Knowledge Problem

Lynne Kiesling

I’ve mentioned NPR’s Planet Money before, specifically their story on the history of employer-provided health insurance. They do a good job (not perfect, but good) of exploring economics topics for a general audience; they did some very good reporting on the underlying macroeconomic issues in the financial crisis earlier this year (although they didn’t discuss Hayek or any business cycle ideas other than Keynes, but it was still better than most).

In a recent episode of This American Life on nighttime activity, the Planet Money team spent time and did interviews in the Hunts Point produce market in the Bronx. It’s full of trenchant observations on the dynamics of supply and demand and the time structure of supply and demand. For example, one buyer is in the market for pears, and early in the night he is having a hard time negotiating a lower price with a seller … but later in the night, toward morning, the seller will be more likely to accept a lower price rather than return home with unsold inventory. But if the buyer takes the risk of waiting a few hours, he might find all of the pears have been purchased at a price higher than he was willing to pay — he doesn’t know the preferences of the other buyers in the market, so he has to evaluate that tradeoff. Similarly, the “hot item” varies from day to day; one day it’s fancy carrots, another day it’s tomatoes, and it all depends on the interaction of what the wholesalers have available and what the buyers who are in the market on that precise day want and are willing to pay.

I liked this story so much that I have listened to it about 4 times in total. Especially if you are teaching a principles course or want to make market dynamics and the time structure of those dynamics more real for your students, this story is extremely useful and well done.

Lynne Kiesling

Here’s an illustration of several important economic points. Illinois instituted a smoking ban in bars and restaurants in January 2008. One of the arguments for such smoking bans is to spare patrons and employees the negative effects of second-hand smoke. Clearly such a blanket ban has some negative unintended consequences that reduce economic efficiency relating to individual liberty; in particular, the legislation does not allow for voluntary smoking bars, where all patrons and employees knowingly and voluntarily choose to work at and patronize the bar.

The Crowbar, on the southeast side of Chicago near the Indiana border, provides an experiment on precisely this point. The bar’s owner takes donations to pay for the fines that he is charged for allowing smoking:

Owner Pat Carroll said his customers — smokers and nonsmokers alike — contribute to a “smoking fund” canister that often sits on the bar, to subsidize the fines he’s incurred for flouting the law.

Carroll said he’s been ticketed twice and paid at least $680. He fears that if he forbids smoking, his cigar-and-cigarette crowd would switch to bars that permit smoking just a few blocks away in Indiana. …

But some smokers say they’ll support any tavern that gives them sanctuary. Laura Pugh said she contributes $5 a month to Crowbar’s smoking fund, considering it akin to membership fees at a private club. If she couldn’t smoke there, Pugh said she’d probably go to a bar in Indiana.

First, notice what the legislation has done in terms of redefining property rights. In essence smokers are purchasing the right to smoke, because the legislation makes the default property right the non-smoker’s right to clean air.

That’s about the kindest interpretation I can put on the smoking legislation, because it does still also contain a substantial dose of the coercive public-health nanny mentality that is frequently reflected in the arguments for such legislation. For example, this quote from the Tribune story illustrates the mentality:

“There are always some bad apples out there who will try to get around the law,” said Tim Hadac, spokesman for the Chicago Department of Public Health. …

Katie Lorenz of the American Lung Association in Greater Chicago said she was disappointed that some bars weren’t complying; she added that the secondhand smoke harms employees and non-smoking patrons. “This is a health issue, and it affects every single person who happens to be in the bar,” she said. “What’s in the best interest of everyone is to not inhale those toxic fumes.”

Note the moralizing and the no-exceptions mentality in these quotes. If a group of people voluntarily choose to patronize and work at a particular establishment, with full awareness of the health effects of smoking, they are “bad apples” because they find the law unnecessarily onerous and believe that their voluntary choice to patronize a smoking bar does not harm anyone who has not made that conscious choice. Lorenz’s statement that the smoking ban is “in the best interest of everyone” applies a uniform public health standard but ignores differences in preferences and willingness to bear risk among people in the population.

Another important part of the economic dynamic here is the inter-jurisdictional competition. One reason the Crowbar continues to allow smoking is the owner’s fear of losing business to competing bars over the Indiana border. I bet that if you analyzed compliance with the smoking ban it would increase as you move away from the Indiana border, other things equal.