The Demand and Supply of Fines and Corruption

supply-and-demandA comment on the last piece prompts this tiny lesson in microeconomics.

“Corruption is one big pain point in the economic growth of a country. I have this funny idea but would like your inputs from an economists perspective. If things get costly it reduces its demand. Can corruption be made costly? This may increase compliance. Just to illustrate. If we raise fine for a fault, say traffic violation, which suppose today is Rs 500 to Rs 5000. Today the violator gets away by paying Rs 100 to traffic police. This is 20% of legal cost. If the penalty is 5000 and assuming traffic police acts rationally thereby asking for bigger bribe…won’t that deter future violations by the offender? Here I presume that traffic police will act smart knowing fully well that offender isn’t going to pay 5000 but at the same time he himself won’t settle for just Rs 100 and may raise ‘price’ to Rs 200 or 300. This is effective 100-200%% jump in bribe money that may pinch offender at some point in time. Pls throw some light.”

To start off, let’s examine the statement “If things get costly it reduces its demand.” In lay terms, that is true but economically speaking, prices don’t affect the demand or the supply of a product. To understand why not, we have to clearly understand what economists mean by “demand” or “supply” and distinguish them from “the quantity demanded” and “the quantity supplied.” Continue reading

The Wealth of Nations — Part 1

Warren Buffett
In his 2016 annual letter (pdf, 28 pp) to the shareholders of Berkshire Hathaway, Warren Buffett makes this observation about America’s economic dynamism.

One word sums up our country’s achievements: miraculous. From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.

“You need not be an economist to understand how well our system has worked. Just look around you. See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it – they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America has amassed wealth totaling $90 trillion.”

Buffett is right about the factors that create wealth — ideas (or human ingenuity), ambition, the free market system, and the rule of law. Let’s explore some of these in more details.
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Churchill on Mohammedanism

Sir Winston Churchill
Sir Winston Churchill

Winston Churchill (1874 – 1965) was no saint. The English should thank god for that. He was a patriot.

He served in the British army and was a writer before he entered politics and eventually became the prime minister of Britain in 1940. He was instrumental in the victory of the Allied Powers (UK, US and USSR) over the Axis Powers (Germany, Italy and Japan) in World War II. He suffered electoral defeat in 1945 but was re-elected prime minister in 1951.

All in all, a remarkable man. He hated Indians, particularly Hindus, with a white-hot passion. Not an uncommon affliction among the colonial rulers of India, past and present. He despised MK Gandhi and called him a “half-naked fakir” — in my opinion, a description that is more accurate than Churchill intended or realized. I suspect stooges however useful cannot possibly earn the respect of those they serve.
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Of Prizes and People

First Prize

We humans instinctively categorize, especially people. We are amateur primitive set-theoreticians. There are infinite ways to categorize people since humans have a humongous number of characteristics.

Consider the categories of people who award prize and people who win prizes. In my view, people who institute prizes belong to the most prestigious set. I order the sets as:

  1. People who institute prizes.
  2. People who win prizes.
  3. People who don’t win prizes.
  4. People who award themselves prizes.

For example, Alfred Nobel belongs to the first set; Einstein to the second set; ordinary grunts like us, who never come within shouting distance of any prestigious award make up the majority of humanity, belong to the third set. We are mostly harmless and generally unimpressive. Continue reading

Private Goods, Club Goods and Public Goods

Lighthouse at Point Reyes
Lighthouse at Point Reyes

Charging home owners’ association dues based on the size of the property is common practice in many places across the world. Is that economically efficient and is it equitable? The short answer to the question raised by reader Mr Baransam1 is yes. The longer answer needs to start with distinguishing different categories of goods that are produced, traded and consumed.

Private Goods

The most common category are called “private goods.” These are formally defined by being “rival” and “excludable.” The rivalrous characteristic arises from the fact that one’s consumption of the good precludes any other person from consuming it. If you eat an apple, that apple is not available for consumption by others. Excludability means that one can be prevented from consuming the good. You can lock up the apple and exclude others from consuming it.
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