Thursday, June 30, 2011

Business: How price controls can make things worse

Cindy's Chicken Coop raises chickens for food at the cost of $1/chicken.

She sells them at $2/chicken to Mary's Market and the profit is her annual income. She raises and sells about 50,000 chickens a year thus she makes $50,000 a year before taxes.

Mary's Market then sells them to you for $4/chicken.

That is how the free market system works.

The government may send the occasional inspector to Cindy's Chicken Coop and they will visit Mary's Market as well.

But what if the government institutes price controls arguing: chickens are essential to the health and well being of our citizens and the people must be protected from the profit taking Cindy and price-gouging Mary.

Therefore, Mary's Market must sell chickens at $2 and if the inspector finds the prices higher Mary will be fined or imprisoned or both.

Mary goes to Cindy and says, can you sell me your chickens for $1.50 a piece?

Mary also starts looking into selling other kinds of products that aren't price controlled to keep her business afloat.

Mary starts looking into chicken farms that may sell her chickens for less than Cindy.

Cindy has to decide, do I see my profits cut in half? Or do I give up raising chickens for a living?

Cindy decides to give up her chicken business and find another line of work.

Mary finds that George sells chicken for the $1.50 price but he makes most of his money selling corn. Thus, his farm isn't set up to raise as many chickens as Cindy so Mary's Market is constantly short of chicken.

Thus, the chicken shortage was caused by the government instituted price controls driving Cindy out of business. The opposite of what the price control was intended to do which was to make chicken available at more affordable prices.

The chicken shortage has gotten dire and people are demanding chicken and will go to great lengths to get chicken. The shortage is so extreme that Michael decides to set up a chicken coop and he brings them to market himself in a truck he parks down the street from Mary's Market. He sells chicken for $8 each (4x higher than the government regulated price). When he sees the inspector coming, his drives off avoiding the fines. The people buying from Michael ask why he charges so much? He explains, "if I get caught I have to pay a fine which has happened on several occasions so I use the profits to pay for those fines." He also explains some of his profits go to paying bribes to inspectors who will look the other way and not issue him a citation.

In the more extreme scenario, not only does the price control result in shortages it can result in black market prices that may be higher than what they would have been without the price control!

Business: Are hybrid vehicles economical?

Short answer: it depends.

Regular car getting 25 miles per gallon
Hybrid car getting 40 miles per gallon
Utilizing the vehicle for 100,000 miles
Gasoline costing $4 per gallon
Comparable repair costs
Comparable insurance costs

The hybrid car saves $6000 in fuel costs.

Change the assumption of gas to $5 per gallon and the hybrid car saves $7500 in fuel costs.

At the moment, hybrid vehicles cost more than regular vehicles. Thus, fuel savings may or may not balance the initial purchase cost.

Also, I don't know if the repair costs and insurance costs are actually identical.

Tuesday, June 28, 2011

Non-profit of the month: June 2011 - UCLA

Budgets are tight all around. It is impacting college education just like everywhere else.

The political mantra among some is that everyone should get a college education and mechanisms should be put in place (i.e. tax dollars in direct aid or loans) to facilitate it. Indeed, getting a college education does open up doors of opportunity. However, not everyone may benefit or need a "4-year" style college education. There is the whole realm of trade schools that provide focused education in specific areas to prepare people for particular types of jobs.

Nonetheless, I had the great opportunity to attend UCLA to get my degree in chemistry and biochemistry. And so this month, I made a contribution to UCLA's scholarship fund.

If you have benefited from a college education, please consider giving to your alma mater to support their efforts!