Economics and Alaska

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Applied cost-benefit analysis

Steve Landsburg does a cost-benefit analysis of executing computer hackers,
"Feed the Worms Who Write Worms to the Worms - The economic logic of executing computer hackers." By Steven E. Landsburg (Slate, May 26), and finds that executing hackers is a better investment than executing murderers.

The article has a provocative use of the idea of the value of a statistical life, and a useful discussion of what economists mean by the term. The article, and associated comments - scroll to the bottom of the page for the links to these - would provoke a great discussion in the cost-benefit portion of an economics of public policy class.

I posted on the valuation of risks to life on April 13: "Value of statistical life". I'm instinctively opposed to Landsburg's proposal to execute hackers (although I'm open on murderers), but I also think that cost-benefit analysis and the idea of the value of a statistical life are useful for policy guidance, so evidently I haven't thought enough about this yet. When am I going to apply my cost-benefit analysis, and when not?

For another applied exercise with the value of the statistical life see the work by Robert Hahn, Paul Tetlock, and Jason Burnett on the costs and benefits of regulating cell phone use in cars. I posted on it in September 2002: "Should it be illegal for people to use cell phones while driving?" The post has links to the original articles.
posted by Ben Muse at 11:40 PM

 
Importing drugs from Canada

It takes a lot of time and money to invent a new prescription drug, but once it's been created its secrets can be reverse engineered and a copycat version can be brought to market for almost nothing. To make it worth while for drug companies to invest in new products, we give them exclusive rights to make and sell their discoveries for 20 years - we give them patents.

But having given them a patent, we've given them market power, and the power to charge considerably more for their product than it costs them to make it. Carrie Conaway shows the patent-monopoly nexus as she tells the story of the cholesterol drug Mevacor in "Too Much of a Good Thing. The Pros and Cons of Pharmaceutical Patents" (Federal Reserve Bank of Boston's Regional Review, Quarter 1, 2003).

These companies may charge less in markets outside the U.S. because market conditions mean that their profits will be higher if they do. They may charge less because the foreign government requires them to. The contrast between the high prices in the U.S. and lower prices across the border in Canada led many U.S. citizens to buy prescription drugs in Canada and (illegally) bring them back to the U.S. Today's New York Times Magazine has a wonderful story by Elizabeth Weil on the way senior activists are using Canadian suppliers to reduce drug costs, make a political statement, and have a good time ("Grumpy Old Drug smugglers"):

"The federation [the Minnesota Senior Federation - Ben] conceived and organized the first prescription-drug-buying bus trip to Canada in 1995, after it sold a cut-rate storefront pharmacy that the federation ran in Minneapolis. Originally the bus trip was intended as a form of civil disobedience and a consciousness-raising event, but almost a decade later the buses are still running. The seniors tend to be in a good mood when, at around 7 a.m., they park their cars at the designated pickup points at Kmart or Cub Foods and climb aboard. From there it's north on I-94, past St. Cloud and Fergus Falls, everyone enjoying free munchies, and then they cross into North Dakota, through the pine forests around Fargo. Lunch is usually at a buffet restaurant, where the spread is wide enough to meet everybody's dietary restrictions. Then it's back on the bus, comparing bills and trading in nostalgia. Two riders once discovered that they were from the same town in Eastern Europe and another two that they attended the same high school. As they pass the vast wheat fields and feedlots of southern Manitoba, there's always time for the perennial VCR favorite, ''Grumpy Old Men.''

Around 4 p.m., the group arrives in Winnipeg, checks into the Ramada Marlborough and splits into two groups. One unpacks and has an early dinner. The other group heads to the office of Dr. Craig Hildahl. A physician licensed in both Minnesota and Manitoba, Hildahl spends 15 minutes with each person, taking vitals and reviewing medical history, and looks over their American prescriptions. If nothing alarms him, he rewrites and faxes prescriptions to a nearby pharmacy. The two groups switch, and in the morning they all pick up their drugs. Loot in hand and savings calculated, they make the obligatory stop at the duty-free shop at the border, where the proprietor hands out free tins of cookies. After what is usually a pro forma pass through Customs (which, like the Food and Drug Administration, seems not particularly eager to go after senior citizens), homeward they go...

Currently it's illegal to import drugs from Canada this way. The Food and Drug Administration is very concerned about the safety of imports.

However, lots of people want to let the bar down, legalize imports from Canada, and drive down U.S. prices. But what works for a few seniors, sneaking back and forth across the Canadian border in raucous party buses, may not work for the nation as a whole. For one thing, our population dwarfs Canada's. The result of liberal importation rules may be high Canadian prices rather than low U.S. prices.

The Congressional Budget Office (CBO) is skeptical that we would reduce prescription drug spending this way. Colin Baker of the CBO prepared an issue brief based on research by him, Anna Cook and Margaret Nowak: "Would Prescription Drug Importation Reduce U.S. Drug Spending?" The CBO "has concluded that the reduction in drug spending from importation would be small."

Although prescription drug prices tend to be 35% to 55% lower in other countries than in the United States, savings associated with import liberalization would be much smaller. Why?

• "A portion of any given price difference would accrue to wholesalers and other intermediaries facilitating the domestic sale of drugs diverted from foreign markets. Some of that portion would represent physical costs (most imported products would require new packaging and labeling), and some would reflect earnings retained by firms."


• Further eroding potential savings would be the likely refusal of drugmakers to indemnify intermediaries against damages associated with the safety and integrity of products shipped to other markets. Parallel trade intermediaries would therefore probably face added liability insurance costs, which would be passed on to consumers.


• "Many foreign governments would have incentives to limit the volume of drugs diverted to the United States, given both their interest in preventing shortages or higher prices in their own countries and the drugmakers' ability to limit supply. Depending on domestic circumstances, governments might simply influence purchasing arrangements by agreeing to export restrictions by contract, for example, or by imposing statutory restrictions on imports."


• "Drugmakers would have an incentive to respond so as to minimize parallel trade or to reduce its rewards. Among their options, as mentioned above, are contract restrictions between manufacturers and wholesalers prohibiting exports, and limits on the volume shipped to markets where orders appear to exceed local needs. Price hikes outside the United States would reduce the price differential and hence the incentive for parallel trade; in some circumstances, even the threat of price hikes could encourage contract restrictions."


• Alternatively, drugmakers could differentiate products distributed in other countries (by altering color, size, shape, or dosage), thereby preventing their distribution as approved products in the United States. Because current U.S. regulations require that all drug products (domestic- or foreign-made) be manufactured in registered facilities, drugmakers could prevent legal distribution in the United States by shifting production to foreign facilities not specifically registered with the FDA."


• Furthermore, under a recent decision of the Court of Appeals for the Federal Circuit, U.S. patent law may enable the manufacturer of a drug patented in the United States and produced overseas to prevent subsequent importation, resale, or use of the product in the U.S. market."

In conclusion:

"On the basis of its evaluation of proposals to date, CBO has concluded that permitting the importation of foreign-distributed prescription drugs would produce at most a modest reduction in prescription drug spending in the United States. H.R. 2427, for example, which would have permitted importation from a broad set of industrialized countries, was estimated to reduce total drug spending by $40 billion over 10 years, or by about 1 percent. Permitting importation only from Canada would produce a negligible reduction in drug spending."

posted by Ben Muse at 9:50 PM

 
Interstate wine sales

The constitutional amendment repealing prohibition (the 21st) included a section (Section 2) allowing states to regulate shipments of alcoholic drinks across their borders: "The transportation or importation into any state, territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited."

On the other hand the Constitution's Commerce Clause, "The Congress shall have Power...To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes...", gives Congress the power to regulate commerce between states.

The tension between these two provisions has been addressed in several federal court decisions. States have used the prohibition repeal provision to protect domestic wine businesses from out of state competition in ways that would be impossible for other products due to the Commerce Clause.

I posted on this issue in March: "Sending wine across state lines" A few days ago the Supreme Court agreed to address the issue in an Institute for Justice case: "U.S. Supreme Court Accepts N.Y. Wine Direct Shipping Case; Case Holds Major Implications for Internet Commerce"

Washington, D.C.–The U.S. Supreme Court today agreed to consider the Institute for Justice’s case Swedenburg v. Kelly, in which the 2nd U.S. Circuit Court of Appeals upheld New York State’s protectionist ban on direct interstate wine shipments to consumers. The one question the court will consider: Does a state’s regulatory scheme that permits in-state wineries directly to ship alcohol to consumers but restricts the ability of out-of-state wineries to do so violate the dormant Commerce Clause in light of Section Two of the 21st Amendment. IJ’s case was consolidated with two cases from Michigan. No argument date has been set...

I learned about this from Virginia Postrel: "FREE TRADE IN WINE?"

Revised 5-30-04,
posted by Ben Muse at 9:17 PM

 
Just a quick note to let you know that I have a fairly heavy workload right now. I should be posting more regularly again after May 18.
posted by Ben Muse at 6:52 AM

 
Springtime in Juneau



That's downtown Juneau in front of you (capital of the nothernmost, westernmost, and easternmost of the United States) lying along the shore at the foot of Mts. Juneau and Roberts.

You can't drive to Juneau, the road runs only five miles to the south and only about 40 miles to the north. We're cut off by the sea, mountains and glaciers and ice fields. You can only fly in, or come in by boat.

The harbor in front of you is busy in the summer. Juneau is a popular cruise ship destination, and the first cruise ship of the year will come in tomorrow. All summer long there will be a steady stream of large cruise ships, Coast Guard cutters or buoy tenders, gillnetters, seiners, longliners, a Navy ship on the 4th of July, kayaks, tenders to and from the cruise ships, the occasional fabulously luxurious yacht, tugs with container barges, and lots of recreational sail and motor boats.

About 30,000 people live here. I work in the Federal Building, the large building, separated from the others, on your left in the picture.

If you'd like to check the docks to see if there's a cruise ship in, use this web cam. Here is a web cam that will give you a close up of the downtown. These two web cams are on the library, and face in opposite directions.

Revised 5-5-04
posted by Ben Muse at 9:53 PM

 
World scientific competition heats up

Today's New York Times had a story by William Broad on the increasingly competitive world of scientific research. The title tells Broad's story: "U.S. is losing its dominance in the sciences.".

"The United States has started to lose its worldwide dominance in critical areas of science and innovation, according to federal and private experts who point to strong evidence like prizes awarded to Americans and the number of papers in major professional journals.

Foreign advances in basic science now often rival or even exceed America's, apparently with little public awareness of the trend or its implications for jobs, industry, national security or the vigor of the nation's intellectual and cultural life...

We are being overtaken by the Europeans and the East Asians, with China looming up in the background. Although at one point a nod is given to the benefits, in general the story is moderately alarmist. We will have to send more royalties overseas when we use inventions patented by foreigners. Tom Daschle is worried. "...future trends look challenging, many analysts say."

Europeans and East Asians are publishing more in prestigious journals, we're publishing less. Larger proportions of U.S. industrial patents are being granted to foreigners ("Japan, Taiwan, and south Korea now account for more than a quarter of all United States industrial patents awarded each year...Moreover, their growth rates are rapid. Between 1980 and 2002, south Korea went from 0 to 2 percentof the total, Taiwan from 0 to 3 percent and Japan from 12 to 21 percent...") Not only that, but these are "good" patents. Scientific papers published by U.S. citizens peaked in 1992, the number of new doctorates peaked in 1998. Our share of the Nobel Prizes has dropped.

There may be reasons for concern (Why have the numbers of new U.S. science doctorates decreased?) but I think Broad's tone of mild concern ultimately misses the real story. It's good - and inevitable - that more of the world is becoming capable of cutting edge scientific research. The more of the planet's brains brought on line, the better. Life will be better in the U.S. because of research done in South Korea. We may send more royalties overseas, but most compensation in the U.S. is labor or entrepreneurial compensation, this depends on labor productivity, and that is enhanced by scientific and technical advances.

Title added 5-4-04
posted by Ben Muse at 10:57 PM

 
Toll roads

Tomorrow's Washington Post has a story by Lyndsey Layton on proposals by Maryland officials to construct express toll lanes to relive congestion on important highways.

"...Express toll lanes are special lanes added to highways that allow motorists to pay their way out of traffic jams. Motorists in an express toll lane pay a fee that is automatically deducted through an electronic reader as their car or truck moves along at highway speeds, similar to the way E-ZPass works.

The price would change with the degree of congestion, so that a premium is charged when the rest of the roadway is especially crowded but the toll drops as the highway empties. On State Road 91 in Southern California, one of the earliest examples of this relatively new trend, express lane tolls range from $1 to $6.25, depending on the traffic in the adjoining free lanes..."

The article notes changing attitudes toward toll roads:

"...Public opinion about toll lanes is shifting. The idea of "congestion pricing," or charging motorists for using limited road space, has been around since the 1960s. But public policymakers long thought it was political suicide to begin charging motorists for something they were used to getting for free, and the idea carries the unappealing label of "Lexus lanes."

In the mid-1990s, toll lanes in California and Texas opened, and subsequent studies showed they were used by motorists of all income levels, usually when people needed to get somewhere in a hurry. They gained support among motorists who didn't use the lanes regularly but saw them as a way of diverting vehicles from the regular lanes..."

posted by Ben Muse at 10:32 PM

 
Interruption of service

A heavy workload may mean intermittent posting for the next two weeks.
posted by Ben Muse at 10:20 PM