Economics

14 breaks

Prices, incentives and why markets do what they do.

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Why a tax lands on whoever can't walk away: tax incidence and the wedge The law decides who hands over the money for a tax, but not who ends up poorer. Put a tax on a market and two prices appear: what the buyer pays and what the… Economics5 min read Why fair coin flips end with one person owning almost everything: the yard-sale model of wealth Give 60 people 100 coins each and let them trade by fair coin flips, with the stake a fixed share of the poorer person's wealth. Nobody has any skill or… Economics4 min read Why a healthy bank can still collapse: Diamond and Dybvig's bank run A bank keeps only a slice of your deposit as cash and lends the rest for years, so it quietly bets that almost nobody asks for their money at once. Diamond and… Economics4 min read Why a country that's worse at everything still gains from trade: Ricardo's comparative advantage How can a country that is worse at everything still gain from trade? Ricardo's 1817 England-and-Portugal example says the answer is not who is faster, but what… Economics4 min read Why two ice-cream vendors end up side by side: Hotelling's beach Two ice-cream vendors share a long beach, and every swimmer walks to the nearer cart. Where should each one park? Drag the carts and watch the dividing line… Economics4 min read Why a free shortcut can make everyone's commute longer: Braess's paradox Build a brand-new road and every commute gets longer. In a town of 4,000 drivers, two routes each take 65 minutes. Add a free shortcut and each driver… Economics5 min read Why the auction winner so often overpays: the winner's curse Why does the winner of an auction so often go home poorer? When a prize is worth the same to everyone, each bidder only has a noisy estimate, and winning means… Economics5 min read Why mild preferences can build a segregated town: Schelling's chequerboard Nobody in this town wants it split into blue and orange districts. Each household only asks that a few of its neighbours look like it. Yet run the rule and the… Economics4 min read Why good used cars vanish from the market: Akerlof's lemons Why can a market of willing buyers and sellers fall apart? In 1970 the economist George Akerlof showed that when only the seller knows a used car's quality… Economics4 min read Why rival ice-cream carts end up side by side: Hotelling's beach Put two ice-cream carts on a long beach and each one is tempted to creep toward the other, because standing next to a rival steals customers without losing… Economics4 min read Why adding a road can slow every driver down: Braess's paradox You would think a free shortcut can only help. In 1968 the mathematician Dietrich Braess showed it can make every driver slower. In our four-road example… Economics4 min read Why people bid more than a dollar for a dollar: Shubik's escalation trap Auction a dollar bill with one twist: the second-highest bidder pays their bid too. It sounds harmless, yet in 1971 economist Martin Shubik reported that… Economics3 min read