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“To Catch a Thief”

“To Catch a Thief”. “a polelike device that locks the steering wheel” sells for $29.95. “a radio transmitter” that “summons the police” if the car is stolen. Sells for $695 and is installed (mostly) on new cars. Police require that no LoJack decals be on cars.

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“To Catch a Thief”

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  1. “To Catch a Thief” “a polelike device that locks the steering wheel” sells for $29.95 “a radio transmitter” that “summons the police” if the car is stolen. Sells for $695 and is installed (mostly) on new cars. Police require that no LoJack decals be on cars. 95% of stolen cars with LoJack are recovered versus 60% of stolen cars without LoJack.

  2. Externalities Externality—the behavior of one agent (person or firm) affects another agent in a way that is external to markets. negative externalities, e.g., “The Club” (prob others will be stolen), chewing tobacco (disease and soiling), alcohol (drunk driving), road salt (car damage), and antibiotics (disease resistant bacteria). positive externalities, e.g., LoJack ( prob others will be stolen), meningitis vaccine (disease), and education (better citizens). Observable by Criminals Unobservable by Criminals

  3. 19th & Early 20th Century Chewing Tobacco Mail Pouch paid barn owners $1 to $2 a year and painted the rest of the barn as well. Founded in 1879 The founders of Mail Pouch came up with the idea when they noticed that people liked chewing the clippings of stogie wrappers.

  4. 19th and Early 20th Century Chewing Tobacco Quotes from Richard Kluger’s, Ashes to Ashes Chewing Tobacco: “splendidly suited” to 19th Century outdoor life In early 20th Century: Messy: spit aimed at “ubiquitous cuspidor(s)” hit “carpets, walls, draperies, and trousers. ” Dangerous: “spreader of tuberculosis and other contagions.”

  5. Early 20th Century Courthouse Cuspidor

  6. Market for Chewing Tobacco (CT), 1900 Social Cost PCT S (private cost) external cost—the health and cleanup costs imposed on others from tobacco spit. PMKT D Q* QMKT QCT Efficient Q

  7. The Market for Chewing Tobacco Social Cost PCT For each pouch of chewing tobacco produced, the social cost includes the private costs of producing the chewing tobacco plus the cost to those bystanders adversely affected by the spit from that pouch. SMKT Social cost of producing Q’ D external cost Private cost of producing Q’ Q’ Q* QMKT QCT QMKT > Q* Market Failure: Negative externalities cause markets to produce a larger quantity than is efficient.

  8. DWL in the Market for CT, 1900 Q* to QMKT are the excess pouches of CT that society would rather Social Cost PCT not produce from an S efficiency (private cost) perspective. A B Willingness to Pay for Q’ = ____ (benefits) PMKT A + B Social Cost of Q’ = _______ A Costs > Benefits by B D DWL due to Q’ DWL of Q*- QMKT Q’ QCT Q* QMKT

  9. Who loves The onset of mouth ulcers and cancers caused by chewing tobacco is higher than typical smoking related diseases that affect your lungs, so guys who like chewing tobacco don’t like to chew ANYTHING ELSE—maybe even for the rest of their lives. a good chew?

  10. The Market for Chewing Tobacco Is this damage part of the negative externality?If not, where is it represented in the model? No* The expected health damage from chewing tobacco helps determine the demand for chewing tobacco. The damage may still be the result of a market failure (lack of info) but not via an externality. Social Cost PCT SMKT PMKT external cost Caveat*: This damage could create a negative externality D via the system of financing health care Q* QMKT QCT

  11. Correcting the Market Failure Social Cost STax(T) PCT PCT SMKT S MKT PT external cost PMKT PMKT tax D D Q* QMKT QCT QT QNT QCT Changing incentives so people (or firms) take account of the external effects of their behaviors is called internalizing the externality. The government can internalize the externality by imposing a tax on chewing tobacco (assume that tobacco companies pay it). QT will equal Q* if the tax (per pouch) = the negative externality (per pouch).

  12. Market for LoJack (LJ) S (private cost) PLJ External benefit (the value of  in prob. that other cars will be stolen) DWL PMKT Social value D (private value) Q* QMKT QLJ Positive externalities cause markets to produce a smaller Q than is efficient.

  13. Correcting the Market Failure External benefit PLJ PLJ S Subsidy S Ss Social PMKT PMKT value PS D D 0 QMKT Q* QLJ QLJ QMKT QS 0 The government can internalize the externality by giving a subsidy to the producer of LoJack. QS will equal Q* if the subsidy (per LoJack) = the positive externality (per LoJack).

  14. Correcting the Market Failure Alteratively, economists Ayres and Nalebuff “urge regulators to require insurers to give discounts to LoJack users.” Suppose the government requires insurers to give discounts of $200 to people who purchase LoJack. External benefit PLJ PLJ S S $200 P’ Social PMKT PMKT value D’ D D 0 QMKT Q* QLJ QLJ QMKT Q’ 0

  15. Empirical Study by Ayres and Levitt LoJack was approved for use in Boston in 1986 Auto Thefts (# per 100,000 people) 4000 3000 2000 1000 Boston (port city) Non-LoJack Cities Results: (1) 50%  in Boston car thefts, (2) 53 chop shops were shut down in LA after LoJack arrived, (3) 1 theft annually per 3 LoJacks installed.

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