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Showing posts from July, 2012

Decision Making as Output and Bounded Rationality

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  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra
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Weather changes and food production

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Agriculture is often characterized by high variability of production outcomes or, production risk . Unlike most other entrepreneurs, farmers are not able to predict with certainty the amount of output that the production process will yield due to external factors such as weather, pests, and diseases. While one cannot deny the rapid advances in technology in food production through better seeds, yield management, irrigation systems etc, weather and climate yet remain wild cards. The drought in South Asia in 1987 and consequent wheat imports and havoc in livelihoods still remains fresh after 25 years.   The origin of Arab spring in late 2010in Tunisia started with the failure to quell food prices and the rise of water wildcatting in Yemen flared up protests there.  Some scientists believe that weather changes due to global warming can depress the food production beyond the current estimates.   UN estimates in 2011 revealed that food prices rose consecutively for eight months
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Formula 1 Constructors, Champions and Elasticity of Supply

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Formula 1 World Constructors’ Championship is won every year based on the points system determined through the Grand Prix results. It is calculated by adding the drivers points in each Grand Prix. In more than half century of championships only 14 constructors have been successful. Further these constructors have come only from four different nations. The most successful is the Scuderia Ferrari which won it 16 times.   Only 12 teams compete in this race from all across the globe of which one wins the top position. The victory in the championship yields tremendous dividends. As we know, participation is limited implying FIA which runs the races is operating in monopsony market. Demand for slots is high with highly inelastic supply.   Why would firms spend billions of dollars to gain that FIA constructors crown.   In fact in recent years, thanks to increasing expenditure on technological improvements, firms have gone bankrupt. Adding to this cost is the astronomical fee of 4
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Green Revolution and Indian Agriculture

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As Larry Lessig puts forth in ‘CODE’, the policy makers use four means to influence allocation of resources. Green Revolution represented the architecture or the product being changed to influence the increase in food supply in the country. It was in 1967-1978 that India began the transformation from endemic famine hit nation to one of the pioneers in agricultural production.   In the 1970’s while the per capita food production was around 180 kgs, it increased to more than 200 kg by the early 1990s inspite of doubling the population. It was a far cry from the days of the disastrous famine in Bengal in 1943 (caused by state indifference than by shortage of food), which wiped out nearly 4 million people   and 1964-65 when PM Lal Bahadur Shastri appealed to people to fast one day per week to ensure availability of food to all.   Borlaug revolution of hybrid seeds sowed the roots for wheat and paddy production in India. The rise in prosperity among farmers in Punjab, Haryana and
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Economics and Policy Design- Right to Education

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The Right of Children to Free and Compulsory Education Act, 2009, popularly known as the Right to Education (RTE) Act, came into being in India from April 1, 2010 and is expected to lead to revolutionary change in the education delivery through schools in India. RTE mandates e very child from 6 to 14 years of age has a right to free and compulsory education in a neighborhood school till completion of elementary education. The economics of education rests on the fundamental premise of education being an investment.   Education is a good and has social benefits.   But pricing of education leaves the population groups unable to afford these fees outside the system. The market failure is visible and the government has to step in. There are four ways in which the government can influence the allocation of resources. In his celebrated ‘Code’ Larry Lessig presents the modes of Law, Market, Norms and Architecture to ensure the allocation or non – allocation of a resource. Let us tak
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SEZs – To Have or Not: A Case of Opportunity Costs

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Ever since India started on the liberalization in 1991, policies regarding the establishment of Special Economic Zones (SEZ) have been fraught with controversy. Simply put, firms in SEZ location allows the developer to get the land, infrastructure, water, electricity and tax concessions thus enabling him to set up manufacturing and processing units in SEZ as opposed to in another location. Further the SEZ remains outside the jurisdiction of the national laws on labour and environment, firms secure an advantage) over non-SEZ locations.   Debate between proponents and opponents has rested upon the utility of these SEZs to the economy and the society. Proponents have claimed that SEZ enable channelizing of investment in sectors that hitherto had not attracted sufficient attention.   Studies have shown better wages and the forward and the backward linkages create spillovers in terms of greater infrastructure access to the local economy. However there are several costs atta
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