Thursday, May 26, 2005
First half of the class begun late because we were into a discussion of health care in Canada, as a student was discussing the importation of prescription drugs to the US. This allowed me to discuss rationing. All scarce goods must be rationed somehow. If we don't use price in the market system to ration, something or someone else has to do the job. This can be first-come-first-served, age, beauty, ethnicity, kinship, equal shares imposed by government, or any number of other items. We ran through the examples of price ceilings and price floors.
We spent some time as well discussing consumer and producer surplus (note to self: do more of this Tuesday.) Given a myriad group of rationing schemes, one wants to know which provides the most benefit to society. What we illustrate is that with an unfettered market that has competition, the combination of the two surpluses is maximized when you allow price to ration goods.
We were doing fine to there. In the end of the fourth chapter of the text was a question I asked students to answer last night in homework:
Friedrich bought a large painting by Turner that was on display at a major exhibition, but he had to agree not to take possession until the show ended six months later. When the show finally ended and Friedrich brought the painting home, he made two discoveries: The show had so increased Turner's prestige that the painting was now worth twice what he had paid for it, and the painting was too large to fit any of his walls. Karl has larger walls in his home and would like to purchase the painting from his friend Friedrich. What is the proper price for Friedrich to charge Karl? What he himself paid for the painting or what he could now get for it if he put in on the market?
The answers to this were fascinating. One student allowed how she faced just this problem with some free infant formula she has but doesn't need: should she give it to her friends who are expecting infants of their own, or sell it to them, or what? Another student said you couldn't charge the market price to a friend because it's a friend, a violation of the opportunity cost rule (the marginal cost of the painting is now double what you paid). But a third student said to the second, if you sell it at cost and your friend turns around and sells it on the market, wouldn't you be upset? Yes, the second student allowed. I gave an example of an ugly tie Mrs. S might buy for me. She asks me to wear it. If I do, it's not because I like it, but if I don't she will be mad. You'd call it a gift with strings attached. So what about the transaction between Friedrich and Karl? And on and on it went, for a half-hour.
The end point of the story to me was a realization that, when dealing with friends, a transaction doesn't always involve the exchange of the same set of property rights as an exchange between strangers. I wouldn't imagine telling a stranger where to hang the Turner picture, but I might tell Karl to hang it where I can come see it later. And of course, in return I charge a lower price, because I didn't transfer a complete set of rights. I closed with a weird example sent to me by reader jw yesterday, wherein a transaction for a sperm donation between a man and a woman later gives rise to a claim for child support, which the court grants. The students are shocked, but I get lucky: one of my students has experience as a guardian ad litem, and helps explain that while a man and woman can have a transaction over the sperm, the woman is not allowed to terminate the rights the child has over the father.
So, I concluded, what is really being transferred isn't the good itself, but a set of rights, which sets up next week's lectures.