Friday, November 02, 2007

Institutions over Econ 101

Everyone remembers Econ 101 and the mindless pounding into our heads the importance of Supply and Demand, and basic behaviors. The theory predicts in almost all cases that as the relative cost of Good A becomes cheaper, more of Good A should be consumed compared to its consumption level at the previous higher price. There are a couple of interesting counter examples but those are either mentioned in passing, or held off until sophomore year.

Another lesson at the end of the semester is the concept of externalities which influence the consumption of a good. An externality is a quality with some positive or negative value that a good has which is not incorporated into the price of the good. My favorite externality a few years ago was the smell of freshly baked bread every morning from a bakery down the street from my old apartment. The bakery could not charge me for the pleasure of the smell, and I definately gained enjoyment from it. Large externalities that are not incorporated into the price of a good can significantly skew consumption patterns.

And we have a great example that Atrios found this morning that confirms ancectodes I have been hearing for years. One would expect with the fall of the US dollar for foreign tourism in the United States to increase. A weaker dollar against the Pound, Swiss Franc and Euro means travelling in the US is much cheaper now than it was three years ago, or as my senior year roommate remembers seven and nine years ago. Back in the late 90s being European and living in the States off of foreign derived income was tough because the dollar was proportionally much stronger. Well that is not the case:

The number of foreign visitors to the United States has plummeted since the September 11, 2001 attacks on New York and Washington because foreigners don't feel welcome, tourism professionals said Thursday.

"Since September 11, 2001, the United States has experienced a 17 percent decline in overseas travel, costing America 94 billion dollars in lost visitor spending, nearly 200,000 jobs and 16 billion dollars in lost tax revenue," the Discover America advocacy campaign said in a statement.

So despite the US being a much cheaper place to visit, the security externalities, both real and theatrical, as well as the much more negative impression of the United States that is held by the primary benefeciaries of a weaker US dollar, has led to Econ 101 Supply and Demand lessons to fail miserably. And I can understand this, as I have been hearing that going through US customs is an insulting and degrading process now compared to seven years ago, and it is just not worth the hassle.

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