Why markets exist

This book review describes the spontaneous development of markets, how they improve lives, and at least one example of a market failure (WSJ, March 2020) 

Is command and control the best way to increase the supply of ventilators?

President Trump invoked the Defense Production Act to force GM to make ventilators (WSJ, March 2020). Three questions come to my mind.

1. What process determines the price of ventilators, supply and demand, negotiations between buyers, sellers, and third-party payers and facilitators, government regulations, or some combination?
2. Which would increase supply more efficiently and quickly, an increase in the price or government command-and-control?
3. Will the government reimburse GM for their opportunity costs or treat GM and its employees as conscripts?

Should government retroactively rewrite contracts during coronavirus?

Some legislators are introducing bills to force insurance companies to pay for losses even though the contracts do not cover the losses (WSJ, March 2020). Three questions come to my mind.

1. What is the role of government in the market system?
2. Does retroactively rewriting contracts increase voluntary exchange or decrease it?
3. When would prices in voluntary contracts be lower, when people know that government may rewrite them to increase costs paid by sellers or when people know that government will enforce them as written.

Here is a money quote: "The rule of law and contracts are crucial in a free society, especially in times of uncertainty when it is a restraint on bad policies driven by panic."

Rationing Healh Care

Coronavirus has rekindled discussions about the best way to ration health care (WSJ, March 2020). The opinion mentions ways to increase capacity to provide health care. Two questions arise in my mind.

1. Does a lottery or algorithm increase capacity when shortages occur?
2. Would the market system increase capacity when shortages occur?

This later post discusses another WSJ article on rationing ventilators.

Are Cigarettes an Inferior Good

Cigarettes companies one among the few companies that weathered well the Great Recession in the late 2010s and their sales have remained stable during the early stages of the coronavirus recession (WSJ, March 2020). The article also noted that demand for cigarettes may be decreasing because growing concerns about the adverse impact on the smoker's health and that demand is not decreasing like other products because of social distancing because cigarettes are "antisocial". 

Trump vs. the Invisible Hand?

Trump signed an executive order making price gouging and hoarding of medical supplies during the coronavirus pandemic a federal crime (The Hill, March 2020). I have some questions.

1. Why would people hoard? One answer is that they are speculating that the supplies will be more valuable in the future than they are now. If they will be more valuable in the future and people sell them now, would the lack of them in the future be worse than the benefit we receive now?
2. What signals and incentives does an increase in price of medical supplies create during a crisis? Are the predicted responses socially beneficial or socially harmful?
3. How do regulations and third-party payers affect the incentives facing firms that produce and distribute medical supplies? Do the laws of supply and demand apply?

Scarcity, tradeoffs, and coronavirus

https://twitter.com/gregjames/status/1241838854891622401

Price Gouging during the Corona Viirus

Texas Attorney General Ken Paxton warned people that he intended to prosecute folks who price gouged items related to the coronavirus (Breitbart, March 2020). 

1. Should firms be allowed to raise the price of toilet paper? Notice the empty shelves in the photos. The photo at the bottom shows the toilet paper aisle in the Food Lion in Mathews County, VA on March 16, 2020.
2. Should firms be allowed to raise the price of hand sanitizer? Air masks? Ventilators?
3. If you answers differ, why?

Turmoil in Oil

O

Oil Markets Point to a Lasting Glut of Crude By David Hodari Joe Wallace | March 12, 2020

Summary: Two shocks to the market for oil – the coronavirus pandemic and a breakdown in the partnership between Russia and the Organization of Petroleum Exporting Countries – have resulted in a surplus and lower oil prices. It is expected that the surplus will not soon be drained away. Classroom Application: When there is a simultaneous decrease in demand and an increase in supply in the same market each change will lower the equilibrium price. But the net impact on the equilibrium quantity is uncertain; a decrease in demand will cause quantity to decrease while the increase in supply will cause quantity to increase. Questions: Draw and label a graph illustrating the demand for and the supply of oil. Indicate in the graph the location of the equilibrium point. Explain why it is a mistake to state that at this point: “the demand for oil is equal to the supply of oil.” Refer to the graph you drew for the previous problem. In the graph illustrate the impact of a decrease in demand and an increase in supply. Briefly explain why the net effect of these two changes on the equilibrium quantity of oil is uncertain. From the article: “The world is swimming in crude oil, and the glut won’t drain away any time soon.” Describe the relationship between quantity demanded and quantity supplied when there is a glut in the market for oil. Assuming that there is no additional change in either the supply of or demand for oil, what adjustment(s) would eliminate a glut of oil? The article refers to “contango” which refers to oil traders buying oil at a low price in order to sell the oil at a higher price at a later date. Would this type of transaction be considered an arbitrage transaction? Briefly explain your answer. In the article the chief investment officer of Massar Capital Management stated: “Even in December, we knew that this year’s supply was going to overrun demand…It’s gone from bad, to very bad, to extraordinarily bad.” For whom is this change “very bad”? For whom would this change be very good? In the article the head of commodities strategy at Société Générale stated: “The…reason…why you get this steep contango is that you have to incentivize people producing oil to store the oil now, as opposed to sending it out into the market.” Why would contango result in people storing oil rather than “sending it out into the market”?

READ THE ARTICLE

Reviewed By: Edward Scahill, University Of Scranton

Trade-offs in choices about how to respond to the coronavirus pandemic

"Containment, after all, has costs for people’s well-being too: It deprives them of jobs and income as travel is curtailed, events are called off, and restaurants and other businesses empty out in ways that don’t happen with the flu" (WSJ, March 2020).

The author of the opinion understands some economics.He points out that efforts to contain the spread of Covid-19 have opportunity costs. "Ministers and officials [in the UK] are considering the trade-off between allowing an acute outbreak, from which the economy would rebound more quickly, or trying to save more lives by imposing restrictions on mass gatherings and transport.'” He calls the discussion of the tradeoff an important debate. 

No one can "understand" the economy

To try to "understand" the economy is a fool's game, according to Donald Boudreaux (AIER, March 2020).

Are High Mask Prices The Problem Or The Solution?

Are High Mask Prices The Problem Or The Solution? (Planet Money, March 2020)