Ponder the following questions:
- You are the owner of a coffee chain, and you determine that 80% of your customer base will support a price of $2.20 for a latte, while 20% is not price sensitive. What should your pricing strategy be?
- Subsidies and social safety nets, often, promote fairness in an economy at the expense of efficiency. How can you subsidize heating bills for the poor elderly in Minnesota without distorting free market forces?
- You are trudging home from work, when a 6'8", 250-lb man called Tiny stops you, and another passerby. He seizes your wallets, but asks you both to secretly bid for the cash in the two wallets put together. What should you bid assuming you know the contents of your wallet?
Tim Harford, the author of The Undercover Economist, writes a clever, witty column in the Saturday Financial Times. He, typically, picks a silly-sounding quandary posed by a reader, and proceeds to offer an insightful analysis and solution, drawing on ideas in economics and game theory. This book follows a similar pattern though the topics he examines are considerably weightier: they span issues as different as product pricing, trade theory, wireless spectrum auctions, and macroeconomics. He emphasizes familiar themes -- incentive structures determine an economy's path; competitive advantage drives specialization; social capital is essential for economic growth of nations; trade enriches everyone. But, he employs these ideas to debunk many common woolly-headed arguments -- that multinationals impoverish everyone by way of building sweatshops, or that globalization has led to massive environmental degradation.
I found the questions in the book very interesting even if, on occasion, I found some of the discussions less than complete. For instance, the chapter on spectrum auctions left me intrigued but none the wiser. The final chapter on the drivers for China's explosive growth is probably the best, and just by itself, well-worth the price of the book.
