Small drillers are turning off the tap because of low oil prices (WSJ, April 2020). Here is a money quote: "Better to keep oil in the ground than lose money selling it at current prices." When does the rig "lose money", when price is below average total cost or below average variable cost?

The Law of Supply

Price decrease => quantity of oil supplied decrease (WSJ, April 2020).

Producers paying buyers to take oil off of their hands.

The price for delivery in May of West Texas Intermediate (WTI) crude oil fell below $0 today (WSJ, April 2020). The negative price means that the producer pays the "buyer" money now when the buyer agrees to take delivery of oil in May. So many questions arise!

1. Why would a producer pay someone now to take delivery of oil in the future? 
2. Why are buyers paying the producers money now to take delivery in November instead of getting paid now to take delivery in May?

Pollution reduces human capital.

MRUniversity produced this great video on the costs of pollution and how economists measure them. Did you know that people make more mistakes playing chess when pollution is high than when it is low?

How to increase access to testing for cv

One effective way to increase access to testing for coronavirus is to increase the price paid to producers from its current level of $40 to $200 (https://marginalrevolution.com/marginalrevolution/2020/04/supply-curves-slope-upward-switzerland-fact-of-the-day-and-how-to-get-more-tests-done.html). If the federal government picked up the tab, estimated the extra cost would be less than $100 billion and a bargain compared with CARES Act and its $2.2 trillion price tag.

Why is the response to increase in demand for PPE slow in the USA?

One reason to encourage firms to raise prices when demand surges is to allow producers to accept the higher costs that they incur to ramp up production (https://marginalrevolution.com/marginalrevolution/2020/04/ppe-shortages-and-the-failure-to-increase-prices.html). The post also points out that the long-run response by producers to higher prices is > the short-run prices: over time either prices will decrease or consumers will purchase even more.

Colluding to Increase the Price of Oil

OPEC+, Russian, the USA, Mexico, and perhaps other countries are trying to reach an agreement to reduce the amount of oil produced (Yahoo, April 2020). The story illustrates the gains from colluding and also the difficulty in achieving and maintaining a collusive agreement.

1. Why would Mexico hold out? What does "hold out" mean?
2. Why would OPEC+ agree to cut production "conditional on the consent of Mexico".
3. What must be true about the demand for oil if a reduction in production worldwide => and increase in total revenues worldwide for the producers. 

Who should get access to a ventilator?

This article describes the tradeoffs deciders consider when they think about how to ration scarce ventilators (WSJ, March 2020). Some commentary on the article follows below. This post also discusses ways to ration ventilators and asks what would happen in the market system.

Summary: Because of the recent flood of Covid-19 patients, hospitals around the nation have halted or curtailed the number of what are deemed to be nonessential surgeries. Doctors and hospitals have struggled to establish guidelines to determine who will receive treatment and who will not. In some cases, these guidelines determine which patients will live and which patients will be allowed to die.

Classroom Application: Economics is the study of how scarce productive resources – and the goods and services made from these resources – are allocated. Scarcity means that there are not enough resources to provide all of the goods and services that people want. In market economies, price is used to ration scarce goods and services. But scarcity and the need to ration scarce resources exists outside of markets. Some decisions to use scarce resources in non-market environments have trivial consequences, while others, such as deciding which patients doctors and hospitals choose to treat, have very significant costs.

Questions:

• There is always an opportunity cost when a decision is made to use a scarce resource or product. Define opportunity cost.
• Assume that a medical doctor had to choose only one of four patients to receive medical treatment for the Covid-19 virus. If the doctor decides to treat one of the patients, what is the opportunity cost of the doctor’s decision?
• The article explains that policies in different states that hospitals and doctors use to determine which patients get to use medical ventilators vary: “…doctors could end up drawing names from hats to break ties…ln still other cases, there isn’t any plan, leaving doctors and administrators to make choices as they go.” When ventilators are sold in a private market, how are the ventilators rationed?
• Explain the difference between positive economic analysis and normative economic analysis.
• From the article: “This week, Dr. Emanuel co-wrote an article in the New England Journal of Medicine urging hospitals to avoid providing ventilators to similarly ill patients on a first-come-first-serve basis that could be biased toward well-connected patients, arguing that a random draw is fairer.” Is Dr. Emanuel’s endorsement a random draw to ration ventilators to ill patients an example of positive economic analysis or normative economic analysis? Briefly explain your answer.
• Which of the two rationing methods is fairer: a random draw, or first-come-first serve? Is your response based on positive economic analysis or normative economic analysis?