Nick Rowe Drops By and the Promise of Economics

     He kindly dropped by and left some thoughts on my attempt to consider standard economics in relation to the Nice Bus company here in Nassau-on Long Island, Ny. I was pointing out that many think the  trouble with Nice-a private company that took over from the previous Metro Authority-that was kind of a quasi public-private kind of company-is that it's a private company that seeks a profit-since most of the bus lines aren't profitable but serve a public interest. Nick left these thoughts:

    'Chapter 15(?) monopoly, and the part of chapter 11(?) "Public Goods and Common Resources" where it talks about natural monopoly.


    'Assume that fixed costs are large, and marginal costs are small, so the ATC curve slopes downwards, with the MC curve always below the ATC curve.'

    'Draw a downward-sloping demand curve.'

    'The efficient quantity is where the demand curve cuts the MC curve (provided the area under the demand curve exceeds total costs), but this involves the producer making losses.'

     'One solution is price control plus subsidies. (Or maybe price discrimination, like where they sell bus passes, rather than a price per ride). Or public ownership.'

      'See especially the section near the end of chapter 15. The bits on regulation and public ownership.'

     http://diaryofarepublicanhater.blogspot.com/2014/04/ive-listened-to-nick-rowe-but-what.html?showComment=1398165499096#c2179237891511219785

    I actually just finished that chapter a few days ago-now I'm in chapter 16 which is about oligopolies. According to Mankiw, oligopolies can be in the public interest provided they aren't successful in doing what would be in their own best interests-colluding with the rest of the oligopolies to achieve a de facto monopoly. 

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    As for what Nick wrote-I'm must gratified I actually know what ATC and MC mean-marginal cost, average total cost; LOL. 

   It seems to me that Mankiw might just add up the consumer and producer surplus-in this case the producer would be the bus company-looking at it in this way might well look good according to this analysis. After all, no doubt many passengers would be 'willing' to pay more than the current $2.25 fare-he might even determine that 'total surplus' would be raised if Nassau County stopped leaning on Nice not to raise its prices. 

   Nick further left this comment:

   "Put it this way: it would be great if an intro economics text gave us the answer to every question we wanted to ask. But that's too much to hope for. In this case, it only gives us some useful tools for thinking about the question and about possible answers. But that makes it worthwhile. To go further, we would need to know more about the bus business."

     For me this is the whole promise of economics and what made me get into it around 2011the hope that it might help us with 'questions we want to ask'-particularly questions of public policy. I've always been a political animal but perhaps I got frustrated with a seemingly interminable debate among political opinions with seemingly no referee-ie, no one to help us know why we should consider one person right over the other. 

    Economics seemed in some sense to  be able to offer something like this. I guess maybe my hope for it-to help us come to informed policy decisions-is kind of like Descartes who had hopped back in the early 17th century that there would someday soon be a calculator not just for arithmetic but for morality as well. 

   The trouble with economics is you're never sure if a particular idea of standard econ is legitimate to use in a certain policy discussion or not. It's very possible it seems to me that based on the standard definition of total surplus one could declare a fare hike for Nice as in the public interest-after all, riding the bus is very 'inelastic-so a fare hike will only raise profits which will raise public surplus. 

    In any case, I appreciate Nick's input and I think that this is the kind of analysis we should try to do more of. I guess his recommendation of reading a text book is a good one after all-after this I have Krugman's  to read, and then Samuelson's-I'm not going to run out of reading material any time soon which is how I like it. 

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    P.S. I really don't have such a strong opinion on the subject of Nice Bus myself-maybe it would be better to go back to the M TA, but I have to say I remember the MTA era and it was hardly a utopia. I don't think that the drivers are later with them than previous and in fact I think it may be the opposite. 

     It seems to me that the drivers may even overall be more polite-I seem to remember that once Nice was here you slowly saw the old pass time of watching passengers run all the way to the bus and bang on the doors before driving off and declaring its too late die out. I don't see the drive leave people they obviously could have picked up nearly as regularly as I used to. Again-I really am undecided on the question.