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Federal Aviation Administration

Ore_Ele
Posts: 25,980
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7/26/2011 2:29:52 PM
Posted: 5 years ago
This is a combination of a current event, how it applies to economic theory, and how that does (or does not) effect one's political views (or economic views).

http://www.indystar.com...

At the end of friday, the federal government failed to pass legislation to keep the FAA funded. By doing so, airline companies no longer have to pay a 7.5% tax (along with various other taxes and fees that range from ticket to ticket, upto 10%).

Now this is basically a tax cut that the government didn't want to do, but it happened. The taxes due in their particular market have been removed. Most conservatives, libertarians, and general free market followers should be happy about this. The constant claims that cutting taxes will lower costs to consumers has been all too common.

And even basic supply and demand suggests this to be true. When a tax is applied, the part of the tax is passed to the consumer and part is ate by the company (pending the elasticity of the supply curve and the demand curve). Likewise, the removal of a tax should also be partially passed to the consumer.

http://en.wikipedia.org...

However, in this real world case with the airlines, we see that no savings is being passed on to the consumer. The vast majority of the market took 100% of the tax breaks and put them entirely into the company pockets. They then actually said that this money will go to R&D which will lead to lower prices in the future (I trust that about as much as I trust government saying they'll cut spending some time in the future).

But how can this be? How does this fit with supply and demand? The only ways are if...

1) Demand for airfare has an unimaginablely steep elasticity (meaning that no one buys airfare because it is wanted, but they absolutely have to).
2) There is no sufficient competition in the market to allow supply and demand to show through (since supply and demand are based on competitive market).

If there are any other ways, I'd be happy to hear them.
"Wanting Red Rhino Pill to have gender"
Lasagna
Posts: 2,440
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7/26/2011 8:39:19 PM
Posted: 5 years ago
I wouldn't promote spending any money at all on air travel. It's a waste of resources, unhealthy, and environmentally unfriendly. People don't need to fly. What for? For f*cking businessmen to go strut their suits and briefcases off for each other? People can drive or take a ship.
Rob
belle
Posts: 4,113
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7/27/2011 12:29:43 AM
Posted: 5 years ago
it seems to me that all it implies is that

(a) the airlines are betting that people who are flying don't pay attention to what percentage of what they pay is tax vs fare

and

(b) they are probably right.

if people don't see the number they are used to paying go up they don't care.

as a corollary it shows that businesses like to take advantage of the nonrational bits of people's behavior. but we've always known that classical economic theory has a grossly oversimplified view of human nature.
evidently i only come to ddo to avoid doing homework...
quarterexchange
Posts: 1,549
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7/27/2011 12:50:51 AM
Posted: 5 years ago
At 7/26/2011 8:39:19 PM, Lasagna wrote:
I wouldn't promote spending any money at all on air travel. It's a waste of resources, unhealthy, and environmentally unfriendly. People don't need to fly. What for? For f*cking businessmen to go strut their suits and briefcases off for each other? People can drive or take a ship.

I don't think we should promote spending money on cars.

They waste resources and are environmentally unfriendly.

People don't need cars, they can go ride a horse or walk.
I don't discriminate....I hate everybody.
belle
Posts: 4,113
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7/27/2011 12:59:33 AM
Posted: 5 years ago
At 7/27/2011 12:50:51 AM, quarterexchange wrote:
At 7/26/2011 8:39:19 PM, Lasagna wrote:
I wouldn't promote spending any money at all on air travel. It's a waste of resources, unhealthy, and environmentally unfriendly. People don't need to fly. What for? For f*cking businessmen to go strut their suits and briefcases off for each other? People can drive or take a ship.

I don't think we should promote spending money on cars.

They waste resources and are environmentally unfriendly.

People don't need cars, they can go ride a horse or walk.

this is probably a parody but its true to a degree. a lot of people who drive will drive 5 or 6 blocks rather than walking... just because they can i guess. its ridiculous. my coworker lives about a 15 minute walk from where we work, and she'll wait around an hour to get a ride home rather than just walk there. people are way too f*cking lazy because of cars.
evidently i only come to ddo to avoid doing homework...
Ragnar_Rahl
Posts: 19,297
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7/27/2011 1:31:26 AM
Posted: 5 years ago
Do you wanna be the airlines in a few years when they have to adjust prices upward when the tax is reinstated (You said it yourself, the government didn't want to do this after all).

Or would you rather present a steady face to the consumer, and get some money while you're at it?

In the long run, if it stays this way, fare increases that would have happened for other reasons... won't, up to an expected value of about the taxes in question, but you can't expect the frictional effects to be null in an industry like airlines, which, while they do allow new competition to change things, do not allow new competition to change things based on events from "Last Friday." You wanna compete with an airline, it'll take you a few years, and the rules will have to stay steady that long for the threat to be credible based on something like this.
It came to be at its height. It was commanded to command. It was a capital before its first stone was laid. It was a monument to the spirit of man.
quarterexchange
Posts: 1,549
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7/27/2011 1:35:19 AM
Posted: 5 years ago
At 7/27/2011 12:59:33 AM, belle wrote:
this is probably a parody but its true to a degree. a lot of people who drive will drive 5 or 6 blocks rather than walking... just because they can i guess. its ridiculous. my coworker lives about a 15 minute walk from where we work, and she'll wait around an hour to get a ride home rather than just walk there. people are way too f*cking lazy because of cars.

I have to agree with you here, but for the most part complaining about airplanes and cars is simply absurd.
I don't discriminate....I hate everybody.
Lasagna
Posts: 2,440
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7/27/2011 10:03:14 AM
Posted: 5 years ago
At 7/27/2011 12:59:33 AM, belle wrote:
At 7/27/2011 12:50:51 AM, quarterexchange wrote:
At 7/26/2011 8:39:19 PM, Lasagna wrote:
I wouldn't promote spending any money at all on air travel. It's a waste of resources, unhealthy, and environmentally unfriendly. People don't need to fly. What for? For f*cking businessmen to go strut their suits and briefcases off for each other? People can drive or take a ship.

I don't think we should promote spending money on cars.

They waste resources and are environmentally unfriendly.

People don't need cars, they can go ride a horse or walk.

this is probably a parody but its true to a degree.

...and he doesn't even know it :)

a lot of people who drive will drive 5 or 6 blocks rather than walking... just because they can i guess. its ridiculous. my coworker lives about a 15 minute walk from where we work, and she'll wait around an hour to get a ride home rather than just walk there. people are way too f*cking lazy because of cars.

The idea is that we set up our communities to minimize the necessity of car travel. If our current communities were people, we'd have internal organs that are meters apart to pump blood to. Right now we are in a transitional phase, in which we have not yet figured out why or how to set up our communities for efficiency. Everything about nature is highly efficient, and we have not yet followed suit.
Rob
Ore_Ele
Posts: 25,980
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7/27/2011 11:42:47 AM
Posted: 5 years ago
At 7/27/2011 1:31:26 AM, Ragnar_Rahl wrote:
Do you wanna be the airlines in a few years when they have to adjust prices upward when the tax is reinstated (You said it yourself, the government didn't want to do this after all).

Or would you rather present a steady face to the consumer, and get some money while you're at it?

You really think they are going to lower the prices back down when the government finally gets around to re-adding the tax?

Most likely the airline industry is going to send out a message saying "we are so sorry our valued customers, but fair prices are going to go up because the government is imposing a tax upon us. We're sorry that this is happening, but please, blame your government for being evil and greedy."


In the long run, if it stays this way, fare increases that would have happened for other reasons... won't, up to an expected value of about the taxes in question, but you can't expect the frictional effects to be null in an industry like airlines, which, while they do allow new competition to change things, do not allow new competition to change things based on events from "Last Friday." You wanna compete with an airline, it'll take you a few years, and the rules will have to stay steady that long for the threat to be credible based on something like this.

Well the events from "last friday" caused ticket prices to jump between 7.5% and 10%, over night (some airlines waited two nights, they are so nice).

Of course, your assuming that there is no collaberation between companies. Competition requires that they work against each other, but if they are not, then the prices would never adjust.
"Wanting Red Rhino Pill to have gender"
Ore_Ele
Posts: 25,980
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7/27/2011 11:45:30 AM
Posted: 5 years ago
At 7/27/2011 12:29:43 AM, belle wrote:
it seems to me that all it implies is that

(a) the airlines are betting that people who are flying don't pay attention to what percentage of what they pay is tax vs fare

and

(b) they are probably right.

if people don't see the number they are used to paying go up they don't care.

as a corollary it shows that businesses like to take advantage of the nonrational bits of people's behavior. but we've always known that classical economic theory has a grossly oversimplified view of human nature.

I would bet that the industry itself is pretty elastic (meaning that if you gotta go, you gotta go), and since the individual companies know this, they can band together to not compete against each other, but which each other.
"Wanting Red Rhino Pill to have gender"
Ragnar_Rahl
Posts: 19,297
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7/27/2011 2:13:48 PM
Posted: 5 years ago
At 7/27/2011 11:42:47 AM, Ore_Ele wrote:
At 7/27/2011 1:31:26 AM, Ragnar_Rahl wrote:
Do you wanna be the airlines in a few years when they have to adjust prices upward when the tax is reinstated (You said it yourself, the government didn't want to do this after all).

Or would you rather present a steady face to the consumer, and get some money while you're at it?

You really think they are going to lower the prices back down when the government finally gets around to re-adding the tax?
If consumers aren't paying attention to the lack of tax why would they pay attention to the reinstatement?
They don't have to lower "prices," they have to lower their cut of the price-- or take the eventual hit to consumption, one that does not corallarily raise with a sudden sale. The price, for the consumer, includes any taxes.


In the long run, if it stays this way, fare increases that would have happened for other reasons... won't, up to an expected value of about the taxes in question, but you can't expect the frictional effects to be null in an industry like airlines, which, while they do allow new competition to change things, do not allow new competition to change things based on events from "Last Friday." You wanna compete with an airline, it'll take you a few years, and the rules will have to stay steady that long for the threat to be credible based on something like this.

Well the events from "last friday" caused ticket prices to jump between 7.5% and 10%, over night (some airlines waited two nights, they are so nice).
The ticket prices to the consumer are the same, no?


Of course, your assuming that there is no collaberation between companies. Competition requires that they work against each other, but if they are not, then the prices would never adjust.
If collaboration alone were the reason it wouldn't be. Relying on collaboration means the first defector wins.
It came to be at its height. It was commanded to command. It was a capital before its first stone was laid. It was a monument to the spirit of man.