Marijuana: The New Cigarette (to be marked)

15 05 2011

Marijuana use is currently illegal in Canada except for medical purposes. However, this has not prevented the development of a black market for marijuana that is worth billions of dollars, the existence of tens of thousands of grow ops in British Columbia, and the fact that 4.5 million Canadians (about 14% of the entire population) used marijuana in 2004. With the prevalence of marijuana in Canadian society, it is obvious that its prohibition is ineffective and that the legal battle against marijuana has been lost. It is time that the government introduce market based policies to influence the use of marijuana and benefit from its market. In other words, it is time for the government to legalize marijuana.

The Externalities of Marijuana Being Illegal

Governments can control for the negative externalities of marijuana use by applying command and control policies or market based policies. Command and control policies are usually regulations that prohibit or require certain behaviours, whereas market based policies involve the use of taxes (taking away money) or subsidies (giving money) to encourage a desired behaviour.

By criminalizing marijuana possession, the Canadian government is using only a command and control policy in its attempt to reduce the use of marijuana. The problem with this is that, unlike market based policies, it offers little economic incentive for people to comply with the law, and as a result causes many negative externalities to develop as people try to dodge around the law. For example, criminalizing marijuana possession has caused the formation of a black market for marijuana, where people operate grow ops and sell marijuana to each other in secret. This market is worth billions of dollars, but the government does not profit from it because the market is not regulated. Also, the money gained from the marijuana market often ends up in the hands of criminals, who use the money to perform more illicit activities.

Another negative externality of criminalizing marijuana is the high cost of running the judicial system involved in court trials for marijuana trafficking, putting criminals in jail and policing for marijuana possession and growing. According to Canadian Alliance MP Keith Martin, $150 million dollars would be saved in court costs every year if marijuana possession was legalized. The financial resources going into enforcing the law would not be a huge matter, if it were not for the fact that it has not reduced marijuana consumption. Of the millions of marijuana users in Canada, less than 1% of them are caught and more than half of that is let off with only a warning.

Criminalizing marijuana has not reduced the supply or the demand for marijuana to yield a socially desirable equilibrium quantity.

The Benefits of Legalizing Marijuana

To eliminate the negative externalities of using command and control policies to regulate marijuana, the government should use more market based policies. For example, cigarettes are regulated using both kinds of policies. The government uses command and control policies through the regulation of the legal smoking age, and through advertisements printed on cigarette packs detailing the negative health effects of using marijuana. On top of that, the government also uses a market based policy by imposing an excise tax on cigarettes, which raises the prices paid by consumers and thus decreases demand for cigarettes. This places the supply and demand of cigarettes at a healthy level.

The government can use similar strategies to regulate the marijuana market, for example by placing similar advertisements in shops where marijuana is sold and on packages of marijuana. The government can also impose excise taxes on marijuana. Using this strategy, legalizing marijuana possession can actually reduce its usage more than criminalizing it. Based on the principles of supply and demand, if marijuana was legalized, there would be an increased number of grow operations as people flood the now legalized market in an attempt to make money. This would shift the supply curve to the right. The equilibrium point for the market would then be shifted to a lower price, increasing the quantity used. However, if excise taxes are applied to marijuana, like they are to cigarettes, the supply curve would shift towards the left. The amount of tax can be adjusted to such a level that the equilibrium point of the marijuana market actually yields a lower quantity consumed than at first, thus meaning that marijuana use has decreased.

There is the possibility that a black market for marijuana will still exist even after it is legalized. This can happen if the excise tax on marijuana is too high. Suppliers may decide not to comply with the regulations in the legal marijuana market, and instead sell marijuana at a lower price to willing buyers to make a higher profit. This will increase costs for the government because the government must then spend money on policing and regulation to ensure that sellers pay their taxes. To reduce the possibility of this happening, the government can ask marijuana retailers to list their suppliers and then search for the suppliers to impose taxes on.

Legalizing and applying excise taxes to marijuana can decrease the quantity demanded and supplied to a more socially desirable level.

Legalization is the Right Way to Go

The government should treat marijuana with a more market based approach. Just like how cigarettes are regulated through command and control policies and market based policies, marijuana should be regulated the same way. The combination of command and control policies and market based policies would be most effective in reducing marijuana use while at the same time benefiting the Canadian economy.

Maybe this isn't such a bad idea.

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Woe is the TTC [To Be Marked]

3 03 2011

I am almost tired of hearing about the TTC and its problems: service inefficiencies, regular strikes, and a recent slew of public relations issues for instance the unfortunately photographed TTC fares collector who was caught sleeping on the job. And do not get me started on the very common fare hike. Honestly, I am one of many loyalists who are asking “the better way” to live up to its name. Now a budget shortfall of about 7 million dollars threatens the TTC balance sheet. To avoid any fare hikes, the transit commission has proposed reducing and/or eliminating 41 less travelled routes. I will admit, instantly I felt this would be the best alternative. If a route is not being efficient in that it does not serve many riders, it would be a waste of funds.By removing benefits from a small group, a large group will benefit. On my daily journeys I see a bus by the name of the 98 Willowdale-Senlac. Time and time again I fume when I see this much underused bus arrive more frequently than my vital 84 Sheppard. This bus almost makes me want to say cut/reduce all underused bus routes if it will make my route more efficient.

By reducing services to low rider routes, the TTC will be depriving a group of individuals of the public transit service. As Royson James (City columnist) pointed out, this is just Darwinism, a survival of the fittest. We are killing off underused bus routes in favor of ones that are more frequented. The wording may be harsh, but this is the wrong path to take because this so called efficient method will make some individuals worse off. Take the time to examine a meek creature in nature, for instance the beautiful dung beetle. It may just be a small insect but it plays a role in the ecosystem in being like nature’s janitor in that it consumes animal excrement as well as provides a source of prey to larger animals. Just like the small dung beetle, these bus routes may play a small role in helping the system but ultimately it plays a role. Mineta Thomas is a daily commuter of a bus route that is underutilized and she is not the only one. They rely on these buses every day. This is their mode of commute to get to work, activities, home, etc. Removing night service would be problematic because some citizens need transportation at night due to working the night shift, etc. The fact is a large amount of users do not have an alternative to public transit. Many do not have access to motor vehicles due to financial and personal circumstances. It’s either public transit or they walk. For efficiency, are we willing to make people walk?

After a route becomes too infrequent riders may just be turned off from the idea of public transit. When will a waiting become too long? There is a chance that people will start to abandon the ideal that is public transit the moment people’s routes are reduced and cut. There is a threshold when it just becomes far too inconvenient. One can bring up the idea that pollution will as a result increase due to more cars riding the streets. However, most people will not cite saving the environment as their primary reason for riding the rocket. The moment people start to abandon the TTC is the moment the organization has failed them as a public service. The TTC was not designed for a few people in mind, but to serve a city entire. That is why the TTC should not cut or reduce certain bus routes.

If anything, there are 2 simple steps that can remove the shortfall and leave the TTC better than before the lack of money occurred. First of all, one must remove the current problem of those who avoid paying their fare through deception. Recently, the TTC proposed fines and the use of TTC security to make sure people are indeed contributing their “fare share.” I agree with this as one of the solutions because as revealed in a recent report, the TTC lost an estimated 22 million dollars in 2010. That in itself is enough to remove the budget shortfall. However realistically speaking, fare evasion is unavoidable and can only so much be deterred. An additional step needs to be taken, and that step is to do nothing but carry on operating. This may sound like an odd statement but ridership of the TTC is expected to have a 7 million dollar increase due to the trend of customer behavior. More people, non-regular users, are starting to buy tickets and tokens only when needed. The only flaw with this is that it is only a trend and may overshoot or, unfortunately, undershoot its actual predictions. Both are not certain fixes alone but together they stand a good chance to clear the 7 million dollar deficit.

Ultimately, bus route cuts to cover-up the shortfall are a step in the wrong direction because the TTC is a service above all else. The Toronto Transit Commission is by no means  a profitable one. It  needs a 429 million dollar subsidy from the property taxes of the city to keep afloat. It serves all Torontonians, not just ones that live close to Yonge Street and have immediate access to subway stations. And that is key; the TTC is not made for the majority. It is made to service all who need it. The sad reality is that the TTC has been knocked for its quality of service in recent years. Many, including myself cite service and efficiency as major problems with the TTC. Removing more services would be a mistake because it would mean depriving a group of people who rely on the specified routes. The evident problem facing the TTC now is not a 7 million dollar deficit but a loss of quality. By following these recommendations, the TTC can remove the deficit without sacrificing anything; they can modernize without having to cut back. Maybe, this is what the TTC needs to “re-become” a beacon of public transit in North America. Maybe I’m being too optimistic.





J7 – Income Inequality [To be marked]

19 01 2011

Income inequality is one of the most pressing issues of our time. According to a Globe and Mail article, Toronto, a city once prized for being a middle-class even city, is becoming more and more of income polarized both numerically and geographically. So, should the government actively be trying to reduce income inequality?

Well, first we should realize that income inequality is not altogether a bad thing. In fact, it is a healthy part of a capitalist society. Being able to increase income is a great incentive to increase productivity and innovation, both for individuals and corporations. Higher income brackets thus turn into goals and lower ones become threats, always there to prod you forward. No matter what anyone says or thinks, someone is going to have more than someone else. Since resources are scarce, those who call for income equality are fighting a loosing battle in our greedy world. Everyone has a different idea of what is completely “equal”, “fair”, or “equitable” and complete equality is close to impossible in these conditions.

But should we just leave it at that and completely ignore the problem of income inequality (polarization)? No! Even though we cannot and should not create full equality, we should still try and close the gap between the high and the low, something which is far less controversial than complete equality. But why?

The first reason is one from morality – it is simply wrong for people to let their fellow brothers and sisters waste away while they enjoy their jacuzzis.  This is akin to leaving someone who tripped on the floor.  In fact, many people who are stuck in poverty are not neccessarily there because of themselves – they are stuck in the cycle of poverty. They need help getting out and we should be there to help them. If we don’t they will be both a burden to themselves and to us – they will need protection by families, friends, and relatives not to mention the fact that there is a chance of increased crime rate for them.

The second reason relates to our current economic “growth”. Not only does the GDP not document spending distribution leading to improper views about our society, but the poor are generally not included in economic “growth” rallies. Should they not feel the growth too? It is also not surpirsing then that, by not increasing in income, even in the best of times,  many low-income areas have limited business ventures/start-ups regardless of “economic conditions”. Let’s look at a projection of Toronto in only 15 years from The Globe and Mail:

Because these red areas have not seen the light of day, businesses will be loosing out on investment opportunities that could see them grow many fold. This can’t happen without letting these people get some income. Businesses cannot set up shop, hire more workers, and sell items, all activities which increase total GDP (C up, then I up, then C up, etc = multiplier effect!!).

In the hands of a few, large sums of money is useless. One can even call it “too much money”. There is only a certain amount of goods and  services that a rich individual can consume. Beyond that, their money is invested. But why not invest in the community? If that money was spread out, it can increase spending (and therefore GDP) even more because more people will spend more on bare minimums.

So how would this work? Well, I would say that those with super-high and high incomes transfer a percent or two (increasing progressively) of their incomes to those of lower income brackets. Though this is a small fraction from those of high incomes, it would be a large fraction when compared to the income it is being transfered too. I would suggest that$150,000 is considered “high class” but I could be wrong.

So, in conclusion, it is clear that, though it may cost more in the short run, the government should work actively to reduce income inequality. We could simply choose to be efficient and take the cheapest route – letting everyone whither away. But no. We are humans and we must try to be as fair as we subjectively can. Fairness requires a lot of sacrifice on our part, but after many years, with more people spending, we will see the positive effects it has on the growth of our economy.





J5 – The Problem of Unemployment [To be marked]

18 01 2011

The Great Recession. An economic event whose very name strikes horror and fear in the heart. The great monster that ravaged the streets of London and destroyed the roads of Stockholm. It did not simply just come and go. It left tracks, one of which is the cause of much sorrow to the average Canadian: Unemployment. That being said, what should governments, who are viewed as saviours and guardians of society, do to clean up this huge footprint? Or should they do nothing at all?

First, we should realize that all forms of unemployment are not equal. In fact, a certain amount of people (6% to 7% in Canada) searching for work is actually expected in a free market economy and is considered healthy. For example, frictional unemployment, people moving from one job to another, is a great indicator of growth as people upgrade jobs and structural unemployment, from shutdowns of sectors in the economy which are not in demand currently, shows an increase in modernization and innovation and an economy facing the future, competing with the wider, developed/developing world. The form of unemployment that is dangerous though is cyclic unemployment which is the result of  falls in the business cycle. People loose their jobs, loose hope, and need sustenance.

I believe that governments should do something about this form of unemployment. Leaving the free market to fix these problems is inefficient – the free market has no incentives to  help its losers. In fact, left on their own, the unemployed may create further complications and negative externalities for society such as increased crime rates and a drag on family and friends, not to mention all the lost tax revenue that could have been collected, all of which could be prevented if the government steps in and helps these people out. Also, it is well-accepted that a government has a responsibility to help its citizens by protecting their physical safety.  But what is often forgotten is that economic safety is just as important! Failing economically has many negative side-effects, harming both your wallet and your physical body, as one editorial in The Nation professes. Is it not also morally wrong just to leave your fellow countrymen on the sidelines while you look on? All reasons combined, governments should step in and do something. But what?…

Well, since cyclic unemployment is caused by fluctuations in the economy, it would make sense to first try increasing economic growth and output (GDP) to help increase the number of employed. The government can try and use fiscal policy to their advantage and help increase governement spending (themselves), consumer spending, business investment, and net exports – the prime components of the GDP which ultimately shifts aggregate demand right. They can do this by decreasing taxes and increasing spending, hoping that the consumer wealth they provide by employing people and removing less of their money would be poured into businesses which would hire more and can bring the economy back up to speed, in a continuous, multiplying cycle. Though this is very effective, it does not completely solve the problem because increases in GDP are not always correlated to employment. In fact, there is often a disconnect between national output and “official” unemployment rates (you are not counted if you give up the hunt, etc) and the day to day lives of Canadians, as shown in this Toronto Star article on current unemployment. So enough with those charts and figures – how do you get  people back to work?

Well, since they are unemployed the governement should try to maximize their ability to look for a job and focus on that task. They should, and are, giving people employment insurance (part of government transfers) so that people can live their daily lives (eat, sleep, bathe) without the fear of poverty behind their backs. This way they can focus on searching for a job rather than just staying alive. Thus, the first step in decreasing unemployment and helping the unemployed would be extending EI benefits. We should not get complacent with our GDP numbers. Clearly, the jobless are as shipwrecked as ever, regardless of the “dipping” jobless rate. Another thing that they can do is help buff up the skills of long-unemployed workers by investing in retraining/training programs. Let’s see what Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, has to say:

“It is unprecedented in post–World War II U.S. history to have 3% of the labor force unemployed for over a year.”

Clearly, we need to put people back on their feet.

To created sustainable growth, indicated by an upward trend in the business cycle, we need to invest in the future. Investing in both people and ideas. According to the CBC documentary linked to earlier, youth are one of the most left-out groups in the economic growth Canada is experiencing – but they are the future! To remain competitive with future generations of other  countries, we need to give our youth jobs to give them experience and a bit of money. The government should concentrate a large portion of its recession spending on jobs that youth – the future generation – can take part in. To create the economy of the future, the government should also create hiring incentives for new and emerging fields like renewable technology. This way, we can lead the world and form a competitive advantage. With the advent of free trade, this is extremely important. If we are left with old, decaying, uncompetitive fields, whose fault is it but our own?

Finally, to clean up, hiring incentives should also be placed in industries that have been hurt in the recession. Industries like manufacutring need to be massaged so that former employees are back at work – we have a moral responsibility to them.

In conclusion, governments really should help the unemployed get back to meaningful work. Though it is expensive in the short run, in the long run you will do two things. Decrease unemployment and create sustained growth (shifting LRAS right). Not bad. Not bad at all. 🙂





Wal-Mart: the best thing since sliced bread.

8 11 2010

Is the world better-off or worse-off because of Wal-Mart?

Surprisingly, you will not find a Wal-Mart at every corner in Toronto but Wal-Mart’s presence is still around. For all our needs, most people turn to Wal-Mart to purchase it, expecting the lowest prices and a convenient one-stop shop. Though this business faces much criticism about being a category-killer, driving out local businesses and enabling poor labour conditions in foreign countries, the world has greatly benefited from the growth of Wal-Mart.

Taking criticism
There is no denying that Wal-Mart holds a large market share. In fact, it exists in an oligopoly along with Zellers and Target. Being the largest, Wal-Mart holds a lot of power in the marketplace, especially concerning pricing of their products. The company’s ability to offer low prices has driven local businesses away because they just could not compete. This has led to many negative views about Wal-Mart, giving the perception that it is a large corporation who does not care about social welfare. However, is it really Wal-Mart’s fault for trying to gain a competitive advantage through pricing strategies? In a free-market economy, businesses should have the freedom to produce and price items as they please, so why is there an exception for Wal-Mart?

Also, the company has been criticized for enabling low wages, not only in their stores, but at the factories of their suppliers. Many reports claim that Wal-Mart gives a low pay to their employees and do not offer any rewards or bonus packages. This means that a Wal-Mart salary is not sufficient to support a family. Let’s think about this for a moment: why would a Wal-Mart worker expect to be paid a high salary? There are no job requirements and most of the work is unskilled labour, meaning, even a high school student could work at Wal-Mart. Logically speaking, there are high volumes of people who would qualify for the position; therefore, when supply of labour is high and demand for the labour is low, wages will be low. The same could be said for the factories in foreign countries. Wal-Mart is China’s largest customer and there is reason to this. China has a large population and thus, large work force. It doesn’t take too much skill to work on an assembly line; therefore, wages are lower in factories. Wal-Mart wants to minimize costs and China can help them do that.

Leading the market
Wal-Mart is a prime example of a successful business model. They take advantage of business opportunities, are consumer-oriented, are continuously changing/adapting, and strive to maximize profits.

They are the leaders in outsourcing. Being one of the first businesses to export labour, Wal-Mart has built a strong foundation on their low fixed-cost business and has inspired other companies to follow their lead. This increases foreign investment in other countries and provides multiple new jobs in those countries that would have otherwise been non-existent.

Wal-Mart’s standards for competitive pricing puts pressure on suppliers to be more efficient. In the featured graph, Wal-Mart’s low prices decreases marginal revenue, therefore, the break-even quantity is higher and profit maximizing quantity is lower. However, if suppliers can find ways to be more efficient and produce under Wal-Mart’s price range, they gain shelf space in one of the largest retailers to exist. The mass volume of traffic alone would increase sales.

Wal-Mart pushes prices (and thus marginal revenue) down putting pressure on suppliers.

At the end of the day, it is a very basic principle: customers like low prices, therefore, businesses should satisfy customer wants and needs. Wal-Mart has done so with their pricing and by offering a wide range of goods and services in one location. They’ve gained such a large and unmatchable competitive advantage that most consumers are willing to overlook any of the company’s faults and suppliers are willing to restructure their organization in order to get their product in stores. Wal-Mart has created such a niche in the marketplace that it cannot be replaced or terminated.

In conclusion, the world is better off with the existence of Wal-Mart. They have increased globalization and trade, brought more inexpensive goods to consumers, created a source of competitive advantage for producers (in product placement), pushes competitors to improve their own operations, and show what it means to be a successful business. Without Wal-Mart, cities would be stuck in an economic plateau that protects local businesses so much that there is minimal room for growth and improvement.





The Wal-Mart Experience That Has Captured Us All.

7 11 2010

“Wal-Mart is a retail planet with a gravitational pull so strong it shapes our economic universe in ways we can barely comprehend.” – Bob Thompson, The Washington Post

The above quote sums up Wal-Mart pretty well.

From a consumer point of view, it certainly seems like a planet. If you need something, Wal-Mart has it. There’s no trouble getting there, since they’re everywhere. And once you get there, there is no problem parking in an endless supply of pavement and white lines. Inside, there is an endless supply of whatever it is you came for – and whatever it is you didn’t come for, but… its so cheap, why the heck not?

“Push” is a strategy in marketing whereby a company  “pushes” the product in customer’s faces, hoping they will buy it. These companies try to attract returning customers to build brand loyalty. Of course, there has to be an incentive for customers to come back – Wal-Mart’s incentive is economic. Wal-Mart is synonymous with the words “rollback” and “low prices”. Its cheap prices combined with our society’s love for material goods keeps customers coming back, under the guise of saving money.

When compared to other retailers, you are technically saving money. Instead of spending $10 on a shovel, you spend $4. How Wal-Mart gets you is when you don’t need a shovel. Economic theory assumes that we are all rational. In reality, that’s not true. Your eye catches the happy face with bright letters that exclaim “ROLLBACK!”, and the bold numbers that seem to yell the price at you. Immediately, you start to rationalize: “well, it’s going to be winter and I’m going to need to shovel. The one I have in the garage is starting to look old. What if I want to buy it later? I might as well buy it now and save myself another trip.” And the same thing happens with ten other items and you walk out of Wal-Mart with ten things you don’t need, and you have no idea what just happened. Read the rest of this entry »





Free To Lose – The Power of (Dr. Friedman’s version) of the Market

7 11 2010

Journal Entry Two (On Prompt Three)

The Friedman Free Market

Dr. Friedman seems to have some clear ideas of how an ideal market should operate. His ideas are so clear and one sided that some might find them irrational. He believes in a free market economy, a pure free market economy. I personally believe too much of one thing is not good. Therefore, I support a free market with certain mixed market components, not the extreme version cooked up by Dr. Friedman. I have no problem with many of the things that Dr. Friedman says but some of it is a bit too irrational and illogical. Moreover, a pure free market economy has never existed and never will as the 16th president of the United States Jean Kirkpatrick said, “There is no pure free-market economy.” Therefore, the primary purpose of this entry is not to prove that a free market will not work, as it does to a certain degree of effectiveness, but rather to prove the flaws in a pure free market as Dr. Friedman proposes.

Law And Order

The purpose of the government is to serve the people’s needs. How can the government serve the people’s need if it is not allowed to have a hand in people’s monetary matters? In a democracy the fate of the people and the government is connected, the two bodies are interdependent. In all free markets there is a certain degree of government intervention no matter what, there is no pure free market. But we have to decide on where the government can interfere and where it cannot. However, it is necessary that the government regulates and implements laws in order to prevent business fraud. Competition does not always necessitate that the best quality products will enter the market, but rather the most profitable products will. It is up to the government to ensure that product quality and business integrity is maintained. There must be a neutral body between the businesses and the consumers that prevents unethical business activities such as monopoly, price fixing and price gouging. An economic system without any degree of regulation would cause a lawless market, unless you trust firms to look out for consumer interests.

A different corporation

Moreover, as Canadians we would probably have nightmares if  something like our health care was privatized to ensure a pure free market. There will always be claims that it can be done cheaper, better and more efficiently if these sectors were privatized. However, crown corporations, government controlled corporations, have served us well. Few notable crown corporations are the Canadian Broadcasting Corporation (CBC), Via Rail and Canada Post. Don’t get me wrong, Canada ranks 7th in the global economic freedom index, one above the United States. But we still have a progressive tax system, tariffs on trade and numerous public services. As a daily commuter I can tell you that the TTC is not perfect, but it gets me where I need to. There have been global attempts to privatize public transit but all of them have failed miserably, Vancouver and London U.K are two examples. It goes to show some markets are best left public. Furthermore, the profits from crown corporations come back to benefit the public and help provide further governmental services. Moreover, there has to be a controlling body which regulates services that we cannot afford to privatize, for example the army, fire service and police. We call this controlling body the government. Unless, Mr. Friedman can enlighten us on how we can turn fire service, law enforcement and the army into private services I think we need the government.

 

You may have seen one of these notorious red boxes in your neighbourhood. Canada Post is a crown corporation.

 

Human decisions, inhumane market

In a free market economy the private entrepreneur is not out there to look out for the interest of the public, this is why we need the government. A tragic flaw of the free market is it makes few better off and leaves the rest where they are (or worse). Creating a giant gap between the rich and poor. Whereas, the mandate of the government is to ensure the improvement of the economic situation of those left behind. A free market is a market controlled by human actions, but human actions can be irrational. Money will always get in the way of ethics, morality and humanity in a free market. Even though, the market is determined by human actions, the market by no means is humane. It is up to the government to look out for the people, this is something the firms will not do. I would like to end this entry with a quote from the former head of U.N, Kofi Annan, who said “We have to choose between a global market driven by calculations of short-term profit, and one which has a human face.”

Canada ranked 7th overall in the global economic freedom index of 2010.