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Extracting all Consumers’ Surplus: A Case From India

The Homo Economicus — Sat, 20 Jun 2009 17:04:31 +0000

Economic theory suggests that in equilibrium, the price of a good is given by the intersection of the demand and supply curves. This means that the market chooses a quantity to be produced and a price for that good such that the consumers and producers’ surplus is zero. You may be thinking: “WHAT is this guy talking about?”…

Well, suppose that you want an non-priced ice cream. If you are willing to pay USD $5 for that ice cream, but you manage to buy it at USD $3.5, then your consumer’s surplus is USD $1.5. The producers’ surplus works the same way – the difference between the marginal cost and the price of that good is his/her surplus.

Foreigners bargaining with an auto-rickshaw driver

I’ve been in India already for two weeks, and I wish my foreigner style wouldn’t be so recognizable in the streets. The auto-rickshaw drivers are well known by inflating their price even twice or thrice than what a local would pay if a tourist is asking for an estimate. Many of these foreigners fall into the trap – a classical case of price discrimination: selling the same product (a ride) for a different price.

The "Dhobi"

The laundry man (known as dhobi in India) is also in this business of price discrimination. As a foreigner, apparently, your underware is harder to wash than for a local. With about 10 foreigners in the hostel I was staying during my course in Chennai, the dhobi enjoyed from a “early Christmas present” this year. He charged us more for each cloth than what he usually charges to the locals. And he also gave a terrible service (came late, and some clothes were misplaced).

What is the explanation for these kinds of things? Why, already knowing that the auto-rickshaw and the dhobi is charging more to a foreigner, still foreigners pay that price? Why don’t we see the “invisible hand of the market” doing its job here. I have two economic explanations which follow:

Monopoly and Information Asymmetries: This is the most basic explanation. The dhobi for instance is the monopoly of laundry in the hostel. Even if you know that the price is higher, there is not too much you can do, specially because you don’t know anything regarding where else can you do laundry. One cannot assure that the rickshaws constitute a monopoly, because there are hundreds of them! However, some of them prefer to maintain higher prices for foreigners and create a mini-cartel, even though I believe that it is a weak equilibrium, since if only one rickshaw offers a lower price, then the rest must follow.
The cost of bargaining: For many foreigners India is a very cheap country. To give you an idea, USD $1 is almost 50 Rupees (Rps). So when it comes to bargaining with an auto-rickshaw – and they know this, that is why they start with very high prices – the cost in terms of time, tiredness, etc of bargaining with a driver for 20 Rps less becomes lower than the marginal utility that one can get from getting into the rickshaw without bargaining – that is, the cost of bargaining is very high. This is specially the case when you are sharing a auto with other friends.

An interesting point to notice about these rickshaws is that they know with almost full certainty that they can extract a higher cost for a foreigner, so I happened to see an interesting economic phenomenon that without a proper explanation could be explained as irrationality: the auto rickshaw drivers sometimes preferred to leave and not taking the customer if the latter refused to pay the high rate. An explanation for this is that they have some kind of cartel, and if one lowers the rate then they cannot extract more from foreigners, but this seems to be like a very weak equilibrium. Maybe, the likelihood of finding another tourist or a better customer is high, and that is why they might refuse.

In any case, what is interesting is that the willingness to pay for many foreigners is higher than the price set by the market, and this together with the information assymetries is what causes the characters of this post to extract all the customer surplus.

It will take me some time to understand what is the best methodology to bargaining during my next weeks here…

This Week in Pictures

The Homo Economicus — Mon, 15 Jun 2009 17:53:16 +0000

In the past two days I’ve been traveling around Chennai and some villages nearby, as part of a field trip organized by the Center for Micro Finance. Here are some pictures of the places I’ve visited so far:

A Street in Chennai

Poster in the Training Center of a Micro Finance Institution

Coconut Seller

Creativity

Children in a Poor Village near Chennai

Businesswoman in her Bicycle Repairing Shop

What do you want to be when you grow up?

The Homo Economicus — Sat, 13 Jun 2009 18:58:40 +0000

This was the question I asked to two girls today in the field trips I made near Chennai to poor villages. The first one is the granddaughter of the owner of a bycile repair shop that was created with a microcredit loan. The cute girl told me that she wants to become a Doctor. Her grandmother has established a very nice business located in a transited street. For 100 Ruppies (less than USD $3) she will check your bike and give you a diagnosis, and then, depending on what is the fail, she will charge you accordingly.

In the next couple of days I will write some basic conclusions about Microfinance that I’ve been extracting from my intense approach to this subject during the recent days.

I asked the same question to another girl in a Self Help Group (SHG) meeting. Very surprisingly she also told me that she wants to become a Doctor (why does nobody want to become an economist?). This group was learning with the help of the NGO Hand In Hand about basic financial concepts such as savings and managing money. The little girl was the daughter of one of the approximately 20 women that were present in the meeting. The little girl was enrolled in school, and she even spoken to us in English, which is the official language of th education system in India. For people that didn’t go to school in the state of Tamil Nadu, their mother toungue is Tamil.

The economic reforms of openness and liberalization made by Dr. Singh, back then the Minister of Finance of the (Congress Party) Government in 1991 (nowadays the prime minister of India) apparently are being felt even in very poor places. The astounding economic growth of India during the last two decades cannot be unnoticed. I wonder if little girls in the India of the swadeshi (self-reliance) – with import substitutions and limited capital markets – would ever think of being a Doctor. I must say that their answer – which I beleive they will be able to achieve – was the most interesting and best learning of the day.

What does lentils have to do with traffic?

The Homo Economicus — Mon, 08 Jun 2009 14:03:06 +0000

The answer is Chennai.

I arrived yesterday morning, and since then, I have been eating lentils for breakfast, lunch and dinner. I have nothing against lentils, and they are good for lunch and dinner… but for breakfast I’m still getting used to it.

I went out yesterday to tour around the city with some friends that I met here. Actually, two out of the three places that we went were closed (if any of the authors of the Lonely Planet guide for India is reading this, please correct your book!). The traffic is terrible. Aside from the fact that we almost got killed in one rickshaw – and the rickshaws themselves – I felt a little bit like in Caracas, where the traffic lights are barely inexistent, and there is no pedestrian culture.

Here are some interesting pictures. I gotta go now to have my lentils for dinner.

The Rickshaw

Sunday Afternoon in Chennai

Playing Criket

Near the Temple

Going inside the Temple

“Sir, you’ve been upgraded to Business Class”

The Homo Economicus — Sat, 06 Jun 2009 11:47:01 +0000

These are the nicest words I’ve heard today.

I’m doing transit in London, about to board my plane to Chennai, India. I was given the good news in Heathrow Airport (after my flight from Tel Aviv). But, why? Well, it might be because I won a lottery because the plane is empty, or as a good gesture to me for leaving the western world for two months. Indeed, I believe that what I’ll see in India will be extremely different, in all senses, than the lifestyles of the people in the west. But that is one of the main reasons of my trip. I think that as an economist that wants to work in development, getting to know closely developing countries such as India with such high rates of poverty incidence and all the other complexities it presents, is a must.

I’ll be for the first 10 days or so in Chennai, attending a course in Micro Finance given by the Center for Micro Finance (CMF), the organization which I’ll be working for. I don’t know much about Chennai, but from what I read in the Lonely Planet guide for India, it said something like: “There is really not much to do in Chennai. It is very hot, and there are not numerous tourists attractions”. Which in other words I think it means: “Just go if you don’t have anything else to do”. However, since I do have something to do in Chennai, I don’t feel bad. Actually I don’t think I’m looking in particular for tourists attractions, but to see and learn about real India.

Then, I’ll be heading south to Thanjavur. A small city of 250 thousand inhabitants. This, in terms of India’s population, is VERY small. I haven’t had enough time to read a lot about Thanjavur. I know it is VERY hot, and it is small. I also know that there are a few temples which are considered important tourists attractions, and that are worth seeing. In any case, I won’t be only working in Thanjavur itself, but also going to the field in villages aroudn the town, so I’m not too worried (I must admit that just a little). In any case, I think it will be a great summer. I brought with me about 10 books to read, since I guess that it is one of the few activities I will be able to do in my spare time, and – aside from that – I couldn’t read too much during this past year, so it will be an opportunity to catch up with books that have been in my bookshelf for quite some time.

One of the books I’m reading, recommended by my good friend Soham, is “In Spite of the Gods: The Rise of Modern India” by Edward Luce. It is a fascinating book. I really recommend it for all those who want a compact and well written “clear picture” of the country.

For now, I have a plane to catch, so you’ll be hearing from me pretty soon!

From Japan to Jerusalem?

The Homo Economicus — Wed, 03 Jun 2009 22:43:56 +0000

On my way to India I made a stop in Israel. Randomly walking in Jerusalem I saw this very interesting restroom – in the middle of a public park. Please, see it by yourself:

The panel of control located to the right hand side of the door has a red light indicating if the toilet is occupied or a green light indicating if it is empty. It also has a button that will open the door and automatically disinfect the toilet:

The sign says: “These toilets are accesible for all users. After use these toilets are washed automatically. The seat is disinfected and dried. Accompany children under 10 years. Maximal use 20 minutes”.

To my surprise, there was no fee to use the bathroom. The whole idea is very clever. The future has come.

Three Things I've Learned about America…

The Homo Economicus — Sun, 26 Apr 2009 01:35:22 +0000

I’ve been living already for about 8 months in the United States. More specifically in Cambridge, MA. It has been an exciting experience and I must say that I like the country and the American people as well.

I wanted to share three things I’ve learned about America, which relates to the way people do business or study, or everything else. These are the three things:

1) Networking: it is a very important issue. Getting to know the people around you as some kind of asset that will help you in the future. In my school they prepare “network events” and classes on “networking”.

2) Essays: you have to write an essay for everything. You want to apply to school, 3 essays. You want to apply for a job: a statement of purpose (i.e. an essay). You want to go to a trip or to a conference: essay. For every little thing, you need an essay. I don’t even know why are there presidential elections. The candidates just should write essays.

3) Everything has 3 things. If you speak, or explain something, or write an essay: 3 is the most common and most used number. You can divide anything in three categories, or you can explain your argument because of three reasons, or you can say the three things that you’ve learned from living in America. So for a good speach/essay you have to say: “I ____________ because of three reasons: (1) _____________, (2) _______________ and (3) ______________”. And then you get to explain one of them separately. It is all about structure.

God Bless America!

No comments…

The Homo Economicus — Tue, 09 Sep 2008 22:52:00 +0000

I found this in JFK Airport in New York City… An automated iPod selling machine…

Believe it or not…

Cuba – Day 4 (Finally!)

The Homo Economicus — Tue, 22 Jul 2008 17:29:00 +0000

The plan for this last day was mostly open. I decided to start walking in direction to the building of the Synagogue and Jewish Community to say goodbye to my friend W that worked there. I found all the workers outside the building because Health Ministry workers came to fumigate all the buildings in the area against dengue fever. W told me that it seems like there is an epidemic, but the Cuban government is very careful not to declare that officially in order not to affect tourism.

I then walked to Havana University. A beautiful campus. The Union of Communist Youth (UJC) is very active in campus, and you can see their offices and fliers all around. Many UJC fliers contained pictures of Che Guevara, Simon Bolivar and Abraham Lincoln. In the middle of the campus there was a tank as a tribute to the Cuban Revolution of 1959. I managed to reach the Social Science Faculty, and I stood on the hallway, and heard what looked like an economics class. They were talking about capital gain and exploitation… was it pure coincidence? Maybe…

Main Entrance to University of Havana

I went to the bookstore to buy some books. One of them showed in the front a huge demonstration of Cubans wearing red shirts. I asked my friend W about those demonstrations, and how come they are so crowded even at mid day (when people are working). He told me that he remembered that some times in the University classes were canceled and there were buses outside in order to let people reach the demonstration. Sometimes, you even had to sign that you reached the place. It seems like there is a lot of control inside the university. The student bodies are well connected to other state intelligence organisms. Avoiding these demonstrations could cause you trouble in the future.

From there I went walking to Jose Marti Memorial building, which is a 70 stories building from where you can have a panoramic view of Havana. There I met a group of 30 elementary school students, who were somehow amazed when they found out that I was there (not for me being me, but for me being a tourist). It is a beautiful place. I managed to payed the lowest price (the one in Cuban pesos) by saying that I am a Venezuelan student in Cuba, making an ophthalmology course. Before you say I am cheap, I did this not that much because of the money, but in order to see whether that ’sympathy’ towards Venezuelan was real or only rumors. Here are some pictures of Havana seeing from this tower:

Panoramic view of Havana

House of the Communist Party in Havana

I spent the rest of the day walking and watching, watching and walking. I ate dinner with Roberto and his family, and I also met again S and M to say goodbye. I sat for a while in Malecon to see the sunset, and went to ask a taxi cab to pick me up at night for going back to the airport. Please enjoy as I did from a seeing the Malecon in the late afternoon:

Lastly, from all the things I learned in Cuba, there was one phrase that I saw in Roberto’s place, that really helped me to somehow summarize what I have learned from Cuba and from Cubans. Here it comes:

“Good, please grant me with

SERENITY to accept the things that I cannot change,

COURAGE to change those I do can, and

WISDOM to identify the difference between these two things “

Let’s hope God will give Cuban people these three elements…

Cuba – Day 3 (Cont.)

The Homo Economicus — Sat, 19 Jul 2008 18:35:00 +0000

Last post was extremely large, so I divided it into two parts… so this is the second one. So, before you start, go back and read the previous post. And the one before that. And the one before, and the previous one also… so, go and read all the posts before going forward!

Well, one of the questions I had on my mind during my visit to Cuba was about the cars. I told several times that most of the cars are very old (very very old!)… But the question is who can buy a car? Why are some Cubans “allowed” to own cars, while others not (in this socialist regime)?

Well, I talked about that with M at her place and she explained that cars are divided in several categories:

Blue license plates are state-owned cars to be used by ministries employees and other government workers. They must report mileage status after using them, and cannot be used for personal issues.
Maroon license plates are also state owned cars, but for white collar functionaries, such as ministers for example. Those were newer cars, and it seems like they do not have to justify their use with mileage reports.
Green license plates are owned by the FAR, which is the acronym for Fuerzas Armadas Revolucionarias – the Cuban army.
License plates with a T in them are rented cars for tourists. Nice and newer cars.
Yellow license plates are usually in the oldest cars, and this is the private cars category. The taxis that can be payed in Cuban pesos are of this category also.

Individuals in the past could have received a private car as a recognition for being a good worker or even by buying it. Today, one who seeks to own a car must buy it, since the economy does not have enough resources to recognize its workers. However, M says, the bright side of this is that there won’t be corruption in giving cars to workers who don’t really deserve them.

At that point, M’s father came home, and I met him. He was a CDR’s activist, and he told me about the “CDRs day” which was actually that very same day. All around the island, at night, people prepared food in large pots in the streets, and danced until midnight. M’s father was in his way to the party in the street. M told me that almost all neighbors contribute to the event donating 20 cuban pesos for the happening. This could be a lot of money for Cubans…

However, it seems like they do have money from abroad. They must… otherwise they cannot survive. But there are at least a few families who don’t have family abroad that can send them money. And I these people must figure out other ways to survive, like exploiting their abilities. For example, I was very impressed to see in downtown Havana some stands that were selling (in foreign currency of course) cars figures made out of soda cans.

In any case, back to political issues, I also talked with M about the Cuban constitution. I showed her the one I bought in the morning in downtown Havana for 40 Cuban pesos. She showed me a updated version of it, and we talked about one of the emends that eliminates an article which allowed Cubans to form a new political party by recollecting ten thousand signatures. A few years back, the position leader did recollect ten thousand signatures, but afterward the Cuban assembly advances this emend having at least 3 million signatures supporting it. This way was completely eliminated the existence of another political party other than the Communist party in the Island. I asked her if she thinks this is democratic, and she said that it was clear to her that the emend was supported by much more people than the new political party request… What do you think?

This lead us to talk about the political repression in the island. M claims that the political inmate are people who really are a threat to security and stability in the Island, and many of them were involved in terrorist attacks. However, she argues that the opposition leader lives in his home without having any repression against him, and he is not in jail.

But repression is all over the Island, and it is easily perceivable. S told me her own story. She was then 18 years old, and she is a very nice and happy girl. She told me that in Cuba, for higher education, studying what you really want is not that simple. S wants to be an actress. That is why she applied to complete her senior high school requirements at an special arts institute. This instituted is very limited in capacity, and they admit some 5 Cubans every year out of a pool of 400. She made it to the last round with another 15 candidates. It was clear that all of them, if they reached that point of the process, were very good actors. Finally, five were admitted, and S was ranked in the seventh place. Coincidentally, the first five were family of famous actors in Cuba. The story does not end here. She was offered to join a new “program sponsored by the revolution” in which she will learn acting, and she would be able also to teach acting. This was when she was still in high school, at age 15. She accepted the offer, and to be accepted she had to sign a contract in which she committed to teach acting for 8 years in schools anywhere in the island after finishing her studies. Well, three years passed since, and she just realized that she does not want to teach acting. She does not want either to study how to teach. She wants to act. Then she decided to drop out from the program. After a few months, she saw that the salary she received from acting in another group (not related to school) was not the same one as she always received. When she asked for an explanation, they told her that she has received compensation payments, and that she was no longer working there. She became a deserter of the revolution because she drop out of the acting program. S was only 15 when she signed a contract committing herself what to do the next eight years of her life. Do anyone of you knew with certainty what you wanted to do when you were 15 years old? I certainly don’t.

This story was really scary for me. The system has this large list of “deserters” that they pass it from place to place, creating incentives for you to repair what you did wrong (by firing you for example…). Being in that list can prevent you from traveling abroad, buying foreign currency and many other things which are for sure related to one owns freedom.

Now S joined another institute in which she studies pantomime and other scenic arts. She is not sure however that she will receive her degree because her name is still in that list.

The Cuban government constantly say that the Cuban people might not be rich, but they live with dignity… Is this dignity???