Download Shifting Demand and Large Screen Shock Value (also cartoons

CHAPTER 5
USING SUPPLY AND DEMAND

LAUGHER CURVE
Q. How many conservative economists does it take to screw in a light bulb?
A. None. If the government would just leave it alone, it would screw itself in.
______________________________________________________________________________
CHAPTER OVERVIEW: What’s It All About?
While Chapter 4 introduced the rudiments of supply and demand, with a preliminary discussion
of equilibrium, this chapter goes into much more detail. Three real-world examples are
discussed and analyzed in detail; government intervention in the form of price ceilings and price
floors, excise taxes, tariffs, and quantity restrictions are introduced. The chapter ends with a
discussion of third-party payer systems.
CHAPTER OBJECTIVES: Students Should Be Able To …
1. Explain real-world events using supply and demand. Students often ask “What’s the
connection of all this to real life?” Well, here it is.
2. Discuss how exchange rates are determined using supply and demand. When you want to
buy a foreign good you must pay for it in the currency of that country. Whether you or the
importer does it for you, someone must trade currencies.
3. Demonstrate the effect of a price ceiling and a price floor on a market. Using the
examples of rent controls (price ceilings) and the minimum wage (price floors), Colander
again ties the analysis to the real world. Discussions of minimum wage particularly makes
for spirited if not rabid debate. It’s funny how people get excited if it affects their
pocketbook.
4. Explain the effect of taxes and tariffs on equilibrium price. Taxes raise prices and reduce
quantity. In quantity restriction, governments can restrict markets by using licenses.
5. Explain the effect of a third-party payer system on equilibrium price and quantity. Under a
third-party payer system, the person who chooses how much to buy does not pay the entire
cost. Since the co-payment demanded by the consumer is much lower, quantity demanded
is much higher and so is total cost.
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Chapter 5: Applying Supply and Demand
WHAT’S NEW? Revisions to This Edition
See discussion of Chapter 4. Macro professors who want to provide only minimal micro
discussions can skip Chapter 5 without any loss of continuity. This chapter has been
significantly updated with two new real-world examples of supply and demand to start the
chapter (how shift in demand may not show up in a change in equilibrium price right away and
how shift factors affected the price of the euro). A discussion of the living-wage movement is
added to the minimum wage coverage and the quota example has been replaced with taxi
medallions (quantity restriction). The difference between a quota and tariff has been moved to
Chapter 21 (Chapter 17 in Macroeconomics). The chapter ends with an example of third-party
payer markets.
DISCUSSION STARTERS: Get Your Class Rolling
1. What effect do you think discrimination based on race, sex, or age has on labor markets?
2. What effect do you think the legalization of illicit drugs would have on that market in the
U.S.?
3. Suppose abortion were again made illegal in the U.S. What effect do you think this would
have on the market for the abortion procedures?
TIPS FOR TEACHING LARGE SECTIONS
Shifting Demand and Large Screen Shock Value (also cartoons – humor)
The factors that shift supply and demand curves make up some of the most basic ideas we
present in microeconomics. Although fairly straightforward, these concepts are also the easiest
to "spice up" with a wealth of current events that are relevant to students. For instance, shifts in
the music and entertainment industry occur daily and are a great interest to most students. For an
example, consider the cover story on the February 14, 2000 addition of People Magazine, "Pop
Princess Britney Spears: Too Sexy Too Soon? Little girls love her, but her image makes some
moms nervous. The controversial teen singer sets the record straight about breast implants (no
way!), much older guys (yuck!) and e-mailing Prince William ("He's so sweet!")” This title
provides a very interesting example of how an entertainer's image and choices affect the demand
for her product in general and from different sectors of the customer base.
A common feature in the large lecture hall is an equally large screen for showing
overhead transparencies or other projected images. When using an example such as Britney
Spears, make an overhead of the cover of the magazine with the relevant cover story title. If the
topic is not interesting enough on its own, a thirty foot Britney Spears projected on the wall has
plenty of shock value in its own right to capture student attention. This is another technique
well-suited to capturing the interest of students more oriented toward visual learning.
A Market Analysis Paper That Is Easy to Grade and Promotes Interaction
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Chapter 5: Applying Supply and Demand
In a large class setting it is often tempting to rely almost entirely on objective exam
questions to evaluate our students, and with good reason. Grading 500 papers of even a
relatively small length can be an overwhelming task. If you want to have a minor writing
component in your class, but with a manageable workload, the attached paper assignment is one
that has proven successful. The drawback is that the assignment is very structured, which limits
some of the student’s creativity. On the other hand, this same feature makes grading manageable
and consistent.
This assignment requires students to connect course content to a real-world, current event. Also,
the interview segment adds an interactive element to the paper. Students learn the material more
thoroughly because they are required to explain their work to someone with no background in
economics.
The Assignment:
For this paper you must select a current article from The Wall Street Journal, Business Week, a
newspaper or any other credibly written conveyor of news. (You may not use an article already
discussed in class.) The article must in some way relate to a change in one of the determinants of
demand and/or supply or the imposition of a price ceiling or price floor. The article must be
current, (published within the past 2 months). In large classes, without this time restriction,
students will try to submit another student’s paper from the previous semester thinking that you
won’t notice. I have caught at least 10 students doing this. The following is a specific breakdown
of how your paper will be evaluated. Divide your paper into sections to match the evaluation
scheme and use the same section headings as the ones provided below. The total text of your
paper should be approximately 3-typed pages in length, double-spaced. (I will deduct points if
I observe blatant length-stretching techniques such as two-inch margins, starting half way down the
first page, triple spacing, 15 point letter font, etc.)
Due Date: The paper is due at the beginning of class on …. I will accept late papers only
with written verification of a legitimate excuse.
Grading Criteria:
Part A. The Economic Analysis (this part of the assignment should be approximately 2 pages in
length and include any graphs).
Title Page: (5 points)
Be sure to include your name, social security number, and section number. Also include a
complete citation of the article with title, source of your article, page number, and the author's
name.
I. Article Summary (15 points)
In this section you should provide a summary of the article you have selected. This section should
be approximately one to two paragraphs in length.
II. Primary Economic Elements (15 points)
In part II you should identify the key economic elements of the article. For example, tell if your
article involves a change in a determinant of demand or supply or a price control. Discuss the
specific economic components. This section should be approximately one paragraph long.
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Chapter 5: Applying Supply and Demand
III. Graphical Analysis (20 points)
Graphically analyze the impact of the economic factors you have discussed in part II. In addition
to graphical depiction, provide a verbal interpretation of what is happening on the graph. How are
producers and consumers reacting?
IV. Conclusions (10 points)
Explain the overall impacts of the change in the determinant or the price control. What is the
impact on producers and consumers? What is the impact on the equilibrium price and quantity?
This section is where you should take the opportunity to provide your own insights as well.
Part B. Interviews (This part of the paper should be 1 page in length.) (30 points)
Interview two people from different backgrounds who are not taking or have not taken ECO201.
The people you interview can be students, but they do not have to be. Let each interviewee read
your article and the paper you have written. Interview them concerning the article and your
analysis. Do they understand the article? Do they understand your analysis? Do they find your
analysis interesting? Do they find the topic interesting? Why or why not? What are their
opinions about the topic?
Attach a XEROXED (500 clipped articles in a stack can be a nightmare!) copy of your article
to the back of the paper.
(5 points)
DO NOT SUBMIT PAPERS IN BINDERS OR FOLDERS. SIMPLY STAPLE THE PAPER
IN THE TOP LEFT-HAND CORNER. THANK YOU.
ON THE WEB: Integrating New Media into the Classroom
http://www.cato.org is the Web site of the Cato Institute, a Washington think tank with “23 years
of promoting public policy based on individual liberty, limited government, free markets, and
peace.” This is also available in Spanish. Click on “Advanced Search” for rent control for such
topics as: “Ads Show Rent Control Raises Prices,” “Zoning, Rent Control, and Affordable
Housing,” and “Housing Policy in New York: Myth and Reality.” Politics: scholarly,
conservative.
http://www.newparty.org/livwag is the Web site of the New Party organization of New York.
The aim of “the New Party, ACORN, and the AFL-CIO and its affiliates, have made ‘living
wage’ campaigns a centerpiece of their programs, and chapters throughout the country are part of
the growing movement to require businesses to pay their employees a decent wage.” Politics:
liberal.
http://www.epionline.org is the Web site of the Employment Policies Institute, “a research
organization dedicated to studying entry-level employment issues.” Links include: “hot topics,
research, living wage, minimum wage, and about EPI.” Politics: conservative.
http://www.tenant.net is the Web site of Tenant Net, “the online resource for residential tenants.”
This is a tenant-assistance site covering such topics as: “Noisy Neighbors, Heating
Requirements, Home Energy Assistance Program (HEAT), Illegal Eviction and Police
Procedure, and NYC Zoning Handbook.” Politics: balanced save for some far left dated issues.
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Chapter 5: Applying Supply and Demand
STUDENT STUMBLING BLOCKS: Common Areas of Difficulty
Students often have difficulty deciding which curve, the demand or supply, moves and why. It is
best to attack this systematically with the Supply and Demand in Action box, and then practice,
practice, practice.
1. Directions: For each of the following markets, draw an initial demand (D1) and supply (S1)
curve. Then draw whatever shift in demand or shift in supply may be caused by the change
mentioned. Label the shifted curves D2 or S2.
a. In the market for swimming pools in San Diego, population has increased by 10 percent.
Price
E2
S
D2
E1
D1
Quantity of swimming pools
demand increased
supply didn’t change
equilibrium quantity increased
equilibrium price increased
b. In the market for U.S.-built cargo ships, the government subsidizes the production of U.S.built ships.
Price
S1
S2
E1
E2
D
Quantity of cargo ships
supply increased
demand didn’t change
equilibrium quantity increased
equilibrium price decreased
c. In the market for toys, Cabbage-Patch dolls are not as popular as they once were.
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Chapter 5: Applying Supply and Demand
Price
S
E1
E2
D1
D2
Quantity of Cabbage-Patch dolls
demand decreased
supply didn’t change
equilibrium quantity decreased
equilibrium price decreased
d. In the market for foreign-made cars, Japanese manufacturers have been slapped with a
drastic import quota.
S2
Price
S1
E2
E1
D
Quantity of Japanese cars
supply decreased
demand didn’t change
equilibrium quantity decreased
equilibrium price increased
e. Now for a tough one – where both curves move. In the market for redwood lumber, the
government just bought a huge stand of redwood trees at Headwater Creek in Northern
California from Maxxam Corporation. At the same time, a house style using natural
redwood siding becomes increasingly popular among the younger cyber-millionaires.
S1
S2
Price
E1
E2
D1
D2
Quantity of redwood lumber
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Chapter 5: Applying Supply and Demand
demand increased
supply increased
in this example equilibrium quantity increased while
equilibrium price decreased
S1
Price
S2
E2
E1
D1
D2
Quantity of redwood lumber
demand increased
supply increased
in this example equilibrium quantity increased and
equilibrium price increased
In summary, in each of these cases, it depends on the relative size of the shifts.
2. Usury is an excessive or exorbitant interest charge. In order to prevent usury – politicians
trying to save the “little guy” from the clutches of greedy “money lenders” -- government
steps in and sets the upper limits on what can be charged for loans. As long as the interest
ceiling (18% in this example) is above the market-clearing price (15%), there is no problem.
The market clears at $20 millions in loans per week.
Interest rate (%)
S
18
Interest
ceiling
15
D
$20
Millliions in loans per week
However, when market forces push the interest rate above the interest ceiling, say to 20%, only
$10 million in loans are made. Who gets the loans? The well-heeled – those with superb credit
ratings.
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Chapter 5: Applying Supply and Demand
S
Interest rate (%)
20
Interest
ceiling
18
D
$10
$20
$32
Millions in loans per week
TIES TO THE TOOLS: Bringing the Boxes into the Classroom
Knowing the Tools: Supply and Demand in Action
This is a systematic procedure for attacking changes in quantity demanded, changes in quantity
supplied, changes in demand and changes in supply. Work out some of the curves in the Student
Stumbling Block section using these steps.
LECTURE OUTLINE: A Map of the Chapter
I. Real-world supply and demand applications (Chapter Objective 1).
A. The impression was given in the last chapter that prices change rapidly in the real world.
However, in 90 percent of the cases, prices are sticky, that is, slow to change. Slowly,
the forces of supply and demand grind away, often unseen and unremarked, but they are
there.
B. The market for advertising.
1. This market is highly competitive and expensive.
2. Demand for advertising follows the market. When the economy is expanding,
advertising revenues rise. When the economy shrinks, as it began to do in 2001,
companies cut their advertising budgets significantly. See Figure 5-1.
3. But wait a minute, Figure 5-1 is misleading. Yes, in due course, the quantity
demanded for advertising went down., But in the meantime, advertisers gave extra
value for the sponsor’s advertising dollar at no extra cost meaning that qualitatively,
the sponsors were getting a price reduction.
C. The price of a foreign currency (Chapter Objective 2).
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Chapter 5: Applying Supply and Demand
1. The forex market determines what the foreign exchange rates will be. Exchange
rates are the price of one currency in terms of another currency.
2. When you want to buy a foreign good you must pay for it in the currency of that
country. You personally do not have to do this since the importer will do it for you.
3. Whoever does it, whenever a foreign good is bought, someone must trade currencies.
4. Between 1999 and 2001, the euro (the currency used by 15 members of the
European Union) fell from $1.17 to $0.90. Why? Supply and demand. The demand
for euros is represented by those buying them while the supply for euros is
represented those who are selling euros. More people wanted to sell euros than to
buy them. See Figure 5-2.
D. Three real-world examples of supply and demand (Chapter Objective 1).
1. Florida freeze: This is a shift factor of supply as the supply curve shifts to the left.
See Figure 5-3. At the original price, quantity demanded exceeded quantity supplied
thereby causing invisible hand pressures to raise the price until quantity demanded
equals quantity supplied.
2. The imposition of a 10 percent surtax on the market for luxury boats: Taxes levied
on suppliers shifts the supply curve to the left. See Figure 5-3. After the tax is
imposed, the quantity of boats demanded drops.
3. Raw coffee beans: This is a shift factor of supply as the supply curve shifts to the
right due to Vietnam entering the market. See Figure 5-3. If the Coffee Growers’s
Federation marketing campaign works out, in time, the demand curve will also move
to the right to its original place or even beyond.
II. Government intervention in the market.
A. A price ceiling is a government-imposed limit on how high a price can be charged.
1. Rent control is a price ceiling on rents, set by government, and applying to what a
landlord can charge for rents (Chapter Objective 3a). The example used is rent
control in Paris following World War I and again following World War II (see
Figure 5-4). The consequences were:
a.
b.
c.
d.
A huge shortage of living quarters.
New housing construction stopped.
Existing housing was allowed to deteriorate.
For many, the only way to get living quarters was to offer a huge bribe to the
landlord.
e. Many families had to double up with other family members.
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Chapter 5: Applying Supply and Demand
2. A similar situation is described that has occurred in New York City.
a. All of the consequences of rent control in Paris (called non-price rationing) have
occurred in New York City.
b. In addition, preferences based upon gender, race, and other characteristics of
tenants, although illegal, are brought into play.
B. An example of price floors: the minimum wage (Chapter Objective 3b). A price floor is
a government-imposed limit on how low a price can be charged. See Figure 5-5.
1. A minimum wage is a price floor on wages, set by government, and applying to
what an employer can pay for wages.
2. Just as in rent controls, the minimum wage sets off reactions in a market.
a.
b.
c.
d.
Those who can find work earn a higher wage. Others become unemployed.
People try to avoid the minimum wage by hiring under the table.
People try to get it changed through political means.
Economists disagree about the effects of the minimum wage.
3. Recent efforts to establish a “living wage” should use the same analysis as minimum
wage laws.
III. Excise taxes (Chapter Objective 4a).
A. An excise tax is a tax that is levied on a specific good. A tariff is an excise tax on an
imported good. Taxes and tariffs raise prices and reduce quantity. The example used
was a 10 percent luxury tax on expensive boats imposed in 1990. See Figure 5-6.
1. Since the luxury tax was imposed on the boat builders, the supply curve moved to
the left by the amount of the tax.
2. Since at a price equal to the original price plus the tax there is excess supply, the
price for boats rose by less than the tax, while quantity supplied and demand fell.
3. The tax was repealed in 1993 because of tax revenue shortfalls.
4. Tariffs, an excise tax imposed on an imported good, has the same effect on the
equilibrium price and quantity as an excise tax.
B. Quantity restrictions (Chapter Objective 4b).
1. Governments can restrict markets by using licenses. The example used was the
12,000 New York City taxi licenses issued in the 1930s. But limiting supply with
this scheme, over time the wages of taxi drivers increased. See Figure 5-7a.
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Chapter 5: Applying Supply and Demand
2. A secondary market in taxi medallions also grew. Since supply remained the same,
the only legal way newcomers could get into the business was to buy a medallion
from a taxi driver leaving the business. See Figure 5-7b. In 1947, a medallion cost
$2,500. Today they cost $250,000.
C. Third-party payer markets.
1. In third-party payer markets the person who receives the good differs from the
person paying for the good.
2. Under a third-party payer system the person who chooses how much to buy does not
pay the entire cost. Since the co-payment paid by the consumer is much lower than
market equilibrium price, quantity demanded is much higher and so is total cost
(Chapter Objective 5).
3. The example used was the health-care system in the U.S. The patient with health
insurance makes a co-payment of $5 or $10 per visit regardless of the true cost of the
visit. The doctor bills the insurance company and the insurance company pays.
4. Another example is going to college. Is the student himself paying the full cost of
his education or is the government or his parents paying part or all of it? If the
student were bearing the full cost himself, he would probably spend less than if he is
being supported by someone else.
CHAPTER SUPPLEMENTS: Other Classroom Aids to Use
 Experiments in Teaching and in Understanding Economics, pp. 15-19: A Double
Auction Market Experiment.
 Classic Readings in Economics: "The Price System in Microcosm: A P.O.W. Camp," pp. 917. R. A. Radford recounts his experiences in a German prisoner-of-war camp during World
War II.
 Classic Readings in Economics: "Rent Control: An Example of Price Fixing," pp. 18-19.
Bertrand de Jouvenel described rent controls in 1948 Paris.
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Chapter 5: Applying Supply and Demand
POP QUIZ
NAME:__________________________________
COURSE: ________________________________
1. An increase in demand:
a. will create a higher equilibrium price.
b. will create a smaller equilibrium quantity.
c. is reflected as a leftward shift in demand.
d. could be caused by an increase in the price of a substitute good or service.
2. Compared to last year, fewer oranges are being bought and the selling price has decreased.
This could have been caused by:
a. an increase in demand.
b. an increase in supply.
c. a decrease in demand.
d. a decrease in supply.
3. A decrease in supply will:
a. decrease the equilibrium price.
b. increase the equilibrium quantity.
c. will create a temporary surplus that will be eliminated as the price rises.
d. be reflected graphically as a leftward shift of the supply curve.
4. If demand and supply both increase, this will cause:
a. an increase in the equilibrium quantity, but an uncertain effect on the equilibrium price.
b. an increase in the equilibrium price, but an uncertain effect on the equilibrium quantity.
c. an increase in equilibrium price and quantity.
d. a decrease in the equilibrium price and quantity.
5. Which of the following would most likely increase the supply of a good?
a. An increase in the selling price of another good producers could produce.
b. A decrease in the cost of needed inputs (such as raw materials) used in the production of
the good.
c. A decrease in consumer incomes.
d. A tariff imposed on the good.
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Chapter 5: Applying Supply and Demand
6. A tax on suppliers will:
a. shift the supply curve up by the amount of the tax.
b. decrease the equilibrium price.
c. increase the equilibrium quantity.
d. have the same effect as eliminating a quota.
7. A price ceiling:
a. is a government-imposed limit on how low a price can be charged.
b. creates a surplus.
c. causes the quantity demanded to exceed the quantity supplied.
d. increases demand and decreases supply.
8. Rent control:
a. is an example of a price floor.
b. will cause a shortage of rental-occupied housing.
c. will cause the quantity supplied to exceed the quantity demanded.
d. is a price set above equilibrium by government.
9. Requiring a license to be a barber is an example of:
a. an excise tax.
b. a co-payment.
c. a quantity restriction.
d. a price floor.
10. In third-party payer markets:
a. co-payments do not exist.
b. the person who chooses the product does not pay the full cost.
c. the individuals involved have a great incentive to keep costs low.
d. goods and services are not rationed through social and political means.
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Chapter 5: Applying Supply and Demand
ANSWERS TO POP QUIZ
1. a 2. c 3. d 4. a 5. b 6. a 7. c 8. b 9. c 10. b
IN-CLASS EXERCISE: Learning Concepts through Practice
HUD Fair Housing Issues: No-No’s in Advertising
There are a number of key words which cannot be used in real estate advertisements because
they are considered to be discriminatory. Any advertisement which on its face expresses a
preference, limitation, or discrimination on the basis of race, color, religion, sex, handicap,
familial status, or national origin is illegal.
As you go through the list with the class, ask the students why such-and-so word appears.
Should HUD be in the business of monitoring housing advertisements?
The unacceptable word list:
able bodied
adult living
adult community
adults only
African
agile
alcoholics, no
Asian
bachelor
bachelor pad
blacks, no
blind, no
Catholic
Caucasian
Chicano
Chinese
children, no
church (es), near
colored
couple
couples only
crippled, no
deaf, no
drinkers, no
employed, must be
85
empty nesters
exclusive
executive
handicapped, not for
healthy only
Hispanic
impaired, no
Indian
Irish
integrated
Jewish
landlord (description of)
Latino
married
mature individual(s)
mature person(s)
mentally handicapped, no
mentally ill, no
Mexican-American
Mosque
must comply w/park rules
(nationality)
newly-weds
no park area
non-drinkers
Chapter 5: Applying Supply and Demand
non-smokers
(number of) children
older person(s)
one child
Oriental
physically fit
Polish
Puerto Rican
quiet tenants
responsible
retarded, no
seasonal worker, no
security provided
shrine
singles only
single person
smoker(s), no
Soc. Sec. (SSI), no
stable
synagogue, near
temple, near
tenant (description of)
unemployed, no
white
white only
CASE STUDIES: Real-World Cases of Textbook Concepts
Case Study 5-1: Pricing Milk in California
The California Department of Food and Agriculture has ordered the minimum price paid to
farmers in January 2000 to be reduced to $1.04 per gallon, a drop of 15 cents from December
1999.
Unlike prices for most other foods, the price of milk is determined by a complex formula in
which the California Department of Food and Agriculture establishes the minimum price that
milk processors pay dairy farmers. The state, however, does not regulate what food retailers
charge customers.
Sources: Paul Schnitt, “Price of Milk Likely to Drop 15 Cents Per Gallon,” Sacramento Bee,
December 28, 1999, p. F1, and “The OPEC of Milk, The Wall Street Journal, June 20, 2001, p.
A18.
Now, let’s graph what happened.
S
Price
$1.19
1. 04
D
Q1
Q3
Q4
Q2
Questions:
1. What do you label the distance Q1 – Q2?
a. The original surplus.
b. The subsequent surplus.
c. The original shortage.
d. The subsequent shortage.
2. What do you label the distance Q3 – Q4?
a. The original surplus.
b. The subsequent surplus.
c. The original shortage.
d. The subsequent shortage.
3. Do you think the retailers should (or will) pass on their lower costs to customers in the form
of lower milk prices?
4. Is this a price ceiling or a price floor that is being established by the California authorities?
5. Do you think government intrusion into the milk market of California should cease? Why?
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Chapter 5: Applying Supply and Demand
Case Study 5-2: Air Bags and Public Safety
Since 1997, at least 3 million vehicles have been recalled due to air bag related problems. Of
these, roughly half were due to problems of the sort that only time and road experience are likely
to reveal.
Automobile air bags were originally designed as supplemental safety devices to be used along
with a combination shoulder- and lap-seat belt. For twenty years the auto manufacturers argued
that, after looking at the costs, passengers were better off with just seat belts. The activists
hissed with contempt at this assertion ignoring the industry’s voluntary installation of the
collapsible steering wheel, the padded dash, and the high-penetration windshield. They,
maintaining that the auto companies were not interested in selling safety, insisted on a federal
mandate. They got it in Standard 208 which required the installation of air bags to protect an
unbelted, 170-pound man in a head on collision (my emphasis).
Seat belt usage went from 10 percent in the early 1970s to 70 percent in the 1990s. What group
was the most likely nonuser of seat belts? Teenagers and young adults, that’s who.
There is a small problem with airbags – they are dashboard-mounted bombs that kill children and
small adults in accidents they would otherwise walk away from. As Ward’s Auto World, an
industry bible once put it, “For the sake of protecting Beavis and Butt-Head, we have put infants,
young children, and small adult women at risk.”
To a large extent, the problem is caused by the precautionary principle that is typically applied to
R & D and commercial products that can actually increase risk. This principle focuses solely on
the possibility that new technologies can pose extreme or unmanageable risks, even after
considerable testing has occurred. The fact is that while new technologies introduce new risks,
most offer net benefits. Most advocates of precautionary regulation are more anti-business and
anti-technology than they are pro-safety.
Sources: Holman W. Jenkins, Jr., “Cigarettes and Air Bags: Won’t the Do-Gooders Ever
Learn?” The Wall Street Journal, June 10, 1997, p. A19; Sam Kazman, “Air bag-Related Recalls
Demonstrate the Need for Real-World Testing As a Prerequisite for Any Air Bag Mandate
Whatsoever,” www.cei.org, February 7, 2000; and Henry I. Miller and Gregory Conko, “Are We
Too Safe for Our Own Good: Radical Environmental Groups Have Prevailed upon Governments
to Assail and Intimidate Industry,” Los Angeles Times, June 1, 2001.
Questions:
1. What kind of goods would an economist call air bags?
2. According to the article, is this a failure of the market or a failure of government?
3. Is this an example of a price ceiling or a price floor?
4. If you were drawing a supply and demand graph of this market, would either of the curves
move, and if so which one?
5. Should air bags be outlawed?
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Chapter 5: Applying Supply and Demand