Sunday, February 11, 2007

Seeking the True Promise: the Difficulty of Forming Cartels

My last two posts were inspired by recent news articles in the field of economics. While newspapers and magazines are important sources of reports on current events, blogs also provide interesting and valuable information that enhances our understanding of the world around us. For the general public who are uninterested in studying data and figures, reading economic news can be boring or overwhelming. Some authorities in the field, however, make enlightening, witty, and engaging comments in their blogs, which encourage people to examine some of the major issues. In my time of research this week I explored blogs written by university professors and economists and found two posts to be especially informative and humorous. One of the posts discusses the difficulties of establishing collusion in the classroom; the other mentions that the reluctance to cooperate in the international community hinders efforts to prevent global warming. The permanent links to the posts as well as my own comments can be found below.

As a student of economics I have witnessed many attempts made by my classmates to collectively cut back studying. Unfortunately all of the collusion efforts, as predicted by Professor Caplan, ended in failure. When my high school economics teacher encouraged the class to organize a boycott against his final, no one believed that he was serious, for we all thought forming a cartel would be easy—at least easier than studying for a cumulative exam. Had we understood the four big reasons, we would not haven been so optimistic. I must admit that I am a “hold-out,” always reluctant to participate in the collusion because I love studying economics. I act as a consumer deriving satisfaction from my education rather than as a firm trying to maintain high price, or high grade in this case. My level of utility does not depend solely on my grade in a positive and linear relationship; instead I have indifference curves mapped on two axes—“economic wisdom accumulated” and “points received on the exam.” I would enjoy the same level of utility if I learn the material but fail the exam or if I learn nothing but receive an A. If I study and earn an A as a result, however, my indifference curve and thus my level of happiness would be much higher than under the two previous conditions. Of course not all of my classmates share my interest. So I agree that heterogeneity is an important cause of the failure of collusion in the classroom.

Permanent Link: EconLog

Dr. Roberts’s argument treats China and the U.S. as two firms in a cartel trying to maintain low level of pollution. If both countries honor the Kyoto treaty, they benefit from the slowing down of global warming. Because reducing greenhouse gas emission leads to a decrease of output, however, if one country keeps its promise while the other continues to pollute, the GDP of the latter would increase at the cost of that of the former. Dr. Roberts predicts that China will not reduce gas emission and suggests that the U.S. should not do so either. But according to Qin Dahe, who co-chairs the Chinese intergovernmental panel on climate change (IPCC) working group, China has set “the goal of cutting its energy consumption by 20 percent per unit of GDP in the period from 2006 to 2010” and has already “reduced emissions by some 800 million tons of coal equivalent from 1991 to 2005.” Qin also states that China’s “forests, grasslands and natural reserves have helped absorb another 3.06 billion tons.” If these data are accurate, the U.S. should, perhaps, make an effort to cut back emission as well. After all, assuming the worst from the partner firm is not the best attitude with which to start collusion.

Permanent Link: Cafe Hayek

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