The new world of economics

The New World of Economics Richard B McKenzie l Gordon Tullock The New World of Economics A Remake of a Classic for New Generations of Economics Students Sixth Edition Richard B McKenzie University of California, Irvine Paul Merage School of Business Irvine California USA Gordon Tullock George Mason University Law & Economics Center Arlington Virginia USA Original Title: New World of Economics: Explorations into the Human Experience Original Publisher: Homewood, Ill.: Richard D Irwin, Inc Original Publication Year: 1975 Original 5th edition published by McGraw-Hill College, 1994 ISBN 978-3-642-27363-6 e-ISBN 978-3-642-27364-3 DOI 10.1007/978-3-642-27364-3 Springer Heidelberg Dordrecht London New York Library of Congress Control Number: 2012933772 # Springer-Verlag Berlin Heidelberg 2012 This work is subject to copyright All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer Violations are liable to prosecution under the German Copyright Law The use of general descriptive names, registered names, trademarks, etc in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com) The economist’s stock in trade—his tools— lies in his ability to and proclivity to think about all questions in terms of alternatives The truth judgment of the moralist, which says that something is either wholly right or wholly wrong, is foreign to him The win-lose, yes–no discussion of politics is not within his purview He does not recognize the either–or, the all-or-nothing situation as his own His is not the world of the mutually exclusive Instead, his is the world of adjustment, of coordinated conflict, of mutual gain James M Buchanan (1966, p 168) Preface E conomics has traditionally been defined by both its methods and its subject matter That is to say, there are economic methods—models and statistical tests—that are based on a set of assumptions about the way people behave and interact with one another Moreover, there is a distinct set of “tools” or “principles” economists employ in their analyses Economists have studied the world of “business” extensively As may be obvious from the table of contents of this book, we believe that the economic methods that have been used to study business issues over the centuries can also be applied to many other areas of human behavior Indeed, while we acknowledge that economics is only a partial view of human behavior, we see no practical limit to the application of economic methods to all areas of human behavior Even a “partial view” can often offer insights that could be overlooked if economics were not employed The test of the applicability of economic methods to areas of human (or, for that matter, animal) behavior is whether insights that stand up to empirical tests are found We remain firmly convinced that these new applications make the study of economics more exciting, more interesting, and more relevant When The New World of Economics was first published in the 1970s, it was (would you believe?) controversial because many economists were not comfortable extending the application of economic methods to politics, sex, crime, marriage, family, divorce, riots and panics, and learning, among other topics We heard from hostile economists who were stunned by our audaciousness Given its widespread use in college and university classrooms over the decades, we are pleased to say that The New World of Economics has changed a number of professional minds It was the first introductory economics reader to discuss (among a host of other topics) public choice economics, the economics of marriage and family, and law and economics Several Nobel Prizes have since been given to economists who have worked in these areas We have also heard from economists and their students who have written to say, in effect, “Right on! About time.” Many of the subjects we have covered in The New World over its first five editions now have extensive scholarly literatures and have been integrated into vii viii Preface “conventional” or “mainstream” economics textbooks published since The New World first appeared A host of other popular books have since been released that have more broadly applied economic methods, most notably Freakonomics, which had a long run on The New York Times bestseller list.1 Indeed, we have chosen to reissue this major revision of The New World because many current practicing economists are too young to remember the success and impact of its first five editions and because many professors of economics of all generations want to show their students the “new, new worlds” of economic inquiry that have emerged within the professional lifetimes of the last generation of economists We have included a number of these “new, new” topics in this edition However, our overall objective remains the same, namely, to show students how the principles of economics are applicable to their everyday experiences and to a variety of issues studied in other courses, not the least of which are business and social science courses that are grounded in psychology, neuroscience, and evolutionary biology Accordingly, we have retained many of the topics covered in the first five editions, but we have also added a heavy emphasis on pricing strategies and behavioral economics, now a burgeoning subdiscipline within economics, which is grounded on serious criticisms of conventional economics’ underlying assumptions and conclusions We review the “behavioralist” approach and its arguments, but we also point to problem areas within behavioral economics Most budding economists understand that businesses can become successful by developing “better mousetraps.” We stress how businesses have improved the profitability of their products by careful construction of their pricing strategies to take advantage of their market positions In any number of topics covered in the following chapters, we describe the insights of another subdiscipline—organizational economics—which has radically expanded since the first edition of The New World was released Most introductory economics textbooks are, literally, encyclopedias of just about everything known in the subject We have always believed that the first and most important principle in economics should be economy in the principles that are taught and studied The critical concern in education is not how much is taught, but how much is learned and what insights can be drawn from what is learned Accordingly, students will probably be relieved and pleased to know that we introduce a relatively small number of principles through coverage of the various disparate topics in the chapters However, we make those few principles work, applying them broadly, to just about every nook and cranny of human behavior We strive to keep the analysis simple in order to make the learning process productive (incidentally, a topic which we elaborate on in Chaps 18 and 19) An often-cited adage applies to economic education: “less is more.” The New World of Economics has been developed on the premise that economics is, at its disciplinary core, a way of thinking We believe that students will want to read this book because of our focused emphasis on honing their thinking skills, as well as applications to interesting topics And by the end of the book, we believe students and readers will be thinking much like economists do, all very naturally (or Preface ix as if by second nature) We have been told numerous times by students and professors alike that this book simply works in changing the way students see the world We are, of course, indebted to our many colleagues around the country who have contributed directly or indirectly to the development of chapters in this book in the form of their recommendations for improvements We are also immensely indebted to our students; they have taught us much that is reflected in this (and past) editions Nothing helps improve a book more than classroom use, and this book has been used, at one time or another, in most of the country’s colleges and universities and in many foreign universities Over the years, both authors have continued to extend the application of economics to an ever-expanding arena of ideas, and in redeveloping The New World we have drawn on our published works for other audiences.2 We welcome students to what could be for many the educational trip of their college careers Irvine, CA, USA Tucson, AZ, USA Richard B McKenzie Gordon Tullock Bibliography 545 Reynolds, Maura, and Peter Nicolas 2009 “Obama $3.55 Trillion Stand.” Los Angeles Times February 29, A1 Reynolds, Maura, Richard Simon, and Peter G Gosselin 2008 “Congress Balks at Bailout Plan.” Los Angeles Times, September 24, A1 Rivera, Ray 2007 “Biodiesel Makers See Opportunity as New York Seeks Greener Future.” The New York Times, May 28, A10 Robinson, Charles 2010 “USC Hit Hard by NCAA Sanctions.” Rivals.com, June 14 Accessed February 22, 2011 http://rivals.yahoo.com/ncaa/football/news?slug¼ys-uscpenalties061010 Robinson, Stanley D 1980 “Recent Antitrust Developments—1979” Columbia Law Review 80 (1): 1–42 Rodin, Miriam, and Burton Rodin 1972 “Student Evaluation of Teachers.” Science 177(September 29): 164–6 Romer, Paul 1994 “The Origins of Endogenous Growth” Journal of Economic Perspectives 1994(Winter): 3–22 Roos, Patricia A 1981 “Sex Stratification in the Workplace: Male–female Differences in Economic Returns to Occupations” Social Science Research 10: 195–224 Rose, Michael 1998 Darwin’s Spectre Prinecton, NJ: Princeton University Press Rose, Nancy L 1987 “Financial Influences on Airline Safety.” Sloan School of Management, Working Paper No 1890–87 Cambridge, MA: Massachusetts Institute of Technology Rose, Stephen J., and Hedid I Hartmann 2004 Still a Man’s Labor Market: The Long-Term Earnings Gap Washington, DC: Institute for Women’s Policy Research Rosenow, E C 2010 “Quit Smoking, Gain Weight: Is It Inevitable?” MayoClinic.com Accessed May 19, 2010 http://www.mayoclinic.com/health/quit-smoking/an01437 Rothkopt, Michael H., and Paul Rech 1987 “Perspectives on Queues: Combining Queues Is Not Always Beneficial.” Operations Research 35(6): 906–9 Rowswell, Steve, John Rich, Heike Syben, Dave Pavelcheck, and John Peca-Medlin 2008 “Licensed Child Care in Washington State: 2006.” Washington State Department of Early Learning Accessed July 6, 2010 http://www.del.wa.gov/publications/research/docs/LicensedChildCareInWashingtonState_2006.pdf Rubin, Paul H 2002 Darwinian Politics: The Evolutionary Origins of Freedom New Brunswick, NJ: Rutgers University Press Ruhm, C J 2009 “Economic Conditions and Health Behaviors: Are Recessions Good for Your Health?” North Carolina Medical Journal 70(4): 378 Accessed October 13, 2010 http://www ncmedicaljournal.com/wp-content/uploads/NCMJ/Jul-Aug-09/Ruhm.pdf Runge, C Ford, and Benjamin Senauer 2007 “How Biofuels Could Starve the Poor.” Foreign Affairs, May/June Accessed May 7, 2007 http://www.foreignaffairs.org/20070501faessay86305/ c-ford-runge-benjamin-senauer/how-biofuels-could-starve-the-poor.html Saaty, Thomas L 1961 Elements of Queuing Theory New York: McGraw-Hill Sadalla, Edward K., Douglas T Kenrick, and Beth Vershure 1987 “Dominance and Heterosexual Attraction” Journal of Personality and Social Psychology 52: 730–8 Salon, Steven, and Joseph Stiglitz 1977 “Bargains and Ripoffs: A Model of Monopolistically Competitive Price Dispersion.” Review of Economic Studies 44(3): 373–88, 493–510 Sanders, Shane, Dennis Weisman, and Dong Li 2008 “Child Safety Seats on Commercial Airliners: A Demonstration of Cross-Price Elasticities” The Journal of Economic Education 39(2): 135–44 Santa Monica (Calif.) 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Admission price, 221, 229, 230, 232, 249 Adverse selection, 71, 72, 74, 75 Advertisements, 70, 236, 238, 241, 242, 266, 283, 384, 455, 456 Afghanistan, 93 After-Christmas sales, 55, 213–215, 217 Agave, 66 Age Discrimination Act, 340, 356 AIDS, 138, 440, 474 Air bags, 39–41 Airport security, 61, 62 Air travel costs, 59, 60 Air travel safety, 58–60, 470 Alert status, 62, 67 Allocation by congestion, 98 All-or-nothing deal, 145, 146, 148–150 All-or-nothing-employment provision, 348 Alt-A mortgages, 411, 412 Altruism, 94, 96, 269 Amazon, 161, 205, 210–212, 484, 485 American Heart Association, 174 Anchoring bias, 197, 422 Anchors, 394, 402, 437–439 Android, 385 Antidiscrimination laws, 182 Antismoking lobby, 265 Antitrust, 231, 236, 240, 258–259, 327, 333–337, 383–387, 389, 390, 491, 502, 508 Antitrust enforcers, 236, 240, 383–386, 389, 390 Antitrust law, 230, 326, 333, 334, 338, 385, 387, 501–503 Apple, 54–56, 128, 137, 167, 209, 253, 258, 261, 287, 288, 311, 312, 384, 385, 389, 429, 436, 468, 484, 491 Application barrier to entry, 258 Arbitrary coherence, 394, 438 Arrow paradox, 371 Artificial sweeteners, 194, 195 Asymmetric information, 71 AT&T, 54, 287, 384, 468 Audible and smellable edibles, 225 Audible.com, 54, 55, 216 Austrian economists, 418, 509 Automobile travel, 40, 59, 61, 470 Availability bias, 197, 422, 437 Average cost, 224 B Baby Bills, 387 Baby boomers, 410 Bailout, 409, 413, 414 Balloon payments, 411, 412 Bandwagon effects, 283–288 Bank of America, 162, 413 Bank of England, 34 Barrier to entry, 258, 383, 385, 388–389 Battle of the bulge, 198 R.B McKenzie and G Tullock, The New World of Economics, DOI 10.1007/978-3-642-27364-3, # Springer-Verlag Berlin Heidelberg 2012 551 552 Battle of the sexes game, 456 Bean, L.L., 282 Bear Stearns, 413 Behavioral economics, 391–415, 417–446, 483 Behavioral economists, 198, 277, 392–398, 400, 401, 404, 406–408, 415, 417, 421, 427, 430, 433, 435, 440, 444, 445, 509 Behavioral finance, 407–415, 512 Below-zero prices, 246, 256 Biodiesel fuel, 66 Black market, 36, 57, 94 Body Mass Index (BMI), 167, 170, 173, 174, 179, 182, 183, 479, 480, 482 Bottle-feeding, 183–185 Bounded rationality, 391, 415, 427 Box-office receipts, 229, 230, 486 Breastfeeding, 183–186, 481 Bubble thinking, 412, 415 Bureaucracy, government, 375–377 Buyout auction, 88 C Cal Tech, 306 Capuchin monkeys, 137 Carbon dioxide, 67 Carbon taxes, 67 Cartel, 18, 105, 240–242, 327–335, 337, 338, 373, 374, 497–500, 504 Cash subsidies, 82, 83 Celebrities’ endorsements, 251 Cell phones, 54, 178, 494 Centers for Disease Control and Prevention (CDC), 178 Charitable exploitation, 143, 146, 474 Cheating, 11–12, 153–165, 325–327, 329–333, 475, 499 Checkout counters, 278, 280, 281, 288 Checkout queues, 278, 281 Cheerios, 242 Chicken-and-egg problem, 286, 287 Child care centers, 184 China, 65, 121, 171, 260, 409, 463 Cigarettes, 23, 152, 187, 188, 262, 263, 265, 438, 492 Cigarettes taxes, 187, 188, 265 Clearance sale, 54, 55, 216 Clemson University, 60, 104, 497 Clinton Administration, 383 Coital frequency, 128, 131–133 Coke, 162 Collective welfare, 361 Common interests, 41, 361 Index Comparative advantage, 117, 349 Competitive markets, 19–21, 82, 120, 240, 263, 266, 271, 291, 329, 377, 388, 390, 422, 426, 434, 445, 446, 449, 492, 498, 502 Concert tickets, 276 Congress, 7, 56, 59, 60, 65, 94, 163, 164, 329, 368, 370, 410, 411, 469, 478 Conservation, 36, 64 Conspicuous consumption, 284 Consumer inertia, 253 Consumer Price Index (CPI), 84, 86, 169, 192, 231, 477 Consumer Reports, 161, 250, 468, 490 Consumer surplus, 144–148, 377, 378, 386, 405, 475 Contraceptives, 128, 137, 459 Cooperative strategy, 433 Cooperweld Corp vs Independent Tube Corp, 337 Copyright laws, 254 Costco, 162, 196, 253 Cost of flying, 11, 61 Counterfeiters, 261 Coupon collusion, 240–241 Coupons, 36, 201, 235–243, 253, 289, 406, 430, 431, 467, 488, 489 CPI See Consumer Price Index (CPI) Credible commitments, 353, 354, 389, 463, 507 Cruise ships, 248, 249 Cult, 287 Cyclical majorities, 350, 370–371 D Deadweight loss, 369, 370, 385, 502 Deal-prone shoppers, 236, 240 Decision biases, 417, 419, 421, 444 Default option, 437, 441 Demand curve, 6, 16, 18–21, 26, 27, 32, 35, 40, 41, 46, 47, 91, 96, 126, 135, 136, 140, 141, 143–146, 148, 203, 205, 207, 208, 229, 232, 240, 256, 271–273, 275, 285–287, 296, 312, 376, 378, 386, 387, 393, 429, 474, 485, 492–494, 498, 509 Demand variability, 274 Development costs, 162, 254, 256, 261, 262, 388, 389 Dialysis, 96 Dictatorships, 163, 362, 382 Digital books, 254 Digital goods, 254–256, 259–261, 266, 388 Digital movies, 254 Index Digital music, 254 Diseconomies of scale, 245 Dishonesty, 159, 163, 165, 348 Disney, 222, 248 Disneyland, 248, 249, 280 Disney World, 248, 249 Divorce, 109–122, 140, 147, 183, 186, 463, 477 Divorce laws, 119, 183 Dominance, 43, 124, 256, 258, 383, 384, 386, 398–400, 415, 455 Double (or triple) coupons, 240 Downsizing, 86, 410 Drunk driving, 66 Duke University, 197, 391, 403 Dupuit triangle, 387 E Early admissions, 204, 205 Ecologically adaptive environments, 426–427 Economic approach, 23, 122, 311, 337 Economic downturns, 174, 175 Economic freedom, 177, 479 Economic profit, 274, 377, 409 Economic puzzles, 53, 68 Economies of scale, 115, 191, 245, 255, 337, 375, 409 Economy in principle, Effective price, 56, 61, 78, 216, 261, 298, 300, 302 Efficiency improvement, 62, 196, 242, 345 Efficient-market hypothesis, 407, 408 Elasticity of demand, 40, 47, 194, 207, 209, 211–213, 231, 485 Electricity, 34, 37–39, 41, 371, 467 Employment security, 341 Endowment effect, 402–405, 415, 435, 440 Energy crisis, 34 Enron Corporation, 37 Entertainment bundles, 227–229 Entrapment, 226, 227, 233, 234 Entrepreneurs private, 382 public, 382 Equi-marginal rule, 14 Ethanol, 65–67, 171, 193 European Commission, 383, 384 Experienced goods, 252 Experimental economics, 395, 436, 449, 456 Extended warranties, 71 External benefits, 240 External costs, 366, 372 Externalities, 328, 365, 372, 498 553 F Faddism, 287 Fairness, 272–273, 494 Family, 3, 14, 21, 22, 28, 36, 41, 43, 59, 84, 86, 109–122, 129, 149, 169, 181, 183, 184, 219, 222, 233, 238, 239, 250, 254, 300, 323, 379, 439, 458, 469, 472, 473 Fannie Mae, 411, 529 Fast-food economy, 179–180 Fast-food restaurants, 79, 168, 178–181, 201, 206, 344, 479, 480 Fat cycle, 186 Fat economics, 167–198 Fat economy, 167, 168 Fat-labels, 193 Fat taxes, 168, 194, 195, 198, 483 Federal Aviation Administration, 59, 469, 470 Federal minimum wage, 180–182, 222, 480 Feedback loops, 185, 419, 421, 423–425, 427, 433, 435, 441, 442, 444, 446 Fertility, 101, 269, 454 First-come/first-served system, 98, 99, 290 Floodplains, 72–76 Flood victims, 73–76 Food controls, 195 Food insecurity, 171 Food preparation time, 191, 482 Foreclosures, 34, 412–414 Frames, 81, 402, 421 Framing, 323, 401, 402, 420, 427, 432, 433, 439, 510 Franchises, 194, 331, 499 Freddie Mac, 411 Freebies, 253, 254, 263 Free downloads, 259, 266 Free goods, 246, 254, 265, 266 Free-rider problem, 37, 373 Free-standing inserts, 235 French fries, 180, 191, 196 Frequent-buyer cards, 209 Frequent-shopper discounts, 236 Friends of the Earth, 66 Fringe benefit, 85, 89, 104, 180, 307, 326, 328, 340, 341, 343, 346, 351, 356, 369 Frugality, 175, 396 Full cost of air travel, 62 Full cost of overeating, 189 Full cost of road travel, 62 Full price, 168, 172, 187–189, 191–193, 196, 197, 242, 407 Full-service restaurants, 178, 179 554 G Gamble, 56, 240, 250, 263, 395–400, 410, 420, 428–432, 452, 510 GAO See General Accounting Office (GAO) Gender gap, 183, 457 General Accounting Office (GAO), 458, 522, 523 General education requirements, 299, 302, 315, 316 General mills, 240, 242 General motors, 160, 375, 376, 378, 414 George Mason University, 410 Gift cards, 215, 217, 485 Global warming, 67, 193 God, 8, 96, 100, 112, 135, 165, 361, 480 Golden handcuffs, 87 Google, 322, 384, 385, 389, 472, 497 Grade inflation, 295, 303, 320–323, 495 Grading structure, 320–324, 496 Great recession, 33, 171, 174–175, 295, 304, 477 Grocery stores, 181, 192, 206, 209, 219, 236, 238, 270, 276–281, 288, 289 H Habits, 95, 183, 187, 198, 250, 269, 413, 424 Harvard, 80, 139, 156, 303, 306, 391, 469, 483 Health care, 71, 72, 168, 174, 176–178, 182, 184, 185, 188, 189, 195, 197, 371 Health-care costs, 176, 184, 185, 188, 195 Healthful foods, 172, 190 Health insurance, 71, 72, 168, 177, 178, 182, 185, 197, 245, 343, 505 Healthy living, 170 Heisman Trophy, 325, 330 Herding, 409, 410, 421, 422 Heroine, 262, 263 Heuristics, 418 High-fat foods, 195 High-income groups, 190, 192 Highway accidents, 60, 62, 472 Hollywood, 280, 287 Holy matrimony, 112 Home-cooked meals, 117, 176, 178, 180, 182 Home depot, 270–272, 274, 275 Homeowners, 77, 86, 87, 398, 411 Home-produced goods, 78 Homoeconomicus, 392, 417, 483, 509 Homosexual marriages, 109, 111 Honda Civic, 56 Honest dealing, 71, 161, 348, 352, 357 Hoover institution, 269 Index Hostage, 162 Housing-market bubble, 408–410 Housing subsidies, 79–89 Human capital, 99, 452 Human sexuality, 124 Hummers, 58 Hurricane Andrew, 282, 283 Hustler, 133 Hybrid cars, 56, 58 Hypothetical value function, 397 I IBM, 258, 384, 392, 417, 483, 491 iChapters.com, 212, 485 Illegal immigrants, 182 Imprinting, 394 In-ad coupons, 236 Income effects, 403 India, 65, 94, 171, 178, 409, 485, 486 Indonesia, 66 Inelastic demand, 208, 216, 220, 233, 288 Inelasticity of demand, 207, 212 Inertia biases, 197, 422, 437 Infant formula, 184, 185 Inflation rates, 341, 356, 413, 414, 477 Information, 5, 6, 8, 9, 22, 26, 68–71, 102–105, 116, 132–135, 157, 161–163, 187, 215–216, 241–243, 246, 250–253, 266, 283, 285, 309, 311, 312, 351, 353, 369, 376, 377, 379–382, 402, 407, 408, 410, 412, 415, 419, 422, 435, 437, 442–444, 446, 449, 450, 475, 490, 495 Information economics, 242 In-kind subsidies, 82, 83, 85 In-pack coupons, 235, 238 Insider nontrading, 102–106 Insider trading, 102–106 Instant messaging, 162 In-store samples, 253 Integrated firms, 230 Intentional shortages, 283 Intercourse, 125, 126, 130–133, 137, 138, 147–149 International trade, 177 Internet access, 246–248 Internet explorer, 246, 259, 383, 384 Invariance, 398, 399, 401, 402, 415 Inventories, 55, 213, 214, 242, 275 iPad, 287, 385 iPhone, 54, 55, 191, 287, 384, 385 iPod, 54, 55, 287 Iran, 93 Index Iraq, 93 Irrational excitement, 394 Irrational exuberance, 391, 408, 409, 412, 413 Irrational failings, 395 Irrationalities, 198, 391, 408, 417, 419–422, 425–428, 431, 437, 441, 442, 444–446 iTunes University, 253 J Jack in the Box, 206 Japan, 54, 139, 239, 414 Jill, J., 279 Job security, 341, 351–354, 356, 357 Joint product, 331, 436, 500 Joint venture, 327, 330, 331, 333, 335–338, 385, 387, 499 K Kellogg, 242 Kidney transplants, 93, 94, 97, 98 Kool-Aid, 194 Kroger, 281 Kuwait, 93 L Labor-managed firms, 340 Labor-market discrimination, 448 Labor-market theory, 346, 449, 450 Large groups, 41, 42, 115, 352, 369, 374 Large lecture halls, 297 Law of demand, 16, 17, 40, 41, 68, 91, 127, 170, 172, 187, 189, 195–198, 202, 228, 256, 393, 394 Law of diminishing returns, 245 Law of unintended consequences, 53–69, 195 Learning efficiency, 315, 317, 318 Lehman brothers, 413 Leisure world, 87 Lemon problem, 71, 74 Lemons, 69–90 Libertarian paternalism, 440, 441, 443, 446 Lie detection, 162, 163 Life expectancy, 173, 453, 477 Locked-in, 257, 263, 491 Long-run equilibrium, 283 Los Angeles Times, 64, 347, 504, 505 Loss-aversion bias, 197, 422 Lottery tickets, 400 Love, 10, 43, 44, 46, 48, 49, 58, 109, 110, 119–121, 123, 129, 133, 140, 147, 149, 204, 207, 214, 228, 231, 467 555 Low-income groups, 181, 190, 192, 486 Loyal customers, 281–283, 493 Lying, 153–165 Lying in politics, 163–164 M MacBook, 209 Mac operating system, 258, 385 Mainstream microeconomic theorists, 392 Malaysia, 66 Male wage premium, 458, 460 Mandatory retirement, 340, 356 Manmade disaster, 75, 90 Marginal benefit, 18, 19, 21, 26, 27, 126, 144, 377 Marginal cost, 12–15, 17–21, 25–28, 92, 127, 144, 145, 224, 231, 232, 234, 245, 246, 254, 271, 328, 376, 377, 385, 386, 388, 389, 392, 466, 473, 484, 498 Marginal utility, 14, 15, 17, 26, 27, 46, 124, 311, 312, 316, 430, 468 Market(s) buzz, 212, 238, 266, 494 demand curve, 19 development costs, 254, 261, 262, 388, 389 inefficiency, 327–329, 387, 498 norms, 439 power, 121, 219, 229, 240, 256, 327, 336, 337, 375, 385, 386, 389 research, 54, 236, 394, 460 searches, 282 segmentation, 207–210, 217, 239 segments, 209, 214, 220, 484 supply curve, 19, 135, 466 Market-clearing price, 271–276, 284–287, 316 Marketing buzz, 260 Marriage, 109–122, 129, 131, 136, 147, 269, 454, 456, 460, 463, 472, 473, 477, 522 Marriage contract, 109–112, 118, 119 Maslow, A.W., 43–49, 467, 468 Maslow’s hierarchy of needs, 43–49 Maternity leave, 185 Mating preferences, 448, 464, 519 Mating theory, 451 McDonald’s, 191, 193, 196, 209, 331, 484, 499 Median earnings of women, 183 Median voter, 363–365 Medical technologies, 189 Medicare, 368 Menial workers, 181 Mental accounting, 401–402, 415 Mercedes Benzes, 63 Metabolism, 187 556 Mexico, 66 Microsoft, 246, 258–259, 261, 383–385, 387, 389, 491, 508 Microsoft antitrust case, 258–259, 491 Middle East, 64, 65, 93, 176, 414 Minimum-wage workers, 181 Money-back guarantees, 162, 440 Monkey prostitution, 138 Monopolist, 20, 146, 148–150, 226–227, 336–338, 372, 374, 377, 387, 388, 487, 502 Monopoly market power, 219 power, 201, 202, 220, 222, 258, 326, 336, 375, 390 price fixing, 230 prices, 389 pricing power, 220 profits, 162, 240, 241, 257, 337, 386, 387, 389, 390 Monopsony, 327–330, 332–334, 502, 504 Moral hazard, 74, 75, 411, 414 Moral Majority, 100 Muggers, 290 Multiple queues, 288–289, 494 Multiplier effect, 287, 414 Muslim students, 295 Mutually beneficial trades, 21, 280, 290, 352, 357, 436 N Napster, 259, 260 National Bureau of Economic research, 194, 323 National Collegiate Athletic Association (NCAA), 325–338, 497–505 National Football League (NFL), 335, 499, 501 National sports championships, 305 National Transportation Safety Board, 58, 59 Natural disasters, 73, 75, 76, 282 NCAA See National Collegiate Athletic Association (NCAA) NCAA vs Board of Regents, 335 Negative surplus value, 145 Neoclassical economics, 391, 417 Netscape, 259, 383, 384 Network effects, 255, 258–261, 286 Network goods, 249, 255–257, 262, 263 Neuroeconomists, 418 Newsweek, 303, 495 New York City, 66, 194, 239, 410 Index New York Times, 171, 180, 204, 266, 326, 391, 471, 477, 480, 484, 513 NFL See National Football League (NFL) Nobel Peace Prize, 93 Nonmoney payments, 135, 137, 139, 140 Non-price competition, 390 Nordstrom’s, 213 Northern Africa, 176 Northern Rock Bank, 34 Nudges, 419, 420, 436–446 Nutrition, 170, 198, 477 O Obesity epidemic, 188 Obesity rate, 167, 170, 172, 174, 176, 177, 179, 180, 190, 193, 194, 476, 479, 482 Ohio State University, 111 Online coupons, 235 On-package coupons, 235 On-shelf coupons, 236 OPEC See Organization of Petroleum Exporting Countries (OPEC) Operating system, 255–259, 383, 385, 491 Opportunity cost, 27–29, 98, 99, 124, 127, 128, 221, 225, 233, 237, 276–279, 290, 329, 393, 404, 405, 421, 434, 487, 493, 498 Opportunity wage, 129 Optimal lie detection, 162–163 Optimism bias, 197, 422 Optimum queues, 277–279 Optimum tenure, 341, 357 Oracle, 261, 384 Organization of Petroleum Exporting Countries (OPEC), 65, 91–93, 170 Out-of-home meals, 176, 178–179, 190 Out-of-pocket expenditures, 278, 404, 405, 415, 421, 434 Owner-managed firms, 347 P Package coupons, 235, 238 Pakistan, 93 Panera Bread Company, 167, 168 Panics, 32–34, 41 Paradox of voting, 350, 371 Paramount, 230, 231, 487 Peak-load pricing, 201, 222–223, 237–239, 242 Pecuniary externalities, 328, 498 Peel-off coupons, 235 Index Perfect competition, 226, 386, 388, 389, 487 Perfect rationality, 392, 408, 417–423, 427–429, 440, 444, 445 Permanent-income hypothesis, 78 Persian Gulf, 93 Perverse incentives, 75 Piracy, 246, 254, 259–262 Pixar, 222 Pizzas, 191 Planning bias, 197, 422 Playboy, 133 Policy bubble, 413, 414 Political ignorances, 368–369, 379–381, 507 Pollution, 29–32, 41, 57, 58 Pollution rights, 31, 466 Polygamy, 452, 456, 519 Ponzi scheme, 165, 410 Popcorn, 201, 206, 219–234, 486–488 Portion sizes, 176, 179, 190, 479 Positive energy balance, 175 Predatory professors, 349 Predictably irrational, 3, 197, 391, 392, 419, 426, 436 Pregnancy, 100, 101, 127, 129, 135, 137, 149, 184, 186 Pregnant women, 100, 102, 186 Premarital sexual intercourse, 137 Premium prices, 56, 71, 167, 277, 280, 281 Preventive health care, 174 Price controls, 41, 65, 79, 80, 87, 139, 193, 361, 372, 482 cuts, 214, 215 discounts, 224 discrimination, 201–214, 217, 220, 222, 224, 231, 237–238, 240, 241, 243, 275, 281, 373, 483, 484 dispersion, 241, 242 insensitivity, 205, 209, 214, 484 searchers, 202 sensitive, 79, 205, 209–216, 220, 237–243, 279, 489 tags, 78, 168, 169, 171, 172, 196 takers, 202 Price-insensitive buyers, 237–239, 242 Price-sensitive customers, 237 Pricing puzzles, 68, 69, 89, 236 Pricing strategist, Pricing system, 36, 41, 96, 98, 99 Principles of economics, 3, 4, 105, 318, 321, 465 Pringles, 195 Private goods, 346, 505 557 Privatizing, 378 Processed foods, 191–193 Pro-choice, 99 Productive professors, 349 Pro-life, 99–102 Property rights, 93, 111 Prospect theory, 391, 395–398, 510 Prostitution, 7, 54, 118, 124, 137–139 Protohumans, 124 Public choice economists, 350, 362, 381 Public goods, 115, 327, 365, 376, 409, 422, 424, 498, 505 Public interests, 361 Q Quantity demanded, 17, 29, 36, 96, 126, 127, 256, 271, 284–286 Quasi rationality, 427 Queue length, 289–291 Queues, 270–273, 278, 285–291, 405, 494 Quotas, 177 R Raisin bran, 242 Ralph’s, 209, 271, 493 Rational addiction, 264–265, 492 Rational behavior, 8, 9, 118, 394–400, 415, 446, 509, 510 Rational irrationalities, 444 Rationality, 8–10, 33, 198, 311, 391–397, 408, 415, 417–423, 425, 427–431, 433, 434, 436, 440–442, 444, 445, 483, 495, 509, 510 Rationally ignorant, 252, 376 Rational professor, 316–318 Rational student, 311–316 Reagan administration, 193 Real grade inflation, 321–323 Real minimum, 181, 182, 190, 196, 480 Real radio, 384 Reckless driving, 39–41, 467 Redemption rate of coupons, 236, 488 Reference prices, 273, 405, 406 Regal theaters, 220, 223, 231, 486 Relative prices, 127, 168, 169, 171, 172, 178, 222, 401, 432 Relativity bias, 197, 422, 438 Rent seekers, 369 Rent seeking, 369–370 Repeated sales, 160 Representativeness biases, 197, 422 558 Reputation, 43, 71, 129, 138, 154, 159, 161, 162, 251, 258, 287, 331, 345, 396, 463, 499 Reputation cost, 129, 159 Residual claimacy, 345 Residual claimant, 345, 352, 505, 507 Retirement, 29, 78–79, 87, 88, 340, 350, 356 Risk aversion, 253, 396, 397, 399, 510 cost, 12, 70, 89, 114, 129, 135, 153, 186, 229, 274, 388, 404, 453 proneness, 397 taking, 448, 453, 459, 460 Rivalrous, 246 Road deaths, 61, 62 Rolling blackouts, 37 Russia, 410 S Sales taxes, 57, 172 San Diego State University, 339 SAT, 305, 306, 459 Saudi Arabia, 93 Search costs, 119, 133, 209, 215, 216, 241, 250, 252, 253, 283 SeaWorld, 280 Securities and Exchange Commission (SEC), 103, 105, 371 Securitization of mortgages, 411 Security checks, 61 Selfish interest, Senior citizen discounts, 79 Sexual exploitation, 147–149 Sexual intercourse, 125, 130, 131, 137, 138, 147 Sherman Act, 230, 334–337, 502, 503 Shirking, 111, 119, 342 Short-run profits, 273, 282, 338, 491 Simple-majority voting rule, 365–368 Single queues, 288, 289, 494 Six Flags Over Georgia, 280 Small groups, 41, 164, 350, 364, 374, 446 Smartphone, 178, 287, 296, 385 Smith vs Pro Football, Inc., 335 Smoking, 23, 152, 174, 187–189, 265, 482 Smoking epidemic, 188 Snacking, 179 Social effects, 286 Socially consumed goods, 285, 286 Social networks, 248 Social norms, 422, 439 Social security, 368, 394, 438 Social stigma, 187 Societal costs, 254 Sony, 162 Index Southeast Asia, 94 Southern California, 38, 63–64, 83, 87, 219, 220, 224, 279, 468 Soviet Union, 273, 410 Special-interest groups, 369 Special-interest legislation, 164 Special interests, 164, 369 Starbucks, 247, 248, 490 Star power, 229, 251 Statistical discrimination, 450, 460 Status quo biases, 197, 422 Stimulus packages, 414, 513 Stimulus-response mechanism, 310 Stock-market bubble, 408, 409 Store traffic, 276, 277 Streetwalkers, 138, 139 Student Achievement Test, 304 Student-athletes, 326–328, 498 Student evaluations, 302, 307, 318–324, 497 Subjective evaluations, 250, 251, 254 Subprime crisis, 413 Subprime mortgages, 412, 413 Subsidies, 64–67, 79–83, 85, 171, 172, 193, 296, 299, 304, 369, 373, 410 Subsidized loans, 304 Sugared sodas, 168, 194 Suicide, 93, 269, 474 Sunk-cost decision biases, 434 Sunk costs, 230, 393, 406–407, 415, 433, 434 Sun Microsystems, 384 Superfreakonomics, 137, 474 Supply-and-demand model, 272 Supreme Court, 164, 230–231, 234, 326, 334–338, 502 Sure-thing option, 396, 399, 420, 430, 432 Surplus value, 144, 145, 147, 149, 386 SUVs, 36, 45, 175, 176 Switching costs, 236, 237, 257, 258, 263, 491 T Tariffs, 3, 171, 177, 193, 518 Taste for discrimination, 449, 518 Tax credit, 56, 65, 468 Tenure, 81, 87, 300, 302, 307, 339–358, 458, 504–506 Tenure tournaments, 352–354 Tequila, 66 Terrorism, 60 9/11 terrorists, 60–63 Textbook publishers, 210–212 Texting, 162 Time cost, 56, 62, 168, 190–192, 196, 214, 221, 222, 233, 234, 278, 279, 404 Time cost savings, 192 Index Tobacco companies, 188, 438 Too big to fail, 413, 414 Tournaments, gender, 457 Toyota Prius, 56 Tragedy of the commons, 38 Transaction costs, 212, 230, 267, 337, 403, 404, 484 Transaction utility, 405–406 Transformation curve, 314–317, 320 Transportation Security Administration (TSA), 61, 62, 67 Travel time, 59 Trinity Broadcasting Company, 38 TSA See Transportation Security Administration (TSA) Tully’s Coffee, 210 U UCLA, 305, 370 Unanimity rule, 364 Unanimous agreement, 364 Unfair pricing strategies, 273 Unions, 112, 119, 369, 450 United Airlines, 59 United Kingdom, 34, 210–212, 355, 485 United States v Paramount, 231 United States vs Addyston Pipe and Steel Co., 334, 501 Universal Studios, 280 University Hills, 84–88 University of California, Berkeley, 339, 340, 504 University of California-Irvine, 37, 63, 79–83, 270, 295, 450 University of California, Los Angeles, University of Chicago, 22 University of Georgia, 330 University of North Carolina, 303 University of Toronto, 370 University of Virginia, 303 University of Wisconsin, 303, 322 University pricing, 296–305 University scholarships, 201, 204–205 U.S Census Bureau, 183, 477, 512, 520 U.S Constitution, U.S Department of Agriculture, 65, 179, 479 U.S Department of Justice, 230, 491 U.S News and World report, 305 U.S Supreme Court, 164, 230–231, 326 U.S Surgeon General, 152, 185 559 V Valentine’s Day, 131 Variance, 290, 363, 420, 428–430, 433, 452, 453, 457, 460, 490 Vegetable oil, 66, 219 Venereal disease, 138–140 Verizon, 384 W Wachovia, 413 Wage gap, gender, 183, 447–449, 451, 452, 457–461, 463, 480, 520, 521, 523 Wait costs, 278, 289, 290 Wait lists, 205 Wait time, 269, 276, 278–281, 288–290, 331, 494 Wall Street Journal, 55, 266, 385, 473, 476, 480, 494, 498, 513 Warner Brothers, 230 Warranties, 70, 71, 162 Water crises, 41, 63–64 Water police, 64 Water shortages, 63 Wayne State University, 447 Weber-Fechner principle of psychophysics, 401 Welfare loss, 370 Welfare recipients, 146 Wells Fargo, 413 Western State University, 378 Whole Foods Market, 210 Windows, 228, 258, 259, 383–385, 491, 508 Women’s liberation, 182–183 WordPerfect, 260, 384 Workforce participation of women, 185 World Bank, 65 World War II, 139, 170 Y Yahoo, 384, 385 Yale, 194, 306, 391 Yelp, 178, 191 Yokohama, 139 YouTube, 162, 253 Z Zoning restrictions, 220 .. .The New World of Economics Richard B McKenzie l Gordon Tullock The New World of Economics A Remake of a Classic for New Generations of Economics Students Sixth Edition... The New World of Economics has changed a number of professional minds It was the first introductory economics reader to discuss (among a host of other topics) public choice economics, the economics. .. impact of its first five editions and because many professors of economics of all generations want to show their students the new, new worlds” of economic inquiry that have emerged within the professional