This document provides a summary of chapters from the book "The Undercover Economist" by Tim Harford. It discusses key concepts from economics like scarcity power, price targeting, externalities, asymmetric information, and how applying economic principles helped countries like China grow rich. The summary highlights chapters on topics such as how supermarkets use price discrimination, the idea of perfect markets, traffic congestion as a negative externality, health insurance markets with asymmetric information, and China's economic reforms and embrace of globalization.

1. Name : The Undercover Economist Author: Tim Harford Publisher: Abacus, UK ISBN : 978-0-349-11985-4 thirumeninathan presenting The Undercover Economist

2. Who pays for your Coffee? What Supermarkets don’t want you to know? Perfect markets and the “World of truth” Cross town Traffic The Inside Story Rational Insanity The men who knew the Value of Nothing Why poor countries are poor Beer Chips and Globalization How China grew rich?

3. Whopays for Your ? aka scarcity power Scarcity power = higher bargaining power = higher earning potential i.e. rent seeking behavior Scarcity power / rent seeking from # natural availability – 1817 England – rise of price of wheat and land rents # regulation – maintaining exclusivity – Green belt – capping of London’s population Why Londoners are not interested in better transportation facilities from suburban areas? # effectiveness of organization – mafia vs violent drug gangs Transfer of resources

4. Whopays for Your ? aka scarcity power High Prices = Monopoly / Controlled sector = can be verified by the ease of entry into that sector Immigration - Skilled vs unskilled migrants Gap between wages of skilled vs unskilled Manifestations of resistance to immigration

5. What Supermarkets don’twant you to know? aka price targeting First Degree price Discrimination # allow the customer to signal the maximum price he is willing to pay # getting the maximum possible from every single customer Unique target strategy # Amazon (web pages using cookies, Costa (Fair trade Coffee) Group target strategy #Subsidies for Children and the elderly in trains and buses # Disney world tickets to locals – frequency counts!

6. What Supermarkets don’twant you to know? aka price targeting Self incrimination – self targeting # Same chain selling different # class of products at different locations # Offer of substitutes Price gouging – using causes Suggestion - Shop cheaply but not necessarily at a cheap store – safewayvs wholefoods

7. What Supermarkets don’twant you to know? aka price targeting Price high or low but not in the middle – always mixing it up! # regular customers – normal sale # bargain hunters – bargain sale

8. What Supermarkets don’twant you to know? aka price targeting Reality checks Does the seller really have scarcity power? Plugging leaks @ travel industry – departure lounges, economy vs business class @ difference between premium products and standard products @ reducing functionality in software / computer hardware

9. What Supermarkets don’twant you to know? aka price targeting Price targeting # good – pharmaceuticals # bad – e.g. regular train services providing discounts to students

10. Perfect Markets &the world of truth Each and every act of selfish behavior is turned to the common good Prices are optional & they reveal information In perfect markets, # prices are voluntary # based on the perceived value of each participant

11. Perfect Markets &the world of truth The truth, the whole truth and nothing but the truth! is MR = MC in a perfect market # due to competitors # due to profit maximization # markets ensure that companies are making the right things, the right way, in right proportions, for the right people

12. Perfect Markets &the world of truth Efficiency vs fairness Enlisting markets for fairness – Kenneth Arrow’s head start theorem Impractical (high taxation on artists and sportsmen) and practical ways (heating allowance for the elderly in cold countries) of achieving fairness

13. Cross town trafficaka externalities Selfish behavior per se is not resulting in common good - due to influence of externalities Traffic congestion - Negative externality Marginal & Average externality charges (e.g. London Congestion charges ) Objections to externality charging

14. Cross towntrafficaka externalities Effect of congestion charging on London traffic Effect of auctions by EPA to combat sulphur emissions # initial resistance citing high costs of abatement # real cost of sulphur scrubbers

16. Rational insanity aka beyond the random walk #smart, agile, experienced birds can get the worm in the short run – stocks of amazon, google etc. # Economy in transformation (due to technological changes) = reduction of scarcity power = not good for business

17. The men who knew the value of nothing aka game theory # auctioneering using game theory 3g auction in UK 3g auction in US, New Zealand # Lessons learnt crash in the telecom sector in UK – successful bidders are still viable # 2G / 3G auction in India

18. Why poor countries are poor Theory of government banditry Cameroon Marcus Olson Democracy > Stable dictatorship > unstable dictatorship Social capital # rule of law # absence of perverse incentives # building up the stake in the common good – e.g. from Cameroon (library) – nepalese dams

19. Beer, chips & globalization Sweatshops of developing countries – are they good or bad? Globalization is bad for the poor? Globalization is bad for the planet? Increased trade = increased globalization Lax environmental standards + transportation of goods over long distances = more environmental damage Vs Trade between developed countries are high Manufacturing processes with environmental standards are often more efficient and cheap ˄foreign direct investment in China ˅ urban air pollution in China Human cost vs environmental cost Increased consumption brings in technological growth and changes in consumption pattern Externality charges for limiting impact on environment

20. How China grew rich? Encounters with ## Great leap forward ## Cultural revolution Deng Xiaoping’s agricultural reforms (i.e. right incentives) and the resulting leap forward Growing out of the command economy – freezing the plan Viable firms earned the marginal value and unviable firms shrank and went out of existence with the plan Govt owned / public and private sector in competition – reduction of waste and increase in efficiency

21. How China grew rich? Foreign Direct Investments –40% vs India’s 2% Hongkong & Taiwan? Right steps taken by Chinese Government - # Fight scarcity # Fight corruption # Correct externalities # Maximize information availability # Get the incentives right # Engage in trade

22. Economics is about people Economic growth is about better life for individuals - Tim Harford