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Lesson 6: Applying the Lessons of the Soviet Union

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Assessment:

A Brief History of the Post Office (As Told By Grandpa McCoy)

“You kids these days have it so easy. Why, back when I was a young whippersnapper like you, we had to walk 5 miles to school – and it was uphill both ways, too. And when I started to work, I made 10 cents a day, digging worms and selling them to fishermen, to support my mother and the little ones. But I tell you, worst of all, was having to go to the Post Office. In those days, stamps were 3 cents – which is about the same as 3 gazillion dollars now – and a trip to the Post Office was a nightmare. Friend of mine waited in line so long, he grew a beard. And, I think it was a law then that when you got to the front of the line, the clerk would go to the back to get something and never return! And you didn’t ever dare complain to the Post Office – No sireeee! Open your mouth and next thing you know, the bills you paid show up late or get lost, and your Sears catalog order comes smashed to smithereens.

“No wonder kids today are such softies! I was down at your Post Office the other day and they were having an open house! Imagine that – sodas and balloons and prizes! And when the counter lines got long, they called another clerk from the back just to help out. Shoot, you don’t even have to go down there half the time. I saw those commercials about how the Post Office is cheaper and just as fast as those guys in the brown shorts, and darned if that postal lady didn’t come right to the door with a priority mail package and my new winter long johns!”

What happened to the Post Office?

Other facts you may want to know:

  • In Grandpa’s day, the Post Office was a government corporation, its yearly funding part of the federal budget.
  • Today, the Post Office is a quasi-public corporation. Within guidelines provided by the federal government, the Post Office must cover its operating costs by charging for the services it provides.
  • Federal law says that only the Post Office can deliver first class mail. Grandpa thinks that’s ok since people send money , contracts, and other valuable things through the mail; it just made him mad that the Post Office never acted like he was an important customer. Now that they do, he’s happy, because he doesn’t trust e-mail or faxes. Says it doesn’t seem natural to just launch messages into the air like that!

Fill in the chart below to analyze the changes in the Post Office.

the old Post Office today’s Post Office
opportunity cost
prices
incentives
property rights
transaction costs

see student handout and teacher guide

Procedures

The concepts and principles we have used to analyze some of the economic problems of the Soviet Union are applicable to situations other than those found in the USSR. In much the same way that a mechanic may use his tools to fix any number of makes and models of cars, we can use economic reasoning to understand conditions in ancient tribal economies, in modern Asia, or even in the United States. The mechanic’s knowledge of the fundamentals of the internal combustion engine gives him a framework and suggests a procedure for finding out why a customer’s car doesn’t run right; knowledge of the fundamentals of economics allows us to discover what’s wrong when parts of our economy seem to be “broken” or don’t work quite the way we want them to.

  1. Suppose that your car isn’t running smoothly; it’s difficult to start and misfires frequently. When you take the car to your mechanic – or when you put on your own mechanic’s overalls – the immediate problem is to use knowledge of engines to answer the question: What things can make a car misfire?
    • Compiling a mental list, the mechanic (or you) begin(s) to check through your car’s engine, eliminating each possibility in turn, until the problem reveals itself. Each item on the list becomes, in effect, one of the mechanic’s mental tools:
      • spark plugs: Are they damaged or improperly connected?
      • compression: What are the results of a compression check?
      • carburetor: Is the mixture of air and gas correct?
      • fuel: Could there be water in the gas tank?
  2. Now it’s your turn. Use the mechanic analogy to identify the economic tool kit or checklist you’ve acquired by completing the lessons in The Economic Demise of the Soviet Union. You should have 5 tools. List the 5 tools below and next to each entry, list at least two diagnostic questions you might ask in trying to discover what’s wrong with the “engine,” – er, that is, the economy. (See handout: Problems in the Economy – Diagnostic Chart)
  3. Describing an economic problem in the US economy:
    • Once you’ve organized your economic tool kit, you’re ready to tackle an economic problem. Let’s start with something as close to home as the local office of the Department of Motor Vehicles (DMV).
    • Ask the class to help write a script about a visit to the local DMV. Begin the story something like this:
      • “When I got my car registration renewal form in the mail a week ago, I noticed that there was a mistake, so yesterday, I left school during my lunch hour and went to the DMV office near school. Knowing I might have to stand in line, I took my sandwich with me, confident that I’d get the business done in plenty of time to get back to school for my next class. Well, silly me . . . “
      • Note: Tailor the story to the situation in your state. Some states now contract with private firms for car registration – with the result that long lines have been eliminated.. If that is the case in your state, change the story to read, “I noticed last week that I’d forgotten to renew my driver’s license on my birthday and it had expired, so yesterday . . . “
    • As students fill in the story line, embellishing it with tales of their own experiences or those of their friends and family, make a list of “symptoms” on the board.
      • Symptoms might include long, slowly moving lines, clerks who take breaks when there are still lots of people in line; clerks who can’t answer customers’ questions, fees or charges that seem arbitrary or hard to understand, etc.
    • Point out that the list of “symptoms” provides clues and that the economic tool kit can help you identify the problem that causes the DMV portion of our economy to function poorly.
  4. Small group practice: Direct students to use the tool kit chart, individually, to analyze the DMV phenomenon. After 5 to 10 minutes, combine students into pairs to share and revise their analyses. When pairs are finished, hold a large group discussion.
  5. Discussion Questions:
    • What is the most obvious symptom of the DMV problem and which of the 5 tools in your kit seems best suited to address this problem? (The lines are the most obvious symptom of the problem, and “transaction cost” is the appropriate tool of analysis. Note: If students suggest that incentives are the problem, suggest that they are making an assumption or hypothesis that they can verify only from the front of the line, not from the back.)
    • Which of the transaction cost questions are applicable to diagnosing the situation and how did you answer them?
      • What is the transaction cost? (the time spent in line)
      • Why does it exist? (because there is too little service being provided for the number of people who want it)
      • Who bears the transaction cost? (the people waiting in line)
      • Does everyone in line bear the same cost? (No. An unemployed person or a retired person bears a lower opportunity cost than a lawyer who is late for a trial or a someone who will have to punch in late on the time clock at work because she was standing in line.)
      • Does the clerk benefit from your waiting in line? (No, he can’t raise the license fee and his income is not determined by the license fee.)
      • Are there people who can escape the transaction costs? If so, who? How? If not, why is no one able to do so? (There don’t appear to be any legitimate ways to avoid the lines. However, the people in line sure wish that they “knew someone,” or that the DMV clerk was a friend of whom they could ask “a favor,” etc.)
    • Ok, now that we understand the line, in your experience, what happens when you get to the front of the line? Stories included clerks going on break just as you get to the front, lots of people chatting on the phone or in groups at desks while only one or two clerks work the counter, clerks who are exceedingly slow and/or who don’t know the answers to your questions – and don’t seem to care.
      • What is your most useful tool for explaining “Why would the clerk be so unresponsive to the line of people waiting?” (incentives)
      • Answer the questions from your tool kit about incentives:
      • What behavior (of buyers and/or sellers) do you find strange or undesirable? In this case what is it about the clerks’ behavior that bothers you? (The fact that it’s their job to wait on people but they don’t seem very eager to do it, or that government employees who are supposed to serve the public don’t show much interest in being of service, or that the behavior of the clerks is so different from that of the clerks in the shopping mall right next door.)
      • Who benefits from this behavior? (the clerks do; they don’t have to work as hard)
      • Who bears the cost of this behavior? (the people in line)
      • Are clerks rewarded for their disinterested and inefficient behavior? how? (hard to tell – unless the reward is in being less burdened by work)
      • Are people punished for this behavior? how? (they don’t appear to be)
    • Showing the clerk your completed form, you ask why the fee is so much higher than it was last year. The clerk shrugs and says, “Cuz that’s the way it is.”
      • Is the fee a price? (No – it is not the result of the interaction of supply and demand.)
      • Is there a market for motor vehicle registration or drivers’ licenses? (No. Law allows no market for the services the DMV provides – auto registration and driver licensing.)
      • How are DMV fees determined? (according to a DMV formula based on state legislation. They are not a reflection of the interaction of supply and demand.)
      • How are fees and prices different in terms of the information they provide? Fees provide no information about buyers and sellers, while prices tell us a great deal about the interaction of buyers and sellers in the market. In this case, the “seller” – the DMV – probably knows that everyone would like to pay less, but does not know if people would be willing to pay more, which people might be willing to pay more, when people might be willing to pay more, etc. The buyers don’t know if the price is high or low, whether or not others value the service highly, whether the resources used in the service are highly valued for other uses, etc.)
      • What is the response of buyers to the fee? of sellers? (There is no discernible response. Buyers don’t have the ability to refuse the product or to substitute something else. Sellers don’t have the ability to change the price in response to their perception of people’s demand – the length of the line – or to alternative uses of the resources.)
    • Asking to see the person in charge probably doesn’t get you much additional satisfaction:
      • Who is “in charge?” (another DMV employee)
      • Who has the property rights? (We can’t identify an individual owner of the property rights. We purchase our motor vehicle registration from the government rather than from an entrepreneur or residual claimant. In a sense, we “all,” own the DMV, but as we learned in the Soviet Union’s example, that’s the same as “nobody” owning it.)
    • So why is the DMV organized and run this way? (What choice was made and what is the opportunity cost?)
      • What were the available alternatives? (This could be an interesting discussion because there are seemingly lots of alternatives: state registration of motor vehicles, no registration of motor vehicles, registration run by a for-profit contractor, voluntary registration for a fee, etc.)
      • What choice was made? (mandated, state-run vehicle registration)
      • What was the next-best alternative, the opportunity cost? (accept a variety of answers)
      • Who made the choice? (state legislature)
      • Who reaps the benefits? (depends on who benefits from the programs and projects financed by the resulting tax revenue)
      • Who bears the costs? (motor vehicle owners)
      • Are the same people who receive the benefits bearing the costs? (depends on how the revenue is spent – if, for example, it is used to finance road construction or repair, drivers of motor vehicles would benefit. If the revenue is used for other purposes, the connection between bearing the costs and reaping the benefits may be broken.)
      • (optional) Extension question: Some states have chosen to provide motor vehicle registration through a private contractor. What are the benefits and costs of this decision? (Student answers will vary. However, note that in the states that have adopted private contracting, the contractor is a residual claimant and has an incentive to provide the service quickly and at low cost. Not surprisingly, lines have been greatly reduced or eliminated.)
  6. Usually, we don’t want the mechanic to just diagnose what’s wrong with the car, we want him/her to fix it. That may not always be the case with the economy – and we may not have the ability to make the indicated repairs, but presume that we do.Assign each group of students one of the simulations below. The group is to identify the tool of economic reasoning that is most applicable to their situation (and be prepared to justify their choice). After filling in the appropriate row on the diagnostic chart, they are to propose a change in the identified parameter, and create a before-and-after skit predicting the effect of that change.
    • The rock group, Throwing Tomatoes is scheduled to perform at the local stadium during the first week of summer break and tickets go on sale May 1st. The line begins to form early on April 30th and area high schools report record absentee rates. In addition, an impromptu local group, calling itself “Middle-aged Tomato Lovers” is protesting what they call “unfair ticketing practices, that deny upstanding citizens in the ‘forty-something’ age range their right to Throw Tomatoes just like the kids!” (Is there a problem? Are the ticketing practices unfair?)
    • A small western city that depends heavily on tourists attracted by the spectacular scenery and nearby recreation opportunities suffers severe winter smog problems caused by temperature inversions in the valley where the town is situated. In an effort to solve the problem and maintain the high level of tourism which employs so many of the city’s residents, the mayor and city council began a program of “Voluntary No-Drive Days,” based on vehicle license plate numbers. Cars with plates ending in even numbers were to be off the road on days with even dates and cars with plates ending in odd numbers were to be off the road on days with odd dates. A study of the first year of the program revealed that compliance with the voluntary no-drive restrictions was less than 5%. In an interesting side light, the DMV reported an increase in the number of people trading in their license plates in an effort to make sure that one car had even numbered plates and the other odd. (What is the basis of the problem? Propose a solution that doesn’t involve legally mandating no-drive days.)
    • As the personal computer transformed from a novelty to a necessity, Apple made what, in hindsight, would be a critical decision to not allow cloning. Even today, while Gateway, Dell, Compaq, Toshiba and a plethora of others have evolved from IBM’s original operating system, Apple Computers are still Apple Computers. And, while Apple users consistently report how much they “love their Macs,” many have, reluctantly, switched to PCs, for which both office and entertainment software is much more varied and available. (Why is a company struggling to stay in business if consumers love the product?)
    • A teenagers works two summer jobs, one as morning counter help at the local fast food franchise owned by his parents and the other waiting tables in a neighborhood restaurant. When his parents dine at the restaurant before going to a movie, they think it wise not to sit at one of his tables if they want to be on time. However, they are amazed to see that their son, who drags his feet all morning long, is indifferent to customers’ requests, and whose manner his father describes as “borderline surly,” is charming, efficient, and industrious. When the manager stops by to tell them that their son is one of his best employees and the top tip earner, they are bowled over. After talking it over, they decide that there’s just no other explanation; clearly he is just not a morning person, but they can hardly fire their own son! (Do the parents have a clue?)
    • A large city received voter authorization to construct a new airport to replace the existing site which has been surrounded by housing developments. In anticipation of future growth, the airport was built in a remote location 10 miles outside the city, more than an hour from the western suburbs, doubling or tripling most residents’ drive time. Recognizing the increased distance and the potential for difficult driving during storms, the airport planners determined that people would be unlikely to take their cars to the airport, especially if there was an inexpensive and efficient alternative. Consequently, they paid special attention to provisions for public transport to the new location, designated several parking locations in the city, and added city bus routes between the parking lots and the terminal. In addition, they authorized the licensing of additional shuttle companies. Having announced these accommodations, they proceeded with the construction, saving money by including only 2 parking garages. The parking rate was $5/day, a 40% increase over rates at the old airport. From the day the airport opened, despite the efficient and effective operation of the shuttles, the parking garages were packed. Travelers were furious to find that after the long drive to the airport, they could not park and had to make the long trip back into town. (What important information does everyone seem to be ignoring?)
    • Teacher Note: Tomatoes-= transaction costs, Smog-= property rights, Computers – opportunity cost, Teen Worker – incentives, Airport – markets and prices
  7. Distribute skit charts and review the directions. (Students are to fill in the chart as they watch other groups’ skits.) Stage the skits for the class.

Problems in the Economy – Diagnostic Chart

Economic “tool” Diagnostic Questions

teacher’s guide to diagnostic chart

Economic “tool” Diagnostic Questions
opportunity cost
  • What were the available alternatives?
  • What choice was made?
  • What was the next-best alternative?
  • Who made the choice?
  • Who reaps the benefits?
  • Who bears the costs?
    • Are the same people who receive the benefits bearing the costs?
  • Was the assessment of costs and benefits made on the basis of faulty or insufficient information?
  • Was there a mistake made in identifying costs and benefits?
market prices
  • Are there prices?
  • Are the prices market prices? (How were the prices determined?)
  • What kinds of information are the prices giving – to buyers? to sellers and/or producers?
  • What is the buyer’s response to the price? the seller’s response?
  • Why are they responding in this way?
incentives
  • What behavior (of buyers and/or sellers) do you find strange or undesirable?
  • Who benefits from this behavior?
  • Who bears the cost of this behavior?
  • Are people rewarded for this behavior? how?
  • Are people punished for this behavior? how?
  • Are there other people in analogous situations who behave differently – that is, in a desirable manner?
  • Are the incentives in the two situations the same or different?
  • Can you think of a way to change the incentives to produce the behavior you prefer?
property rights
  • Who has the property rights?
  • What is the nature of the property rights – are they limited in some way?
  • Are the property rights enforced? if not, why not?
  • Would changing the property rights change the behavior of the people (buyers, sellers, users) involved? If so, how? If not, why not?
transaction costs
  • What is the purpose of the transaction costs?
  • Who bears the transaction costs?
  • Who (if anyone) benefits from the transaction costs?
  • Are there people who can exclude themselves from the transaction costs? If so, who? How? If not, why is no one able to do so?
  • How could the transaction costs be eliminated?
  • What do you think would happen if the transaction costs were eliminated? Why?

student handout – group 1

The Case of the Contested Concert Tickets

Directions:

  1. Discussion groups have been given different scenarios, one dealing with each of the 5 economic principles on your diagnostic chart. Read the scenario below. Decide which of the tools of economic reasoning is most applicable to this situation. Refer to the questions on your diagnostic chart to identify the problem and to fill in the appropriate row on the chart.
  2. Using the economic concept you choose as your primary diagnostic tool, propose a change and predict the outcome. Be prepared to explain and defend your prediction, in terms of economic reasoning.
  3. Create a short before-and-after skit to show the class your analysis and prediction.
  4. Fill in the other rows of the chart by watching the skits of other groups.

The rock group, Throwing Tomatoes, is scheduled to perform at the local stadium during the first week of summer break and tickets go on sale May 1st. The line begins to form early on April 30th and area high schools report record absentee rates. In addition, an impromptu local group, calling itself “Middle-aged Tomato Lovers” is protesting what they call “unfair ticketing practices, that deny upstanding citizens in the ‘forty-something’ age range their right to Throw Tomatoes just like the kids!” (Is there a problem? Are ticketing practices unfair?)

Concept Diagnosis of the Problem
(use the diagnostic questions)
Proposed Change Predicted Outcome
opportunity cost
prices and markets
incentives
property rights
transaction costs

student handout – group 2

The DWS (Driving With Smog) Case

Directions:

  1. Discussion groups have been given different scenarios, one dealing with each of the 5 economic principles on your diagnostic chart. Read the scenario below. Decide which of the tools of economic reasoning is most applicable to this situation. Refer to the questions on your diagnostic chart to identify the problem and to fill in the appropriate row on the chart.
  2. Using the economic concept you choose as your primary diagnostic tool, propose a change and predict the outcome. Be prepared to explain and defend your prediction, in terms of economic reasoning.
  3. Create a short before-and-after skit to show the class your analysis and prediction.
  4. Fill in the other rows of the chart by watching the skits of other groups.

A small western city that depends heavily on tourists attracted by the spectacular scenery and nearby recreation opportunities suffers severe winter smog problems caused by temperature inversions in the valley where the town is situated. In an effort to solve the problem and maintain the high level of tourism which employs so many of the city’s residents, the mayor and city council began a program of “Voluntary No-Drive Days,” based on vehicle license plate numbers. Cars with plates ending in even numbers were to be off the road on days with even dates and cars with plates ending in odd numbers were to be off the road on days with odd dates. A study of the first year of the program revealed that compliance with the voluntary no-drive restrictions was less than 5%. In an interesting side light, the DMV reported an increase in the number of people trading in their license plates in an effort to make sure that one car had even numbered plates and the other odd. (What is the basis of the problem? Propose a solution that doesn’t involve legally mandating no-drive days.)

Concept Diagnosis of the Problem
(use the diagnostic questions)
Proposed Change Predicted Outcome
opportunity cost
prices and markets
incentives
property rights
transaction costs

student handout – group 3

An Apple Today . . .

Directions:

  1. Discussion groups have been given different scenarios, one dealing with each of the 5 economic principles on your diagnostic chart. Read the scenario below. Decide which of the tools of economic reasoning is most applicable to this situation. Refer to the questions on your diagnostic chart to identify the problem and to fill in the appropriate row on the chart.
  2. Using the economic concept you choose as your primary diagnostic tool, propose a change and predict the outcome. Be prepared to explain and defend your prediction, in terms of economic reasoning.
  3. Create a short before-and-after skit to show the class your analysis and prediction.
  4. Fill in the other rows of the chart by watching the skits of other groups.

As the personal computer transformed from a novelty to a necessity, Apple made what, in hindsight, would be a critical decision to not allow cloning. Even today, while Gateway, Dell, Compaq, Toshiba and a plethora of others have evolved from IBM’s original operating system, Apple Computers are still Apple Computers. And, while Apple users consistently report how much they “love their Macs,” many have, reluctantly, switched to PCs, for which both office and entertainment software is much more varied and available. (Why is a company struggling to stay in business when consumers love the product?)

Concept Diagnosis of the Problem
(use the diagnostic questions)
Proposed Change Predicted Outcome
opportunity cost
prices and markets
incentives
property rights
transaction costs

student handout – group 4

Help Wanted: “Morning People” Only

Directions:

  1. Discussion groups have been given different scenarios, one dealing with each of the 5 economic principles on your diagnostic chart. Read the scenario below. Decide which of the tools of economic reasoning is most applicable to this situation. Refer to the questions on your diagnostic chart to identify the problem and to fill in the appropriate row on the chart.
  2. Using the economic concept you choose as your primary diagnostic tool, propose a change and predict the outcome. Be prepared to explain and defend your prediction, in terms of economic reasoning.
  3. Create a short before-and-after skit to show the class your analysis and prediction.
  4. Fill in the other rows of the chart by watching the skits of other groups.

A teenagers works two summer jobs, one as morning counter help at the local fast food franchise owned by his parents and the other waiting tables in a neighborhood restaurant. When his parents dine at the restaurant before going to a movie, they think it wise not to sit at one of his tables if they want to be on time. However, they are amazed to see that their son, who drags his feet all morning long, is indifferent to customers’ requests, and whose manner his father describes as “borderline surly,” is charming, efficient, and industrious. When the manager stops by to tell them that their son is one of his best employees and the top tip earner, they are bowled over. After talking it over, they decide that there’s just no other explanation; clearly he is just not a morning person, but they can hardly fire their own son! (Do the parents have a clue?)

Concept Diagnosis of the Problem
(use the diagnostic questions)
Proposed Change Predicted Outcome
opportunity cost
prices and markets
incentives
property rights
transaction costs

student handout – group 5

“I Don’t Go Anywhere Without My Car!”

Directions:

  1. Discussion groups have been given different scenarios, one dealing with each of the 5 economic principles on your diagnostic chart. Read the scenario below. Decide which of the tools of economic reasoning is most applicable to this situation. Refer to the questions on your diagnostic chart to identify the problem and to fill in the appropriate row on the chart.
  2. Using the economic concept you choose as your primary diagnostic tool, propose a change and predict the outcome. Be prepared to explain and defend your prediction, in terms of economic reasoning.
  3. Create a short before-and-after skit to show the class your analysis and prediction.
  4. Fill in the other rows of the chart by watching the skits of other groups.

A large city received voter authorization to construct a new airport to replace the existing site which has been surrounded by housing developments. In anticipation of future growth, the airport was built in a remote location 10 miles outside the city, more than an hour from the western suburbs, doubling or tripling most residents’ drive time. Recognizing the increased distance and the potential for difficult driving during storms, the airport planners determined that people would be unlikely to take their cars to the airport, especially if there was an inexpensive and efficient alternative. Consequently, they paid special attention to provisions for public transport to the new location, designated several parking locations in the city, and added city bus routes between the parking lots and the terminal. In addition, they authorized the licensing of additional shuttle companies. Having announced these accommodations, they proceeded with the construction, saving money by including only 2 parking garages. The parking rate was $5/day, a 40% increase over rates at the old airport. From the day the airport opened, despite the efficient and effective operation of the shuttles, the parking garages were packed. Travelers were furious to find that after the long drive to the airport, they could not park and had to make long trip back into town. (What important information does everyone seem to be ignoring?)

Concept Diagnosis of the Problem
(use the diagnostic questions)
Proposed Change Predicted Outcome
opportunity cost
prices and markets
incentives
property rights
transaction costs

teacher guide to small group problems

Concept Diagnosis of the Problem
(use the diagnostic questions)
opportunity cost
  • Apple’s alternatives were to allow cloning of their operating system or to not allow it. By not allowing it, they reaped the benefits of being the only supplier of home computers using their very user-friendly system. They gave up the benefits of allowing others to clone their system.
  • It turned out that those benefits were substantial, in terms of product innovation and price reductions that greatly increased the market share of PCs. With the benefit of hindsight, it is easy to say that Apple made a mistake in underestimating the opportunity cost of being the exclusive supplier – and it doesn’t do them much good in terms of profit to claim that PCs are becoming more and more like Macs.
  • Students may offer a variety of predictions about what would have happened if Apple had chosen the other alternative. Make sure that they address the opportunity cost – the benefits of remaining an exclusive that Apple would have given up.
prices and markets
  • The airport planners are ignoring the information provided by price. Even though they raised the parking price compared to the old airport, the fact that the lot is always full – too full – tells them that they haven’t provided enough parking at that price, or that they need to raise the price, or that the price of shuttles isn’t low enough to change people’s demand, etc.
  • This is typical of decisions in which prices are set by government planners who have insufficient information. At the very least, the planners should have created contingency plans that allowed them to change both the price and the supply of parking in the months after the airport opened, and/or they should have offered a variety of parking options at different prices to find out how consumers would use the new airport.
  • Possible solutions include turning over both parking and shuttle service to private companies that must pay a fee to the government and then is free to set prices.
incentives
  • The parents are explaining their son’s behavior in terms of his personality rather than in terms of incentives. Whether he’s a morning person or not is irrelevant. The difference is that as counter help, they pay him the same hourly rate no matter how hard he works. Since he knows they won’t fire him, and since he doesn’t see a direct connection between the success of the franchise and his income, he doesn’t work very hard. In the restaurant, however, he gets tips and he quickly figured out that his attitude and efficiency have a big impact on his income.
  • The parents might consider a way to change the incentives for their son. They might offer him a bonus structure based on the numbers of meals sold at the counter during his shift, or on the numbers of compliments they hear about him from customers. Or, they might make his hourly pay fluctuate with the success of the business in the previous week.
property rights
  • The problem here is that no one owns the air – and therefore, no one gets a direct benefit from making sure it stays clean. This is a classic case in property rights known as “the tragedy of the commons,” in which resources owned in common are overused.
  • Drivers see no benefit from not driving themselves because everyone else is. In addition, the individual driver is both powerless to stop others from driving and aware that his own sacrifice of the convenience of driving makes little difference in the overall smog problem.
  • Proposals to change the situation – without legally mandating no drive days – would rely on assigning property rights. If the state has the property rights to air, it could, for example, charge you a fee for every mile you drive, based on how much your car pollutes. This “fee” could be figured by an odometer check and paid with your yearly vehicle registration.
transaction costs
  • Standing in line to get tickets does, in general, impose greater costs on middle-aged people than it does on teenagers because their time is generally worth more than a teenager’s time.
  • Perceptions will differ as to whether or not this is “fair.” Using lines may be a conscious decision on the part of concert tour promoters who know that in the long run, it is teenagers who buy more of the collateral products like CDs, T-shirts, and posters. They may choose to keep ticket prices lower knowing that teenagers will stand in line- because of the opportunity cost of their time – and adults are less likely to do so.
  • Raising prices may reduce the transaction costs, but you could argue that older people who could pay higher ticket prices could also pay someone to stand in line for them.
  • Some concert promoters use a lottery for ticket sales.

student handout

Assessment:

A Brief History of the Post Office (As Told By Grandpa McCoy)

“You kids these days have it so easy. Why, back when I was a young whippersnapper like you, we had to walk 5 miles to school – and it was uphill both ways, too. And when I started to work, I made 10 cents a day, digging worms and selling them to fishermen, to support my mother and the little ones. But I tell you, worst of all, was having to go to the Post Office. In those days, stamps were 3 cents – which is about the same as 3 gazillion dollars now – and a trip to the Post Office was a nightmare. Friend of mine waited in line so long, he grew a beard. And, I think it was a law then that when you got to the front of the line, the clerk would go to the back to get something and never return! And you didn’t ever dare complain to the Post Office – No sireeee! Open your mouth and next thing you know, the bills you paid show up late or get lost, and your Sears catalog order comes smashed to smithereens.

“No wonder kids today are such softies! I was down at your Post Office the other day and they were having an open house! Imagine that – sodas and balloons and prizes! And when the counter lines got long, they called another clerk from the back just to help out. Shoot, you don’t even have to go down there half the time. I saw those commercials about how the Post Office is cheaper and just as fast as those guys in the brown shorts, and darned if that postal lady didn’t come right to the door with a priority mail package and my new winter long johns!”

What happened to the Post Office?

Other facts you may want to know:

  • In Grandpa’s day, the Post Office was a government corporation, its yearly funding part of the federal budget.
  • Today, the Post Office is a quasi-public corporation. Within guidelines provided by the federal government, the Post Office must cover its operating costs by charging for the services it provides.
  • Federal law says that only the Post Office can deliver first class mail. Grandpa thinks that’s ok since people send money , contracts, and other valuable things through the mail; it just made him mad that the Post Office never acted like he was an important customer. Now that they do, he’s happy, because he doesn’t trust e-mail or faxes. Says it doesn’t seem natural to just launch messages into the air like that!

Fill in the chart on the following page to analyze the changes in the Post Office.

student handout – assessment

the old Post Office today’s Post Office
opportunity cost

  • What decision was made about the provision of mail service and what was the opportunity cost of that decision?
prices

  • What information does the price of a stamp provide?
  • why does the price of stamps change more frequently today than at Grandpa’s Post Office?
incentives

  • What are the incentives facing postal employees and what behavior is encouraged / discouraged by those incentives?
property rights

  • How can we use knowledge of property rights to explain the unresponsiveness of the old Post Office? the responsiveness of the new Post Office? the success of companies like UPS and Fed Ex?
transaction costs

  • What does Grandpa’s description tell you about transaction costs in the old Post Office? the new Post Office? the success of Fed Ex and UPS? individuals’ willingness to try using fax or e-mail services

teacher’s guide to the assessment

the old Post Office today’s Post Office
opportunity cost

  • What decision was made about the provision of mail service and what was the opportunity cost of that decision?
  • The decision was made that mail delivery was to be a government function, funded largely by taxes.
  • The opportunity cost of the decision was giving up the benefits – mostly in efficiency and responsiveness – of providing mail service through a competitive market
  • A decision was made that the Post Office must be self-supporting.
  • The opportunity cost of that decision was giving up low-priced stamps and consumer tolerance for the inefficiencies and lack of responsiveness.
prices

  • What information does the price of a stamp provide?
  • why does the price of stamps change more frequently today than at Grandpa’s Post Office?
  • Stamp prices provided no information – either about how much consumers wanted or valued the service or about how much it cost to provide the service in comparison to substitutes.
  • Stamp prices still do not provide accurate information about consumers’ demand for the service. However, they do provide a little more information about how much it costs to run the Post Office – information that consumers may use in voting or in offering feedback to their elected representatives.
incentives

  • What are the incentives facing postal employees and what behavior is encouraged / discouraged by those incentives?

 

  • Postal employees are paid for their time.
  • There is no reward for doing more work and no penalty for doing less.
  • Thus, the incentives encourage workers to take a long time to perform tasks – both because there is no penalty for being slow and because there may, in fact, be a reward in the form of overtime pay.
  • Workers are also discouraged from working harder than anyone else. There is no reward for doing so, and there may be a penalty in the form of colleagues who resent that they’re being made to look bad.
  • Consumers have no alternative to the Post Office. Workers thus have “guaranteed jobs” and no reason to be responsive to customers.
  • Postal employees are still paid for their time. However, because the Post Office must be self-supporting, it now must compete with alternatives – e-mail, fax service, package delivery companies, and messenger agencies for the customer’s business.
  • This changes incentives for the managers of the Post Office, who must make sure that the operation can cover it’s costs and retain enough business to justify its existence. Hence the improved counter service, open house parties, etc.
  • This also changes the incentives for workers in that a decline in customers means a cut in jobs.
property rights

  • How can we use knowledge of property rights to explain the unresponsiveness of the old Post Office? the responsiveness of the new Post Office? the success of companies like UPS and Fed Ex?
  • The Post Office has no owner – no residual claimant who gets the profits and bears the losses.
  • Taxpayers fund the Post Office and pay the salary of the Post Master General. He is not motivated by profit.
  • There is still no “owner” of the Post Office, but new legislation means that the Post Office must operate as if there is – in other words, as a corporation. While not necessarily trying to make a profit, the Post Office does try to avoid loss, and this makes it more concerned about customers.
  • Competitors to the Post Office began with the disadvantage of being legally unable to deliver first class mail. Motivated by profit, they looked for things consumers wanted. They found the opportunity to profit in service and convenience.
transaction costs

  • What does Grandpa’s description tell you about transaction costs in the old Post Office? the new Post Office? the success of Fed Ex and UPS? individuals’ willingness to try using fax or e-mail services?
  • Transaction costs in the old Post Office were extremely high. However, there were few acceptable alternatives and customers paid the transaction costs rather than go without the service.
  • Transaction costs in today’s Post Office are much lower as the Post Office must compete with businesses who realized that their chance to profit was in reducing or even eliminating transaction costs.
  • Today, when transaction costs at the Post Office rise, more and more people switch to alternatives like package delivery, messenger, e-mail, and fax.