A Plus to Report

This week I discovered one benefit to this experiment. In planning for my course this semester, I’ve spent a lot of effort reducing what I “cover” in class. This week I had the opportunity to add some material that I haven’t been able to teach in a while. We had a mini-discussion (less than a full class period) on several issues:

• What is value? (One’s subjective judgment of what something is worth.)
• What determines value? (Tastes and Preferences, assumed exogenous and stable at least until next semester when we explore advertising.)
• How does the market price differ from value? (The market price is the consensus view of market participants about what something is worth.)
• How might market prices not adequately reflect social value? (Market prices don’t reflect the values of folks who don’t participate in the market because they lack the ability to pay. Market prices can be biased by people with strong preferences in favor of some item and with great ability to pay. This might explain the apparent difference between the value to society of teachers and nurses relative to their incomes, or the extraordinarily high incomes of professional athletes.)

This was one of those discussions that addresses complex yet important ideas that often get left out of traditional text coverage, since the ambiguity makes them difficult to handle precisely.

I look forward to adding additional interesting topics later in the course.

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One Response to A Plus to Report

  1. rrycroft says:

    Your discussion of how market prices might not adequately reflect social value is a bit misleading. It is not accurate to say that some people do not participate in certain markets. Everybody participates in every market. It is just some participants are on that section of the demand curve that lies below the equilibrium price–in some cases in the negative region. People with low incomes certainly do influence the price of all goods. Their limited demand reduces overall demand for the good keeping its price lower than it might otherwise have been.

    With respect to the incomes of teachers and nurses, I think you forgot the diamond-water paradox. Water has a higher value to society than diamonds, but sells for a lower price because price is determined by marginal utility, not total utility. Alternatively, the low incomes of teachers and nurses is not the result of a lack of value placed on their services, but rather the fact that there are lots of people with those skills. Prices are determined by demand and supply, not just demand.

    With respect to professional athletes, their high incomes can be explained by the fact that they operate in markets where people are unwilling to settle for second best and because technology allows them to sell their services in a very wide market. With television and podcasts and vodcasts and DVDs and all that, people never need settle for lesser athletes, everybody in the world can watch the best athletes. (See Sherwin Rosen, “The Economics of Superstars,” AER)

    The better approach would have been to teach them about externalities.

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