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A Treasure Trove Of Econ Research For You, With A Free Lesson In Public Goods…

March 22nd, 2011 · 11 Comments
Econ 101 · Fun With Data

It’s been floating around the econ blogosphere today that The Brookings Institution has decided to make all of its research publicly available for free. (In case you aren’t familiar, Brookings is a DC-based nonprofit research organization, i.e. think tank. Here is some more explanation, complete with a cartoon.) I am psyched about this for a number of reasons:

  • I like free stuff. All else being equal, I prefer not paying for stuff to paying for stuff.
  • Easier access might actually make it so that the people and organizations who should be looking at this research to inform their decisions can actually get their hands on it. For example, I’ve always been amazed that JSTOR, the biggest journal database out there, doesn’t have an option for individual subscriptions, even for people and organizations willing to pay for them.
  • It’s socially optimal from an economic standpoint. More on that in a second.

I like that the editors of the Brookings Papers on Economic Activity seem to agree with me:

“We need to be able to give policymakers the information they need to help steer U.S. and other economies away from bumps and potholes as much as possible. We hope these papers help inform the policy discussion.”
– Editors David Romer and Justin Wolfers

Wolfers also has a nice piece on the Freakonomics blog announcing the decision to provide open access and explaining why it’s the right one. On the latter point…

Wolfers states that “If my students learn only one thing, it’s this: Price equals marginal cost.” This statement isn’t technically correct, but, in context, I think I know what he was trying to say. That statement should read “it is socially optimal for prices to be set at the marginal cost of production.” The marginal cost of production is just how much it would cost to produce one more unit of a thing (or, more or less equivalently, how much it cost to produce the last unit). In the case of the Brookings papers, the cost to Brookings of providing online access to one more person is essentially zero, so a zero price (i.e. open access) is socially optimal. Goods with close to zero marginal cost that have a price of zero are called public goods.

In practice, we see many scenarios where price does not meet up with marginal cost. For example, I could have made the above point about cable television rather than online journals- the cost of one more subscriber is close to zero, so it would be socially optimal for cable TV to be free. So why isn’t cable TV free? It’s important to remember that “socially optimal” means “biggest economic pie for the collective producer/consumer group.” It’s often the case that what is good for the overall group isn’t what is specifically best for producers, so unless producers have widespread altruistic tendencies (read, are nonprofits or very focused on corporate social responsibility), price frequently isn’t going to converge to marginal cost.

It’s also sometimes the case that if a company charges a price equal to marginal cost, it won’t be able to cover its fixed costs. (These companies usually fall into the natural monopoly category.) In the example above, if cable companies were to actually charge a price of zero, they wouldn’t stay in business for very long. Granted, gains to consumers would more than make up for the cable companies’ losses, but that’s of little help unless customers start voluntarily showering the companies with cash in order to keep them in business. (This is why many public goods are funded by the government.)

Luckily, Brookings has lots of grants and such to cover its fixed costs of operation, so I wouldn’t expect it to go out of business any time soon. Now, go and get your nerd on- Justin Wolfers gives a good list of memorable papers from the archives.

Tags: Econ 101 · Fun With Data

11 responses so far ↓

  • 1 Dan L // Mar 22, 2011 at 5:04 pm

    In other words, if his students learn only one thing, it’s a pithy statement that is just patently false in the real world. Not something I’d want to brag about…

  • 2 econgirl // Mar 22, 2011 at 5:12 pm

    Justin is a really smart guy, so I am reasonably confident that he just mistyped. On a related note, I really have no idea what I would want people to take from economics if I had to choose only one thing.

  • 3 Andrew S // Mar 23, 2011 at 11:39 am

    I think that if you had to take one thing from economics, it should be that there is no free lunch or that wants are unlimited but resources are finite. Most other economic concepts have exceptions, assumptions, and caveats but those two axioms hold true. More than anything else, a thorough understanding and acceptance of those facts would help our economy.

  • 4 econgirl // Mar 23, 2011 at 2:40 pm

    Amen.

  • 5 manchild // Mar 23, 2011 at 11:19 pm

    If you give some of the context around the quote, it makes more sense: “What is the socially optimal price of online access to economics journal articles?
    If my students learn only one thing, it’s this: Price equals marginal cost.”

  • 6 Punditus Maximus // Mar 24, 2011 at 2:57 pm

    Socially optimal if and only if a dollar has the same marginal value to Bill Gates as to me.

    Just saying.

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