The Undercover Economist: Book analysis and review, part I

I just finished reading Tim Harford's The Undercover Economist and found it to be quite good. I thought that he did a great job of introducing many of the basic tenets of economics in a fashion that any bloke off the street could read and understand easily.

Of course, since I'm fairly well-versed in many aspects of economics, I found the book to be a bit rudimentary at times. Nonetheless, I've decided that if I end up teaching an introductory course on economics, this is required reading material for sure.

I'd like to touch on one of the recurring themes in Tim's book, which is how markets can be distorted. There are four main ways: scarcity, externality, imperfect information, and regulation. I can't actually remember if he explicity mentions government regulation as one, but he certainly implicitly states it. (Note: I should clarify in this space that Tim is really talking about overregulation as government regulation can actually be a method to correct a malfunctioning market.)

When thinking of scarcity, one has only to look so far as the closest monopoly: Microsoft. Whether you fear them or love them, Microsoft exercises near total monopoly power in the world of computer operating software. This is a form of scarcity in that if you want to run a PC, you really have only two options: Windows or Linux (no, I haven't forgotten you Mac users, but I'm choosing to ignore you for reasons of simplicity). Since there are only two options, there is a "scarcity" in operating software. If you want to work on a PC, Microsoft pretty much has you by the balls because you don't really have many options.

In his book, Harford references David Ricardo and his farming example. If you are a farmer and there are many other farmers, say more farmers than there are plots of fertile land, then the landowners exercise scarcity power because there are fewer farmers than land and all farmers want land to farm on. This is the beginning of a bidding war and the price of farmland will rise until the second-least productive (assuming that the number of farmers is n and that there is n - 1 plots of farmland) just breaks even with how much the land costs versus the income he earns from farming. The poor farmer who was least productive could not afford the cost of farmland because at the price the last farmer was willing to pay, this unproductive farmer would not have been able to generate enough income to make rent. In this scenario, the landowners exercise scarcity power, and this can (but does not have to by any means) distort the property market.

In my next post, I'll continue my analysis by discussing the second factor that distorts markets: externalities.