Friday, February 16, 2007

Race, Internet, and Necessity

According to the March 15 online edition of Business Week the racial gap between those who have internet access and those who do not is narrowing. Recent research reveals that 71% of non-Hispanic whites, 60% of non-Hispanic blacks, and 56% of Latino adults access the internet. Apparently the major difference in internet usage between the races is the quality of internet access and where they are able to connect. Only 29% of Hispanics have broadband in their homes, while 43% of whites and 31% of African Americans have this feature. For those who do not have internet in their homes at all, public libraries are a main source of access. (Holahan, 2007)

This information is interesting when considering what type of good the internet is. Presently the internet is a natural monopoly. It’s largely excludable because not everyone can readily access the internet without paying for it, and it is not rival in consumption because one person using it does not stop or diminish the ability of others to use it. The only exception to this is accessing it through public libraries for free, in which case the internet could be classified as a common resource. However, since this type of access is used much less than access via private subscriptions, the internet is currently a natural monopoly.

As a natural monopoly, the supply and demand equilibrium is largely guided by price alone; only those who can afford private subscriptions have access to the internet. But is this fair? Should this be considered an example of market failure? Should the government do more to subsidize internet access?

Taking into account how large a role the internet plays in both business and personal affairs, not having access to this resource could be as damaging to society as a whole as not having clean water, food, etc. Paying household bills, searching for employment, even higher education, are all facilitated by the internet. The social benefits of providing equal internet access to all citizens may be higher than current demand dictates, marking this as an example of market failure. By providing free access at public libraries, the government is taking steps to correct this situation, but a gap still exists. One way to bring the social demand and supply to its optimal equilibrium is to provide subsidies to low income families, perhaps as a branch of the welfare system, for private access. This may include funding part of computer purchasing costs as well as internet subscription fees. Already the internet is an integral part of many everyday tasks, and as technological advances continue, access will no longer be considered a luxury, but a necessity.

Source:

Holahan, Catherine. “America’s Digital Divide Narrows.” Business Week Online. March 15, 2007. Reference URL:
http://www.businessweek.com/technology/content/mar2007/tc20070315_573361.htm?chan=
top+news_top+news+index_technology

Monday, February 12, 2007

Interest Rates Up in Europe

In the March 8th online edition of Business Week, Moore reported that the European Central Bank raised its interest rate by .25% to 3.75% in order to keep inflation at bay. This move was heavily criticized, however, since the overall inflation rate was less than the ECB’s recommended 2% for the last six months. Many, including the Association of European Chambers of Commerce, felt the interest raise was unnecessary and would discourage business growth in the coming quarters within the 13 European Countries that use the Euro. (Moore, 2007)

The European Central Bank is the European equivalent of the Federal Reserve Bank in the United States. By raising the interest rate by .25%, the ECB is affecting the discount rate, or the rate at which European banks can borrow money from the ECB. A higher interest rate means banks will have to pay more to borrow money, and will cause a decrease in the amount of money borrowed. In turn, banks will have less money to give investors, and the amount of people investing - starting new businesses, etc. - will drop. This is exactly why groups such as the Association of European Chambers of Commerce looks unfavorably upon the higher interest rates.

On the other hand, higher interest rates help to keep inflation down because there is less money supplied to the economy. As the quantity theory of money states; the more money in circulation, the higher prices will be for goods and services, which leads to inflation.

When the European Union was first formed, the ECB lowered interest rates to stimulate the growth and development of the new, larger economy. Now that the EU’s economy is relatively stable and healthy, the ECB believes higher interest rates will not have a substantial negative effect on the EU’s continued growth in the near future.

Even with the recent rise in interest rates, the ECBs rate at 3.75% is still lower than the Fed’s rate of 5.25%.

Source: Moore, Matt. “European Central Bank Raises Rates.” Business Week Online. March 8, 2007.
Reference URL: http://www.businessweek.com/ap/financialnews/D8NO6L000.htm?chan=search

Saturday, February 3, 2007

Hybrid Sales Down - A Blow to the Environment?

In the March 8th online edition of Business Week, David Welch reports that sales of hybrid vehicles have dropped during the first quarter of 2007. In comparison to last year, hybrid sales only account for 1.8% of total sales, down from 2.1% in 2006. The high price tag attached to these “green” vehicles is the number one reason cited for the lack of sales (Welch, 2007).

The intersection between market performance and environmental concern will undoubtedly be a cornerstone of this year’s economic trends. Building media pressure, such as Al Gore’s Oscar win for “An Inconvenient Truth,” combined with greater environmental awareness will finally force consumers to make a definitive and difficult choice. Either buy the less expensive car and contribute to global warming, or sacrifice those extra dollars and buy the hybrid. Clearly, money, not conscience, is winning the battle for 2007.

As the law of supply dictates, higher prices for hybrids has prompted car manufacturers to produce more of them. Over the next 20 months at least 30 new hybrid models are scheduled to enter the market, up from about 14 models to date (Welch, 2007). And while this may be very good news for the environment, the recent downturn in demand is also exerting pressure for depressed prices. Already companies are being forced to slash prices on hybrids in the hopes of increasing sales, and reaching a new market equilibrium.

But as this price fluctuation is occurring, environmental concerns are becoming harder for everyone to ignore. At some point in the very near future the “more expensive/less expensive” choice isn’t going to be the determining factor for vehicle acquisition. Instead of a movement along the demand curve based on price, a complete shift will occur based on the vehicle’s environmental impact. Whether this shift is prompted by consumer’s good will or governmental controls is still to be seen.

The use of public transportation, an environmentally friendly substitute, may also play a key role in determining the future demand for hybrids. Although more inconvenient than individual transportation, buses, trains, and trams may become the most affordable means of travel for the majority of consumers - dropping the demand for vehicles in general, and allowing the market to settle on a higher-than-average price per hybrid.

However, because most western cultures have come to depend heavily on individual transportation, perhaps a more realistic solution is finding a less expensive way to produce hybrids. Already manufacturers are working toward this end, devising more cost-effective means of production, such as cheaper lithium ion cell batteries (Welch, 2007). Such production cost-cuts will lead to less expensive hybrids, and hopefully more consumer demand…A winning scenario for everyone, including the environment.


Source:

Welch, David. “Why Hybrids are a Difficult Sell.” Business Week, March 8th, 2007. Reference URL: http://www.businessweek.com/autos/content/mar2007/bw20070308_093177.htm?chan=autos_autos+index+page