Re: In Praise of Pay Toilets
Even though the cost of bathroom maintanence is lump sum and so, doesn't affect marginal costs, it can affect price if consumers' willingness to pay for your product (say, a hamburger) is greater if the option of restroom service is included. The observation that this is largely an empirical question is correct. Suppose consumers do not price the bathroom option. Inclusion of a bathroom increases average cost, but not marginal cost. In the long run, if the industry is a constant cost competitive industry, then price must equal marginal cost must equal minimum average cost. If everyone supplies a bathroom (which, we assume is not valued by consumers), then I can make larger profits than anyone else in the insustry (my minimum average cost is lower than everyone else's). I will be imitated and everyone gets rid of the bathroom. So, if an industry is constant cost competitive, and if consumers don't value bathrooms, then, in a long run equilibrium, we will not see bathrooms. If bathrooms are valued, then the industry demand curve shifts outward, leading to a higher equilibrium price. If I do not provide a bathroom, it may seem I can increase my profits, as in the case above. However, I will really now be selling a different product, that is hamburgers without bathrooms (a dismal thought!). In this case, the existance of bathrooms will happen if the extra revenue generated by consumers' increased willingness to pay, exceeds the cost of maintaining bathrooms. To sum up, if consumers do not value bathrooms, we will not see them. That is a matter of economic logic, not empirics. If consumers do value bathrooms, we will see them only if they are valued by the consumers at an amount greater than their maintenance costs. That is an empirical issue. This is all subject to the additional assumption imposed of competitive constant cost industry. At 01:11 PM 5/30/2002 -0400, you wrote: From: john hull [EMAIL PROTECTED] Your question seems straight forward, yet I'm not sure I understand. Assuming the problem is at my end, let me try again and you can tell me where I'm going wrong. That I may poorly articulate what I'm thinking is a given, so please bear with me. Everything you've written makes sense, indicating that the question is deeper than I first gave it credit for being. But I'm still going to be stubborn and defend my answer. I face a certain state of the world and I optimize. Suppose that the government then levies a lump-sum tax. Since it doesn't affect any marginal values, it is non-distortionary, so I don't change my opitimizing behavior--I just suffer a loss of utility from the taxation (I have to enjoy less across the board). Analogously, the firm with the free bathroom experiences the cost of maintenance as just a lump-sum expense. It may be spread out, but it affects no marginal values. Since it affects no marginal values, it doesn't affect the firm's optimizing behavior--the firm just suffers lower profits as a result. The prices the firm charges for goods are the same with and without the free bathroom. Hence toilet maintenance is not a part of the prices. The reasoning makes sense, until we take a step back and ask ourselves something: namely, Since the cost of bathroom maintenance has no effect on price, does that mean that a McDonald's(tm) would be able to charge the same prices WITH a bathroom as they would WITHOUT one? Let's look at this quandary in detail. Suppose it's common practice in the city of Boston for fast-food restaurants to allow free access to their restroom facilities. One restaurant manager wakes up one morning with the idea that the bathrooms are just one big cash sink (no pun intended), and decides to brick up his men's and women's lavatories. He reasons that customers will still come in to enjoy his hot, delicious McSomethings, and can just use the bathroom in Wendy's across the street. Now, this is just a thought experiment; we're unfortunately short in empirical data. But I think the following is reasonable to assume (challenge me if I'm wrong): * Facilities with bathrooms cater to sit-down meals moreso than take-out meals. 7-11, for instance, will sell you a whole meal for $5.00 (hot dog, chips and soda), yet doesn't expect you to sit there and eat it. The Dunkin' Donuts kiosk in the Harvard Square train station doesn't even have any seats; no one's expected to stick around. But if a customer's going to invest a certain amount of time at a restaurant location, a bathroom is a reasonable enticement / externality / public good / what-have-you. * Sit-down meals tend to be larger than take-out meals. You can bring a large party into a restaurant that caters to sit-down meals (the soccer team after practice, your high school buddies after a late evening, etc). In an establishment where meals are expressly take-out, you're limited by the patience of everyone else who's waiting to order. If it's a late-night drive-through
Re: Tax Leisure via Time Audits?
At 09:12 AM 4/26/2002 -0400, you wrote: But as an economist, I should try to figure out how to make sports markets more efficient, rather than trying to sabotage them so more people will do things I prefer. Isn't government different from sports (although sports leagues are cartels, so...)? As governments grow, the market for wealth transfers and hence, rent seeking grow. You can make government internally more operationally efficient, but if that leads to government growth and therefore growth in inefficient rent seeking, then allocative efficiency suffers. As economists, aren't we interested in allocative efficiency gains? Kevin D. Sachs, Ph.D. Assistant Professor phone: 513.556.7198 University of Cincinnatifax: 513.556.4891 Department of Accounting/IS email: [EMAIL PROTECTED] 302 Lindner Hall, P.O.Box 210211 Cincinnati, OH 45221-0211
Re: Securities analysis
At 11:16 AM 4/4/2002 +0530, you wrote: Hence it is very difficult for me to understand how people can believe Efficient Markets Hypothesis especially when its assumptions are so flawed ( rational people, no information asymmetry !). I am never able to understand why there is so still so much heat generated to this day. I have a counter point. Can somebody first prove that the assumptions behind efficient markets hypothesis are true ? That today's man is no longer driven by greed and fear and is rational (at least when it comes to investing !!) ? That actually everybody knows as much about companies and no one has an information edge ? If this cant be proved how would a theory built on these foundations be true ? Not everyone in an efficient market need be rational or informed -- just enough to spot and arbitrage transitory mispricing -- a point I made in my last post. There has actually been experimental evidence that a budget constraint is sufficient to generate rational pricing in a market with irrational participants. Unfortunately, I don't recall the citation. Also, few actually believe in strong form market efficiency where even inside information is priced in an unbiased manner (although rational expectations could induce unbiased expectations about hidden inside information!). Aside from that, what information asymmetries are you talking about? Again, not everyone in the market needs to be equally informed to obtain rational equilibrium prices. Now I will be so controversial as to invoke Milton Friedman's instrumentalist methodology, which asserts that the realism of assumptions is of secondary importance compared with the predictive power of the theory. In other words, the proof is in the empirical pudding. And when the scientific method is applied, the jury is out, as I asserted in my last post. Finally, I must express much dismay at the willingness of list members to assert pervasive irrationality -- presumably implying that the (neoclassical) economics paradigm, founded on the assumption of rational choice is not an appropriate way of viewing the world. After all, this listserve is named after a delightful book which applies the economic approach to anything and everything! To me, what defines an economist -- armchair or otherwise -- is the willingness to apply the economist's way of thinking to all kinds of empirical problems and puzzles and hopefully be able to tell a plausible story with refutable and testible implications. __ - Original Message - From: Kevin Sachs [EMAIL PROTECTED] To: [EMAIL PROTECTED] Sent: Thursday, April 04, 2002 1:32 AM Subject: Re: Securities analysis At 11:24 AM 4/2/2002 -0800, you wrote: Information does not instantly get propagated to all participants in a market, so there are profit opportunities for those who study market patterns. It is not necessary that all market participants be informed for a capital market to be informationally efficient. What is necessary is that there be some informed traders that will spot transitory mispricing and that those informed traders be able to act on the information quickly (i.e., that transaction costs be low). The jury is still out on the scientific evidence supportive of or contradictory to efficient market theory. It is noteworthy though, that evidence of market efficiency anomolies seldom demonstrates the existence of trading rules that yield genuine abnormal profits. Kevin D. Sachs, Ph.D. Assistant Professor phone: 513.556.7198 University of Cincinnati fax: 513.556.4891 Department of Accounting/IS email: [EMAIL PROTECTED] 302 Lindner Hall, P.O.Box 210211 Cincinnati, OH 45221-0211 Kevin D. Sachs, Ph.D. Assistant Professor phone: 513.556.7198 University of Cincinnatifax: 513.556.4891 Department of Accounting/IS email: [EMAIL PROTECTED] 302 Lindner Hall, P.O.Box 210211 Cincinnati, OH 45221-0211
re : securities analysis
At 11:48 PM 4/4/2002 +0530, you wrote: The real question is whether the hypothesis should be built on the underperformance of the majority or on the outperformance of the minority (if it is strongly clustered) More specifically, the question is whether the overperformance of the minority could have been predicted based on information which was publicly available at the times they traded, since they were presumably not privy to inside information that wasn't also available to the rest of us. This question gets at the gist of market efficiency. Unfortunately, we don't understand the trading rules of these successful traders (and probably never will). Alternatively, we might ask whether these traders have discovered ways of reducing transaction costs that the rest of us haven't caught onto, allowing them to profit in ways other informed investors can't. Also, as I teach my students, market efficiency is an equilibrium concept. If someone is not there to take advantage of new information first, then efficient prices will never obtain. Are these successful traders the elusive information arbitrageurs that make markets efficient? I suspect not since, if I were one of them, I wouldn't want you to know! Finally, and probably most to the point, how are we measuring outperforming the market? This is a crucial issue in empirical studies of market efficiency. Since the profits of the traders we're discussing were reported in a case study, it's not clear that any rigor was used in measuring abnormal profit. If these investors specialized in portfolios whose risk characteristics were greater than those of the overall market, we expect them to earn a higher rate of return than that of a market portfolio. So, how carefully was this done. Even rigorous studies of market efficiency are sensitive to the problem of mis-specification of the assumed asset pricing model -- the model upon which abnormal profits are measured. In fact, given our current scientific technology, market efficiency cannot be empirically refuted since we cannot distinguish a genuine inefficiency from a mis-specified asset pricing model. Unfortunately, all empirical tests (except experiments) jointly test efficiency and the asset pricing model assumed. Kevin D. Sachs, Ph.D. Assistant Professorphone: 513.556.7198 University of Cincinnatifax: 513.556.4891 Department of Accounting/ISemail: [EMAIL PROTECTED] 302 Lindner Hall, P.O.Box 210211 Cincinnati, OH 45221-0211
Re: Securities analysis
At 11:24 AM 4/2/2002 -0800, you wrote: Information does not instantly get propagated to all participants in a market, so there are profit opportunities for those who study market patterns. It is not necessary that all market participants be informed for a capital market to be informationally efficient. What is necessary is that there be some informed traders that will spot transitory mispricing and that those informed traders be able to act on the information quickly (i.e., that transaction costs be low). The jury is still out on the scientific evidence supportive of or contradictory to efficient market theory. It is noteworthy though, that evidence of market efficiency anomolies seldom demonstrates the existence of trading rules that yield genuine abnormal profits. Kevin D. Sachs, Ph.D. Assistant Professor phone: 513.556.7198 University of Cincinnatifax: 513.556.4891 Department of Accounting/IS email: [EMAIL PROTECTED] 302 Lindner Hall, P.O.Box 210211 Cincinnati, OH 45221-0211
