Wasn’t the example that she was not maximizing profits - or rather, that she was factoring in non-monetary costs which led her to conclude that she could make more cash by working horrific hours, it would not be profitable overall?
That’s the flaw I see with the madonna thing - non-tangible assets have value - not just labor, but time spent not laboring. A corporation doesn’t experience this so it doesn’t show up on balance sheets, but the costs are still there, and real, for human individuals. So when madonna refuses to work more hours, it’s because the consumers are not willing to pay her enough to convince her to have more concerts, not because she’s artificially limiting the supply to drive up the price. So, by definition, the market is at equilibrium.
Now, if she is sitting on her hands just to drive up the price of existing concerts, that’s different. But I don’t gather that’s what the scenario is here.
I think after reviewing this that, technically, you are correct in this single transaction case if there is no price discrimination.
So for example, if Madonna was charging $100 per album, and someone was willing to pay $50 (for something with a marginal cost of $1, say)
Madonna can figure out a way to price discriminate and get it in the hands of that person for $50, or
Technically, there is a deadweight loss of $49 from this foregone transaction.
But that looks at it in a vacuum, no? The consumer still has $50 in his pocket that can be used for something of equivalent utility (or surplus). So as long as he has other choices besides music of equivalent utility (or surplus) there is no net economic loss overall. He can use it to buy purple shirts, or food, or entertainment by blowing it on the craps tables in Vegas.
It’s only when the $50 becomes useless - if it’s taken from him, if there are no other choices, if the $50 cannot be invested over time (to grow to $100 and buy the Madonna album), then there is a loss in the system overall.
Madonna tickets are what that consumer valued most. The difference between $50 Madonna tickets and $50 of whatever the next most valued item is deadweight loss.
I do not feel that taxes can be written off as useless. In this example, the deadweight loss is the difference between $50 Madonna tickets and whatever the government does with the money. This is of course almost impossible to calculate, given that some government programs have negative value, some have positive value, and it is impossible to say which the $50 goes to. Plus it would have to be looked at over the whole system rather than on an individual basis (The welfare recipient may consider the deadweight loss to be a lot different than the NFL star).
I think we are talking about the merits of the existence of the tax rather than the merits of paying the tax.
And for what it is worth, I think some taxes don’t cause deadweight loss, or at least prevent a greater deadweight loss somewhere else. i.e. Bob can’t buy Madonna tickets because they are taxed too high, but gets more value from the roads built with the tax.
If so, then it is a poor example. All benefits and costs for all parties count equally.
It shows up when the turnover rate is 100%!
If there are perfect substitutes, then it is not a monopoly.
This has been answered, but consider it for a moment. I wish to buy a Madonna-authorized, Madonna-signed, Madonna-hair jacket because this was where I would get the highest utility. I would be indifferent between this and some other thing in some other quantity. But my individual preferences do not determine price, so just because I am indifferent between one genuine Madonna-hair coat and eleven tanker trucks of Dr Pepper doesn’t mean I can even obtain eleven tanker trucks of Dr Pepper. Even if Dr Pepper tanker trucks are a perfectly competitive market where marginal cost equals marginal revenue. To be sure I am not going to just burn my money, but I will spend it in a less-preferred way.
The deadweight loss won’t be [$50 - MC_Madonna], it will be the difference between the potential surplus of Madonna minus the surplus of the next-best-alternative.
Very well played discussion. Very well played, indeed. I sharpened some of my economic language and enjoyed it immensely.
No, it isn’t. Not automatically, anyway, which is what erislover has been trying to explain for so long. But maybe a different tack will help.
A competitive, economically efficient market has as a part of its operations a competitive labor market to supply it with manpower. If that assumption doesn’t hold, if the labor inputs have some sort of market power themselves (like, say, doctors in a hospital), then the output (medical care in the hospital) will itself reflect that market power. The same is true for Madonna concerts. And that’s exactly what we see: the supply of medicine has been restricted because of the market power of physicians.
Now if you’re a professional economist like Milton Friedman, your solution to this problem is not to deny the definitions of freshman econ. No, those definitions have been established after years of research to provide the keenest insight to the problems at hand, and both liberal and conservative economists happily work with them. His solution is to change the system in a way that creates more efficiency. In the case of medicine, it’s a matter of deregulation for Friedman, as he argued that the state should remove all licensing procedures for doctors. This solution is pulled directly from the most introductory theories. Lower the barriers to entry, and you create more competitive, and therefore more efficient, market conditions. And this is why Friedman was so admirable a libertarian in many respects. He knew what he was talking about, and he made solutions in line with his knowledge. Even if you disagree with his solution, as most everyone does, you can’t possibly fault his thought processes.
There don’t seem to be many like him. Maybe it’s just selection bias on my part, but it seems to me like an awful lot of conservative/libertarian commentators complain about the lack of economics knowledge among the left, that people should take an undergrad economics course or two. But frankly, I don’t think this problem is limited to any one segment of the political spectrum, regardless of how many dimensions that spectrum has.
From the evidence available, it seems to me that all kinds of people are happy to drop mainstream economics just as soon as it reaches conclusions that they’d rather not believe. This includes radical socialists, whose childish ideals of revolution are roughly akin to destroying your car’s engine in anger when it breaks down instead of just replacing the alternator, but it includes just as easily libertarians who take as an axiom the view that government activities are inefficient (and even immoral), instead of viewing efficiency as something to be objectively measured, studied, and discussed.
I never take as axiom that all government activities are immoral. I would claim, however, that there are precious few functions that government should undertake. Those can be defined by very tight rules, as we have discussed elsewhere many times.
Nearly every other activity is indeed unnecessary, inefficient and if done to placate a special interest at the expense of the whole - yes, immoral.
My own moral sensibilities jibe strongly with yours. I absolutely do think it’s immoral when a special interest benefits at the expense of the whole due to government intervention.
However:
I almost never bring that up in discussions here. Moral disputes in public policy discussions are normally useless because different people have different moral sensibilities. There are still people out there who detest capitalism in favor of some amorphous socialist ideal. And that’s just one extreme example. There are plenty of milder differences across the political spectrum.
Next, even if you’d like to avoid circular reasoning and not take government inefficiency as both axiom and conclusion, it’s easy to slip into that error when you’re working, however unintentionally, with self-serving definitions. Your definition at the beginning of this thread of intro econ terminology was simply incorrect. It was completely inaccurate. I don’t mean to be an asshole about this. 99% of people can’t define it, either. It’s no big deal on its own. But it does call into question your belief that all government activities that fall outside your own criteria (discussed elsewhere) are inefficient, if you can’t define what inefficiency actually means in this context.
And me? I am all about efficiency. It’s my favorite topic, because it’s one objective piece of analysis that people like both Paul Krugman and Milton Friedman can agree on. Even when it’s hard to measure, all the professionals agree that it exists and is worth fighting for.
It’s exactly the sort of idea that non-professionals from all over the spectrum give at least lip-service to. It’s nice and shiny, even if people don’t actually believe in it. And too often in my experience, people abandon talk of “free markets” immediately when it hits their personal sphere. I don’t know how many libertarianish lawyers I’ve talked to who rage about government interference up till the point when I note the barriers to entry in their own business, professional licensing by the bar, whereupon they do such a sudden about-face it’s a wonder they don’t fall down from dizziness. Are they being hypocritical? I don’t know for sure, but I’d guess so for most of them.
They don’t have the consistency of Milton Friedman. They seem to happy to fudge the definitions whenever it benefits them, to take a dim view of government efforts to improve efficiency for everybody else, but to be firmly in support of government controls when it benefits them. Their various claims about efficiency are largely, I suspect, empty post-hoc rationalizations to buttress what they always wanted to believe from the beginning.
Completely agree with P1. That’s why the rule of law is supreme, insomuch as it protects freedom. The Moral High Ground gets pretty crowded up at the top, with anti-abortionists, socialists, left-wingers, right-wingers and whomever else is Up There claiming that their impositions on the rest of us are done in the name of some moral good.
P2. I concede that I mis-used the definition of ‘deadweight loss’, in the way its defined in a tight, classical sense of a single commodity product. You have me there. But I will stand by my original arguments in all of my posts above when the broader topic of economic loss is considered. I don’t see how mis-using the definition of ‘deadweight loss’ changes the overall argument I was trying to make.
Does it change your overall point in this thread? No, I wouldn’t say that. But the error you made about market failure (deadweight loss/economic efficiency) was still serious enough to deserve having more attention called to it.
I’m not really sure this is a large problem when the barriers to entry are low. The market may only bear a few in this position. It increases the possibility of some kind of oligopoly, I suppose, but if there is some competition and the barrier to entry isn’t insane, it doesn’t really matter.
Do you mean, because there are few, they can control prices, or do you mean, because of regulation, prices are controlled?
True. But if there is significant demand for an alternative, why do you suppose none has appeared?
I disagree. I don’t want to go off into the weeds here, but I would argue that I missed the technical definition of deadweight loss for a single, commodity-priced product.
The definition from wikipedia:
** In economics, a deadweight loss (also known as excess burden or allocative inefficiency) is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal. **
I would argue if you rephrase the sentence after ‘equilibrium’ to read
'…for goods and/or services…
The larger, lowercase ‘d’ definition of deadweight loss becomes that in the overall system as a whole. Yes, I acknowledge I just made that up. But would you agree that it makes sense? The Madonna fan is not choosing to spend his $50 in a vacuum of one product or service. There isn’t just one, single P-Q graph in the world of economic decisions.
So I would defend myself by saying that it isn’t really a ‘biggun’. In fact, I would argue it’s more of a little-un. More akin to missing the multiple choice question on the freshman econ exam, but having a professor who can’t think beyond a commodity P-Q graph in the textbook and apply an example to the real world.
The ‘biggun’, in my opinion, is a mistaken attempt to link natural monopolies, which come and go in the real world and are always subject to competitive entry, with government control and taxation, by narrowly defining ‘deadweight loss’ in an effort to make the two environments equivalent. Which was part of the original point of the OP. They are not even close to being equivalent environments.
If the government takes away $50 via taxation and squanders it on hole digging and filling, that is a big deadweight loss. If Madonna can’t price discriminate and get the consumer his $49 surplus (in the example above), so the consumer settles for their next best alternative of purple shirts at a $48.50 surplus, it’s not a big deadweight loss. And it’s one for which the consumer retains control.
The deadweight loss of the system as a whole is the sum of individual deadweight losses.
No redefinition is necessary. All you have to do is understand the real definition.
Funny how all it takes is a conflict between what the experts know and what the ideologues would like to believe for average IQ at the uni to drop 50 points.
It’s not a “mistaken” attempt to link the two. They are linked by their inherent similarities. But once again, it requires that you actually understand how those markets function. You don’t.
Yours is not a small mistake. It has been and continues to be a fundamental misunderstanding. The deadweight loss they both cause is identical. Equivalent. Exactly the same. The causes are different, but the deadweight effect is the same.
No.
A deadweight loss is what it is. If there’s $50 worth of deadweight loss from a government excise tax on liquor, and $50 worth of deadweight loss from monopoly pricing, then those losses are equivalent. They are exactly identical. In stark contrast, this deadweight loss is not equivalent to tax revenue. The government can acquire hundreds and hundreds of dollars of tax revenue and still cause only a meager $50 deadweight loss to the market.
Consumer response to this loss will be exactly identical in both markets. Some folks might buy a purple shirt instead of a Madonna ticket. Other folks will buy a purple shirt instead of a bottle of liquor. Others will continue to buy the good in question, and simply pay a higher price for it (and thus they’ll receive less consumer surplus). There’s a second best choice for both markets, but that doesn’t change the deadweight loss. Both monopoly pricing and the excise tax will price the good out of some consumers’ range, and that’s the source of the loss. It comes only from the people who buy their next best thing.
The real difference between the two examples is not the inefficiency itself but who benefits from the inefficiency. In the case of a monopoly, it’s the monopolist benefitting from a transfer of consumer surplus into producer surplus. For a tax, both the consumer and producer lose value to the benefit of the government which receives tax revenue. But that government revenue is not deadweight loss. Unlike the deadweight loss, which has been destroyed, that value from tax revenue still potentially exists in the world, depending on what the government does with it.
What the government does with that revenue is another story in another market. It could do something stupid like commissioning the digging and refilling of holes. But in that case, we have an entirely different market with an entirely new deadweight loss. In this case, the government subsidies are producing an over-allocation of hole management resources (or for a real world example: US ag subsidies). So now we have deadweight loss in two markets, and I assure you, economics professors are capable of adding the losses from these two markets without need for you to point it out. As it happens, economists and math get on well with each other.
It is definitely worth pointing out that, when the government taxes in order to spend inefficiently, society gets gored both coming and going. But we can’t conflate those markets, and we can’t assume that the government will always spend poorly. In fact, for those of us who are interested in providing the whole story, we also need to mention that if the government uses its revenue to purchase public goods with high positive externalities, then the government is using its revenue to correct a deadweight loss in a different market, potentially leading to a net gain. The inefficiency in one market can be offset by added efficiency in another. Or the government can tax and internalize any external costs that a market doesn’t ordinarily account for, and thus reduce deadweight loss without even considering what it might spend the money on. Or the government can tax and pay down debt, and thus reduce future crowding out of investment. In other words, there’s a heckuva lot that the government can do, both positive and negative.
Listening to you, people will get only half of the story, and that not even correctly explained.
Now, some of your other comments are valid. Some (not all) natural monopolies are potentially subject to future competitive entry, and even when they aren’t, there’s often nothing to be done about the market failure. Satellite dishes stirred up the cable companies; cell phones changed the land-line market; and Madonna concerts just can’t be regulated in any sensible fashion. It’s not worth it to have the government jump in as the savior of economic efficiency in each and every context, and it’s nice to have conservative/libertarian types to point this out every once on a while.
As long as their observations are correct, that is.