. In fact, I think many people, including the government officials, believe in such an argument, supported especially by medical doctors. Therefore, cigarettes are heavily taxed and the government will also ban electronic cigarette as a recent initiative to curb smoking.
   I write this blog post not because I hate or like smoking. However, I have read one article that uses "economics" arguments to criticize the high cigarette tax policy. I am concerned with economics and I found the "economics" arguments in this article are problematic in some aspects. So, let me share with you.
   The Hong Kong government has increased cigarette tax quite frequently in recent years. The said article aims at criticizing this policy. Its arguments are summarized as below:

1. With these frequent tax hikes, those who still smoke are someone who will never quit. Their demand curve is nearly vertical. Further taxes cannot induce them to quit. 
2. Smuggled cigarettes are substitutes for legally sold cigarettes. Further tax hikes simply encourage more smuggling. 
3. Alcohol and junk food are also hazardous to health. But the government has chosen to cancel tax on red wine instead of banning wines, and it does not tax junk food. It is unfair to smokers.  

What do I think? I will not say these arguments use wrong economics. But it is another matter to say that these arguments can support a "no further tax" policy. The major problem of these arguments is that it is misplaced, assuming that the tax policy serves only one purpose: making the smokers healthier. Yes, this seems to be exactly what the government campaign against smoking is about. But I doubt that we should concentrate on, and only on, this single purpose.
   For Point 1, if tax is simply to reduce the number of smokers, it is perhaps justified to argue that tax is of no use anymore when demand is already vertical (though I doubt this is true: if tax is further increased, some very addictive smokers might also consider, by incurring a high cost, to quit, or at least they may reduce smoking). But tax also serves another purpose, i.e. collecting revenue for the government to provide its services to citizens. Normally, tax is a necessary evil: Taxation generates distortions and deadweight loss. Even so, the government still has to collect tax, or no service can be provided. Now, taxing cigarettes is another story: It is not a necessary evil. Taxing cigarettes already serves a positive function (however small): controlling a bad behaviours, namely, smoking. At the same time it also collects revenue. So, you can't simply say the tax is useless if it does not reduce smoking significantly, provided that it still generates revenue: without this tax, the government would have to collect more revenue from other taxes of necessary evil nature.
   For Point 2, taxing cigarettes increases the profits for smuggling. This is true. But this is also true for any taxes on any goods. Does it mean that we therefore should not tax any goods (whenever smuggling may be triggered by taxes), or not to raise the tax rates for these goods (so as to avoid triggering smuggling)? The answer to the first question is (quite obviously) "No", and it is not hard to arrive at this answer. The answer to the second question, however, depends. If there is a better way to achieve what the tax can achieve (but will not trigger smuggling), of course the answer should be "Yes". But is there? Of course, there is another way to reduce smoking but will not generate more smuggling, e.g. banning smoking in more locations. But is this a better way? We must consider the cost of enforcing such a policy (by sending law-enforcers to more non-smoking zones) and ask: Is it relatively less costly to ban smoking or to increase tax but devote more resource to anti-smuggling? There is no presumption that enforcing a ban must be less costly. Hence, unless we accept that reducing smoking (further) is not supportable (anymore), what we need to consider is the relative cost of achieving the goal, not to abandon the goal (whenever a bad side-effect is involved).
   For Point 3, this really touches upon the core issue: Why do we tax cigarettes but not other unhealthy goods such as junk food if the policy is to promote health? It seems that the current policy is unfair to smokers. Nevertheless, is cigarette taxed simply because of the health of the smokers as what the slogan in the first sentence of this blog says? I think this is the key point and the major blind spot. Most people, for or against cigarette tax, focus exclusively on this reason - the smokers' health - and nothing else. If so, we really should tax or ban also other unhealthy goods, including most wines and junk food. Why should we target only at cigarette? The answer, to me and many textbook authors of economics, is very clear: taxing cigarettes is for the health or benefit of the non-smokers.
   When a person smokes, a non-smoker will also suffer, breathing unhealthy second-hand smokes. In economics, this is called externality. On the other hand, drinking wines or eating junk food normally will not affect other people. It affects only the consumers' own health. There is no externality. In campaigns of public policy promotions, surprisingly, this is rarely mentioned. What is mentioned frequently is only the health of the smokers. This practice perhaps makes people forget what is the most crucial difference between smoking and other unhealthy goods. In fact, smoking is in a way not different from pollution. Regardless of whether it is good to the smokers or not, it affects other people (non-smokers) adversely, and in most circumstances the smokers will not take their harms on others into account when choose to smoke. That's why smoking should be, from an economics perspective, controlled by public policies.
     So, even if public policy makers forget this purpose, we should not: controlling smoking is for a good economics reason, i.e. externality. In fact, I think the article author mentioned above is not bad in applying economics. The article author knows how to use high-school level economics concepts for arguments. These concepts include demand elasticity, substitutes, and fairness. However, it misses something important: what is the purpose of taxing a good from the very beginning?

Division of labour lost and found

   One great challenge to today's university economics teachers is to find a way to arouse students' interests in economics. I say today's teachers because I suppose that students in the past were more interested in economics and so university teachers did not need to worry about this very much. Why is this a problem today? I may be biased but, based on my interactions with students, I guess today's high-school economics is not very interesting, and emphasizes memorizing things (at least as far as DSE economics is concerned; I will discuss some more about this later). It cannot arouse much interest in the subject. Even if students are interested in economics in high school, when they go to university, discovering that economics are quite different from what they have learned in high schools, they may quickly lose interests in economics. Thus, again, this poses a challenge to university economics teachers.
   As such, in a recently held orientation day, I asked students which topics in high-school economics interested them most. Answers like demand and supply, money and banking, etc have been received, and these are not unexpected answers. One answer, to me, is somewhat unexpected: division of labour. At that time, my reply to the student is: this is a tasteful choice. I hadn't elaborated but actually this was also my choice: When I was a high school student, I found "division of labour" one of my most interested topic. I first encountered this topic in a subject called Social Studies in Form 3. Sadly, the topic was a small topic in high school. Not much I was told about it. Worse still, the topic can (almost) never be found again in university economics education. Normally, economists may mention it when they mention Adam Smith, the father of economics who is a well known advocate of this concept, but almost never mention it elsewhere. Does it mean what is considered important in high school (division of labour) is no longer considered important in higher level of economics?
   My answer is: Not really. Although division of labour is not explicitly listed as a topic or subject anymore, it has been discussed in another name: international trade. Obviously, trade is a popular subject in university economics. Every economics department offers such an elective course. It is also a big topic in high school. In both contexts, the central concept in trade is comparative advantage, not division of labour. However, division of labour is effectively the underlining principle of comparative advantage and trades.
   What does it mean? First, why is there benefit from division of labour? The concept is originally used to describe a worker's job. A worker can do everything in order to produce, say, a shoe, or he can do only a small part in the whole process, for example, just for making the leathers, or only for the heels, or only the shoelaces, etc. Of course, some workers are responsible for combining these parts into a shoe. Concentrating on only one small part of the whole process makes the job easier done and thus can be quickly finished. As such, division of labour greatly enhances productivity, given the same labour resource.
   Understood. But why is this related to trade? The relation is not very clear as trade is often about the whole nation, not about individuals. Furthermore, a new concept of comparative advantage is introduced here. For example, England is relatively good at producing cloth while Portugal is relatively good at producing wine. If England specializes in cloth production while Portugal specializes in wine, and England trades with Portugal for getting wine by cloth, this enables both countries to have more clothes and wines, and both are better off. Here, jobs have not been divided into smaller parts. There does not appear to be a division of labour in trade.
   But this difference is only apparent. The principle behind is essentially the same. A nation can produce both cloth and wine for the well being of its citizens. It is very much like a worker doing all the steps in producing a shoe. Now, the "whole job" of satisfying citizens can be "divided" into two parts: producing cloth and producing wine, and one nation does not do all the parts of this job: England does only the cloth part and Portugal does only the wine part. Finally, the two parts must be combined to produce the final product, "the well being of its citizens". Here, this final step goes through the process called "trade".
   So, you can see: the structure of the problem is almost completely the same between trade and division of labour. Although one is concerned with the whole nation while another one is concerned with individuals, they are not so different in essence. In fact, division of labour between nations (one specializing in only one production activity) requires international trade: if there is no trade, each nation will not specialize but must produce both goods. Otherwise, they cannot get both goods, each of which deemed essential for their citizens' well being.
   Of course, nowadays we understand more about how nations are engaged in the international division of labour and trade network. Therefore, the relation between trade and division of labour is indeed much closer than what is illustrated above. For instance, production of an iPhone involves international division of labour: US does only the product development and marketing part, its camera may be produced in Japan, batteries in South Korea, chips in Taiwan, and China does the assembly job, etc. When one part moves to another country for doing the remaining jobs, international trades are involved. From this perspective, not imaginable in the time of Adam Smith, the relation between the two aspects is actually very close.
   Furthermore, why division of labour enhances productivity? At the individual level, we believe that a smaller part of the job is easier and so can be done more effectively. But if so, why this logic can't be used in the context of the whole nation? When one nation is doing only one job (producing either cloth or wine), this nation will find it easier to finish the job. Thus, division of labour in fact offers an extra reason (other than comparative advantage) to explain why nations should specialize and then trade.
   On the other hand, if comparative advantage can explain why a nation should concentrate on doing only one job (producing one good), why this logic can't be used in the context of individuals? Different individuals, indeed, have different comparative advantage: strong and powerful persons may be more suitable for the part involving strength while patient and careful persons may be more suitable for the part involving details. Individuals' comparative advantage offers an extra reason (other than small jobs being easier) why division of labour enhances productivity.
   Lastly, at the individual level, the final job of combining parts into the whole product is not achieved through "trade". But, again, this is only an apparent (not an essential) difference. Nowadays, many economists consider a firm is a place for "internal trade". When a worker hands over a part to another for completing the job, it is much like trades in market where suppliers offers intermediate goods to another firm for producing a final good. "Internal trade" saves the negotiation cost and risks involved in two workers' trades (if a firm did not exist). But this is sort of another form of trade. The essence between "internal trade" and "external trade" is not greatly different.
   So, economists in fact do not forget division of labour. Just that they emphasize more on trade and will not bother build up these close links for the sake of students. This practice is not good for education purpose: students may find something emphasized very much in their early stage of study no longer taught again. The impression is that their knowledge is not accumulated progressively. If this is one reason why they do not like university economics, and sooner or later lose interests in economics, I think this practice should be changed: there should be more linkages built between high-school and university economics by adjusting either the former or the latter.