Tweet [1]
Suppose Jones bought several dozen gallon-sized bottles filled with nothing but ordinary air: 78 percent nitrogen, 21 percent oxygen, and 1 percent other gasses. Jones then loaded these bottles into a pick-up truck and drove around town offering to sell each bottle for $229.99. As Jones drove he broadcast through a loudspeaker the following message: “Air! Authentic, breathable air available here at the amazing price of only $229.99 per gallon! Nothing, my friends, is more essential to life than air. If you’re denied air for even a few minutes, you’re a goner. So get your air here!”
How many bottles of air would Jones sell at $229.99? How many bottles would he sell if he lowered his price to $29.99? What about to $9.99? Or to $0.09?
The answer, in each case, is none. The earnings available to be reaped by sellers of air are so low that, in the real world, literally no one attempts to make a living at this trade. This outcome is the correct one. Because on the surface of the earth, breathable air is so abundant that it’s free for the taking, it would be wasteful to use even one second of human labor to deliver it to consumers of air.
But what if Jones nevertheless persisted in his attempt to earn a living selling air. He’d surely plead along the following lines: “It doesn’t make sense to pay so little – in fact, to pay nothing! – to sellers of something as essential to life itself as air when other people are paid much more to supply the likes of popcorn, beer, and bubble gum. If we don’t raise the pay of air sellers, we risk losing our access to air! Humanity will suffocate!”
Of course, upon hearing Jones’s plea, you would correctly conclude that he’s deluded. Precisely because air is naturally so very abundant, we need to devote no human effort to supplying it.
Yet Jones doesn’t give up. He, an aspiring seller of air, continues to plead, this time by taking humanity on a guilt trip: “It’s unjust for suppliers of a good – air – that satisfies an essential need to be paid so little while people who supply popcorn, beer, bubble gum, and other frivolous luxuries are paid far more! Humanity’s priorities are all wrong!”
Jones, though, has matters backwards. Yes, air is essential to life. Nothing is more so, and few things are as much so. But this fact does not determine air’s economic value. The economic value of a unit – say, a gallon – of air offered for sale comes from the satisfaction that a buyer would experience by acquiring that extra gallon of air. Because any person offered that gallon of air would, were he or she to reject the offer, continue to have access, free of charge, to all the air that he or she wishes to breathe, if that person did acquire that extra gallon of air it would add absolutely nothing to his or her satisfaction. Therefore, the maximum amount that this consumer is willing to pay for the gallon of air is $0.
Of course, what’s true for this particular consumer is true for each of the eight billion persons now inhabiting the surface of the earth.
This manner of price determination is what economists mean when they say that “prices are determined at the margin.” Air’s essentialness to human life is obvious. But the usefulness to humans of having access to any good in total, such as access to the earth’s air supply, does not determine the usefulness of any unit of that good. The determination of economic value – of market prices and wages – is affected also by available supplies.
The greater is the supply of a particular kind of good relative to the number of uses to which humans believe that good can be beneficially put, the less is the satisfaction that will be gained by using one additional unit of this good. The most urgent human wants that can be satisfied with this good are the first wants that units of this good are used to satisfy. After these urgent wants are satisfied, whatever additional units that remain of the good can satisfy only wants that are less urgent. In the case of air, it is fortunately so very abundant that any one unit of air satisfies no wants at all. Any one unit of air is useless to humans, despite the undeniable essentialness of air to human survival.
Because the price people are willing to pay for a unit of a good reflects the amount of satisfaction that acquisition of that additional unit is expected to bring, goods that are very abundant have low market prices, even if some uses of this good are utterly essential to human survival. This fact is why the market price of a gallon of air is zero: an additional gallon of air supplies zero satisfaction.
What does this esoteric economic reasoning about air and economic margins have to do with first responders and professional athletes? Answer: a lot! Just as you should be pleased that, in our world, something as essential to life as breathable air is more abundant than is frivolous bubble gum – indeed, air is so much more abundant that its price is less than the price of bubble gum – you should also be pleased that in our world something as essential as first-responder services are much more abundant than are the abilities to expertly drive golf balls onto greens or to routinely hurl 99 MPH fastballs into strike zones.
Unfortunately, supplies of first-responder and teaching services aren’t naturally superabundant, as is air. So we must pay positive prices – wages – in order to secure supplies of these services. But given this misfortune, we are fortunate that supplies of first-responder and teaching services are much more abundant than are supplies of athletic and acting abilities. The result is that the total prices that we must pay to be rescued by first responders and taught by teachers are much lower than are the total prices that we must pay to be entertained by world-class athletes and actors.