There is a very real sense in which all economic transactions, so long as no party is compelled to partake, are for the benefit of everyone. Every trade or purchase is a case of two people giving up something in exchange for something they value more. Otherwise, says the economist, they would not take part in the trade to begin with. If I buy a gallon of milk for two dollars, this means that I value the gallon of milk more than two dollars—otherwise, rationally, I wouldn’t make the purchase. Likewise, the grocer values the two dollars more than he values the gallon of milk—otherwise, rationally, he’d keep the gallon of milk instead of selling it. Thus, through trade, both of us are better off than we before.
This, the economist says, is true of every voluntary transaction. In this sense there is no such thing as an “unfair trade” or “getting ripped off”—if I didn’t end up benefitting from the transaction, I wouldn’t have entered into it. If I purchase Hannah Montana tickets for $500, then I obviously value those tickets at more than $500—otherwise I would have stayed at home or done something else instead. So by purchasing them for “only” $500, it is difficult to say that, in an economic sense, the trade was unfair, since I am now better off than if such a transaction were illegal. When I say that the trade was unfair, what I’m really saying is that I want the transaction to be legal, but with a mandatory lower price.
Economists note that this sort of regulatory behavior—a “price ceiling” in their parlance (or a “price floor”, if you’re trying to benefit the sellers rather than the buyers) results in a market inefficiency. The current level of supply doesn’t magically stay the same, but with lower prices. Rather, by restricting the price from growing to a certain level, you reduce the supply as well. If there are no $500 Hannah Montana tickets, then I’m less likely (not more) to be able to purchase a sub-$500 Hannah Montana ticket.
Although this makes sense from a rational perspective, it doesn’t help the early iPhone purchasers from feeling taken advantage of by Apple when, shortly after their purchase, Apple announced a $200 price cut. Logically speaking, they value the iPhone at more than the $600 they purchased it for—otherwise they never would have shelled out the cash—so why do they suddenly feel that $400 would have been a “more fair” price point?
The answer has to do with that “economic profit” concept I talked about yesterday, and also a bit about human behavior, which I’ll talk about tomorrow.
Entries (RSS)