Consumer surplus

by Russ Roberts on July 7, 2011

in Competition, Creative destruction

Whether you measure it by willingness to pay or how much you’d have to be compensated to go without something, the emergent harmony of the market gives us such a good deal most of the time.

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{ 51 comments }

kirby July 7, 2011 at 8:51 pm

I was just thinking about this, the disparity between cost and value because of the subjectivity of value. We went on a family vacation costing about $800, but all my brother could think about was his $8 video game. Yes, sad. But true.

Ken July 7, 2011 at 9:43 pm

Sadness is subjective too. How sad is it that you need to spend $800 to get the same joy your brother gets for $8?

Regards,
Ken

vidyohs July 8, 2011 at 8:15 am

Ouch, that was merciless. :-)

kirby July 8, 2011 at 3:25 pm

You’re right; because of the subjectivity of adjectives, nobody should ever use any adjective that could be construed in another manner because there is another interpretation.
Also, I said nothing about myself and personal happiness. Try again.

Ken July 8, 2011 at 4:15 pm

“I said nothing”

Exactly. Collect your thoughts. Write in clear, specific sentences, instead of vague generalities producing incoherence. And try again.

Regards,
Ken

kirby July 8, 2011 at 8:33 pm

Just because your brain track isn’t long enough doesn’t mean my train was jumbled up. However, to (over)simplify it for you-

Just because sadness is subjective doesn’t make the point invalid.

Ken July 8, 2011 at 9:01 pm

kirby,

There you go. Nice and simple. I knew if you thought hard enough you could make yourself clear.

“Just because sadness is subjective doesn’t make the point invalid.”

I wasn’t challenging your one and only point (that value and cost are not the same). That’s why I used the word “too”.

And you in fact did say something about yourself and your personal happiness by saying YOU were sad that your brother enjoyed an $8 game more than an $800 vacation. I merely pointed out that it’s sad that you had to pay $800 to get the same enjoyment out of life that your brother got for $8.

There is nothing to “try again”. I nailed it the first time and your simplistic brain just couldn’t handle it. That makes me sad, since I didn’t say anything complicated in my first comment. It makes me sad that you think it’s sad that your brother doesn’t like everything you like to the same degree that you do. It makes me sad that you fail to appreciate the differences between you and your brother, making you sad.

Regards,
Ken

Kirby July 8, 2011 at 10:02 pm

no, I said ‘sad, but true’.
I never actually said what was sad. I allowed your subjectivity to modify whichever part of the sentance you thought was sad, the $800 part, the $8 part, the subjectivity of value part, or the family vacation part.

Ken July 8, 2011 at 11:58 pm

“I never actually said what was sad”

I knew you’d pull out this particular semantic and misdirection. Standard weasel move for someone who doesn’t want to admit emotion. Are you a robot? Or is your pride really that strong that you are now conniving you deceive not just me and the commenters here, but yourself as well?

The problem is that if YOU didn’t feel sad how do you know “what” was sad? You didn’t say someone else told you “what” was sad. You said YOU thought “what[ever]” was sad. Well, what does it mean to think something is sad? Either intellectual dishonesty (saying something is sad without having any knowledge of whether it actually was for the purpose of deception) or you actually felt sad.

Regards,
Ken

Kirby July 9, 2011 at 4:52 pm

I just realize the whole picture. Don’t feel embarrassed that you don’t and try to backtrack, you’re being obvious.

W.E. Heasley July 7, 2011 at 9:45 pm

Beware the extraction of consumer surplus!

Firms, say US public education K-12, with monopoly power, exploit their monopoly position by extracting consumer surplus from buyers.

Steve_0 July 8, 2011 at 1:21 am

I wonder if they K-12 public education system often mentions that it is a monopoly. How do THEY exploit their monopoly position, and what do they extract from “buyers”?

muirgeo July 8, 2011 at 10:56 am

I’m betting a lot of the people involved in bringing these creations to existence both were publicly educated and used technology developed by public institutions or public funding… the microprocessor and the internet both being examples. The idea that this surplus is solely a result of our private institutions is silly and baseless.

Here’s a question….

If you could never pay taxes again would you give up the internet?

Ken July 8, 2011 at 12:10 pm

muirgeo,

“I’m betting a lot of the people involved in bringing these creations to existence both were publicly educated”

What deep insight you have. A government run education monopoly exists for primary and secondary education and you’d “bet” that after forcing people to pay for it, people use it. You’re a genius.

And neither one of your “examples” aren’t really examples. The microprocessor was developed by Intel for a high performance calculator requested by a private company. The internet was developed and built with private money. Small networks had been put in place to connect gov facilities and colleges using gov money, but that wasn’t the internet.

While the gov did have a hand in networks, you’re making the absurd assumption that without the gov these things would not have been developed. Since the gov is the institution responsible for the horrendous telecommunications monopolies that dominated the US for most of the 20th century, how long did the gov delay the creation of this wonderful technology?

Regards,
Ken

T Rich July 8, 2011 at 1:43 pm

Ken,
Great post.

I had the same questions as to whether Muir’s assertions were actually true or not. The other thing that bugs me is this sense that had some government funded research and development not been government funded, … well then, it just would never have happened.

I have met some of the people associated with the early development of networks for DOD. Yes, it was government money and it was for a defense purpose (a legitimate Constitutional activity). However, these men were incredibly bright, creative and entrepreneurial. They would have created something amazing whether it was for DOD or someone else – the point is that the government spending shaped their activities in certain ways.

We can’t know how things would occur if the government through DOD, DOE, DoEd, etc. were not distorting markets. The natural tendency (been there done that) is for people in the R&D game (particularly at universities) to seek the easiest and biggest amount of money. And right now that is the fed’l government. However, some of the big foundations are beginning to influence research as well.

My preference would be for the feds to stay within the boundaries of the Constitution and let states and business influence education and research in a smaller, closer, more accountable fashion.

Ken July 8, 2011 at 3:02 pm

T,

“The natural tendency (been there done that) is for people in the R&D game (particularly at universities) to seek the easiest and biggest amount of money.”

Amen to that. Going off topic, I’ve read a lot lately about cancer research and why it hasn’t made the advances expected due to the enormous amounts spent on that research. Most of the conclusions drawn are that since government directs these funds, they go to areas of research not necessarily best for developing new methods, but to where gov bureaucrats think it should go with really no thought to ROI. The researchers themselves write grant proposals for areas of research they KNOW offer less probability of success because they know the biases of the gov will never grant them research funds for those areas.

Medicine is probably the area most affected by what you’re saying. I often wonder where we would be if the FDA couldn’t ban anything, but merely label them (suggested by Robin Hanson) . How many drugs aren’t even researched due to the extreme conservatism associated with drug research? How many people are dead that otherwise would be alive?

The DOE is another great example. How bad would power outages be if they were NOT run by gov bureaucrats? The gov’s insistence that bigger is better led to a black out affecting multiple states and two countries in 2003 (55,000,000 affected in the US and Canada). The government’s drive to make citizen’s dependent on them, rather than encouraging independence has left the US extremely vulnerable to an electrical system that could easily go down due to a single power surge. God forbid the sun ever throws anything serious at us like in 1859.

The examples go on and on about gov intervention into markets, all of which fall behind significantly over time than they otherwise would have if not for the “wise” commands given them by the likes of muirgeo.

Regards,
Ken

kirby July 8, 2011 at 8:37 pm

We don’t know what would happen if government hadn’t funded them: maybe we would have better things!

Ken July 8, 2011 at 9:07 pm

kirby,

“We don’t know what would happen if government hadn’t funded them: maybe we would have better things!”

Exactly. muirgeo’s myopic brain doesn’t seem to understand the circularity of his argument. He wants gov intervention. Well, we got it. In spades. In both power generation and delivery, as well as microelectronics. This intervention, without any doubt and especially power generation and delivery, retarded these industries progress and technological intervention.

Then his pathetic mind actually has the audacity to say that the gov is responsible for a technology that would have come about much earlier had the gov not intervened to begin with. Since something happened after gov intervention muirgeo takes that to mean that without the gov intervention that something wouldn’t have happened. Like the fool that he is, he then calls for even more intervention. His inability to think past his nose, he calls for policies which are guaranteed to make things worse.

Regards,
Ken

vikingvista July 7, 2011 at 9:51 pm

Beautifully done. Who was it that produced that video? The NEA? DoE? No? Well, whoever it was, I’m sure this will be playing in public school classrooms across the nation.

Herman July 8, 2011 at 12:08 am

You owe me a new iPad.

Richard Stands July 8, 2011 at 12:32 am
vikingvista July 8, 2011 at 12:43 am
tms July 7, 2011 at 10:11 pm

“The wealthiest people pay the highest price and get the worst version of the product.”

Even for health care.

Herman July 8, 2011 at 12:13 am

True story, I worked on a billionaire’s video infrastructure. He hired people to scour tv guide and record shows, digitize them, and load them onto some equipment that would play it back to his TV.

It cost millions to build and thousands to operate each month. Two years later, TiVo did it better.

Ron H. July 8, 2011 at 1:15 am

My bullshit detector is beginning to melt!

Methinks1776 July 7, 2011 at 10:22 pm

Can’t thank you enough for posting that video, Russ.

Fantastic!

Slocum July 7, 2011 at 11:25 pm

Now walk down the hall and play it on your iPad for Tyler Cowen-he’s convinced that the consumer surplus of the internet is small and benefits mostly the conitive elite rather than ordinary people.

kirby July 8, 2011 at 8:07 am

Oh no, the benefits of modern architecture and civilization haven’t yet met him- he lives in a shack out in the woods.

Cthorm July 8, 2011 at 3:29 pm

I doubt Tyler really believes “the internet is small and benefits mostly the conitive elite rather than ordinary people.” He certainly has said it in presentations for his TGS book, but he is just being controversial to drive home a point. Innovation is more iterative now than in the early 20th century. I believe the biggest contributor to this, rather than Tyler’s “low hanging fruit” proposal, is the increasingly institutional (i.e. bureaucratic) nature of education in the US.

Shellie July 8, 2011 at 12:03 am

what do you do whensomeone has altered your life using tectnology and you were so unaware it has taken me 30 yrs to solve this problem and the guy i was in love with was in the airforce. name Don B. and my name was ShellieL. at the time we were at Hurlbertfield Airforce base and i just had a miscarage and blocked this

Steve_0 July 8, 2011 at 1:23 am

WTF?

Peter McIlhon July 8, 2011 at 4:22 am

Dr. Boudreaux, do you still think drugs should be decriminalized? Well, I still do – but THAT was awkward.

Methinks1776 July 8, 2011 at 11:33 am

To be fair….they are illegal now and the ocean of resources we’ve poured into the war on drugs doesn’t seem to have stopped this person from frying her brain.

LowcountryJoe July 8, 2011 at 9:05 am

Could this be Ms. Long? Curious: why didn’t you spell you first name correctly? It’s great to see some Hollywood types at the Cafe.

LowcountryJoe July 8, 2011 at 9:06 am

Hey, maybe you and this other starlet could form a has-been clan here.

Herman July 8, 2011 at 12:23 am

This was a tough question, because I would be unemployable in my current occupation without access to the Internet. It would cost me $1m+ on that basis alone. Unless everyone else lost it too, then at least I would not be uniquely disadvantaged.

Slocum July 8, 2011 at 7:33 am

Yes. To be fair, the question about the internet really should be phrased differently to measure consumer surplus. It should be, something like, “If you were given the power and were considering only your own interests, how much would you have to be paid to shut down the Internet permanently?”. Obviously, it’s too complicated to be a good survey question, but the point is that you don’t want to measure how much it would hurt to be excluded from the internet in a society where everybody else is online, you want to measure how much you value living in a society with the internet vs a society without it.

kirby July 8, 2011 at 8:13 am

Once you factor in email, work, the need to replace wikipedia with a 50-volume encyclopedia, google and their ‘search’ ability, and the millions of other things unique to the internet, it tends to cost in the tens of millions. I mean, how do you get a job if you can’t get or receive email? How about if you can’t connect long-distance in any way other than the phone and snailmail? The cost goes to 15m or 20m.
The irony: $15 a month for internet means $180 a year, for your entire 70-year life means $12,600 is the cost of what you give up…. maybe the internet providers should raise their prices?

Frank33328 July 8, 2011 at 9:04 am

You get internet for $15 a month?

kirby July 8, 2011 at 3:34 pm

Note: Replace internet with:
Cable, Phone bills, ,
Oh, and http://tinyurl.com/3avtbdg

Ron H. July 10, 2011 at 11:04 pm

Kirby

The irony: $15 a month for internet means $180 a year, for your entire 70-year life means $12,600 is the cost of what you give up…. maybe the internet providers should raise their prices?

You might want to tighten your use of numbers. Few people use internet from the day they are born until the day they die. I did very little with it before the age of 5, and in my future senility, I may find it less than useful also. It’s also hard to imagine that the cost of internet access will remain a constant $15.mo for 70 years.

Your $15/mo sounds pretty cheap, as Frank33328 noted. I’ll bet it’s an intro rate for some short period, after which it will adjust to a higher, less brag-worthy rate. If you’re referring to dial-up, then you aren’t really talking about internet access as we know it..

Economiser July 8, 2011 at 7:20 pm

I disagree. The question is fine as-is. Why should the question be set up to balance everyone’s costs against only your personal benefits?

Scott July 8, 2011 at 5:36 am

I wish we could get folks like this to make documentaries and top notch marketing to back them to counter Michael Moore claptrap.

Warren Smith July 8, 2011 at 8:04 am

Innovation would seem to have a rather remote prospect of ever reaching exhaustion. Price it right and they will come.

vidyohs July 8, 2011 at 8:20 am

Thanks for that video, it is the sort of fundamental education that children should be exposed to beginning with the first grade. My e-mail list will certainly be exposed to it.

Captain Profit July 8, 2011 at 8:48 am

The video restored my faith in humanity. The comments on youtube destroyed it again…

ohioralph July 8, 2011 at 8:54 am

This video demonstrates the ridiculous statistic of GDP. How do you measure the value of Gordon Gekko’s telephone to the smart phone of today when in dollars Gekko’s phone costs more and generates a higher dollar GDP. The smart phone costs less in dollars but generates substantially more value. GDP only measures dollar units not value so using it to measure growth or productivity is a meaningless exercise.

John Dewey July 8, 2011 at 9:22 am

I think comparisons of GDP from one year to the next are not so distorted. So I’m not so sure that GDP is ridiculous in the short term.

Slappy McFee July 8, 2011 at 9:17 am

Caution Thread Hijack:

Russ -

Just wanted to share that the Hayek rap video got another play/plug on Stossel last night.

That is all

You may now return to your thread – Hijack ended

Sean July 8, 2011 at 12:18 pm

Concerning the cell phone example it seems probable that if the government had attempted to make cell phones available to everyone when they first came out in the 1980′s, we would all now be paying, overtly or covertly, $4000 for the exact same cellphone that Gordon Gekko used.

T Rich July 8, 2011 at 1:48 pm

Sort of like a university education.

The universities know how much of their own money parents are willing to pay for a degree from Podunk U. They then look at the current level of grants that students are likely to get from government. They then add factor 1 (parents willingness to pay own money) to factor 2 (government coercion) and come to the final figure for tuition.

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