Econers, The Economics Students Committee

The following member will serve as the new session of 2019-2020.

Lee Yat Long(President)
Chong Ho Hin(External Vice President)
Chung Yiu Hong(Internal Vice President)
Lee Cheuk Him(External Secretary)
Li Chun Pong(Internal Secretary)
Ho Pui Ying(Promotion Secretary)
Lee Wing Man(Financial Secretary)
Au Tsz Hon(Marketing Secretary)
Kwok Tsz Fung(IT sec)
Wong Lok Him(Head of Publication Committee)

We appreciate and thank you for the hard-work of the previous session.

[Defending Radiation by Eating Salt]

Yesterday my friend, who is now an exchange student, spent one euro in printing his e-ticket at an Airbnb. He told me that he was taking Ryanair, the staff might not allow him to take the flight without the e-ticket or paying ten euro in printing the e-ticket at the airport. Finally, Ryanair did not require the passenger to show their e-ticket on that flight. He was very happy as he told me that he was rational in economics sense. He told me that if he did not print the e-ticket at Airbnb and if he is required to show it, he might lose ten euro. The cost of printing at Airbnb is smaller than the expected cost of printing at the airport.

This event leads me to think about the earthquake in Fukushima in 2011. Due to the earthquake, the nuclear power plant exploded. There was a rumor that taking salt can prevent radiation absorbed into human bodies. As a result, demand for salt surged. Price of 100g salt even rose to $40 per 100g (normally it costs $5 for 100g unless you are buying luxurious salts). Many people claimed that the people rushed to buy salt were insane and brainless. However, was this really irrational?

Giving price of salt is $50, the cost of curing cancer is infinity. Even if there were a negligible probability that salts are useful, the expected cost saved is still much lower than your cost of a pack of salt. Due to the love towards family, many housewives rushed to buy salts in crowd and dirt markets. This action was completely rational.

In the end, my friend asked me, “Wilson, am I right? Am I smart?”. I replied, “You are right, however, you are stupid.” He was angry and asked me if I were him, what would I do. And I told him, “I would, of course, print the e-ticket at the school’s computer barn.”

https://hkusteconresources.blogspot.com/2018/11/defending-radiation-by-eating-salt.html?m=1&fbclid=IwAR2P6kN3TAVm3xr1MvarKPheKYsPM5KkAdwUTZ6C3HkcisaccaL3od1lcYI

Credit: Wilson Wan

For those who wish to become the next Executive Committee of Econers or know more about our aim and goal, here is your CHANCE 🤩🤩

Econers will hold our information session on 15 November 2018 🤓🤓🤤🤤 Please come and join us~ 😜 At there, you will be meeting other potential excos that you may work with 😆😆 Also another great chance of meeting new friends 😊😊😊

Econers Info Session Details:
Date: 15 November 2018 (Thurs)
Time: 19:00 - 20:30
Location: LT-F

If you wish to come, please fill in the form and register:
https://goo.gl/forms/553oqKtz7rDljgmV2

All students (in ECOF/MAEC/ECON) or SBM-undeclared (for year 1 and 2) are welcome to join us! Also, please help to spread the news to your friends ;)

Econers Info Session 2018 For those who wish to become the next Executive Committee of Econers, here is your CHANCE 🤩🤩 Econers will hold our information session on 15 November 2018 🤓🤓🤤🤤 Please come and join us~ 😜 At there, you will be meeting other potential excos that you may work with 😆😆 Also ano...

[Crimes and Interest Rate (Part 2)]

I have collected the data of real interest rate and crimes rate in the US from the year 1968 to 2014. Crimes rate is defined as the number of crimes per 100,000 population, thus the effect of population growth in crimes number is considered. Before looking at econometrics analysis, let first take a look of the correlation coefficient between interest rate and crimes rate.

The correlation coefficient between real interest rate to

Murder: 0.78
R**e: 0.37
Robbery: 0.17
Aggravated assault: -0.39

Burglary: 0.87
Larceny-theft: 0.70
Motor vehicle theft: 0.57

Data shows that there is a positive relation between real interest rate and crime rate. Moreover, the correlation between real interest rate and property crimes (the bottom three) is higher than the correlation between real interest rate and violent crimes (the top four). This shows that maybe impatient people just want to have earlier consumption rather than hurting others.

However, can we conclude that higher interest rate leads to a higher crime rate? Surely no unless we can control the effect of all other variables that affecting crime rate, including GDP, unemployment rate, Gini coefficient, etc. Therefore, to investigate the causality, we have to conduct sophisticated econometrics technique in order to isolate the effect of interest rate from all other variables.

I have calculated the first difference of interest rate and crime rate and conducted the HP filter to the data. As a result, I can isolate the effect of the change in interest rate on the change in crime rate. The followings are the effect of one percent increase in the real interest rate of crime rate, parentheses is the t-statistics:


Murder: 2.46 (2.893)
R**e: 4.05 (3.695)
Robbery: 5.86 (6.271)
Aggravated assault: 3.00 (3.805)

Burglary: 4.01 (5.072)
Larceny-theft: 3.30 (5.043)
Motor vehicle theft: 1.85 (1.96)

The regression result shows that an increase in real interest rate will cause a higher crime rate, and the coefficients are all statistically significant. One percent increase in interest rate results in 2.46% increase in murder, 4.05% increase in r**e, 5.86% increase in robbery, etc...

Therefore, data confirm that higher interest rate results in higher crime rates.

https://hkusteconresources.blogspot.com/2018/11/crimes-and-interest-rate-part-2.html

Credit Wilson Wan

[Crimes and Interest Rate (Part 1)]

Empirical findings show that crime rate and interest rate are positively related. In other words, when interest rate is higher, crime rate will also be higher. These two variables seem unrelated, this phenomenon, however, can be explained by economics.

Interest rate as a discount factor
“One dollar today worth more than one dollar tomorrow”. This sentence is right given a positive interest rate. If you have one dollar, you can invest and get back one plus the interest tomorrow. The higher the interest rate, the more you get, and the more valuable the one dollar today.

With a similar manner, what if you owe your friend one dollar? Should you repay it today or tomorrow? The answer is clear, you should postpone your repayment as you can get more interest if you postpone. The higher the interest rate, the less you have to repay.

Therefore, the existence interest rate adds value for today’s benefits and diluting future costs. The higher the interest rate, the more “impatient” the people are.

Crimes as an impatient act
When a person commits crimes, he/she gets the present enjoyment. For example, burglary and robbery let you get a certain amount of money to spend now; assault allows you to express anger to those you hate; r**e… well….

Of course, after you get the enjoyment, you have to pay the cost. Yet, punishment will be made in the future. Since interest rate is a discount factor, your real cost will be lower when the interest rate is higher.

In part 2, we will dig into data to see whether higher interest rate leads to a higher crime rate. A story will become a theory if it is verified by data.

http://hkusteconresources.blogspot.com/2018/10/crimes-and-interest-rate-part-1.html?m=1

Credit: Wilson Wan

[Why Barbecue Mix Combo is More Costly than Barbecue Regular?]

It is not uncommon to see that the price of barbecue mix combo with rice/noodle is more expensive than barbecue regular with rice/noodle. For instance, at HKUST LG1, barbecue pork with rice is $22 while barbecue pork mix soy sauce chicken with rice is $25. Many people tried to use the concept of diminishing marginal benefit, diminishing marginal utility or diminishing marginal use value, etc. to explain this phenomenon. These explanations, however, have missed one crucial condition. In this article, I will give a full explanation for the case that a combo is more expensive than a solo.

The Condition of Diminishing Marginal Utility
Many people use diminishing marginal utility to explain this phenomenon. When a consumer keep buying the certain good, the additional utility (or benefit) will decrease. Picture that, what do you feel for the first bite of your barbecue pork when you just finished the 8-hour lectures? You definitely feel very dim and very ecstasy. Then, what do you feel when you are eating the tenth bowl of barbecue pork with rice? You will think that they are s**t. Therefore, if you have more variety of choices, the diminishing marginal utility of each component is smaller. Thus, the aggregate of your satisfaction is larger. As a result, you are willing to pay a higher price. This is convincing, isn’t it?

The Missing Condition: The Combination Have to be Complement
Well, if you tried to add some milk into a cup lemon tea, I guess no one is willing to pay a higher price for this combo than just a cup of lemon tea or just a cup of milk. The reason why the combo can be sold at a higher price, or why consumers are willing to pay a higher price for the combo, is that the combo are complementary to each other. Tofu is complementary to roasted pork, thus consumers are willing to pay a higher price for braised tofu with roast pork. Lemon tea and milk are not complementary to each other. Consumers will not pay a higher price even if they exist diminishing marginal utility.

http://hkusteconresources.blogspot.com/2018/10/why-barbecue-mix-combo-is-more-costly.html?m=1

Credit: Wilson Wan

[如夢？如花？Adverse Selection and Online Dating]

Many people (in HKUST) in the society nowadays find it difficult to find a girlfriend/boyfriend. As a result, many of them resort to online dating in order to complete their dream. Unfortunately, many people complain that the quality of their dating partner is much lower than their expectation. Worse still, some unscrupulous liars make use of the dating platform to scam people’s wealth. The reason behind is that adverse selection is inherent in these types of dating platforms.

What is Adverse Selection?
Adverse Selection is one of the most crucial concepts in Economics. Professor George Akerlof introduced the concept of Adverse Selection in 1970. The story is that due to asymmetric information between buyers and sellers, buyers cannot distinguish the quality of the products. Therefore, buyers will pay for the average price of the high-quality products and low-quality products. Sellers of high-quality products will leave the market if the average price is lower than their cost. As a result, only low-quality products are left in the market. The low-quality products (which is called lemons) repel the high-quality products (which is called peaches).

Applications of Adverse Selection
Adverse Selection can be found in many cases. For example, in the insurance market, insurance companies cannot distinguish between high-risk insures and low-risk insures. Therefore, insurance companies will set the premium equals to their expected cost (probably with a mark-up). In this case, the low-risk insures will think the premium be too expensive and reject the offer. As a result, only high-risk insurers will buy the insurance.

Another example is in the car market. The buyers do not want whether the car is a peach or a lemon. Thus, buyers will place the average price between a peach and a lemon when they are offered a car. When this price is lower than the value of a peach seller, the peach seller will leave the market. Eventually, only lemons are left in the market.

Adverse Selection in Online Dating
The adverse selection problem is that many of the dating prospects are lemons. In other words, the quality of clients tends to be lower than expected. You thought that your prospect is如夢, but eventually you meet up with 如花.

This is an inherent problem due to asymmetric information. First, people are free to manipulate their information at the online platforms. In order to achieve their goals (to get a partner or to cheat money), the dating prospects would try to exaggerate their types, such as claiming that they are 1.8meters high, having several properties, making $50,000 per month, or even be able to swim to international waters easily by just using single hand and battling with sharks, and blocking hailstorm by single arm. Thus, quality is lower than expected.

Second, people participating in online dating are the lemons in real life. If they are not the lemons, they are able to find their partner in the traditional way and do not need to rely on online platforms. Therefore, only the losers and scammers would like to join the online dating platforms.

How can the Adverse Selection be mitigated? You might try to think about it and leave the comments.

*If you do not understand Chinese, 如夢 is a metaphor for the high-quality girls and 如花 is a metaphor for the low-quality girls.

link: https://hkusteconresources.blogspot.com/2018/10/adverse-selection-and-online-dating.html

Credit: Wilson Wan

從旺角行人專用區事件看界外效應(Externality) (上)

旺角西洋菜街自2000年月起成為行人專用區，原意是紓緩空氣污染和改落人車爭路的情況，不少市民在此街頭表演，吸引大批途人圍觀，但自2012年起成為大媽大叔表演粵曲和70-80年代流行歌的平台，其巨大聲浪令附近商戶和住客飽受困擾，最終在大量投訴之下，2018年8月4日，旺角行人專用區正式殺街，不能再表演，但大媽團轉去尖沙咀海旁重施故技，使市民和表演者大為不滿。

一個人的行為可能為其他人帶來成本，若他不用向受損一方作出補償，他只會考慮自己需要付出的成本，而不會考慮其他人要負擔的成本。以旺角行人專用區事件(下稱專用區事件)為例，大媽團表演的時候只考慮私人成本(Private cost)，即其行為要負擔的代價，例如表演器材的租費和搬運費，並不會考慮界外成本(External Cost)，即行為決策者以外一方要負擔的成本，例如聲浪對民眾的滋擾、使附近鋪租租金下跌等等。

由整個社會的角度看，社會要負擔的總成本(Social cost) 便等於私人成本加上界外成本。因有界外成本被轉嫁到社會身上，此時邊際社會成本(MSC)大於邊際私人成本(MPC)，我們稱此為私人成本和社會成本出現分歧(Divegence between private cost and social cost)。

中學的時候我們學過有效率的資源分配應生產於邊際得益(MB) = 邊際成本 (MC)，由社會角度看邊際社會得益 (MSB) 正正等於同邊際私人得益 (MPB)，即是大媽團表演時享受的快樂感，然而現在大媽表演只會考慮自己得益，生產到MPB = MPC 的單位，而此單位下MSC > MSB，市場失效，社會出現了生產過剩，有淨損失(Deadweightloss)。

用人話去講上述的句子：由於大媽團生產表演服務時部分成本轉嫁到社會，而且沒有因此作出補償，因此從社會角度去看是「做多左」，應該減產。而淨損失(Deadweightloss) 意味資源分配沒有效率，代表存在受到影響而沒有得到補償的人。這種現象，我們稱為界外效應(Extenrality)。

注意一點，經濟學這裡說的是減產（例如減少表演時數），不是完全禁止生產，公共空間是經濟物品(Economics Goods)，在稀少性的問題下，一個經濟物品分配給某人，便意味排斥其他人，還社會一個安靜地方同時等於放棄大媽團享樂的機會，我們不能說享用安靜空間的價值一定高於大媽享樂的價值。

而面對界外效應，我們可以用不同的方法應對：例如徵稅使界外成本轉嫁回私人身上、限制產出、發牌等等。這一點留待下回再作分享。

[Econ Major Gathering]

唔經唔覺又到咗十月，Econers將會喺10月8號舉行第一場嘅Gathering event, 誠邀各位同學、教授到場一齊聚會，以輕鬆心情迎接嚟緊嘅midterm😁

日期：10月8日
時間：下午3:00
地點：LSK 7/F
費用：$0

October has come, Econers are holding the first major gathering event, inviting all students and faculty to join our gathering!

Date: 8th October
Time: 3:00 PM
Venue: LSK 7/F
Charge: $0

[Econ Major Gathering]

唔經唔覺又到咗十月，Econers將會喺10月8號舉行第一場嘅Gathering event, 誠邀各位同學、教授到場一齊聚會，以輕鬆心情迎接嚟緊嘅midterm😁

日期：10月8日
時間：下午3:00
地點：LSK 7/F
費用：$0

October has come, Econers are holding the first major gathering event, inviting all students and faculty to join our gathering! 😙

Date: 8th October
Time: 3:00 PM
Venue: LSK 7/F
Charge: $0

從房地產交易看誘因不為人知的一面

誘因(incentives)是指驅使我們行動的因素。經濟學家熱愛誘因，因為透過研究誘因我們可以預測人類的行為：小孩為了賞勵會聽父母話、學生為了進大學會努力讀書、毒販為了豐厚利潤會賣冰毒、公司為了逃稅會造假報表、官員為了獲取權力會貪污……

在日常生活中，資訊是不完美的，因此我們常常會依賴專業人士去解決問題，為我們減低資訊成本 (Information cost)，例如看醫生以減低醫錯病的風險、上烹飪課獲取料理整作的經驗、請專業技工修維電器避免電死自己等等。

房地產交易是其中一個例子，比如說，出售房子的時候，我們會請經紀為我們工作，其一原因是房地產經紀人更多擁有房地產的資訊：有關房子的價值、市場狀況、交易成本，甚至買家心態，他都遠知得比你多。

但是別忘記這些擁有資訊優勢的專家也是人，同樣會受誘因影響，而專家如何對待你，也是取決如誘因是如何設計。有時設計對你有利，例如加州的汽車技師會在廢氣排放檢查時放水，以搏取車主日後來維修的生意；有時設計對你不利，例如1996年一項醫學研究發現，在生育率和剖腹生產的比率成反比的關係，這反映出在經濟不景氣的時候，醫師會使用較昂貴的方法產子。然而汽車維修和醫療檔案均不會有公開記錄，因此懷疑和證明專家濫用資訊優勢完全是兩回事，只有站在對方立場去思考會如何對待自己，才是了解其行為最佳的方法。

那麼回到正題，替我們進行房地產交易的經紀人的誘因設計對我們有利嗎？相信不少經濟學學生都會答有利。
房地產交易是有公開記錄，容易查證，經紀人的誘因就是佣金（香港平均是2%，當中約80-90%上繳公司），為你做廣告，討價還價，賣出的房價愈高，他的收入便愈高，聽上我們的利害一致，事實真的如此嗎？

事實不然。以一個600萬的單位作例子，可觀的話經紀就有二萬四千元，聽上去還不錯，不過如果房子的價值其實不止600萬呢？可能只需要多努力登一點廣告，或者耐心等待，房價就會上升到650萬。

50萬，對於賣家來說的邊際得益很大，但對於經紀而言，其邊際得益只有2000元，而現實中平均銷售期每長10日就才賣高3%，即每賣高18萬就賺多720元，同樣的時間經紀人可以出售其他人的房子獲利更多，720元這個誘因根本不足以推動他們花精神再做廣告，跟買家討價還價。因此經紀賣自己的房子會耐心等候，但替你賣房子時就鼓勵你盡快接受出價，甚至可能會提供錯誤的資訊，希望能最快結案賺多一單。所以下次賣房子的時候，不妨等待多一會，亦不要盡信經紀。

參見
Freakonomics p24-28 專家如何曲解事實
money gogogo 地產代理佣金怎樣計算

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