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Celebrate Consumer Surplus

The collaboration that the market makes possible across continents and time is one of the wonders of the world. I, Pencil conveys that wonder by showing how the fabrication of pencil depends on the actions of thousands of people who never meet. And there is no central planner to coordinate their actions. This story can make a market enthusiast even of a small child.  I have seen this for myself!

Consumer surplus is another marvel of the market.  In a competitive market, most consumers get a product for less than they would be willing to pay for it. The markets deliver us more than fair exchange. The idea of consumer surplus plays a large role in some areas of law, particularly antitrust. So it is important to dramatize this concept.

In class, I ask students to think of the product from which they get the greatest value. That large difference between the price paid and the benefits conferred shows how the market serves individual desires—really individual in that few or no other people share all of them.

In order to make the issue more vivid I share an example from my own life: an e-reader. I can buy a top of the line e-reader for 200 dollars (say a Kindle Voyager) and I am sure I would be willing to pay five times the price. From early grades, I have always been a reader of many books at time: the e-reader keeps them together and accessible. I travel a lot: the e-reader is easy to take on the plane.  I have a quite small residence in an expensive city:  e-books do not take up space. Unlike tablets, the e-reader is not connected directly to the internet: it is a precommitment to read long-form material in a world where we are bombarded by short-burst information. I can get very impatient, especially on bureaucratic lines. The e-reader is a pacifier that keeps me out of jail.

But the e-reader is important for my spiritual as well as my material well-being. Ever since I was little boy, I have been awed by libraries, getting sometimes a little weepy just thinking about all the knowledge they embody. In the e-reader I have a rather large, portable personal library of books that have instructed me, amused me, or even on a few occasions, to use Kafka’s words, “come like an icepick to break the sea frozen inside.”

And many of these books—the great classics of the Western World—from Plato to Jane Austen are now available free of charge. Of course, explaining that low price requires another dramatization—on behalf of intellectual property. Still, consumer surplus on its own, understood viscerally, provides us another reason to celebrate how the market serves the interests that most make us who we are.

Reader Discussion

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on October 31, 2014 at 14:46:31 pm

[T]he markets deliver us more than fair exchange. The idea of consumer surplus plays a large role in some areas of law, particularly antitrust. So it is important to dramatize this concept.

In class, I ask students to think of the product from which they get the greatest value. That large difference between the price paid and the benefits conferred shows how the market serves individual desires….

Nice that McGinnis mentions antitrust – and, by implication, industrial organization (now a Nobel Prize-worthy topic). If you ask students to think of a product with a large difference between what you pay and what you would pay, I hope they think of utilities – water, gas, electricity, etc. Left to laissez faire economics, providers might restrict supply and charge exorbitant sums for these things – and McGinnis would still praise them for creating consumer surplus.

In short, consumer surplus is great – but it’s not the whole game. We also need to be mindful of how the surplus is allocated. It’s useful to remind students (and aren’t we all students?) that we can have consumer surplus, markets, AND regulation – and indeed, regulation may result in MORE consumer surplus.

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nobody.really
on October 31, 2014 at 16:07:05 pm

It may - and then again, it MAY NOT!
witness, California's troubles with their regulatory scheme(s) for power distribution and how well that went.
Or look to Washington State with its regulatory dose of *renewable energy" requirements and how well that is working out.
Better still - look to the Fueherland for regulatory silliness and how well the German and EU carbon *regulations* have served the people - higher costs and less than adequate supply.

Let's just be mindful of WHAT regulations we are praising. Surely, some are helpful for safety, etc; yet this is a far cry from successfully positing that they engender surplus.

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gabe
on November 08, 2014 at 07:55:43 am

You brought up antitrust...as you know, utilities are monopolies and Not competitive markets (by gov design), which is why the results you've just described are true. Food is just as essential.

There are a few localities that have competitive utilities, and their prices are considerably better.

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James

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