Monkey shortages and the strategic monkey reserve

The New York Times reported earlier this week:

Mark Lewis was desperate to find monkeys. Millions of human lives, all over the world, were at stake...

The world needs monkeys, whose DNA closely resembles that of humans, to develop Covid-19 vaccines. But a global shortage, resulting from the unexpected demand caused by the pandemic, has been exacerbated by a recent ban on the sale of wildlife from China, the leading supplier of the lab animals.

The latest shortage has revived talk about creating a strategic monkey reserve in the United States, an emergency stockpile similar to those maintained by the government for oil and grain...

In the meantime, the price for a cynomolgus monkey has more than doubled from a year ago to well over $10,000, Mr. Lewis said. Scientists researching cures for other diseases, including Alzheimer’s and AIDS, say their work has been delayed as priority for the animals goes to coronavirus researchers.

The shortage has led a growing number of American scientists to call on the government to ensure a constant supply of the animals.

Let's put aside the idea of a 'strategic monkey reserve' (we'll come back to it later). A shortage arises when the quantity of some good or service demanded exceeds the quantity supplied at the current market price. This is illustrated in the diagram below. At the market price of P0, the quantity demanded is QD and the quantity supplied is QS. Since QD is greater than QS, there is not enough supply to satisfy the demand - there is a shortage.

Ordinarily, a shortage is a temporary situation. That's because the price will adjust to ensure the market ends up at an equilibrium. In this case, the price of monkeys for research should increase. As the price increases, the quantity of monkeys demanded decreases, and the quantity of monkeys supplied increases, [*] and eventually we would end up at the point where quantity demand is exactly equal to quantity supplied, which is the quantity Q1 in the diagram above, where the price has increased to P1. Notice that this is consistent with what is noted in the New York Time article, "the price for a cynomolgus monkey has more than doubled".

How does the price rise? In my ECONS101 and ECONS102 class, I describe it in the following way. There is a shortage, so some willing buyers (of monkeys) are missing out, and some of them will be willing to pay more than the current market price. Those buyers will find a seller, and ask for a guaranteed supply of monkeys, and in exchange they offer a slightly higher price. In other words, buyers bid the price (of monkeys) up. An alternative mechanism is that buyers who miss out could find a successful buyer, and offer to buy the monkeys off them for a higher price. Again, the result is that the market price of monkeys is bid upwards. The price of monkeys increases.

Anyway, let's take a step back and see how we ended up in this situation of a shortage to begin with. This is illustrated in the diagram below. The market was initially in equilibrium, where the demand curve D0 meets the supply curve S0, with price P0 and the quantity of monkeys traded was Q0. Then, the demand for monkeys increased to D1 due to vaccine firms wanting monkeys for testing. The price initially stays at P0, where the quantity of monkeys supplied remains at Q0, but at that price the quantity of monkeys demanded increases to QD. There is a shortage (between Q0 monkeys supplied and QD monkeys demanded). Notice that this diagram is actually the same as the first diagram - the only differences are that we've added the initial demand curve D0, and labelled the quantity of monkeys supplied Q0 rather than QS. 

How would a strategic monkey reserve change things? First, it is worth knowing a little bit about the U.S. strategic petroleum reserve. The U.S. holds millions of barrels of petroleum in reserve, equating to more than a month's total domestic demand. If there is a 'severe supply interruption', the government can temporarily increase the supply of petroleum by making some of the reserve available for sale. If the U.S. Government did something similar for macaques, and decided that the current shortage triggered the release of monkeys from the reserve, the result would be an immediate increase in the supply of monkeys. This is shown in the diagram below. Let's assume that the government releases enough monkeys to keep the price stable at its initial levels. The supply would increase from S0 to S1, and the price would remain at P0, with the new equilibrium quantity of monkeys (determined by the intersection of D1 and S1) being Q2. There is no shortage, because at the price P0, the quantity of monkeys demanded (Q2) is equal to the quantity of monkeys supplied (Q2), including the supply from the strategic monkey reserve.

Finally, it is worth noting that a supply increase is not a usual response of a market to a shortage. It only occurs in this case if the government has a strategic monkey reserve, and uses it to deal with the shortage. That is different from shortages of toys at Christmas, because the government doesn't maintain a 'strategic Christmas toy reserve'. In that case, the price of Christmas toys would probably increase (as described above).

Is a strategic monkey reserve necessary? The answer to that question should depend on a careful assessment of the costs and benefits (and risks) of not having the reserve. However, given that the initial stages of the coronavirus pandemic revealed that there were not even enough reserves of personal protective equipment (and shortages were still ongoing nine months later), I suspect there are more important reserves that should be stood up first.

*****

[*] However, in the very short run, the supply of monkeys for research could be perfectly inelastic, meaning that it is totally unresponsive to price changes, and the supply curve is vertical rather than moderately upward sloping as shown in the diagram. That's because monkey breeders can't instantly increase 'production' of monkeys in response to the higher price. However, whether the supply curve is upward sloping or vertical isn't important for the rest of the explanation.

Teaching the economics of online dating

Some time ago, I reviewed Paul Oyer's book Everything I Ever Needed to Know about Economics I Learned from Online Dating, noting that it was "a delightful treatment of how economics can apply to a wide range of activities, not just online dating". Clearly, I'm not the only person who enjoyed the book. Andrew Monaco (University of Puget Sound) enjoyed it so much that he created an entire upper-level undergraduate course based on the book, as he detailed in this 2018 article published in the Journal of Economic Education (ungated earlier version here).

The course is really just an elaborate bait-and-switch, where students are taught economic theory and modelling. As Monaco explains:

Online dating serves as an alluring point of entry, but ultimately, the course is an advanced undergraduate microeconomic theory course with a focus on economic modeling...

One colleague has described it as “a Trojan Horse into the world of economic model-making,” and another has said that although it “may simply sound like a sexy course …it is theoretically rich and complex, wherein on-line dating is used as a vehicle to explain and develop other models of economic phenomena.”

Monaco doesn't present any thorough analysis of the success of the course, but he does offer this:

Student responses on course evaluations can also provide qualitative insight into the effectiveness of this course at achieving its objectives. On the surface, students overwhelmingly find the material engaging, as evidenced in a typical comment: “Online dating is a fun and intriguing way of presenting economic questions and analysis.”

Finding interesting and appealing ways of connecting students to the course material should be the goal of all good lecturers. I currently use a range of materials from many different sources (including Oyer's book and others), but building a course based around a single common theme (such as online dating) is an appealing alternative. Similar to Marina Adshade's course on the economics of sex and love, that formed the basis for her book Dollars and Sex (which I reviewed here). Or basically any course on sports economics.

While I won't be doing anything like that any time soon, Monaco's approach is certainly worthwhile sharing.

Tyler Cowen on the four most important things to know about macroeconomics

ECONS101 teaching starts next week. While we won't get to macroeconomics until the last four weeks (and even then I'm not teaching that part of the paper), I thought this Bloomberg article by Tyler Cowen (of the Marginal Revolution blog) was interesting, because in it he highlights the four most important things to know about macroeconomics:

The first and most important thing to know about macroeconomics is that a strong negative shock to demand — a sudden decline, in other words — usually leads to a loss of output and employment. Nominal wages are sticky, for a complex mix of sociological reasons, and so employers do not always respond to lower demand with lower wages for workers. Instead they lay some people off, and that can lead to a recession.

That may sound pretty simple. But it is one of the most important discoveries in history. It was true in the Great Depression, in the disinflation of the 1970s and ‘80s, and in the financial crisis following 2008.

The second thing to know is that well-functioning central banks can offset such demand shocks to a considerable degree — or even prevent them from arising in the first place. The bank can engage in complex financial transactions or simply print more currency to stabilize nominal demand and restore some measure of order.

The third thing to know is that if central banks go crazy increasing the money supply, the result will be high price inflation. There is one exception to this, which was evident in 2008 and 2009, when the Fed paid interest on bank reserves: If central banks simultaneously act to decrease the velocity of money — that is, if they take measures to reduce borrowing and lending — then price inflation will be limited accordingly.

A fourth thing to know is that non-monetary shocks, if they are large enough, can also create recessions or depressions. Consider the oil price shock of 1973, the current pandemic, or bad harvests in earlier agrarian societies. Central banks can partially stabilize such shocks, but they cannot erase them.

I believe an overwhelming majority of macroeconomists would largely agree with these propositions, even if they might place the emphasis differently.

We only have four weeks of macroeconomics in the ECONS101 paper at Waikato. Les Oxley teaches the macroeconomics section, so how does he do relative to Cowen's four important things? All four are in there, plus more. The first and fourth points are covered in Topic 9 (Economic fluctuations and unemployment), the second point is covered in Topic 12 (Monetary policy), the third point is covered in Topic 10 (Money and inflation). That we cover all of Cowen's four important things is a useful affirmation for our ECONS101 paper, even though we can only fit four weeks of macroeconomics into it.

For completeness, Topic 11 of ECONS101 covers government fiscal policy (taxing and government spending). It may be somewhat surprising that Cowen has no 'important thing' associated with fiscal policy, which is a staple of every introductory macroeconomics textbook. Although maybe it isn't that surprising, since having read the MR blog for many years, I get the distinct feeling that Cowen is a sceptic about the fiscal multiplier (the idea that an additional dollar of government spending leads to more than a dollar of total output for the economy). I haven't formed a particular view myself. The idea of the fiscal multiplier is sound in theory, while the empirical evidence as far as I am aware is that multipliers are generally quite small. However, it still seems like a big idea in macroeconomics, and I'm glad that we include it in ECONS101.

[HT: Marginal Revolution]

Bonus points for tries in rugby create incentives in both directions

In rugby competitions, it is now standard to award bonus competition points to teams that score a certain number of tries in a game. The last holdout competition was the Six Nations, which introduced bonus points only in 2017, over 30 years after they were first introduced in New Zealand's National Provincial Championship (in 1986). In 2016, Super Rugby modified the bonus point, by moving from teams needing to score four tries, to teams needing to score three more tries than their opposition. In all cases, the purpose of these bonus points is to increase try scoring, by creating incentives for teams to score more tries.

As I noted in yesterday's post on child allowances:

...'people respond to incentives'. When economists say that, they mean that when the costs of doing something increase, we tend to do less of it. And if the costs of doing that thing decrease, we tend to do more of it. The reverse is true of benefits - when the benefits doing something increase, we tend to do more of it, and when the benefits decrease, we tend to do less of it.

In this case, bonus points for tries increase the benefits of scoring tries, so teams should try harder (pun intended). But, do these incentives work? In a 2019 article in The Conversation, Liam Lenten (La Trobe University) says yes, and no:

In research to be published in the Scottish Journal of Political Economy, we report that the introduction of the try bonus was effective in increasing the likelihood that teams would score four tries in a match (which is an above-average number).

The effect was concentrated on home teams, which given the advantages they already enjoy are more often in a position to go for the bonus. It would appear to lend support for the view that the rule (or policy, in economist-speak) had achieved what it was meant to...

But not so fast. We also found a significant reduction in teams scoring five or more tries.

That’s right, a reduction.

We believe it was driven by teams reducing their attacking effort once the bonus had been secured, as a large share of teams that score a fourth try already have a comfortable lead, and it is generally late in the game.

It means that, on balance, the evidence in favour of bonus points achieving their aims is mixed. At best they achieve something, at worst they are counterproductive.

The research itself was finally published last year (sorry, I don't see an ungated version), and is co-authored by Robert Butler (University College Cork) and Patrick Massey (Compecon). It was based on data from the European Rugby Cup (or Heinecken Cup, if you prefer) over the period from the 1996/97 to 2013/14 seasons, with a bonus point for scoring four tries introduced in the 2003/04 season.

Butler et al. found that teams that scored at least three tries were more likely to score a fourth try than would be expected based on game and competition conditions. So, there was a positive incentive for try scoring for teams that had already scored three tries, and those teams were putting in more effort to score.

In contrast, teams that had already scored four tries were less likely to score a fifth try than would be expected. So, there was a negative incentive for try scoring for teams that had already secured a bonus point. Those teams were taking their foot off the gas, because there is less incentive to keep running up the score once they had scored four tries.

It would be interesting to see what the incentive effects are for Super Rugby, now that the bonus point is based on net try scoring - where teams need to score three more than the opposition. That rule change has only been around a few years, so it will take much more data collection before a quantitative analysis can be conducted. In the meantime, keep an eye on how the teams are playing when they are close to a three try lead. Super Rugby Aotearoa starts this coming weekend!