Dear Economist

Dear Economist,
A single Milky Way costs 20p in my local corner shop. A twin pack costs 47p. I’ve made a habit of checking the prices in other shops and a twin pack invariably costs more than two singles. What could be the cause of this apparent madness?
The madness in pricing, that is, not the madness of a twenty-something compulsively checking the price of children’s sweets.
Kendrick Curtis, via e-mail

Dear Kendrick,

I am composing this reply overseas, far from the British corner shops where I can check your story, but what you say rings true. In my own travels around shops with a clipboard – a sure way to make the staff twitchy – I have often discovered products with an unexpected mark-up. One example was the medium-sized pack of washing powder priced at rather more per 100g than the small or the large.

All shops want to offer competitive prices to customers who demand them, while charging more to customers who do not much care. Random mark-ups will do the trick: they are easily avoided by bargain hunters but will often snare the unwary.

You are right that it does feel mad for a twenty-something to check the price of children’s sweets; that is why the pricing you describe is clever. I am confident that many adults do not consider the price of confectionery, and that most children do. If I am right, the mark-up on a twin pack is likely to be aimed with pinpoint accuracy at greedy, careless grownups. The children will find the cheaper deal – if they want two Milky Ways, they can buy two singles. Adults, their wallets overstuffed and the days of saving for penny chews long forgotten, will grab for a twin pack and pay more. It seems to me like sweet justice.

Also published at ft.com.

Dear Economist,
My extended family is very important to me, and I try to make the time to visit them. Unfortunately my husband doesn’t see things the same way. He works very long hours, and says he is tired after work and prefers to stay at home with me. (Actually, he usually watches television.)
Recently, he has been invited to apply for a job that will mean shorter working hours. Should I encourage this? Will he join in more with the social activities that are important to me?
Worried Wife, Cirencester

Dear Worried Wife,

What you seem to be asking is whether shorter working hours encourage social interaction outside the home. It’s a hard question to answer; some studies suggest that people who work long hours spend more time socialising and joining societies or clubs: work hard, play hard, that kind of thing. But that may just be because they are ambitious people with lots of energy and little need for sleep.

There is one study, by economists Henry Saffer and Karine Lamiraud, that might throw some light on your question. They looked at what happened when France reduced the working week from 39 hours to 35. The law came into force in 2000 for companies with more than 20 employees, and in 2002 for smaller businesses and for the civil service, creating a natural experiment for the researchers to study.

Their conclusion: hours of work did indeed fall, but few people used their extra free time either to visit relatives or to join a book club. I am sorry to disappoint you, but my guess is that if your husband wanted to hang out with your mother, he would already be doing so.

Also published at ft.com.

Dear Economist,
I am amazed by people who stand outside in front of the opening doors of trains and lifts knowing full well that the people inside will have to exit before they can enter. Obstructing the Exiters will only delay them, and the Enterers seem to be in such a rush that this is surely not in their best interests. What is astonishing is that this is a universal phenomenon. Explain!
Nazir Kazi

Dear Nazir,

I, too, have observed this phenomenon with trains but more rarely with lifts, and I think that suggests an explanation.

It is true that by obstructing people who are leaving the train, people may delay it by a few seconds.

A few seconds delay to everyone on the train is an appreciable social loss, but scarcely matters to the selfish individual in question.

True, a delay is a delay.

But you have misinterpreted what such people are aiming to do. They are not trying to hasten the departure of the train; they are trying to get a seat. That means being the first into the carriage just as seats are being vacated, which in turn means standing in front of the opening doors and generally getting in everybody’s way.

It is a classic prisoner’s dilemma: everyone would be better off if everyone hung back, but each individual does better for himself by pushing forward.

It is not surprising that this behaviour is more unusual when it comes to lifts. Lifts do not have seats, and usually have room to accommodate everyone who is waiting.

The behaviour you describe is selfish, but it is not irrational.

Also published at ft.com.

Dear Economist,
Occasionally, I buy and launch my own fireworks, generating cheerful positive externalities. Sadly, some amateur launchings end in tragedy – and there is frequent talk of a private firework ban. What is the economically efficient way of dealing with those negative externalities?
Jens Frolich Holte, Norway

Dear Jens,

If you’ve diagnosed the problem correctly, we can reach for a textbook solution. In a market with zero transaction costs, Coase theorem tells us that your neighbours could, in principle, pay you to hold firework displays, or not to, depending on their enjoyment of the spectacle or fear of injury.

More likely, we would need to approximate the Coasian solution with an externality tax on fireworks (to reflect the risks) or a subsidy (to reflect the benefits). But I am not sure you have correctly identified the positive and negative externalities here.

Unless you are shooting the fireworks down the street, most of the risk is surely borne by you and your friends, who’ve chosen to enjoy the display at close range.

There is no negative externality there: they’ve knowingly taken the risk.

On the positive externality side, I doubt that more distant neighbours enjoy the show as much as you think, not knowing when it is going to start. And they may be aggravated by the noise.

On balance, where are the externalities?

We should focus instead on encouraging more responsible use of fireworks. If your firework display hurts an innocent, you should be liable. An appropriate level of likely damages will encourage you to take exactly the right amount of care with your displays.

Also published at ft.com, subscription free.

Dear Economist,
I gave my sister a 30 per cent share of my mortgage when buying a new house two years ago so she could get on the property ladder. In return, she gave me some money towards the deposit on the house – about 20 per cent of the total put down. Given my larger share of the investment and commitment, should I get a greater proportion of the equity than my 70 per cent share, if and when we sell?
Ben

Dear Ben,

It is astonishing that you have entered into this enormously valuable contract without agreeing terms, but perhaps I should not be surprised – your letter suggests that you are unable even to think clearly.

You do not “give” someone a share of a mortgage any more than you “give” them a share of your restaurant bill.

If all you mean is that you gave her 30 per cent equity in exchange for a deposit, stick to the deal.

But I think you mean that your sister paid 20 per cent of your deposit and 30 per cent of your mortgage and has received nothing in return so far. You, on the other hand, have had your living costs subsidised and your risks in the property market hedged. Thanks to a housing bubble, your joint investment has paid off and you would now like to cream off some additional upside. Had there been a slump – widely forecast when you bought the house – would you be offering to bear more than 70 per cent of the loss?

There is no well-defined outcome from your befuddled arrangement, but it would be reasonable for your sister to enjoy more of the upside.

She took on nothing but risk, while you lived on the cheap. Family values, indeed.

Also published at ft.com, subscription free.

Dear Economist,
I am 17 years old and my school only recently became coeducational. The other sixth-form students are almost all male, like me. I feel that the school does not meet my romantic needs and that I will never know true love while at school. In fact, I’m not having much luck at finding any love at all. Please can you help, or even just offer some hope?
Yours, truly lovelorn,
Student K, Bedford

Dear Student K,

You are right. The sixth form does not meet your romantic needs. Even if the boys only mildly outnumbered the girls – say, 55 to 45 – then assuming everyone paired off in the traditional fashion, there would be 10 boys left out, hormones raging, willing to offer the girls a better deal in one way or another. Sensible girls know how to exploit this healthy competition in their favour.

Still, as you grow older, your time will come. In cities across the developed world, dating-age women outnumber dating-age men. (Economist Lena Edlund argues that women have more to gain from city life than men.)

The excess supply of datable women and the resulting dating disadvantage forces women into bursts of self-improvement, which may explain why they tend to be better dressed and better educated than men. Research by economists Kerwin Charles and Ming Luoh finds a similar effect when many otherwise-marriageable men end up in prison. It does not take much to tip a dating market out of equilibrium, and your plight seems particularly extreme.

Yet take heart. At your age I was in an even worse situation, at an all-boys school. All seemed lost, until I discovered that the girls’ school opposite was willing to look for some gains from trade.

Also published at ft.com.

Dear Economist,
I use the same password for all my e-mail and internet-portal accounts (online shopping, etc). Now I am worried about losing it to an identity thief. What should I do?
Confused Kid

Dear Confused Kid,

Rick Smith, information security expert at the University of St Thomas, summarises the conundrum: “The password must be impossible to remember and never written down.” The typical password is a jumble of characters that must be changed frequently. When you type it in, the computer obscures what you are typing, giving your visual memory no chance. Congratulations if you can cope with all this, let alone duplicate the feat 20 times.

There are some tricks you can rely on – for instance, your passwords could be obscure acronyms inspired by song lyrics. Yet the dilemma remains: either use the same password for each account, or write them down and put them under your mouse mat.

Impossible password guidelines have been developed by security professionals wishing to cover their backsides. Fine. Now you must cover yours. First, consider who picks up the pieces if things go wrong.

Your current approach is discouraged, rather than forbidden, by banks. But if you wrote down your password, security breaches would become your problem.

Second, do not be depressed. Many accounts have obvious passwords: the user’s name, their partner’s or simply “password”. And up to one-third of users are thought to write them down. Fraudsters like easy targets, so remember: you may not need to be smarter than them, merely smarter than the guy whose password is “password”.

First published at ft.com.

Dear Economist,
I am perplexed by the enormous publicity devoted to the subprime debacle while micro-credit lenders have been showered with praise. Isn’t Countrywide just a micro-credit lender for the US, except that people are borrowing for homes rather than bullocks? And why are borrowers in developing countries so much better at repaying their loans?
Bombay Beauty

Dear Bombay Beauty,

No problem explaining why it is easier to repay a microfinance loan: the loans are a lot smaller. Beyond that, you have a point. Microfinance loans, like subprime loans, target poor clients in underserved communities, and charge high interest rates.

The economist Dean Karlan argues that the difference is largely about spin. We hear about the far-away people whose lives have been transformed by microfinance, and we hear about the subprime defaulters whose lives are in a mess. But Karlan points out that micro-credit borrowers do default, and that subprime default rates are much lower than you would think. And while some subprime borrowers were duped by complicated loan terms, financial literacy is even worse in developing countries.

Karlan also argues that micro-credit “group liability” schemes are overrated. In such a scheme, friends and neighbours have to make up the shortfall if someone can’t pay. But an experiment carried out by Karlan showed that such schemes put off borrowers without increasing repayment rates.

None of this is to condemn microfinance. Rather, it is worth remembering that poor people can benefit from access to credit, even if the credit is expensive – and even if they live in the US.

Also published at ft.com.

Dear Economist,
I frequently extract large sums of money from Bozzer, my flatmate, in our regular poker game. He’s convinced variance is to blame for his losses; in truth, however, he’s simply terrible – and I’m simply delighted with my new watch. Am I right to exploit him in this way?
R. Casablanca

Dear Mr Casablanca,

Unless you are holding poor Bozzer’s family hostage in the basement, this is a voluntary transaction between consenting adults. Presumably, he knows that he is losing money, even if he is not smart enough to work out why. And poker is lots of fun: even if he recognises that he is outclassed and the game is costing him, it may still be worth his while. After all, no customer makes a profit from going to the cinema either, but we rarely worry about that.

On that basis you have no case to answer.

However, I cannot wholeheartedly give you the absolution you seem to be seeking. You must first establish whether Bozzer is a poker addict. I’ll spare you the technical details – let’s just say that they probably involve hyperbolic discounting – but I can recommend an approach for dealing with a rational addict. If, away from the card table, Bozzer says that he wishes he could quit the poker habit, you must help to discourage him. Perhaps you could enlist a third party to hold on to cheques from the pair of you. She would post the money to a charity if you are ever caught gambling together.

I must also warn you that things may not be as they seem. Is Bozzer, perhaps, playing the long game?

If one evening he suggests raising the stakes, beware.

You think he’s the “fish” – but he may be reeling you in.

Also published on ft.com.

Dear Economist,
I feel guilty because I paid £200 to co-host a birthday party for my five-year-old with another mother, but got at least £300 of gifts in return. As a guest, I don’t like these parties because you take two gifts in return for only one party bag. But co-hosting is surely a rational thing because you pay half and get a full complement of presents?
South London Mum

Dear SLM,

Congratulations on your move to more efficient birthday parties. It seems to be a happy accident, since you have failed to realise the true scarce resource here. It is not doggy bags or disposable toys, but time. By hosting a joint party with a friend, you are saving time for many parents who would have had to attend two such parties in quick succession. The children may feel hard done by, but then again they may not. Even five-year-olds do not want a party every day.

As for making a profit on these parties, an economist understands that gifts need not be exchanged instantly and with exact accounting for value. You hosted a profitable party but feel exploited when others reciprocate – perhaps you should see these events as two sides of the same coin. It will not take long before these profits and losses even out. Surely the credit crunch is not so severe that you cannot wait a month or two for a return on your gift giving?

As for the party bags, they are truly immoral: to quell your feelings of guilt, you dose up other people’s children with sugar and additives. Is this a generous act, or a craven one? I commend your move to halve the supply of party bags; my only complaint is that you have not eliminated them altogether.

Also published at ft.com.