Human Action

Published

on June 16, 2023

in Economics, Self-Promotion and Technology

. 14 Comments

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14 Responses to “Human Action”

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1 1 David R. Henderson
June 16, 2023 at 7:59 pm

Wonderfully done. I e-mailed you and Bob a few minutes ago with my complement.
2 2 Roger Schlafly
June 18, 2023 at 8:59 pm

I think that ChatGPT gave the better answer, to the problem as stated. The question says: “In a country where everyone is identical, 100 people wait in line each day to buy raspberries at a controlled price.”

This is confusing. If everyone is identical, then why are only 100 buying raspberries? The obvious assumption is that the government is controlling sales somehow, such as by mailing out 100 ration coupons everyday. Those with coupons also get coffee, while standing in line. ChatGPT correctly calculates the social cost in this case.

You could think of the coffee as being equivalent to lowering the price of raspberries by 25 cents.

To get a different answer, you have to make some extravagant assumptions, such as that more than 100 people will stand in line, or that people will get into fist fights, or that some people will be incentivized to take unusual and expensive steps to stand in line.

These extra assumptions are bizarre, unrealistic, and not stated in the problem. Maybe they could be made if the problem had a Part 2 that asked to discuss how altered incentives might change your answer. But as the problem is asked, I believe ChatGPT gave a fine answer.
3 3 Steve Landsburg
June 18, 2023 at 9:19 pm

Roger:

1) “If everyone is identical, then why are only 100 buying raspberries?” This is like asking “If all the air molecules in my living room are identical, then why are only half of them in the left half of the room?”. Identical particles (or identical consumers) behave differently in equilibrium all the time. In this case, we can even identify the cause — we are told that because of a controlled price there are only enough raspberries available for 100 consumers. Why would a 101st bother waiting in line?

2) The rest of your answer denies the theory of supply and demand, which is taught in the first week of any good economics course and is as well-established (both theoretically and empirically) as anything else in economics and many things in the physical sciences. That theory tells us that:

A) For any quantity, there is a demand price and a supply price (the prices at which demanders would collectively want to buy that quantity and at which suppliers want sell it).

B) For a quantity that’s actually traded, demanders must pay the demand price and suppliers must receive the supply price. If, for example, suppliers are receiving more than the supply price, then they are selling less than they want to sell, which leads to competition among suppliers that pushes the price down. If demanders are paying less than the demand price, they are buying less than they want to buy, which leads to competition among demanders that pushes the price up.

C) There is only one quantity for which the demand and supply prices are equal.

D) If the quantity is fixed below the quantity in part C), then the demand price is higher than the supply price. By part B), this means that demanders are paying more than suppliers are receiving. This means that there must be a component to the price above and beyond the cash payments from buyers to sellers. Theory does not tell us in any given instance what that price component will be, but it can take the form of time spent waiting in line, or fistfights, or any of many other things. All we need to know is that it must be costly.

E) If the government is mailing out ration coupons, then the price component in part D) is likely to take the form of a (possibly black) market price for the coupons. You are right that there is no social cost to this form of competition, unlike all the other forms. But if this were happening, there’d be no need for other forms of competition, hence no need to wait in lines in the first place. So we can rule this out.

F) What you call “extravagant assumptions” are not assumptions; they are *conclusions*, from the reasoning above. And they are inescapable conclusions, given a rudimentary understanding of supply and demand, which is exactly what ChatGPT seems to be missing.
4 4 Roger Schlafly
June 19, 2023 at 2:05 am

You say “Why would a 101st bother waiting in line?” This suggests that someone is selling raspberries on a first-come first-served basis to the first 100 customers. And that some are willing to wait in line for raspberries and some are not. But the exam question says none of this. It says that the people are identical, so they have the same desire for raspberries and willingness to stand in line and pay. If the line is 100 long because some people are more willing to stand in line than others, then the conditions of the problem are violated.

I do not see what the law of supply and demand has anything to do with the problem. There is no market for anything. Nothing affects how many people stand in line, or how long they wait, or how much they pay. There is no reason to think the bundled coffee with have any effect on the raspberry buyers. I guess I must not have been paying attention freshman week in class.

I see in the older thread a lot of discussion about extraneous issues like the time spent waiting in line. Nothing in the problem says the coffee has anything to do with that. Maybe the customers only spend 30 seconds waiting in line, with or without the coffee. You say: “free coffee cannot make anyone happier.” They are getting raspberries and coffee for the same price that they previously paid for just raspberries. You have to somehow make a bunch of assumptions about inconveniences causing unhappiness. In a real market, sure, you would have to pay more to get more. But this is a govt and price controlled operation, not a market.
5 5 Steve Landsburg
June 19, 2023 at 9:58 am

Roger: The solution to this problem is a simple and straightforward application of supply and demand. I broke that argument down for you in six steps labeled A) through F). You responded by repeating the same fallacious arguments you made the first time around, with nothing to indicate that you’ve digested any of those steps.

If you would like to understand the correct argument, I am happy to help, but you’ll have to start by telling me which of the six lettered steps is the first one that you’re not following.
6 6 Henri Hein
June 19, 2023 at 8:23 pm

Roger @4:

“If the line is 100 long because some people are more willing to stand in line than others, then the conditions of the problem are violated.”

The line is not 100 long because some people are more willing to stand in line than the others. It is 100 long because there are only raspberries available for 100 customers. The people know this and they know how many people wait in line. Person #101 is equally as willing to wait in line as person #100, but as they can tell they won’t be getting any raspberries, it’s pointless for them to enter the line.
7 7 Roger Schlafly
June 20, 2023 at 2:56 am

I fully accept that market prices are driven by supply and demand.

Henri says: “Person #101 is equally as willing to wait in line as person #100”. So why is person 100 getting raspberries, and not person 101? There must be some mechanism that is not explained. It could be coupons, but there are a lot of other ways in which 100 people could be privileged.

Steve says that person 100 is getting raspberries at a below market price, so he must pay for it in some other way. Such as getting into a fistfight with person 101 to prevent him from cutting into line, I guess. Or by waking up early to spend more time waiting in line. Or by having to buy black market raspberry coupons.

I just don’t see how to square any of these possibilities with the given problem assumptions. As Henri says, no one is more willing to stand in line than anyone else. Nobody is going to get into fistfights either, unless you add some very unusual assumptions. And there cannot be a black market in coupons unless some people are more willing to pay than others, but they all have the same willingness to pay.
8 8 Henri Hein
June 20, 2023 at 1:28 pm

Roger:

“So why is person 100 getting raspberries, and not person 101? There must be some mechanism that is not explained.”

But it *is* explained. It’s due to the price controls.
9 9 Roger Schlafly
June 20, 2023 at 2:49 pm

The price controls make everyone want to buy. Some mechanism limits them to 100 buyers. Maybe the govt mails out ration coupons. Maybe only citizens with id numbers in a particular range can buy on a particular day. Maybe only those who live in a particular neighborhood. There are other possibilities.

The mechanism cannot be willingness to wait in line a long time, or ability to win fistfights, by the assumptions of the problem. The privilege to buy raspberries cannot be bought and sold in a black market. All the people have the same demand for raspberries.
10 10 Steve Landsburg
June 20, 2023 at 4:01 pm

Roger: You wrote:

I fully accept that market prices are driven by supply and demand.

That may be, but it is crystal clear that you don’t understand why market prices are driven by supply and demand.

Here is the argument in a nutshell: For any quantity, there is both a supply price and a demand price. Competition guarantees that suppliers receive the supply price and demanders pay the demand price. If everything paid by a demander is received by a supplier, then the market quantity must be the unique quantity at which the demand and supply prices are equal.

Now either you buy that argument or you don’t. If you don’t, then you have no reason to think that market prices are driven by supply and demand. If you do, then you should be willing to apply the same logic to other circumstances.

(In fact, once you’ve mastered a bit of logic, it’s the ability to apply that logic in other situations that makes the difference between my strongest and my weakest students.)

In the case of the price control, the demanders are already standing in line. Their time is worth something, say $X per serving of raspberries. Therefore the demand price exceeds the supply price by X. Therefore the demand price must continue to exceed the supply price by X unless something shifts the demand or supply for raspberries. The government’s action effectively reduces X by 75 cents per cup, so something else must raise it by 75 cents per cup to return it to its original value.

(I have modeled the free coffee as a change in price; you could, if you wish, model it as a change in the demand for raspberries, but you’d get exactly the same conclusion — because two different correct arguments cannot contradict each other).

You seem to be focused on the implausiblity of particular examples like fistfights. We might disagree about that implausibility, but it makes no difference — the logic of supply and demand says that *something* has to fully offset the value of the free coffee.

I note that you have implicitly declined my invitation to pinpoint the exact step in the argument where you stopped following. The invitation is still open.
11 11 Roger Schlafly
June 20, 2023 at 11:11 pm

Okay I am consulting my copy of Price Theory and Applications, 2nd Edition, which you so generously gave me many years ago. It starts off with the laws of supply and demand. A later chapter on welfare economics has a section on price ceilings. It says that consumers do not get any benefit from a price ceiling, because “they compete with each other to acquire the limited supply. Depending on the nature of the good, this may take the form of standing in line, searching …”. No mention of fistfights, but “a number of other possibilities.” Those costs eat up all the savings.

I am still not convinced, but I see the argument you are making, and I can study the remaining 700 pages for more details.
12 12 Z
June 23, 2023 at 11:27 am

Steve,

Kind of along the lines of your discussion with Roger; I also own a copy of Price Theory. Surprisingly, you don’t mention price floors in my edition, but there is a section for price ceilings. I wanted to ask, in the case of price floors, specifically the minimum wage, does the logic work the same in reverse? What I mean is, government imposes a price control on the legally mandated wage employers must pay (the demand price) that’s above the competitive wage, but is the actual wage the employees get (the supply price) *less* than both the minimum wage and competitive wage? If so, how does that translate in the real world? Reduced hours and/or compensation?
13 13 Steve Landsburg
June 24, 2023 at 9:40 pm

Z: I’m sure that the answer to your question varies quite a bit from industry to industry and from firm to firm. But in the presence of a wage price floor, there has to be either costly competition for jobs or reductions in job-related benefits. The latter can take the form of fewer coffee breaks, for example. But a more important example is that it can also take the form of less on-the-job training. On-the-job training is valuable to employees, but not so valuable to employers, because employees can quit at any time and take their skills elsewhere. Therefore much on-the-job training is provided not to make workers more productive, but to make jobs more desirable. There is an old paper of Ed Lazear with substantial evidence that wage price floors often lead to so much less on-the-job training that even for workers who find employment at the floor price, lifetime income falls significantly.
14 14 Z
June 26, 2023 at 10:58 am

That’s really cool! I had no idea you could apply those basic models in such a way, but it makes sense. Usually the classes I took just focused on the effect on equilibrium quantity based on where the horizontal price lines intersected supply & demand.

I’ll definitely be looking for that Ed Lazear paper too.