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a blog from young economists at Nova SBE

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American Healthcare Market: A Very Tilted Scale

In 2011, USA’s health expenditure reached 17.7 % of GDP, that’s two-and-a-half times more than the OECD average. Evidence suggests that prices for health services are substantially higher in the United States than elsewhere. Figuring out why is not that simple.

A simplistic supply-demand approach would tell us that prices are higher because demand is higher – Americans want more healthcare – or because supply is limited. Or both. In any case equilibrium is reached. However, we should be careful with oversimplifications. The market for healthcare is extremely complex and very different across countries.

First, one should note the presence of a third agent, the health insurer. While the public National Health System (NHS) covers all citizens in the UK, private health-insurance firms have a huge role in the American health care market.

Now, let us consider how inelastic the demand for healthcare is. People will do almost anything to keep themselves and their loved ones healthy. From a competitive market point of view this doesn’t represent a problem, all it means is that equilibrium price will turn out to be very high. However, if we take equity concerns into consideration this inelasticity is reason for alarm. It is a potential goldmine for suppliers and can create a lot of problems for consumers.

While governments and non-profit hospitals may not have profit-maximization as their primary goal, a lot of other health care providers and private insurance firms, do, and they have a lot of market power in the US. They can push prices of medical procedures up, sometimes to astronomical amounts, and people will still buy them.

To aggravate this, there is a considerable information asymmetry between consumers and suppliers/insurance companies. Many times patients are unsure of what their preferences are to begin with. Furthermore, consumers of healthcare tend to deeply trust health care providers, assuming that the supply side is motivated to act in their best interests but that is not necessarily the case. Interestingly, this is not a common assumption for most markets. So, for example, people’s perceptions of how much they need certain treatments can be easily manipulated. Also, it is important to remember that once a patient is admitted to a hospital she can easily end up consuming healthcare without knowing what the final price will be, as costs for exams and procedures quickly pile up. The private market for doctors and insurers has lobbied for decades to hide details on doctors’ performances and prices.

In a place like the United Kingdom, government has a very direct influence on prices, as they are deeply shaped by negotiations between public hospitals, doctors and pharmaceuticals. In some cases the government sets prices for certain procedures or for pharmaceutical products. Even with some distortions, the American market might be closer to market equilibrium than the British one. Whether this is a good or a bad thing falls out of the economics spectrum.

Personally I have some reservations about letting the health care market run freely. Let’s just say that under the veil of ignorance I would much rather be sick in the UK. Despite some positive changes brought by the Affordable Care Act, being chronically ill and relatively poor in the US is still no American Dream.

Margarida Anselmo, 715

General reference:
Microeconomics: Theory Through Applications, v. 1.0 by Russell Cooper and A. Andrew John


Demand to fight the cold progression in Germany: Real problem or a lot of fuss about nothing?

Latest the Bavarian governor Horst Seehofer demanded for a reduction of the income tax in order to fight the bracket creep in Germany. In January 2017 he wants tax breaks of a single-digits billion euro. Finance Minister Wolfgang Schäuble replied on this claims last Wednesday presenting calculations of his ministry. The outcomes show that only 5 euro per taxpayer and month will be on the account of the cold progression in 2015. A public dispute about the so-called bracket creep arouses frequently in the run-up to elections. It is an instrument often used to justify election pledges in form of income tax cuttings. So is the actual bracket creep no problem as Schäuble indicates and the recurrent discussion on that topic just cheap talk to butter up the voters?

Before answering that question it needs to be clarified what the cold progression or bracket creep is.

In Germany as in many other countries taxes are levied by the ablility-to-pay principle. That simply means: who earns more has to pay more taxes. This principle is implemented by a progressive tax rate where the effective average tax rate increases with higher incomes. Bracket creep comes into being when the wage increases in order to compensate inflation. Let us assume we have an inflation of 3% per year and an increase in gross wage of 3% as well. Nominal wages increase whereas real wages stay constant. What happens to the tax then? Although the purchasing power of the individual hasn’t change he has to pay more taxes, which means his real net wage is lower than before if the tax threshold isn’t adjusted. Therefore cold progression is also known as “secret tax increase”.

What about the situation in Germany?

The argument of Wolfgang Schäuble is not really convincing. Admittedly the amount of 5 Euro per month and taxpayer doesn’t sound very impressive, but in a long-run consideration it sums up. In the year 2016 the ministry of finance estimates the costs for the taxpayer at 72.34 euro per year, thus about 6 euro per month. Altogether this would be about 130 Euro for the years 2015 and 2016.

If the adjustment of the marginal income tax rate remains undone, the incentives to work are weaker and the growth of potential out is below its best. This is supported by Süssmuth and Heer that found that a long duration between two adjustments in tax rates fosters a decline of employment, outputs and savings. That is in line with a recent request of the ECB-director Coeuré and his predecessor Asmussen that ask the German government to cut taxes in order to support investments and reduce tax burden of employees, which could strengthen the domestic economic trend.

Because of that reasons adjustment in the income tax rate is necessary and the government should not spare at this end.


Clara Mareike Pott

Colorado – The Cannabis Experiment

The use of marijuana for medical, recreational and spiritual purposes has been around for millennia(1), and recently its use for the treatment of diseases like cancer and epilepsy have been showing promising results(2). However, nowadays it is an outlawed substance almost everywhere. The War on Drugs, especially towards cannabis, has been harshly criticized by a lot of people, not only on the grounds of personal freedom and democratic values, but also for the money that is spent on law enforcement and the amount of money that could be used for public finance, by taxing the cannabis market.

As of November 6, 2012, Colorado passed the Amendment 64(3), which outlined a statewide drug policy for cannabis (also known as marijuana, among a variety of other names). The law addresses cannabis personal use and regulation for adults 21 and over, as well as cultivation and sale, among other things, effectively regulating cannabis in a manner similar to alcohol. The first stores were open to the public in the 1st of January, 2014, and by the 1st of July, over 200 marijuana shops were licensed(4). Buyers of recreational marijuana at such dispensaries are subject to a 12,9% in state sales taxes(5), plus a 15% excise tax(6).

Nine months after Colorado started retailing marijuana for recreational use, it’s time to look at some numbers. From the beginning of January to the end of May, retail sales at marijuana dispensaries summed up to $90 million(7). Just in June, the tax revenue from the marijuana industry topped $7 million(8). The first $40 million of excise taxes are targeted to school construction(9). Regarding law enforcement costs, the State expects to reduce its expenses by approximately $60 million(10).

Michael Elliott, executive director of Colorado’s Marijuana Industry Group Trade association estimated that around 10,000 Coloradans were working directly in the marijuana industry(11). On top of that, we should also bear in mind the work it provides to construction workers, attorneys, labeling and packaging companies, and testing labs, as well as the economic stimulus it puts in the tourism industry.
Colorado’s Governor John Hickenlooper, who was elected in 2010 and officially added the law that legalized the consumption of cannabis to Colorado’s constitution on December 10, 2012, estimates around $114 million in tax revenues(12) for the current fiscal year, which started in July.

On the other hand, in Europe, there are also Cannabis Social Clubs (non-profit organizations in the format put forward by the Coalition for Just and Effective Drug Policies, previously European NGO Council on Drugs – ENCOD(13)) which exist in several countries already (Spain, the Netherlands,…), and are often considered more adequate, given the subject. However, in Portugal none of these economic settings is possible due to legal constraints, which originate a market failure: individuals who want to engage in an economic transaction, will be committing a crime by doing so. This is definitely a topic that should be open to debate, as it could seriously improve Portugal’s economy and put it one step closer to a freer and more just society.

“The more effective prohibition is at raising costs, the greater are drug industry revenues. So, more effective prohibition means that drug sellers have more money to buy guns, pay bribes, fund the dealers, and even research and develop new technologies in drug delivery (like crack cocaine). It’s hard to beat an enemy that gets stronger the more you strike against him or her.”

Cowen and Tabarrok, Modern Principles of Economics, pg.60

1. Li, Hui-Lin (1974). “An Archaeological and Historical Account of Cannabis in China”,Economic Botany 28.4:437–448, p. 444

José Ricardo Sequeira – 729

China and a national property tax

According to CNBC China has start its preparation concerning a national property tax in order to rebalance the real estate sector. The main reasons for this are the low property prices and the overdevelopment of real estate in China.

China’s investors today are highly investing in the property markets so as to keep the economy growing. New apartments are build, as well as offices, shopping malls, etc. All this leads to an oversupply in the property markets and to the well known phenomenon of ‘ghost cities’. As a consequence of this soaring supply, prices for properties have become very low. According to Professor Gan of the Southwestern University of Finance and Economics in Chengdu and Texas University A&M, the current housing stock is from that size, that every household in China owns at least one house. Up to now, there are no holding costs in China to be in possession of a property. This implies that house owners will not have to pay a fine if their houses are not used, so they do not care whether their houses or buildings are utilized or not. That is one of the reasons why the ghost cities are able to exist, besides the fact that investors who buy the properties have enough money, so they do not feel it in their pockets when the apartments or buildings are empty and not being sold. Introducing a property tax may immediately have an effect on this situation of overbuilding.

The Chinese government already started to implement local pilot programs with the aim of slightly introducing the property tax. However, the programs failed because of opposition from the local authorities. Both at the local and provincial level the property tax is not a popular concept. One of the reasons for this disapproval is that several inhabitants and officials do not want to make public the exact amount of properties they own. Evidently, in order to implement a national property tax, the exact number of properties needs to be summed up in a national database. In contrast to the new property tax payers, the industry sector has no problem with the realization of such a tax, since they do not expect the taxes to hurt their businesses.

A national property tax will become a necessity in China to finance the local governments. Until now, Chinese governments are selling land use right, which form a large part of their revenues. Eventually, they will have no land anymore to sell, which implies that their revenues will dramatically shrink. This will lead to long term problems in terms of even higher local government debts.

Despite all the resistance, the market has already resigned that the tax is not preventable. The size of the tax is not yet discussed, but people expect it to be quite gradual.


Birgit Derzelle

To Gift or to Bequest?

One major fact to bear in mind when estimating the effects of introducing a certain tax is the possibility that agents might change their behaviour due to that same tax. Agents often react to taxes by reducing the quantity consumed of that good or by simply switching to another good. Hence, taxes, as well as deductions, in certain circumstances, can be seen as an instrument to achieve certain behaviour.
We can apply this analysis to intergenerational transfers, which are called gifts between the living (the legal term is “inter-vivos” gifts), or bequests, when these transfers take place at death. Hence, in our simple model we are considering an individual who is choosing between two options on how to use his money – gifts and bequests. Many factors influence the way people allocate transfers between these modalities, and one particular factor that is relevant in our discussion is the way taxes and deductions are split between them and thus changing its respective relative prices (if we think of a 2 good choice model).
A gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return, while the estate tax, on the other hand, falls on the value of one’s wealth, at the date of death. There are several ways to reduce the taxable estate, and one of them is through charitable deductions – the amount given as charity is deductible from the taxable estate. Thus this deduction gives a strong incentive to charity giving through bequests. (1)
In fact, Jon Bakija, William Gale and Joel Slemrod (2003)(2), tried to identify some relation between the existence of taxes and the amount of charitable bequests, which, as said before, are exempt from taxation. They stated that abolishing the 49% top marginal rate of federal estate tax (2003) would approximately double the price of a charitable bequest relative to an ordinary bequest for the wealthiest estates, leading to a possible reduction of the charitable bequests. In other words, the price elasticity of charitable bequests is large and significant, which means that increasing the (relative) price of this modality will lead to a large reduction on charitable bequests.
David Joulfaian (2005)(3), on the other hand, tried to establish a link between capital gains, gift and estate taxes and the allocation of transfers between lifetime gifts and bequests by the more wealthy. The author demonstrated that capital gains taxes and gift taxes significantly discourage lifetime gifts. Furthermore, he found that taxes play a significant role on the timing of the transfers, even for the wealthiest.
In the US, estate tax was subject to several reforms in the past decade – the 2001 Tax Act increased the applicable exclusion amount (for gift tax purposes) which progressively increased until 2009. In 2010, the Tax Relief Act reunified the estate and gift tax exclusions at $5 million (indexed for inflation), and the American Taxpayer Relief Act of 2012 made the higher exemption amount permanent while increasing the estate and gift tax rate to 40%. Because of inflation, the estate and gift tax exemption is $5.34 million in 2014. The lifetime gift and the estate tax exclusion are expressed as a total amount – currently $5.34 million per person – and if you exceed the limit, you (or your heirs) will owe tax of up to 40%. (4)
How these reforms affect the amount of estate given to charity and the way people allocate their transfers is still unknown and merit of future study.

(1) –
(2) –
(3) –
(4) –

David Dias Pissarra.

Smoking Ban

A smoking ban is a public policy that includes criminal laws and occupational safety and health regulations which prohibit tobacco smoking in certain public places and workplaces.

Smoking bans have many origins and they are different worldwide.
Most countries focused mainly on medical consequences of second hand smoking, which, according to many researches, is almost as harmful as smoking: people who live in homes with smokers have a 20-30% higher risk of developing lung cancer than those who do not live with a smoker, while for those who work with smokers the percentage of higher risk is about 16-19.

Secondhand smoke can therefore be considered as a negative externality for the non-smoker generated by the smoker. Since we have an externality if the behavior of an agent impacts directly on the wellness of another agent, the difference in smoking policies worldwide can be in part attributed to a different consideration of the externality.
Those who focused on the harmful consequences of secondhand smoke, implemented primarily policies that are aimed to guarantee the air quality in indoor places, considering the outdoor impact of secondhand smoke negligible. This can be realized even with very severe policies: for instance, in Singapore it is not allowed to smoke in any uncovered area close to windows or other external openings that opens into or onto any interior part of the building.
On the other hand, some institutions took into consideration other factors, such as the environmental impact of smoking outdoors, for example the cigarettes left on the streets or in the parks, rather than in appropriate containers. This is a negative externality that affect the community as a whole and that generally requires more stringent policies.

In economic terms, the necessity of a policy to regulate smoking habits arises from the recognition of an externality in the economy, that cannot be managed efficiently by the agents alone.
As a matter of fact, if we consider two agents, the smoker and the non-smoker, and two goods, money and smoke, while money is a good for both agents, smoke is a good for the smoker but it is a “bad” for the non-smoker, as his benefit increases as the quantity of smoke decreases. So, if we map the indifference curves for the smoker, we see that his utility increases as the quantity of smoke and money increase; on the other hand, the utility of the non-smoker increases as the quantity of “clean air” (as an opposite of smoke) and money increase. The Edgeworth box obtained combining these two maps shows that the bundles chosen autonomously by each of the two agents lie on the opposite sides of the box instead of on the contract curve. Therefore, the two agents cannot reach a Pareto efficient equilibrium.
When the problem of externalities emerges, a solution consists in defining a clear system of property rights, for example imposing the right of the non-smoker to have clean air. In other words, if we set the initial endowment for both agents, fixing a certain amount of money and clean air, they will negotiate in order for them to maximize their utility and the optimal chosen bundle will end up lying on the contract curve: according to the Coase Theorem, the market can potentially solve externalities, if property rights are clearly assigned and negotiation is feasible.
In this sense, smoking policies help the economy in reaching a Pareto efficient equilibrium.

Silvia Salvadori


Animal Spirits

The term “Animal Spirits” was popularized by Keynes in his 1936 book “The General Theory of Employment, Interest and Money” and was an attempt to put in perspective the market rationality assumption. But, taking it literally and the other way around, is there really something that animals can teach us about economic behaviour? Surprisingly enough, it is possible to observe economic reasoning in non-human animals. This may seem to have some ridiculousness in it, but in fact it has been the object of study of several comparative psychologists in the last decades. Studies conducted in an operant conditioning chamber using food rewards aimed to establish a connection between stimulus-response relationships and such economic concepts as demand, labour supply or budget. I will present two examples of this kind of experiments, both very simple and intuitive.

Pigeons, for instance, seem to have grasped the essential response to a decrease in wage in terms of labour supply. When deprived of food, pigeons in an operant conditioning chamber discover that they are provided with food by pecking a small disk, placed in one side of the chamber. Then, pecking behaviour is reinforced, since it is associated with a reward (food). Food is here thought as the currency and pecking the work a pigeon has to carry out in order to get the corresponded reward. By pecking the disk regularly, the pigeon earns its wage, which might be adjusted by changing the amount of food supplied, the rate at which food is supplied or the food itself (according to its desirability). It has been observed that pigeons work (pecking) less when the reward is reduced. This is described as a similar behaviour to the effect in (human) labour supply of a decrease in wage.

Studies on demand in rats have showed that the negative slope of the typical demand curve stands when it comes to the animal kingdom. This time, the monetary analogue is bar pressing. Rats placed in a conditioning chamber are awarded with a certain commodity (usually different types of food) by pressing the bar. The number of bar presses required to obtain a certain commodity is treated as the price of that commodity. By changing the number of bar presses required to a certain commodity, we can, therefore, change its price. The results point out that there is a contraction of demand to a certain commodity when rats have to press the bar more times.

These are truly simple economic principles, which are confirmed by rudimentary, but significant empirical evidence. The goal of this type of experiments is to detect economic reasoning in experimentally-tractable non-human animals. Behavioural economics has gained preponderance in the last decades of the twentieth century and research of this type (which is a branch of behavioural economics, with a strong relationship to psychology) is argued to have its role in explaining microeconomic decisions. We may like it or not (have to admit that this is not orthodox economics), but this heuristic approach seems to be an interesting trend in economic theory. It certainly helps to demonstrate or even explain what is behind some basic economic concepts. Rationality assumptions are confirmed in this examples but a more important role (and a more challenging one) is played by behavioural economics when it comes to explain why market participants makes systematic errors at the light of rationality principles. Over-reactions to market information in financials markets, which can lead to the creation of bubbles and crashes in extreme situations, are a well-known example of such a situation.

The idea that human behaviour can, after all, be compared to animal behaviour is difficult to accept. But, as far as this kind of experiments is concerned, it is a fact. It seems Keynes was literally right.

Bernardo Branco Gonçalves



Battalio, R. C.; et al. (1981). “Income-Leisure Tradeoffs of Animal Workers”. American Economic Review 71

Kagel, J. H.; et al. (1981). “Demand Curves for Animal Consumers”. Quarterly Journal of Economics 96

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New law allows child labor in Bolivia – but where is the justification?

In July 2014 Bolivia has become the first nation worldwide to legalize child labor from age 10. The South American country passed a law that lowers the child labor age restriction from 14 to 10 years and allows children to carry out work on certain conditions. The new policy is seen by some as an attempt to combat the high level of poverty in the country. But is this the right approach to tackle the problem? Could the legalization of child labor really help families to overcome poverty? Before discussing possible consequences of the new law on child labor let us take a look on the current situation of the country:

Bolivia is considered to be the poorest nation in the South America. About 45% of its population lives below the national poverty line (most recent data from 2011). As a consequence, a lot of children are forced to contribute to their families’ income by taking up employment. A study by the International Labor Organization (ILO) in 2008 showed that around 850.000 children work in Bolivia, a number that stands for about 25% of all kids in the country. While the children were working illegally before, Bolivia’s new law allows child labor from the age of 10 under certain circumstances. Children between the age of 10 and 12 are allowed to work in self-employment if they have the permission from their parents and are enrolled in school. Furthermore, the law sets 12 as a minimum age for children to work under contract – again, under the condition that they continue to attend school. For contracted work, the law imposes the same minimal wage for children as for adults.

While the Government of Bolivia sees the necessity for the law in assuring child’s labor security, it is very difficult to justify it when looking at its possible implications for the children and its families. I found immediately plenty of arguments against the law from a humanitarian point of view (we should secure that children can enjoy a happy and unburdened childhood as it is very essential for safe and healthy human development) but given the context of our blog, I would like to share some thoughts that are related to the economic side of legalizing child labor in Bolivia.

Looking at families that suffer from household income poverty we can conduct that the new child labor law could shift the family to a higher income level. Studies have shown that household income poverty results in child labor activities that can directly generate income. Since the new law guarantees a minimum wage also for children, we can assume that parents will consider sending their children to work in order to alleviate their financial burdens. In the short-term this might pay off, due to the additional income a family in poverty would be then able to cover the reasonable basic living expenses, child labor could therefor resolve economic hardship.

But what about the economic impacts in the long run? Experts agree that legalizing child labor could actually intensify poverty. Their main argument lays in the fact that working children tend to miss out a proper education. Although the law imposes school attendance, by taking up employment children would not have the time nor the energy to concentrate on their homework and could even drop out of school. As a consequence, the uneducated children turn into low-income adults and would remain on a lifelong low income level; and in poverty?




Unconditional basic income: More harm than good?

What would you do if you were guaranteed a fixed amount per month in addition to your wage and regardless of your working situation? You would have to think about this question if an Unconditional Basic Income was approved in your country. But, what is that? Basically, an Unconditional Basic Income (UBI) “is an income unconditionally granted to all on an individual basis, without means test or work requirement. It is a form of minimum income guarantee that differs from those that now exist in various European countries in three important ways: it is being paid to individuals rather than households; it is paid irrespective of any income from other sources; it is paid without requiring the performance of any work or the willingness to accept a job if offered” (Basic Income Earth Network, BIEN). Looking at the BIEN definition it would be reasonable to claim that intuitively the majority of the people would prefer this type of system instead of receiving, for instance an unemployment benefit because, besides other facts, the search for a job is not required. However, one needs to be careful when judging the UBI. A discussion on some of the relevant arguments that play a role in the debate of the UBI follows.

Many claim that the discussion about UBI had a great impact in recent years because there is an inability to fight unemployment using conventional means. Therefore, will UBI actually fight unemployment? First of all, the UBI can have some consequences, namely disincentive work and affect labor supply. Thinking about the well-known income effect (i. e. the fact that the additional income provided by the UBI can influence the number of working hours), individuals may prefer to spend their additional income on more leisure and thereby decreasing working hours instead of continuing to work the same number of hours. Furthermore, the degree of desincentive to work is influenced by the generousity of the income, which means that it is expected that the higher the income, the higher the desincentive to complement it with a wage. Indeed, an experiment has been made in Canada („Mincome“, experimental guaranteed income program between 1974 and 1979) and this has shown that total working hours fell by 5% on average, thereby supportting the theory.

On the other hand, UBI has the potential to enhance entrepeneurialism by giving individuals the opportunity to start a small business. This fact would partially contradict the desincentive to work argument. What is important to highlight here is that entrepeneurialism would increase economic activity. Such conclusions are supported by the Namibian pilot project implemented in 2008 and 2009 in the Omitara village.

Second of all, there is a welfare effect. Now, if one thinks about who will gain and who will lose with UBI, one needs to distinguish between three types of individuals: the unemployed, the individuals who don’t like their jobs and the individuals who have good labor market perspectives. The effect on the first group will depend on the difference between UBI level and the level of unemployment benefit. Individuals will be able to increase their earnings with UBI only if the UBI is greater than the level of unemployment benefit. Otherwise, individuals with high wages (i.e. „high“ unemployment benefit) will lose with UBI (assuming here that UBI<unemployment benefit). The effect on this group and particularly on the individuals that have high wages is further influenced by the duration of the unemployment benefit. The lower the duration of the unemployment benefit, the higher the positive effect of UBI. The second group will more easily quit the labor market since they have an income they can live with until they find a job they like more. The last group will probably lose their non-monetary compensations. So, a Pareto improvement is only likely to happen under specific assumptions. Moreover, individuals, particularly women, taking care of children or elderly people, would benefit more from UBI since they would receive an income.

Finally, UBI would also influence wage levels. Thinking about the fact that individuals can leave their jobs more easily, employment in less attractive fields may suffer. Firms in these fields may have to increase their wages and, in contrast to this situation, firms with attractive job offers may be able to decrease their wages.

In conclusion, a quick economic analysis of the UBI allows the evaluation of some costs and benefits of this measure. In general, one can state that UBI has both negative and positive employment effects and that identifying winners and losers of the UBI depends both on the individual‘s employment situation and on the type of job the individuals currently has. It is also reasonable to claim that the effects of the UBI are different among countries as both mentioned experiments have shown. Therefore, the effect of this type of income is ambiguous.

Joana Samagaio, 755

Public advertising of tourism: Is there a consensus?

A novel matter arrived to the public opinion in Lisbon a few years ago. The question was: should the municipality apply fees to entrance into the city and to overnight stays in hotels, hostels, lodgings and so on?

The idea was that the money collected would serve to finance advertisement expenses the municipality would incur publicizing the city and touristic activities in the region. The fees would range from 0.20€ to 1.90€ for 5 stars hotels. Additionally, 1€ was to be charged to every tourist coming into the city by cruise ship, airplane or train. However, it is somehow controversial if this would in practice benefit related businesses. These ended up not being implemented because people said it would hurt revenues by discouraging tourists from coming here. More recently, the government is thinking about increasing the fees applied to airline companies at Lisbon airport by 7.56% and in Porto by 1.5%.

When firms invest in promotion willingly, they are supposed to do it according to profit maximization objectives. Advertisement may increase sales because it informs consumers about prices and features of the product or it can persuade consumers to buy the product associating it with positive images or by repeating its name. Advertisement does not only increase sales but also prices, therefore, it may raise profits as well. Still, a firm should spend money in advertisement just until its last Euro spent is smaller than the generated increase in profits.

Dorfman-Steiner’s result states that how much a firm should spend in advertisement by unit of sales must be equal to the ratio between the advertisement elasticity of demand and the price elasticity of demand. This means two things: a firm should advertise more when the consumers’ sensibility to advertisement is higher and less when the sensibility to price is higher.

Tourism may be a type of product/service requiring strong advertisement, since it is expensive and it is a so called product of choice, such as cars. But usually the promotion is done by the social media, by private associations and through word of mouth. However, if the government or a municipality starts collecting revenue by forcing hotels to charge more to their clients and then using this revenue to finance advertisement itself, it raises the question of whether this initiative is efficient or not.

In fact, what will happen is that tourism in Portugal will become more expensive in absolute terms and relative to substitute services, like travelling to other countries. Moreover, travelling to Lisbon will be relatively more expensive than travelling to Porto. On top of that, luxurious tourism, like going to a resort, will become relatively more expensive than going to a hostel, for instance.

If the advertisement somehow compensates the loss in revenues resulting from the price increase, the profits are either maintained or raised. However, airport fees and other forthcoming taxes on tourism are not meant to finance advertisement, which means the likely outcome is that the municipality will get more money to pay its debts, while businesses and consumers will get worse off.

Nowadays, economic growth is being driven mostly by tourism and the activities involved, such as air transportation. In 2013, tourism represented around 14.1% of exports, commercial traffic in airport infrastructures increased by 1.5% in landed aircraft and by 4.9% in the movement of passengers (7% if we account only for Lisbon). The city of Lisbon is in 4th place within the Top 10 elected European cities by the tourist guide Fodor’s. Therefore, in my opinion, when tourism is thriving and boosting our economy, maybe taxing the sector is not so much of a good idea, doing it is essentially taking the focus away from our ex libris source of income, which is tourism.

Carolina Conde Rodrigues

# 622


Aeroportos de Portugal (ANA)

Desafios do Turismo em Portugal 2014, Pricewaterhouse Coopers (PwC)

Instituto Nacional de Estatística (INE)

Lisboa discute taxas de entrada e dormida para turistas (22-Sep-2010), Público, available at:–para-turistas-20250307

Observatório, Turismo de Portugal, Ministério da Economia

A Contradiction in Bitcoin’s Pricing

Five years ago the cryptocurrency ‘Bitcoin’ was created. It was the first of now over 300 virtual currencies to use a peer-to-peer network to transfer money via the internet. The technological details exceed the intentions of this blog as well as the authors abilities but the fundamental achievement was to redundantise trusted third parties (primarily banks) during transactions and by doing so massively reducing transaction costs and transaction time. While Bitcoin has repeatedly gained media attention it is still underrated as one of the most impressive modern inventions and based on that opinion I want to use this opportunity to gain some more attention while showing the contradiction in the pricing.

BitCoin Price Development

Figure 1: Bitcoin exchange rate into USD since the first transaction in January 2009. Source:

The figure above shows the massive fluctuations of the Bitcoin exchange rate since its release. Within two years the value went from close to nothing to exceeding the 1000$ mark. It seems instinctive to assume speculations, as the cause of this development. With no inherent value apart from its function as a medium of exchange, Bitcoin lacks basis to justify such immense price increases. Also the close relationship of media attention, represented in Figure 2 by google trends, and the price development indicates speculative behaviour rather than behaviour based on rational expectations in the sense of Eugene Fama.

BitCoin Trends Development

Figure 2: Google Trends used as a reflection of Bitcoins relevance since its start. Google Trends measures the quantity in which a term, here ‘Bitcoin’, is searched. The time with the highest interest is rated with 100% and the rest is illustrated in proportion. Source: Google Trends

While speculation is one potential reason for the immense price increase there is another which at first sight might seem far-fetched. Previously I stated the innovative character of Bitcoin which leads to gigantic potential in the financial markets. In that way there is the possibility for Bitcoin to replace less efficient transaction methods and with it their underlying currencies resulting in it as the primary medium of exchange. A uniform international currency if you want, even though there is no intention of world improvement in this essay.

Instead the focus is on the implications this possibility contains. From an investor’s perspective Bitcoin is valued based on its expected exchange rate. The sum of all possible future exchange rates weighted with their respective probabilities. Assuming that Bitcoin catches on and goes into a self-reinforcing cycle resulting in it as the primary currency, the demand would explode. Thus the value would rapidly increase based on simple concepts of supply and demand. BitCoin Money Supply

Core to this idea is not only the expansion of demand but also that Bitcoin’s money supply is predetermined. The inventor of Bitcoin, Satoshi Nakamoto, programmed the first Bitcoin code in such a way, that while the total amount of Bitcoin increases, it does so at a decreasing rate. Finally the amount of Bitcoins will reach its maximum of 21 million.

Due to the potential increase in demand and the restricted supply it can therefore be considered rational for investors to pay extraordinarily high prices for Bitcoins in expectation of future increases. But the problem that remains is that Bitcoin only has value based on its function as a medium of exchange and when the price of Bitcoins increase that is equivalent to a deflationary development. In consequence the original function is lost and value of Bitcoin should be zero. Considering the homo economicus and forward-looking agents, this development should be anticipated and the value of Bitcoins should never have exceeded zero.

Figure 3: The amount of Bitcoins available on the market cannot be influenced.

Source: European Central Bank: Virtual Currency Schemes, 2012

Lars Uden


Nakamoto, Satoshi: Bitcoin: A Peer-to-Peer Electronic Cash System, 2008, to be found on:

Pagliary, Jose: Ron Paul: Bitcoin coud ‘destroy the dollar’, 2013, to be found on:

European Central Bank: Virtual Currency Schemes, 2012, published online:

Velde, François: Chicago Fed Letter: Bitcoin: A primer, The Federal Reserve Bank of Chicago, No. 317, 2013

When we began studying Economics the first thing we learnt was the behaviour of the demand and supply curves. As we know the demand curve is negatively sloped, i.e., when the price goes up the demand goes down, and the supply curve is positively sloped.

However, there are products that contradict these assumptions – Giffen goods in which when the price goes up the demand goes up too.

The most famous example regarding this type of goods is the potato during the Irish potato famine of the 1840s. At that time the main ingredient of the Irish food was the potato and in that year a disease commonly known as potato blight affected Europe. During this crisis the Irish families saw their income decrease and the price of potatoes increasing which caused a huge chaos. As a result, when the families bought potatoes the income left was increasingly smaller, so it was impossible to buy other goods except potatoes and therefore, families started buying more potatoes with the money that was left. As it can be seen the price and the demand of potatoes increased at the same time.

This is related to the substitution effect (when the price of a good increases, consumers tend to substitute this product with another similar good which is cheaper), so because they can’t buy meat, for example, they replace it by more potatoes.

It can also be said that rice in China is a giffen good too, but we need to pay attention that this doesn’t happen to everyone, we only can said this for the poorest people and the reason is the same as we used in the Irish case. When the price of rice increase the Chinese people can’t afford other goods.

But is the price of goods a reason to desire?

«Perception and desirability play a huge role in the pricing game. The more expensive something is, the more exclusive and, therefore, desirable it becomes. Burberry, for instance, said as recently as March that it would raise prices to increase its appeal to the upper end of its customer base and attract new, wealthier customers.»

In order to understand this is important to introduce another concept that will have the same behaviour that the previous one but in a different way- Veblen goods.

The Veblen goods are related to the luxury market, i. e., they are related with status and in some way the high prices gives consumers power and happiness. And this is why some luxury brands are increasing their prices, to turn their products more exclusive and more desirable.

Sometimes the higher, the best!

In the other hand, we have Inferior goods which are «a type of good for which demand declines as the level of income or real GPD in the economy increases» . This type of goods used to have negative income elasticity of demand. But what is that? The income elasticity of demand measures how sensitive the quantity demanded of a good is to changes of the income.


For example, are drugs inferior goods? According to the Atlantic Economic Journal (2007,) it depends «on the relationship between substances abuse and time in household production, there can be a positive or negative relationship between drug use and income» .

In this study the evidences suggests that illegal drugs are normal goods for consumers in schools or colleges. However, through the study we can also conclude that illegal drugs (specifically marijuana and cocaine) are inferior goods for other categories such as working individuals and non-working individuals. The reason is the fact that the consumption of drugs is related to the «higher opportunity cost of drug consumption for the higher income people and this can explain both income inferiority for substantial part of the overall sample and the positive relationship between income and substance abuse for young adults» .

So, the best answer for those questions is: it depends!




“Private Copy Law”: A “public” problem

Is being discussed in Portugal the implementation of a tax on digital devices that allow the storage of files, called “Lei da Cópia Privada”. This fee is intended to compensate the authors for legal copies of their works as musics or books.With this policy, the government will impose a tax of up to 15 euros (except for printers that can reach 20 euros) on each electronic device.

If we assume that the sales forecast of 2.54 million smartphones in 2014 are right, considering a tax rate of €0.12 per gigabyte and an avarage of 4 gigabytes per smartphone (and consider that only smartphones will be taxed), it will lead to a 1,22 M€ on tax revenue that could cover the prejudice of legal copies made ​​by consumers .

On another hand, according to a study by GfK, were sold in Portugal about € 16.5 million last year in music sector. Of these 70% were on physical media such as CD’s or DVD’s, and the rest in digital format such as download, legally.

Using the studies of International Survey on Private Copying Law & Practice, 2013, the World Organization of Intellectual Property, that says that the rates of private copying earned 11 cents per capita in Portugal last year. We can obtain that If these values ​​are considered for after the implementation the tax it was a total tax revenue of 1,1 millions of euros.

There are one problem with this new law that is not contempling the remote storage in the cloud” because don’t yet exist control mechanisms for those copies.

Theorically, having a increasing in price of digital devices, that stores can do, according  the  theory  of  consumer’s  choices  to maintain a constant utility consumers will have to increase their income or else purchase substitute goods.The implementation of that tax, it is going to lead to a decreasing on purchasing power of consumers so it will cause consumers with the same level of income can opt for mobile phones with fewer features, also hurting the sellers and producers of smartphones and others electronic devices. Furthermore there might be an increase of illegal downloads.

To conclude, if the assumptions above are fulfilled, a comparative static analysis will lead to a decreasing in utility of consumers with the aplication of this tax.

José Maria Vaz Patto

no 732

References: – ixzz3E9T63wn3

How fun can Game Theory be?

If one has seen the movie “Beautiful Mind”, one will never forget the scene where John Nash (role played by Russell Crowe) finds the best strategy to guarantee a pleasant night to him and all his friends. In fact, his thinking revolutionized the science of strategy. Since its beginning, Game Theory (a multidisciplinary field) has become an intrinsic part of Microeconomics, and we will now take a look into what it is about.
Please enjoy the video below (until 5:30):


The Initial Game

There are two players (player 1 – Big Guy; and player 2 – Small Guy) – please do not mind the typo (Smal) in the diagrams. Each player has two possible strategies (either they ‘split’ or they ‘steal’). There are £13.600 to be split, taken entirely by one of the players or simply to vanish (we get the payoffs from here). Both players know the possible strategies of the other player and the respective payoffs, so we are in the presence of a complete information game. Given this, here is the initial game:

initialgameBy definition, a Nash Equilibrium is the optimal outcome of a game. In a NE, no individual can receive incremental benefit from changing his strategy, assuming the other player remains constant in his strategy.

So, is there any NE in this game? Where?

Let’s imagine Big Guy plays ‘split’. If so, Small Guy is better off playing ‘steal’ and taking the whole money. Now, if Big Guy plays ‘steal’, the Small Guy is indifferent between ‘split’ or ‘steal’ since he will get nothing in both outcomes. Because of this, one can say that for the Small Guy, ‘steal’ is a weakly dominant strategy. The same applies to the Big Guy (try thinking about that on your own) and, thus, given that ‘steal’ is a WD strategy for both players, (‘steal’,’steal’) is a NE.


Now look at the bottom-left outcome (Big Guy plays ‘split’, Small Guy plays ‘steal’):

  • Given that Big Guy is playing ‘split’, could the Small Guy be better off by changing from ‘steal’ to ‘split’? No, his payoff decreases.
  • Given that Small Guy is playing ‘steal’, could the Big Guy be better off by changing from ‘split’ to ‘steal’? No, his payoff is zero in both outcomes.

So, again, we found a NE = (‘split’,’steal’). Try on your own to understand why (‘steal’,’split’) is also a NE.


As we can see, there are three NE in this game. The only outcome that is not a NE is shadowed in yellow.

The (‘split’,’split’) outcome can be considered the fairest and most rational one but, in fact, it is the less likely to happen. Why? Because if a player knows the other is going to play ‘split’, he has a great incentive to deviate from his strategy, play ‘steal’ and take all the money. So, it is clear that the game is set up in the way that both players have the incentive to ‘steal’ and, in the end, making it funnier to watch.

“Small Guy, I want you to trust me 100% that I am going to pick the ‘steal’ ball” – said the Big Guy

Well, as we saw in the video, players ended up reaching the only outcome that is not a NE. Why was that? It only happened because of the previous statement that, after all, changed the whole game.

newgameAfter such statement, the Small Guy is facing an entirely different game. Moreover, the Big Guy added “I want you to do ‘split’ and I promise I will split the money with you after the show” to which the crowd reacted with laughter. In any case, if Big Guy is playing ‘steal’, the Small Guy knows he will get nothing independently of what he plays. But with the promise made by the Big Guy, the Small Guy can attribute a probability (p) to the truthfulness of the statement. If Big Guy is actually speaking the truth, playing ‘split’ is the obvious choice for the Small Guy (hence, he will get a positive payoff instead of picking ‘steal’ and getting zero for sure).


To everyone’s amusement, Big Guy was lying. He did not play ‘steal’ as he said he would. Instead, he played ‘split’ knowing that he had forced the Small Guy to desperately pick ‘split’.
One can infer that, in spite of lying, the Big Guy was being truthful when saying they would split the money. He could easily go for the ‘steal’ and keep the money for himself, but he did not (of course, the pressure of being broadcasted in live television counts).

Strategic behaviour can be quite fun, right?





Green Fiscal Reform

Nowadays in Portugal the Portuguese Households and Firms are under a high tax burden, due to the fiscal constraints on the Public Administration. To promote an environmental mandate of taxes the Portuguese Government has created a Commission to study a Green Fiscal Reform over its Fiscal Structure.

Such Green Reform has as main objectives:

– Contribute to eco-innovation and efficient use of resources

– Reduce dependence on foreign energy

– Induce more sustainable patterns of production and consumption

– Promote entrepreneurship and create jobs

– Achieve efficiently international goals set by Green Treaties

– Diversify revenue sources, always having in mind a neutral change of the tax system

On a technical point of view the orientation of this reform aims to decrease the negative externalities, which arise from the Portuguese economic activity and put in risk the sustainability of the same.

Negative externalities, the so called market failures in economic theory, are the costs from an individual decision, either from an household or a firm, not supported by the decision-maker and passed onto society impacting not only them but also the remaining. In this case the pollution created by individuals, when driving to work or energy firms when producing electricity, will affect the Portuguese environment and hence economy,.

To decrease negative externalities more sustainable patterns of production and consumption are required. A reform of the Portuguese fiscal system targeting an increase of green tax revenues shares on the overall Portuguese tax income, maintaining the total sum of taxes untouched, will direct Households and firms for such patterns.

On green taxation the Portuguese Government is discussing the creation and aggravation of:

– Tax on Carbon Emission

– Tax on Air Transport of Passengers

– Tax on Plastic Bags

– Tolls on Cities entrances

Following the assumption from the Input-Output model considered in economics, that prices for final goods are determined by its own production costs, the increase in taxation will increase costs and hence prices. In this case increase in taxation will cover highly polluting sectors of the economy such as the Energy Sector, the Air Transport Sector but also un-environmental habits such as the general use of plastic bags and private transportation.

The new taxation, by increasing costs for Firms on such Sectors creates incentives for companies to restructure its production patterns for more advanced, less polluting technologies. So as to circumvent taxes, always having into mind the maximization of profit, known as the Firm’s Problem in economic theory, Firms will turn to ecological production methods.

To induce a new sustainable consumption pattern over Portuguese households, increasing prices over goods whose production methods are decidedly polluting, will direct households for “greener” goods whose prices remain constant, directly intervening over what in economic theory is known as the Consumer Problem.

Within the current context of the Portuguese Economy, the increase of green tax burdens over Firms and Households, already overloaded by taxation is offset by a decrease of tax segments. The Commission for the Green Fiscal Reform estimates an increase on tax revenues of 165 M€, according to the Draft for Green Fiscal Reform. This increase in taxation will be used in the following terms:

– 25% for Personal Income Tax

– 25% for Tax Credit for Investment

– 50% for Social Rate of Employers

These measures will have a positive impact over the income of Households, what in economic theory is called Budget Constraint; and a decrease in labour costs for Firms.

The re-arrangement of the newly aggravated green taxes will balance its negative effects over Economic Agents as also potentiate economic growth.

On a personal note, I do defend an increase of green policies such as green taxation having as a main objective an increase of the sustainability of the Portuguese Economy. A decrease over main tax segments such as the Personal Income Tax to balance these policies is also positive in my opinion taking into account the coagulant levels of taxation for the development of economic activity in Portugal.

However it is curious the electioneering tone that such a reform has, when presented for 2015, the year of Parliamentary Elections in Portugal.

Jaime Marques Pereira, Nº716


Vasconcelos, J., Arnaldo, A., Brigas Afonso, A., Lobo, C., Roseta Palma, C., Dias Soares, C., Araújo, F., Silva Lopes, J., Alves, M., Ferreira dos Santos, R., 2014. Projecto da Reforma da Fiscalidade Verde

2014, Sobre os Efeitos Ambientais e Económicos de uma Nova Tributação do Carbono em Portugal, Relatório Técnico de Avaliação a Submeter à Comissão de Reforma Fiscal Ambiental