Saturday, August 13, 2016

Four economic lessons from recent news reports

Wherever patients control the marginal dollars, health care markets work and they work very well

Private ownership of rhinos will benefit them

How the maple syrup cartel is breaking down

Trade is beneficial (how hard it is to make a chicken sandwich from scratch)

From Mark Perry.
"1. News Story I: “The Most Powerful Force For Reducing Healthcare Costs: The Marketplace” by John Goodman, who describes the outcome of an experiment in California that gave patients greater control over their healthcare spending and greater incentives to shop around at different hospitals for hip and knee replacement surgeries:
[A] California experiments completely upset the paradigm that dominates conventional health policy thinking. Truth be known, most health policy wonks think the way Bernie Sanders thinks. They have believed for their entire professional careers that bureaucracies are far superior to individual patients in bargaining with providers. Clearly they are wrong.
None of this is surprising to my colleagues and me, however. We have been observing for years that wherever patients control the marginal dollars, health care markets work and they work very well.
If third parties were paying all the bills, Rx.com would not exist. Nor would MinuteClinic or Teladoc. Nor would Uber-type doctor house calls or Uber-type home care visits. There would be no transparency and no price or quality competition in the market for cosmetic or laser surgery. The list goes on.
Economic Lesson: Market forces and competition generally lead to better service, higher quality and lower prices in all markets including healthcare. Consumers spend their own out-of-pocket money on goods, and services like healthcare very carefully and frugally, but are much less cost-conscious when medical costs are not transparent and when a third party (insurance company, government, etc.) is paying most of their healthcare costs. As Goodman points out, a competitive marketplace for  healthcare reduces medical costs with transparent pricing, market forces, competition and greater consumer control over healthcare spending. In contrast, government control over healthcare typically increases costs due to hidden pricing, reduced competition, a lack of market forces, and less consumer control over spending.

2. News Story III: “If South Africa Lifts The Ban On Trading Rhino Horns, Will Rhinos Benefit?” from NPR featuring John Hume, a private game rancher in South Africa who owns 1,300 rhinos (more than anybody in the world, some are pictured above from a National Geographic profile on his rhino ranch) and 10,000 pounds of rhino horns.
South Africa’s highest court is preparing to decide whether to uphold the country’s domestic ban on trading rhino horn. Supporters of the ban say striking it down would encourage international smuggling of rhino horn, which fuels poaching. But private rhino owners like Hume contend that meeting demand for rhino horn is the best way to curb poaching and save the species.
On the black market, the price of rhino horn can fetch more than gold. In an effort to stem poaching, international trade was banned in 1977 under CITES, the multilateral treaty that regulates wildlife trade in order to protect endangered species. In South Africa, domestic trade in rhino has been illegal since 2009. But poaching has only increased. Hume says the only way to save the species it to sell the horn.
In order to protect his animals, Hume spends more than $200,000 a month in security. “I will run out of money. I will run out of protection of my rhinos,” he says. “I will not indefinitely be able to afford the helicopters, the soldiers, the radars.”
Rhino horn grows back if not fully removed from the animal, and Hume regularly trims it off his animals. He has stockpiled 5 tons of the stuff.
Economic Lesson: When private property rights for a valuable asset like rhinos or elephants are not allowed (like in most African countries), and/or when commercial sale of valuable assets like rhino horns or elephant ivory are illegal (like in all of Africa), the results are predictable: The herds of rhinos and elephants will decrease over time due to illegal poaching  (1,175 rhinos were poached last year in South Africa – home to 80% of the world’s rhinos – up from only 13 rhinos in 2007) and illegal sales of horns and ivory. In other words, it’s the predicable economic outcome known as the “tragedy of the commons.” When a valuable asset like elephants or rhino are owned in common by everybody, there is no financial incentive to provide good care and stewardship of those animals. The tragedy is the predictable outcome that those assets like rhinos and elephants will decline in numbers. In contrast, when private ownership and commercial use are allowed for rhinos and elephants, the economic incentives of private property and financial rewards will produce a predictable outcome: greater numbers of elephants and rhinos (for example, John Hume’s rhino herd has been increasing by nearly 200 per year).

3. News Story III: Maple Syrup Cartel Battles a Black Market Rebellion” from Bloomberg:

The cartel that produces 72% of the world’s maple syrup is starting to crack. After eight years of tightly limiting output to keep prices high, the Federation of Quebec Maple Syrup Producers next year will boost its quota by 12% for 13,500 sap farmers who operate in the Canadian province. The goal is twofold: Reclaim the 10% of market share lost to the U.S. over the last decade, and quell a rebellion by producers increasingly turning to black market sales for growth.
Economic Lesson: According to economic theory, cartels arrangements that artificially restrict output and raise prices (e.g. OPEC and the DeBeers diamond company) are inherently unstable and contain the seeds of their own disintegration because: a) the artificially high prices and positive profits earned by cartel members will induce new competitors to enter the industry (US maple syrup producers, not part of the Canadian cartel, increased output 23% this year and highlight the ongoing increases in US production that have taken 10% of the market away from Canadian producers) and/or develop products that are close substitutes, b) cartel members will attempt to earn more of the total profit for themselves by cheating on their agreement with other members to restrict output, c) individual members can gain by lowering their price to a level that is below the cartel-determined price and d) individual cartel members are often unable to effectively police the price and output policies of other members. Economic theory would suggest that “cartels aren’t forever” and the cracking of Canada’s maple syrup cartel is a good example.

4. News Story IV: “Making This Chicken Sandwich from Scratch Took Six Months and $1,500” from Today.com:
Forget farm-to-table — a Minnesota-based YouTuber has pushed the concept of cooking from scratch to whole new heights. While most of us would normally run to the supermarket for ingredients, Andy George, the founder of a new video series called “How to Make Everything,” took the task of making a chicken sandwich to its literal extreme.
It ultimately took him six months and $1,500 to make the final product using a thorough 16-step process that required him to grow a garden (step 1), harvest wheat (step 10) and even, yes, slaughter a chicken (step 14), see video below.
Economic Lesson: Trade is beneficial, creates value for consumers, and makes us better off thanks to the economic principles of division of labor, specialization, comparative advantage and mass production. And in the same way that trade between two individuals (buyer and seller) is good, trade between two cities is good, trade between two states is good, and trade between two countries is good. In contrast, restrictions on trade always make us worse off, despite the political rhetoric we hear from Donald Trump suggesting that America could be better off by imposing tariffs on Americans buying imports and reducing trade with other countries."

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