Category Archives: Journal 1

The Battle of the Three Isms

world

It is so easy to get overwhelmed thinking about the term “economic system.”  As the words roll off my tongue I envision millions of pieces of string connecting everyone in the world, from the lady running the ice cream parlour down the street, to the wealthy CEO in a tall skyscraper somewhere, to the people who govern our countries and make decisions from which we all are affected. Each string representing an economic transaction of some kind, and each one of us tangled somewhere in between.

The length and arrangement of these strings, however, are determined by the underlying economic system in place. How can we determine which arrangement is the best? How can we tug at these strings in a way that causes the least harm to others and produce thriving, independent economies?

This question has been answered on several occasions by many historians, economists, and political leaders, who believed that their ways of thinking were the best ways to run their countries. However, the search for the right answers still continues and there is a decision to be made by the end of this blog post. So let’s begin what I like to call “The Battle between Three Isms” (cheesy name, I know).

First of all, we should define what we are looking for, and the criteria upon which we will be able to make the decision between our three candidates. An economic system is an organized way in which a country allocates resources and distributes goods and services across the whole nation or a given geographic area. Any economic system must answer three fundamental questions:

  1. What goods and services do we produce?
  2. How do we produce goods and services?
  3. For whom do we produce goods and services?

After we understand the answers to these questions, we must also look at how efficient and how equitable each economic system is, and if there are any trade-offs involved with implementing one system over the other. Now it’s time to meet our contestants!

 

capitalism.png
About the Contestant: A free thinker, a very competitive businessman who values profit over EVERYTHING else, however, is very adaptive to the world around him.

 

Contestant A: Mono the Capitalist (Market Economy)

Our contestant, Mono the Capitalist is the one behind many of the richest, fastest growing economies in the world today. The United States, Canada, the United Kingdom, Germany – are some of the most prosperous nations in the world, and their economy is heavily based on Mono’s beliefs and ideals. Mono believes that a country’s trade and industry should be controlled by the private owners for profit, rather than by the government or the state. The private owners can control the factors of production, and they derive their income from their ownership. This characteristic of Mono’s capitalist view provides ordinary people with the incentive to maximize profit, helping the economy grow as a whole. That’s why Mono always says “Greed is good!”

Answering the Three Fundamental Economic Questions

Capitalism is based on the principles of a market economy, in which economic decisions are guided by the changes in prices that occur as economic transactions take place. Economic decisions are influenced by what consumers will buy, or as consumers express their preference for certain goods and services, they are produced. Since we know that the factors of production are owned privately by sellers, they will try to produce goods and services as cheaply and efficiently as possible in order to make a profit. Therefore, all of the fundamental economic questions are answered by individuals, and not by the government, which is essential in understanding a capitalist economy.

  1. What goods and services do we produce?

Businesses base decisions on supply and demand and consumer preferences.

  1. How do we produce goods and services?

Businesses control factors of production, therefore they decide upon how to produce goods.

  1. For whom do we produce goods and services?

Goods and services are made for the buyer, by the seller, in which both benefit through a voluntary transaction.

Equity vs Efficiency

Mono founded capitalism on the idea that the good of the whole society depends upon freedom of choice, competition, and the right of every individual to pursue wealth for his or herself. However, when it comes to efficiency and equity, capitalism does not check every box.

Let’s first talk about efficiency. This is something that Mono’s capitalism does extremely well. An economy is efficient when it takes all opportunities to make some people better off without making other people worse off. Capitalism allows the individuals who run businesses to control production and distribution of goods and services. Since their primary goal is to make a profit, this encourages firms to be more efficient, cut costs, and create new products that people want. If firms fail to keep up, they will go out of business, and this is exactly what causes them to continue to make more and more profit.

Equity, on the other hand, means that everyone gets his or her fair share and that the benefits of resources are distributed fairly among the members of society. However, capitalism isn’t concerned with equity. Capitalism is a race, a race to make a profit, and if you don’t run, you won’t benefit from it. Capitalism allows everyone to start at the same line, but the speed that you run is entirely up to you. That is why capitalism is often criticised for being cruel to the disabled, the elderly and the poor, who have a major disadvantage in this race, and therefore do not have an equal opportunity to benefit from it.

Advantages of Mono the Capitalist

  • Capitalistic economic systems provide limitless opportunity for each individual. It is the only economic system that allows every individual to have an equal chance of success, regardless of inherited social class. This incentive of guaranteed success provided by capitalism drives hard work, perseverance, and hope.
  • Since a market economy runs on the basis of supply and demand, it ensures that the most desired goods and services are produced for buyers.
  • Goods and services are produced in the most efficient way possible, earning the maximum profit for businesses and a low price for buyers.
  • Capitalism results in the overall increase of innovation and economic growth due to its fundamental competition which exists between businesses. Firms are forced to continue to innovate to spark the interest of consumers and remain competitive.

Disadvantages of Mono the Capitalist

  • Since capitalism forces people to compete with one another, it has no real system to care for those who are at an inherent competitive advantage.
  • Making money and profit is at the heart of any capitalistic economy, therefore the need to compete may not allow human resources to be optimized. For example, a child who might otherwise discover the cure for cancer might instead work at McDonald’s to support her low-income family.
  • Capitalistic economies seem to place a price on everything, as this economic incentive is enough for people to put almost anything up for sale. In a society where everything is for sale, life is harder for those who cannot afford it. In addition to this, placing a price on certain things can promote certain attitudes towards them. Paying kids to come to class on time may make them be more punctual, but they may begin to take advantage of these incentives when this is something that should come naturally.
communism.png
About the Contestant: Worships the State, has a stable job, not looking for any real progress or improvement in life or in the economy.

Contestant B: Krab the Communist (Command Economy)

Our second contestant, Krab the Communist, not to be confused by his friend Buzz the Socialist, currently governs countries such as China, North Korea and Vietnam, which claim to be communist states. Communism is considered to be one of the extensive economic ideologies, tracing back to the first hunter-gatherer societies, Ancient Greece, and modern communism in 19th century Russia. In a nutshell, Krab’s communism aims to replace private property and a profit-based economy with a society in which all property is publicly owned and each person works and is paid according to their abilities and needs. In a communist system, the State is responsible to provide work and compensation, and the production and distribution of consumer goods. Krab imagines a complete communistic society without class divisions, which would be based upon the principle “From each according to his ability, to each according to his needs.”

Advantages of Krab the Communist

  • It is obvious at this point that the largest advantage of communism is that it embodies equality. There is no social class system at all, and as such, citizens have the peace of mind that everyone is equal.
  • There are advantages for those who have an inherent competitive disadvantage, such as the elderly, children or the physically and mentally disabled, as they will be able to live just like everyone else.
  • Communism eliminates business monopolies since the government owns and controls all businesses and the price at which goods are sold.

Disadvantages of Krab the Communist

  • A lack of personal growth is a great disadvantage when it comes to communism. Since all people are equal efinancially and there is no social status, this may demotivate professionals to do a good job because there is no incentive for them to continue to work hard.
  • People are treated as commodities, which can be ordered at whim due to the extent of government power within communistic economies.

 

socialism
About the Contestant: Friends with the State, has a stable job, believes in the welfare of the community as a whole, and very cooperative.

 

Contestant C: Buzz the Socialist (Command Economy)

Our final contestant, Buzz the Socialist, is one whose ideas and morals have been embedded in many of the most prosperous and happy countries in the world, including Belgium, New Zealand, and the Netherlands. It seems to be that Buzz’s ideas are proving to be a great decision for these countries, but what exactly is socialism, and how is it different than its counterpart, communism? Socialism is defined as a type of economic system in which the means of production, distribution and exchange of resources should be owned or regulated by the community as a whole. Socialism is based on the idea that humans are naturally cooperative, and it is a less aggressive form of communism. Like communism, socialism’s main focus is on equality, but workers earn wages they can spend as they choose, while the government operates the means for production.

Advantages of Buzz the Socialist

  • In a socialistic economy, the issue of income inequality is less, because of the absence of private ownership. Everyone works hard and is paid as per their skills and ability.
  • Similar to communism, one of the benefits of socialism is that it is free from monopolistic practices, and exploitations of consumers by large corporations are not possible.
  • More freedom is provided to citizens in comparison with communism, as individuals are allowed to spend their income the way they choose to.
  • The six basic needs in life are met within a socialist economy, which provides a sense of security for the people living in the country.

Disadvantages of Buzz the Socialist

  • It is due to competition that an economy becomes prosperous, and without it, producers are not forced to use their talents and skills to create quality goods and services, and consumers cannot have the product at a relatively cheap price. This means that the economy does not grow rapidly as it would in a capitalistic economy.
  • There is also a lack of freedom as there would be in a communistic economy, as individuals do not have many essential freedoms, such as freedom of enterprise, and freedom of choice of occupation.

Answering the Three Fundamental Economic Questions (Command Economy)

Communism and socialism are based upon the principles of a command economy, in which production, investment, prices and incomes are determined centrally by a government. This means that all economic decisions are centralized, giving citizens of such a country no real influence on the economy. Governmental planning groups determine things such as the prices of goods or services and the wages of workers.

  1. What goods and services do we produce?

The government decides which goods and services are needed, and consumer preferences have no influence on what is produced.

  1. How do we produce goods and services?

The state has control over all factors of production, therefore the way goods and services are produced is completely in the state’s hands.

  1. For whom do we produce goods and services?

The distribution of goods and services is decided by the government.

Equity vs Efficiency (Command Economy)

Equity is the principle upon which the two types of command economies operate. When Karl Marx and Frederick Engels originated the first few ideas of modern communism, they wanted to end the exploitation of the masses by the few. The goal of the command economy was to eliminate the class distinctions among people, making them all equal to each other – not necessarily prosperous or happy, but equal. Simply put, it is the idea that everyone in a given society receives equal shares of the benefits derived from labour, and distributes the wealth of society so that the poor can rise, and the rich can fall to the level of the middle class.

Although it may seem like a command economy proposes the creation of a perfect world, it’s far from perfect. Yes, everyone would have food and shelter, and a true communistic or socialistic society would be free from oppression, but we trade all our freedom for a little bit of security. Due to the government having control over all factors of production, communistic and socialistic economies are also highly inefficient. There is no reason to cut costs, or to innovate, no incentive for workers to work harder, or to make more money because the wealth is to be redistributed again, and again. There is no real reason to do anything, no real progress.

So who wins?

After this very exciting discussion, I think I have come to a conclusion about who will win this “Battle of the Three Isms.” Drumroll, please! Contestant A and Contestant C! Mono the Capitalist and Buzz the Socialist! After analyzing the advantages and disadvantages of all three economic systems, it is obvious that a combination of Mono’s efficiency and Buzz’s equity will provide the best opportunity for an economy to grow while maintaining freedom for the individual and equality for society as a whole.

Advertisements

How Rational Are We Really?

Has it ever bothered you how outrageously high Starbucks and Apple’s prices are compared to their competitors?

Has it bothered you even more that both these companies are arguably more successful than their competitors in spite of their pricing practices?

Well it bothers me, so I set out to get to the bottom of it.

The laws of supply and demand do not explicitly show that there is a price where consumers are “overpaying”, but this is because the definition of the price in this model is how much the consumers are willing to pay. In order to determine if an individual is overpaying, there needs to be context such as how similar products are priced, the circumstances around the purchasing decision etc.

In my opinion, the 3 major reasons people overpay for products are the Anchoring Model, buyer’s preferences and incentives, and the inelasticity of goods.

The Anchoring Model:

The Anchoring Model works off the principle that our minds rely too heavily on the first pieces of information it sees . By manipulating the initial piece of information that consumers receive, price-makers can affect the consumer’s perception of subsequent information. For example, consider two phones that are identical. One is marketed at a price of $800 where as the other is marketed as $800 but is 50% from its initial price of $1600. Even if you wouldn’t normally purchase a phone at $800, you would still feel inclined to purchase the one at 50% off since there is a sense of value created through the “discount”. Using this strategy, companies can convince consumers to pay more than they were initially willing to pay.

As Dan Ariely outlines in this video , Starbucks is able to convert Dunkin Donuts customers into its own through the anchoring process. After walking into Starbucks once, the consumer convinces themselves to walk in each time they pass by Starbucks until they eventually are considered a regular Starbucks customer. Through minor details such as not serving donuts, Starbucks was able to undermine the previous notion of “coffee” established by Dunkin Donuts and implement their own set of standards including prices.

In this case, the decision making is quite irrational. Although the consumer rationalizes to themselves through the discount, this decision is made using misleading information. Personally, in order to circumvent these tactics, I monitor the price of products I’m interested in regularly so I know what I should expect, however, this isn’t always possible and it’s understandable how people may fall into this trap. 

Buyer’s Preferences and Incentives

Another reason people may pay more than they should for a good is a combination of buyer’s preferences and the use of incentives. The sneaker market is a good example of this. Over time, the price of sneakers has increased substantially

Eric Myers, a Northeastern MBA graduate and director at engineering firm INTEGRIS Group said the following.

“Rising sneaker prices can be attributed to a variety of factors: rising costs of labor in China, increased costs for raw material, inflation, and general price increases, yet it appears that the price increases have significantly outpaced these factors over the past decade,”

This is likely due to the nature of marketing and cultural shifts in our society. They have positioned sneakers as what’s “cool” right now and as such the demand curve has shifted right due to a favorable change in buyers preferences, resulting in a higher equilibrium price. Furthermore, through social incentives, individuals will buy expensive shoes in order to fit in with the crowd. As a teenager,  I understand the sentiment of this type of decision making, but that does not make it logical. In this case, the cause of the behavior is irrational, but the results of these decisions follow normal economic models so it can be understood to an extent.

Elasticity

In certain cases, the lack of elasticity of the a good results in people paying more than they need to. For example, coffee is an inelastic good for many since it only takes a small portion of ones income and it is somewhat of a necessity. Due to this, coffee-makers know that they can raise their prices slightly and people will continue to buy coffee. Technically, consumers would be overpaying relative to the previous price, but since a consumer surplus (a difference between the price paid and the price a consumer is willing to pay), they will continue to buy coffee. In this case, the behavior is rational since it doesn’t make sense to stop drinking coffee due to marginal increases in price. 

Overall, in most cases where consumers are overpaying for their products, it is due to irrational decisions making that is primarily based on feelings . However, there are cases, such as the case with elasticity, where overpaying isn’t necessarily irrational.

Scarborough Subway Expansion

Many years ago, when Rob Ford was still alive and John Tory was host of The John Tory Show on CFRB, a debate was brewing in the midst of Toronto city council, and it centered on this one question:

What are we going to do about Line 3?

For ten years, the city of Toronto had been meaning to repair the Scarborough Rapid Transit Line (aka Toronto’s Subway Line 3), meant to service the suburb of Scarborough in the northeastern corner of the city. As the increasing number of riders gradually started to place greater strain on the aging infrastructure, a solution was needed.

But it couldn’t just be any solution. No, this solution had to not only account for fixing Line 3’s passenger capacity, but also had to modernize and reinvent the Line with new technologies, transit cars, and infrastructure. Eventually, the council settled on two solutions:

  1.  Build an LRT. (A tramway with higher capacity)

It was an elegant idea. With the advent of new technology, Light Rail Transit was becoming more and more cost effective by the moment. Not only would a Scarborough LRT be able to handle an increased passenger workload, it could also be expanded and integrated into other routes around the city to connect more commuters than ever before. In fact, it appeared to be the option that council was going to implement all the way up until 2010, when this man came along…

o-ROB-FORD.jpg
Rob Ford, the Prime Minister of Canada Mayor of Toronto (2010-2014)

He proposed this idea:

2. Build a subway extension of Line 2 (Bloor-Danforth)

Technically, the original Line 3 is an extension of the Line 2 into the Scarborough region, which is why this idea makes some sense. Why have a separate transit system when you can merge them all into one subway line? Ford was elected and scrapped plans for the LRT system. Eight years, many revisions and a new mayor later (John Tory), and the subway extension plan is still on. It is a one stop extension at the Scarborough Town Centre shopping mall, and is planned to cost around 3.35 billion dollars payed by all three levels of government.

Here is why it makes no sense.

The Line is Inequitable.

The economic definition of equity is a state in which the benefits of resources are shared fairly among members of society. Where is that 3.35 billion dollars coming from exactly? The splits look like this: 1.99 billion dollars from the province, 910 million from the city and 660 million from the federal government. These are tax dollars which are not just coming from Scarborough or Toronto. They’re coming from people across Canada, with an especially substantial investment by the province. And yet, according to a TTC report in 2014, the line itself would only stretch 7.6 km, and that was the original three stop plan. An one stop plan would be even shorter in length.

sse_network_opt_2_interim_v09.jpg

Take a look at the map above. Do you see that line connecting Scarborough Centre and Kennedy? That’s how tiny the extension is. 3.35 billion dollars is being poured into a subway service that most of the taxpayers will not even see, much less use. That is the very definition of unfair.

Now you might be thinking that tiny inequities such as these are necessary in order to improve the lives of some citizens. After all, it was on that principal that the original Line 3 was built on, to service the Scarborough region. But that simply leads to my next point.

The Line is Inefficient.

Efficiency comes when society gets the most value it can from the resources it has. In this case, we must ask ourselves, is building this line really giving us the best “bang for our buck”? Reportedly, the city has around 23 billion dollars in unfunded projects that it has yet to fund, many of them essential. For example, Don River flood protection, which is the key to opening up undeveloped land. Or how about money to clean up George Street? Investment in that part of the city could actually improve the lives of residents by improving property values and removing drug addicts and gang members. Heck, even the basic costs of maintaining the TTC itself are not being met by the city.

33b9-2015123-george-st-2.jpg-resize-_opacity_100-frame_bg_color_FFF-gravity_center-q_70-preserve_ratio_true-w_1300_.jpg
Wouldn’t it be better to fund a clean up of these George Street buildings than to fund a 3 billion dollar one stop subway extension?

Every loonie spent on funding the Scarborough extension is a loonie that could have been spent on these types of projects. The spending is inefficient because for every Scarborough passenger gained, there was an opportunity lost to bring more buses to the TTC or to provide flood water protection to downtown residents. Those improvements would have benefited more people in a wider area rather than simply cater to a small pocket of the city.

However there is even more. Not only is the money being improperly allocated, it has also been improperly spent.

In 2016, in an effort to save money, the city elected to build a one stop subway extension. At the time, it was projected to cost 2 billion dollars. Now however, the price has rocketed upward to 3.35 billion dollars. Allegedly, the price of the project may fluctuate even more, with a range anywhere from 70-150% of the current estimate. The city still does not have a firm grasp on how they plan to build the extension, despite the fact that the plan was proposed 8 years ago by a mayor who has already passed away. Every additional year that this planning drags out for will be a year where money is being wasted. The entire project has not only become inefficient, but is starting to leach into the public’s wallets.

The “Next-Best” Option.

So, what should be the plan for the Scarborough line?

The answer is simple. Option 1! Or should I say, the new Option 1.

As far as I see it, the governments of Ontario and Canada have negotiated a 3.5 billion dollar deal to fund transit expansion in the city. By funding a 3.3 billion dollar subway extension, all of that money is eaten up. The costs of this plan thus far have been pretty clear, 3.3 billion dollars and an expansion in the amount of commuters that the subway can take on. A city report found that for each new rider gained, the governments would be paying 1.45 million dollars to attract them to use the subway. The benefit to the TTC is the extra fare that they can charge these new consumers. Assuming that they each pay an adult fare of $3.25, and that they must each make a trip twice a day using the service, (1.45 million dollars divided by $6.50/day divided by 365 days/year is around 611 years), it would still take around 611 years for the TTC to make that money back (not counting for inflation). On the bright side, however, commuters would save 5 minutes on their travel time.

Well, what about the Scarborough LRT? The 7 stop Scarborough LRT would be a 1.5 billion dollar project, funded in part by the city for 910 million and the federal government for 660 million dollars. Already, the numbers look better. Not only is the LRT about half as costly as the subway extension, it also happens to service a larger area as well, planning to run all the way north until it hits Sheppard Avenue. It doesn’t take math to know that less investment and an increased rider base will already see the cost per customer go down from 1.45 million dollars. However, the greatest part about the Scarborough LRT is that it allows for the funding of a second LRT line, which will connect even more passengers, the 17 stop Eglinton East LRT. Under the current plan, this LRT would only be 10% funded and probably never completed. The sum benefit of the LRT model is that it uses the same amount of resources to cover a much larger area of passengers, decreasing costs while at the same time connecting more of the city.

It’s About Changing Priorities.

It’s not about asking for more money from the provincial government. It’s about doing the smart and rational thing. Mayor Tory wants to forge ahead on the subway because there’s already been “too much talking”. He assumes that people just want to see something being built after a decade, rather than something which is good for the city. The TTC should prioritize quick and efficient transport for the city of Toronto. This means increasing the number of buses in the streets and upgrading subway cars. It means creating relief lines in order to reduce the amount of stress on the subway system.

It does not mean throwing money at a one stop subway extension meant to service a small portion of Scarborough. It does not mean spending for the sake of spending. And it certainly does not mean wasting limited funds on an area that will not be able to meet the subway’s capacity.

The Scarborough Subway Extension

The Scarborough Subway Extension has been a controversial topic as many people have opposing ideas and opinions on whether the government should go through with the plan. The expansion would cost $3.35 billion which could be used towards improving the current transit infrastructure. By analyzing the conditions of the TTC foundation that is running now, it will be shown that the money would be more useful towards bettering the system.

Although the extension would benefit those that wish to take the TTC from the Scarborough area, the corporation should focus on perfecting its practises before expanding it to farther outreaches that would be harder to maintain. There are many complications with the subway lines that are currently available to passengers. This extension would take focus away from problems that passengers from within the city are facing. In 2016, there was a total of 2,373 delays that lasted five minutes or more. That averages to seven delays a day. In my opinion, the Scarborough extension will dilute the TTC’s attention to these existing, recurring problems.

The obvious benefit of allocating these funds to improving the existing TTC infrastructure is improved service. In the TTC’s Service Standards Update, it outlines that they’re standard of operation is less than passengers’ idea of ideal. Busses are unreliable during high congestion hours and times of precipitation, while subway trains are delayed because of experimental train schedules and passenger interference. A cost to abandoning the Scarborough extension project could be even slower service for some time while the commission works through solutions to find the one that best addresses the problem.

Another potential cost of abandoning the Scarborough expansion project is the loss of potential profit from new passengers. Opening new operations in Scarborough gains access to a new area of potential customers for the TTC. However, the number of projected new passengers is considerably low. If the reliability and conditions of the busses and trains improves, there is the possibility of gaining the same profit from others within the city.

As seen in an article written by Rebecca Lee, many people in Toronto find owning a car extremely expensive. However, the deciding factor of commuting in a car is the convenience of it. If the public transit system was upgraded, some car users could switch to taking it as a cheaper alternative.

In my opinion, the expansion should be funded by putting aside some money from the profit the TTC makes. In 2016, the commission reported a total financial asset value of $1,339,768. Although it realistically would take some years to accumulate the funds necessary to go through with the extension, it would allow it to be self-funded. This way, the people of Toronto won’t be concerned with where the funding comes from or where it should rather go.

With all of these reasons considered, I believe the government shouldn’t construct the Scarborough Subway extension.

 

WORKS CITED

http://www.cbc.ca/news/canada/toronto/ttc-subway-delays-1.4068358 

https://stevemunro.ca/2017/05/15/the-reliable-unreliability-of-ttc-service/

https://www.theglobeandmail.com/news/toronto/scarborough-subway-will-cost-more-but-attract-fewer-people-reports-find/article34159618/

https://www.lowestrates.ca/blog/is-it-worth-it-to-own-car-toronto

https://www.ttc.ca/About_the_TTC/Annual_reports.jsp

Does the Sharing Economy Work for Workers?

We all know what a market is at it’s core: a relation between supply of a good and demand for that good. For thousands of years it was as simple as a trade of one thing for another, a buyer would give up something of value to receive the good that they wanted. This is fundamentally how trade and the economy worked and how we structured our businesses to function.

However, there is an alternative that is gaining more and more traction, the idea of this “sharing economy.” The sharing economy operates on the function that the logical thing to do is to interconnect all people that could supply a good or service with all people that demand that good or service in order to satisfy those demands in the most efficient manner possible. From a consumer perspective, this looks quite good. Renting a house is much simpler and streamlined through Airbnb, Uber gives me instant access to transportation as well as all the information I could ask for in terms of my preferences for a ride and Amazon and Ebay allow me quick access to sales by anyone anywhere which gives me much more choice and will lead me to a result that best suits my tastes, better than what I might get from a limited selection from any other one retailer.

So this is where the sharing economy works, it satisfies consumer wants better than anything else in the past, and that means that as long as consumers have money to spend, these new businesses will stay profitable. Some may argue that the drawback of this system is that traditional retailers have no way of competing against it (such as how taxi drivers fought when Uber took their jobs) but this is not a real problem with how this system works, just an unfortunate side effect. Consumers will almost always choose the highest quality option available at the same price and as such, more and more are using Uber and Amazon because they are the most efficient. Traditional retailers are stuck with their old, inferior systems and while that may put people out of work, that’s not a result of any failure of the sharing economy, it’s a result of it’s overwhelming success, and a success that still ultimately benefits consumers.

So buyers are happy because they have better access to the goods they want now, good for them. Here however is where the problem arises: consumers may be getting everything that they want, but how are workers doing? The answer is, not so good: in statistics from 2016, 52% of people providing a service for a sharing economy company quit within their first year of the job and statistics are similar for people in similar businesses that work by selling over online services. This unwillingness to stick around for long periods of employment makes sense when you consider that workers for these services are not seen as permanent employees, but just one-time contract workers, and as such are not always given the full benefits, wages or even working conditions that full-time employees would expect.

Another problem which makes the sharing economy hostile for those trying to do business is the difficulty of starting a new business in an existing market. These new industries – Uber, Amazon, Aribnb – all created new ways for us to receive the services that we want and as such, were massively successful because they were the only ones offering these new efficient new methods of transportation, buying used products and renting respectively. These early firms had their business spread like wildfire and soon enough, they were everyone’s go-to for those services, even when other businesses attempted to grab a potion of the market. People just can’t be bothered to set themselves up with a new business that is practically identical to an existing one, especially because that existing one works so well. In this way, these new businesses formed monopolies and monopolies mean – as they do in all industries – that the firms at the top can do whatever they damn well please and people will still go to them because they’re the only option. However, not only are these monopolistic companies mistreating their employees, but they’ve even been able to resist government influence and grow even faster because of that.

When Uber became successful, the managers of the company started employ tax-dodging techniques to avoid paying the US government, maximizing their profit and expanding their reach faster than they’d have been able to otherwise. They set up subsidiary businesses in The Netherlands that, by paying royalties to each other, actually avoid paying much of the company income to any government whatsoever. The reason that we are seeing more of these loopholes being exploited now is due to companies like Uber, Google and Apple where much of their value is in their intellectual properties, which makes them far more mobile than companies in the pre-internet age, as those traditional businesses would have had to move their entire base of operations in order to make a move such as this. In response to loopholes such as these, many countries, including The UK, Australia and France have been talking about the necessity of global tax reform to better handle companies like this.

Personally, I feel that the sharing economy and the services that it provides are definitely a good thing, but something that the world isn’t ready for or able to adapt to yet. I’m all for more efficiency in having our desires met, and the sharing economy provides this using the internet to connect us faster than ever before with whatever it is that we want. However, it’s not right for these companies to also use the advantage of the internet and their mobility to avoid everything taxes as well as not giving their employees benefits or full wages due to the nature of their contractor-like jobs. It will take time and it may even take cooperation between different countries, but once governments around the world are able to figure out how to close these loopholes and better establish regulation to give sharing economy employees the treatment they deserve, the sharing economy will be an important new wave of how we are able to buy and sell what we want with who we want. At it’s core, the sharing economy is about converting products into services that provide those products, and with today’s internet-connected society, that is a very useful thing to have.

Can I please have a discount?

Price.

What defines it?

How do we as humans decide that an iPhone X is worth more than the Google Pixel 2 yet their function are the same. So why is one worth around $1,400 while the other is worth only $700?

This increase in prices of phones helps to beg the question, if the prices we pay for goods are rational. What makes it rational? Should we be paying just enough to cover costs and provide a little profit to those who are providing it or should it just be given the ideal of “Well if you want to buy if you will pay the price if not then don’t bother? To me price can be seen as a quantitative value given to objects to help society rank on how much it is worth. My hypothesis on why some things that have the same function as other are worth more just because of the status it brings with it. With this in mind it leads me to the conclusion that the prices we pay for goods are not rational.

Status is attached to the irrational side of us. If status was rational then we would not long for the prestige of higher classes. As humans we want to of course be viewed as the best. No one wants to be poor or longs for that. So having something that is expensive is something that is necessary. This is known as social stratification. This dictates that people in society need to live to certain standards that are set by society.  So when you have someone who is rich it is expected of them to have a mansion, expensive cars and everything with a really nice price tag on it. It’s not expected of someone with a high status to pick something off the clearance rack at Walmart. The reason why things can be priced a certain way is based upon what society deems fit. This whole society deeming fit of certain things can be seen as a negative social incentive. If you do not get that really expensive Michael Kors bag even though are rich people of that class with shun you and see you as inferior because you do not flex as much as you should.  As economist John Harsanyi, states that

“apart from economic payoffs, social status seems to be the most important incentive and motivating force of social behavior.” 

Because of the social incentive of buying something with a higher price tag and this incentive people just cave into longing for the prestige instead of getting whats necessary.

57c73e1e1800002100bce6f3

This doesn’t make it rational. If the prices we paid for goods were rational I believe things would be on a level playing field because we would be looking at the function of the product and not the status and the extra bells and whistles (not including what deals with performance). For example if you have the same car why is it fair to pay more for a different color? Should it not be the same? I feel that it would be rational to pay for the same car but in a different color. The color should not dictate the price, the function should and because of that it is not rational.

With all this information stated above it also helps to beg the question if something can be overpriced and to that I say yes. Overpriced I feel it a term that is in the eye of the beholder something that I would find overpriced might not be the same of what someone else finds overpriced. Because people are not rational we cannot assume that every mind works the same. So when it comes to overpricing one person could take it differently than someone else. If someone lacks the influx of funds they will be more cautious then someone who has a wad of cash laying around.

Some companies can also get away with selling absolute nonsense. This is to do with branding. If a company is seen as something that is associated in having higher social prestige they can sell things that are outrageous for things that are not even worth. For example the company Supreme sold a brick for $30. Because of the status associated people were dying to get their hands on this brick. So after they ran out people were selling their bricks for around a whopping $1000.

Capture

At the end of the day price is going to be something that society is going to have to deal with it whether is rational or overpriced. It represents what we as society value and what is associated with the rich and the poor!

Journal Prompt #1- Hsin-Yen Liu

What determines a student’s mark? Knowledge? Intelligence? Effort? Sure. But apparently there’s one more thing: money.

In 2011, The Toronto Star published an article revealing the issue of students paying for grades.  Basically, certain private secondary schools, known as “credit mills,” allow students to earn easy and inflated marks for a fee of $500 to $980 per course. Below are some of the findings on credit mills:

  • Grades at some private schools arbitrarily increased upon request
  • Credits granted with less than half of mandatory class hours completed
  • Missing student assessments
  • Teachers without proper qualifications and those who “do not understand” evaluation and assessment
  • Rewriting of tests for $100
  • Students left to write tests with little supervision and access to the Internet.

Most people, I assume, would frown upon the idea of paying to get good marks. If students can exchange paper bills for better marks, then what would become of the meaning of marks? Wouldn’t marks become a measure of wealth, not ability? However, as questionable as this credit-mill business may seem, it exists, and it seems quite successful.

The question is: why?

Incentives and Opportunity Costs
We can use incentives and opportunity costs to explain why private schools are willing to sell “A-credits,” as well as why some students are willing to pay large amounts of money for higher marks.

For the credit mills, it is clear why they want to give easy marks to students: economic incentives (money). By allowing students to get high marks effortlessly, the schools attract desperate students who will pay $500 to $980— as mentioned earlier—for each of the courses that they take. This makes a lucrative business that the schools would definitely not want to miss out on. So basically, for the credit mills— which have nothing to offer (they obviously don’t offer good education if they have unqualified teachers) except easy marks—

Now, how about the students? Why would some students want to obtain their credits from credit mills? Well, we can analyze the opportunity costs— the values of the next best choice.

If the students choose to go to regular schools, their opportunity cost would include the higher marks that they could have gotten from the credit-mills. This could very well translate into getting into the desired university programs and receiving scholarships. Also, perhaps less importantly, the opportunity cost would also include some extra time; if they have gone to the credit-mill schools, they would have gotten their credits with less than half of the mandatory class hours, as well as fewer assessments to spend time worrying about.

On the other hand, if the students choose to buy easy marks, their opportunity cost would include the $500 to $980 that they spend on each of their courses, as well as “proper” education. What do I mean by proper education? Well, education with qualified teachers, enough class hours, and reasonably difficult tests during which the Internet is not allowed —none of which you can find in the description of a credit-mill class. By not receiving proper education, it is obvious that the students do not study or learn as much as they would have in a regular class.

Evidently, for the students who are choosing to get their credits from credit-mills instead of regular high schools, the latter is costlier. That is, they place more value on getting higher marks (and more free time) than on the course fees and a proper high school education. As a result, they choose to sacrifice their money and their high school education so that they don’t miss out on higher marks and free time. Why? Some of them may know/feel that the only way for them to get to into their desired university programs is to pay for the required admission marks. Since getting into the “right” university programs is so important, nothing — not even bad high school education or high financial costs— will stop them from doing whatever they can to ensure their placements in the programs. Or, they might just have “screwed up” very badly in public school, to the point where buying their marks seems to be their only solution.

So here we go. We have private schools that are willing to supply good marks at high prices, and students who are willing to pay those prices to get better marks. This is why the credit-mill industry is successful.

Credit Mills: Good or Bad?
Hmm, so perhaps credit mills are not that bad after all. Some students get the marks that they need, and the credit mills get to pocket large amounts of money. It’s a voluntary trade, and everyone seems happier. However, this is only a superficial observation. If we compare the efficiency and and equity of two school systems—one with and one without credit mills—we will see that credit mills are indeed bad.

Efficiency: one system is more efficient than another if some people are better off and no one is worse off. So, in the short term, it may seem more efficient to have credit mills— some private schools are better off with more money, certain students are happier with paid high marks, and the remaining students are just getting the marks that they normally get. Some people are better off, and the others are not worse off.

However, on the long run, having credit mills is definitely not more efficient. The private schools are still better off with more money, but many of the students are worse off. According to the Toronto Star article, students who pay for grades “are beating out more academically deserving teens for university spots and lucrative scholarships.” This makes the “more academically deserving teens” worse off. In addition, the students who pay for grades will eventually “flunk out because they’re not ready.” So they are worse off too.

In the end, the credit mill industry only benefits the credit mills, and it harms many students. Thus, a system with credit mills is definitely not more efficient. However, this is not to say that a system without credit mills is more efficient, because it makes the private schools worse off.

Equity: According to research fellow Harry Jones from Britain’s Overseas Development Institute, equity means that people are treated as equals, and it concerns three major areas:

1. Equal life chances: There should be no differences in outcomes based on factors for which people cannot be held responsible.
2. Equal concern for people’s needs: Some goods and services are necessities, and should be distributed according solely to the level of need.
3. Meritocracy: Positions in society and rewards should reflect differences in effort and ability, based on fair competition.

It is quite clear from the above criteria that it would be inequitable if students can pay for grades; credit mills create unequal life chances. Students who are born to poorer families are at a disadvantage because of a factor for which they are not responsible— their parents’ income. Also, if one student is getting a better mark than another student because they (or most likely, their parents) have paid for it, clearly that does not reflect “differences in effort and ability,” does it? It would not be a fair competition if students can pay for grades.

On the other hand, if credit mills did not exist, a difference in marks would be a more accurate reflection of the differences in effort and ability. The outcome would be much fairer and much more equitable. So from this perspective, credit mills should definitely not exist.

To sum it up, credit mills do not make a school system more efficient, for even though they benefit the private schools, they make many students worse off. Also, credit mills make the school system a lot less equitable and fair. Seeing as a school system should aim to benefit the students, there is really no reason why credit mills should exist.

Students should not be able to pay for grades.

Solutions?
Now that we have established that credit mills are bad, how can they be eliminated?

Actually, back in 2009, the school ministry attempted to reduce the problem by flagging every private school credit with a “P” on the transcript. They did it in the hopes that universities would disregard the undeserved high marks, and thus lowering the opportunity cost for obtaining credits the regular way (the high marks bought from credit mills will then have little value).  However, many universities, such as Wilfred Laurier University, University of Toronto, and University of Western Ontario, still take the approach of “a grade is a grade is a grade.” The “P” tells nothing about the nature of the marks except that they are earned from private schools, but not all private schools are credit mills. In other words, the extra “P” did nothing to change the opportunity costs for students.

An inexpensive improvement on the existing “P” would be adding the names of the private schools onto the transcripts. This could perhaps give universities a better idea of whether the marks are legitimately earned or not. However, Jennifer Yang, the author in this Toronto Star article, feels rather pessimistic about it; she questions whether universities would take the trouble to create a ranking system for all the private schools.

I believe that the solution lies in getting to the root of the problem—identifying and doing more about the schools that are selling marks. As Yang has mentioned in her article, there should be better inspections: suspicious schools should be inspected more to ensure that they are doing everything properly. And to avoid an increase in spending, schools with good records should be inspected less often.  Also, once identified as being credit mills, private schools should face more consequences. Currently, schools can get their credit-granting authority revoked if is found that they have problems. However, they can re-open as soon as one year after the they are shut down! Clearly, there should be a change in policy to increase this waiting time, so as to discourage schools from doing wrong.

The ministry should add negative economic incentives too: if they fine credit mills large amounts of money for selling grades, then the opportunity costs for doing the business would increase significantly. Not only only would the schools be shut down (for a while), they would also lose the profits that they have earned in the previous year(s). If the fines are large enough, the opportunity costs for selling grades would rise to a level at which credit-mills would find it more desirable and less costly to run their schools properly (to offer real education, not just marks).

A (Not So) Brief Recap
To sum everything up, there exists a problem in our education system where students are able to pay for easy grades by going to certain private schools known as “credit mills.” They pay something in the range of $500 and $980 for each course, and in return they get high marks that require almost no effort.

The credit-mill industry is successful because the private schools want to earn money, and students value high marks. However, being successful doesn’t make it good: not only does it make some students worse off (thereby not making the school system more efficient), it also makes the school system less equitable.

To eliminate credit mills, more inspections should be done so that the problem-schools can be better identified. Also, credit mills should face worse consequences once they are identified. They should have to wait for more than one year before they can re-apply for their licenses, and they should be fined (heavily). With proper incentives, the opportunity cost for selling marks could be increased to a point where it is actually costlier than that of not selling grades.

Paying for grades is a serious problem, but not one that cannot be fixed.