Total Eclipse of Supply - Why are Solar Eclipse Glasses Impossible to Find?

America is gearing up for its first total solar eclipse in well over a quarter century, and there’s something strange going on near the path of totality. No, I’m not talking about the possibility of Lizard Man sightings during the eclipse, but rather the fact that there appears to be a shortage of the cheap disposable solar eclipse viewing glasses that are essential to wear if you want to look at the sun without permanently damaging your eyes. This article, from Denver, describes the difficulty that people from Oregon to South Carolina are experiencing in finding the glasses in the waning hours before Monday’s eclipse. I’ve discussed shortages before on this blog, so why is this one so strange/unexpected?

A total eclipse over the United States is a once-in-a-generation phenomenon
(Photo credit: NASA  via Wikimedia Commons)

The shortage of solar eclipse glasses is interesting because it should qualify as a relatively competitive market (many buyers and sellers; free entry/exit; etc…), and the product is relatively inexpensive and quick to manufacture and distribute. In addition, science allows us to predict future eclipses far into the foreseeable future, so it’s not like this event suddenly snuck up on everyone. Thus, despite there being no specific laws placing a price ceiling on solar eclipse viewing glasses (some states’ general price gouging laws could potentially apply, but I’m not aware of any being applied at this time), a shortage of eclipse viewing glasses has emerged. So, you may be asking yourself, what kind of factors would contribute to such an economic anomaly?

When a competitive market experiences a shortage, it usually adjusts for the disequilibrium created (quantity demanded > quantity supplied) by increasing prices until the market reaches equilibrium. This occurs because, as prices rise, more suppliers are willing to produce more eclipse glasses, and at the same time some consumers stop demanding pairs of glasses because the price gets too high for them. We expect this to take a bit of time to occur, but even if there were no additional time to produce more pairs of glasses the price of glasses should increase a lot until enough consumers drop out and there is no longer a shortage.

The path of "totality" stretches from coast to coast!

(Photo credit: Wikimedia Commons)

There are two interesting things that appear to be occurring with eclipse glasses. First, it appears that both producers and consumers may have underestimated the Demand for these glasses. This is likely do in large part to the rarity of total solar eclipses in the United States. It’s hard to predict the level of Demand without much historical data, especially due to the lack of eclipses that could be hyped up by so many internet and 24/7 news stories. When stores that don’t typically sell eclipse glasses (hardware stores, gas stations, etc…) were deciding how many pairs of glasses to order to stock their shelves, they seem to have preferred erring on the side of underestimating Demand. This makes sense; while eclipse glasses are relatively cheap to produce and store, their value drops to almost nothing after the eclipse on 08/21/2017. The next total solar eclipse in the US is not until 2024, and only overlaps with this year’s path around southern Illinois/southeast Missouri. That leaves a lot of stores across the nation that would have to store any excess glasses with very few potential buyers after Monday.

The second complication, that may be the most interesting to an economist, is that many groups began advertising several weeks before the event that they would be handing out eclipse glasses for free. Some were schools, museums, and other government institutions who may have been seeking to promote the “public good” by helping protect people’s eyes while encouraging people to pay attention to this scientific phenomenon. Others were retail establishments, including many optometrists, who used the free glasses as a form of advertising and a way to get potential customers in their doors. No matter their reasons, these free glasses seemed to have two effects. First, many suppliers knew they’d be trying to sell glasses against others who were giving them away for free, and so they logically ordered fewer than they otherwise would have. Second, many consumers (like me) heard that there were free glasses available, and chose to pass by those that were for sale in the store a few weeks before the eclipse.

Were you able to snag a pair of these stylish and necessary frames?

(Photo credit: nps.gov)

By the time everyone realized that Demand was much higher than expected, it appears to have been too late. No longer being able to find free glasses around town, consumers turned to the stores selling the glasses. Prices appear to have been a bit “sticky”, with the high Demand not being fully revealed to the stores selling the glasses until they had almost sold out. If they had raised their prices immediately only to find that Demand was low, consumers would have only bought from their competitors, and they would have been left with a large excess of glasses with no buyers.

One additional complication in this ordeal was the emergence of “fake” solar glasses sold on Amazon and elsewhere. Many people purchased glasses for themselves and their families only to be told that they may not be fully protected from the solar rays after all, and that they would need to find the “approved” version of the glasses. Whole counties even ordered and distributed these unapproved glasses! As any given person only needs one pair of approved glasses to view the eclipse, many people who would have otherwise been satisfied and not purchased more glasses at any (positive) price were now thrust back into the market to try to buy a pair of glasses in time.

We typically expect a market to self-equilibrate over time, unless some sort of barrier (such as a price control) keeps it from doing so. With the Great Eclipse of 2017, we can see that a confluence of unique circumstances has created a shortage of eclipse glasses that it appears will persist through the end of the phenomenon. With a little economic insight, we can “shed some light” on this mystery, just in time for Monday’s darkness.

Credit for Trying - Is Banning Transactions Fees a Win for the Consumer?

Take a second and think back to the last time you bought something that was on sale. How great did it feel? It’s easy to recognize and appreciate deals when you get a better price for something you were going to buy anyway. But how do you feel when the tables are turned, and you’re charged extra to buy something?

For example, when you go to the gas station to fill up your SUV, do you pay with cash or credit? At most stations, the price that you pay per gallon when using cash is different than the price per gallon for using credit. Either way, you’re getting the exact same gasoline, so how do you perceive this difference in price? If you see it as a mark-up or extra fee for using credit, you’re probably not a huge fan of the price differential. On the other hand, if you see it as a discount for using cash, you may view it favorably, and would be unlikely to want to see the discount removed.

When you purchase something, you often weigh 
the cost and benefits of using cash vs. credit

(Photo credit: 401kcalculator.org)

It is with this in mind that this article from The Telegraph, across the pond in the UK, caught my eye. The article was written by The Telegraph’s Consumer Affairs Editor, who chalks up a new law banning charging many credit card fees as a clear victory for consumers. If the title of the article, “[e]nd to rip-off credit card fees…” doesn’t make this position clear, the description of these “rip off” fees as being “used by shops, restaurants and travel firms to make extra profit at the direct expense of customers choosing to pay by card” should remove all doubt. But is the removal of these fees truly a clear “win” for consumers, at the expense of the greedy shops, restaurants, and travel firms?

Let’s begin by considering a portion of the quote above. These fees are charged to customers who are “choosing to pay by card.” This implies that the customers have other options (usually cash), but find paying by card to be preferable for some reason. Presumably, either they find using credit more convenient, or they may receive some cash back or points for using their credit cards. No matter the reason, some citizens chose to pay in credit despite the fee, and others chose to avoid the fee by paying in cash. Essentially, you’re free to sort into the group (cash or credit) that you feel is the best deal for you, after taking the fees into account.

Now what happens if you ban the ability to charge credit card transaction fees? If you’re a consumer, perhaps you’re hoping that the cash price will stay the same, and the credit price will be lowered to match it. Those who previously paid in credit would now be better off, since they still get the perks (convenience, points, etc…) of using credit, but for a lower price. If this scenario were to play out, even those previously using cash would be as well off, if not better off. Some of them may even choose to switch over and begin using credit cards for their purchases! Consumers would clearly be better off, and the costs would fall on either credit card companies or those greedy shops, restaurants and travel firms. The problem is, this scenario has some assumptions that aren’t likely to play out in the real world.

How do you view the price difference in
paying for gas with cash vs. credit?

(Photo credit: 127driver via Wikimedia Commons)

The issue with the scenario above is that it assumes the cash price will stay constant. It’s like assuming that if gasoline is currently $2.00/gallon when using cash, and $2.10/gal when using credit, that all gas would be $2.00/gal after the fees were banned. But it’s costly for gas stations and other stores to offer the payment option for credit cards. They even have to pay fees to the credit card companies for facilitating these transactions. If gas stations can’t pass along these fees to consumers, they have to find some other way to not lose money on the transaction. In this example, gas stations will do one of two things. First, they may increase the price of gas for everyone, let’s say to $2.05/gallon. While those consumers using credit cards are now better off, those who still use cash are clearly worse off, as they are helping subsidize the purchases of their credit using neighbors. The other possible result of the ban on fees is that vendors may choose to cease offering credit cards as a payment option all together. In this case, those who previously used credit cards are clearly worse off, as they used to have to choice to use either cash or credit and chose credit, but now must choose their second best option.

The lessons in the example above could easily be extrapolated to apply to all sorts of shops and firms. It’s easy to see that a law which essentially limits the choices of the consumer is not necessarily a clear “win” for all consumers, or even the average consumer. Viewing the issue as a discount for using cash rather than a penalty for using credit allows us to see more clearly the true costs and benefits of such a regulation. Perhaps The Telegraph is giving lawmakers more credit than they deserve.

Prognosis Negative - The Dual Drivers of Electricity Price Variability

How great would it be if someone paid YOU to consume their goods or use their service? For instance, what if instead of having to pay to go see a new hit movie, you not only got into the theater for free, but were even given a few dollars in compensation?

People love to complain about their power bills being too high, 

but what if you actually got paid for using power!?

(Photo credit: Max Pixel)

This is exactly what would occur if prices were negative for a good, but it’s a fairly rare occurrence. Why? For most goods, the Supply curve doesn’t cross below zero (or even marginal cost (or even minimum average cost for a given firm)). This means that even in the most competitive markets, suppliers are free to either leave the market or just not sell their goods to you, if they can’t get a high enough price to make selling them worthwhile. A negative price doesn’t usually satisfy this condition, so you may wonder if it is ever something we would observe in a real-life marketplace.

It would be unexpected for movie theaters to pay 

consumers to go see new blockbuster films.

(Photo credit: LuisJ3000 via Wikimedia Commons)

As it turns out, we do observe negative prices for goods from time to time. As you may have guessed from the title of this article (unless you were thrown off by the Seinfeld reference), the market for electricity will at times end up supplying electricity for negative prices. A few unique characteristics of this market lead to such an occurrence. These characteristics include:

•          The inability to store the good for long periods of time
•          Markets that are often segmented and closed-off from other parts of the country
•          Varying levels of subsidy to different types of electricity generation
•          The impracticality of shutting down or scaling back electricity generating operations for short time-periods

When considering all of these peculiarities together, it is not surprising that at times more electricity will be generated than people want to consume, resulting in a negative price. What is most interesting, however, is how fittingly electricity generation provides a “powerful” example of how there are always two sides to a market.

I first learned of the negative prices in this market while reading an article in 2015. At the time, it was fascinating to see prices below $0 for a good, but for the particular scenario described it was easy to figure out why it had occurred. In this instance, the supply of electricity in the short-run was relatively fixed and inelastic (due to the reasons outlined in the bullets above). As such, and price changes would likely come about due to shifts in demand. This was exactly the case. During periods of extremely low demand for electricity, the inability to store or substantially reduce the production of electricity at low cost meant it was cheaper to take a loss by selling it for a few hours at a negative price than it would have been to completely stop generating power.

What made this story even more interesting, is when I came across this article recently discussing the upcoming total solar eclipse. The article is all about how the eclipse is a very rare event, but will still have a large impact on the amount of power being generated that day, due to the drop in ability of solar panels to convert the sun’s rays to energy. What I found most interesting in this article, is the following:

“The onslaught of wind and solar resources is already regularly contributing to wild swings in power supplies across grids, sending wholesale electricity prices below zero on some days.”

I was struck by this particular sentence, because it is describing negative prices in the electricity market for completely different reasons than the article discussed above. That is to say, even if demand is stable, the type of technology used to produce and supply power (e.g. renewable energy sources like solar and wind) can have such inherent variability in productive capacity that supply can shift in substantial ways. In this case, it is the supply-side of the electricity market that is sometimes leading to negative prices.

The important takeaway from all of this is that there are two sides to a market, and it is the unique characteristics of the market you are looking at in space and time that will determine the degree to which supply and demand work together to determine prices. People often have the tendency to focus on one or the other, but it’s best to remember to stay “plugged-in” to information about both.