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The Undercover Economist: Exposing Why The Rich Are Rich, The Poor Are Poor--And Why You Can Never Buy A Decent Used Car!
By Tim Harford
The Undercover Economist by Tim Harford gives readers an economist's view of many aspects of how the free market works and how it can bring about certain societal conditions.
Topics discussed in The Undercover Economist include the power of controlling scarce resources, how supermarkets price goods to maximize profits and confuse consumers, and how inside information affects negotiations.
An interesting chapter Why Poor Countries Are Poor evaluates the role corruption and kleptocracy play in keeping poor countries poor. Harford points out that corruption is not only unfair, but it's also ineffective at distributing resources and growing a country's economy.
As one resident of a poor country notes, even if the country receives massive financial aid to improve infrastructure, it doesn't matter, because the dictators tend to pocket the money. And, what is actually spent on infrastructure is often wasted.
Harford writes: "Development projects are often commissioned by people with no great interest in success but a great interest in bribes and career advancement. If the effectiveness of the project is a minor consideration, then it can hardly be a surprise if the project does not deliver on the publicly announced aims, even if it has delivered on the real aims of enriching bureaucrats." [Unfortunately, this is happening more and more in America today due to the growth of earmarks, where politicians set aside government investment for specific projects. These projects benefit cronies who in turn support the politicians.]
People have little incentive to get an education in a corrupt country, because people don't receive jobs based upon meritocracy. Jobs are given to political cronies. Governmental institutions then become dysfunctional. The institutions tend to become more corrupt. The lesson: institutions do matter, and an objective rule of law is crucial to a country's economic well-being. The citizens of a country ultimately pay for political corruption.
The Undercover Economist devotes one chapter to understanding what happened during different government auctions of cellular radio spectrum, i.e., the right to create cellular networks and thus sell phone service to customers. How the auctions were set up played a major role in determining if the auctions were effective in raising revenue for the government.
Harford compares the spectrum auctions to auctioning off your house, worth $300,000 and receiving either $3,000 or a whopping $2.3 million. The author includes a good discussion of poker and game theory. In the case of the successful U.K. auctions, Harford says economists showed they could "earn their keep."
The Undercover Economist argues it's important to set rewards and penalties, so it's in the best interests of people and industries to behave responsibly (we'll just define "responsibly" as meaning what broader society wants). By doing so, Harford suggests economic policies can address major problems not usually considered economic in scope.
For example, Harford discusses how sulfur emissions were reduced by auctioning off the rights to produce a given quota of sulfur emissions. Harford explains: "They [the EPA] set up an auction for the right to emit sulfur dioxide, which causes acid rain. Polluters were given a quota of emission permits and could either buy more permits in the auction or reduce their emissions by shutting down, installing sulfur scrubbers, or buying cleaner coal. When the EPA simply tried to tell them to install sulfur scrubbers, the power generators argued that it would be very expensive to do so, and they lobbied hard to stop the mandatory regulation. Even the EPA estimated that the cost of reducing sulfur dioxide emissions by one ton would probably be in the range of$250 to $700 and might be as high as $1,500. But when the EPA conducted the auction in 1993, very few polluters made high bids. The companies had been exaggerating their costs. By 1996, permit prices had fallen to $70 a ton, and even at that price many polluters were buying cleaner coal or installing scrubbers rather than buying permits to continue polluting. … The regulators discovered that getting rid of sulfur dioxide was so cheap that few people were willing to pay much for the right to keep producing it."
Harford says economists today could create the same sort of auctions for dealing with greenhouse gas emissions to combat global warming. Through such an auction system, Harford says, we'd quickly learn just how much it really costs to reduce greenhouse gas emissions.
The Undercover Economist by Tim Harford is a readable introduction to many aspects of economics and how they play out in everyday life.