Saturday, July 22, 2017

A Penguin Introduces Henry Farrell To Ronald Coase

I'm a penguin.  I do normal penguin things... like swimming and fishing.  But I also appreciate Ronald Coase.  So I took a break from my normal penguin activities and read Henry Farrell's recent blog entry... Why Coase’s Penguin didn’t fly.  Who was Coase's penguin?  Am I?

The entry has a couple of main characters in it... Alex and Pat.  We don't actually know their gender.  As a penguin I find this to be a problem.  But it's easy enough to fix... Alexander and Patricia.

The couple wants to do something together.  She would prefer to watch a movie while he would prefer to take a walk in the woods.  Here's what does not happen in Farrell's entry.  She gets her phone out, opens the relevant app, finds Alex, clicks on his name, clicks "New" and then enters the two options...

1. Movies
2. Walk

After doing so she clicks "Create".  Alex's phone goes *bleeeling!* and he gets it out.  He opens the app and decides how much he'd be willing to pay to have his way.  She decides how much she'd be willing pay to have her way.  When they are both finished the app displays the result...

1. Movies: $3
2. Walk: $7

Alex is willing to pay more.  Therefore, the most valuable option is for them to go for a walk.  Since Pat isn't getting her way the app doesn't transfer $3 from her account to his.  But it does transfer $7 from his account to hers.

The couple bared their hearts to each other.  This is Ronald Coase.  He's a really great guy.

Admittedly, I do have a bird brain.  So maybe I'm misunderstanding that the problem with social cost is that it's hidden.  Maybe Coase didn't perceive that costs need to be seen and known in order for mutually beneficial decisions to be made.  And maybe I can't fly.

2 comments:

  1. Interesting, but incomplete!
    You would really also need to rate the opposite, ie how much would you pay (or indeed need to be paid) to *not* pursue a particular option.

    And then you'd run into the problem Dan Ariely describes here: http://danariely.com/2012/05/08/turning-the-tables-fdr-tom-sawyer-and-me/ - value is not objective.

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  2. When Pat is deciding how much she'd be willing to pay for her preferred option (going to the movies) she also takes into account how much she'd need to be paid to walk in the woods. So her $3 dollars WTP for going to the movies is also her minimum willingness to accept (WTA) for walking in the woods.

    Is it necessary to unbundle WTP and WTA? Let's imagine that the previous day two hikers were killed in the same woods by a pack of wolves. In this case there might be a huge disparity between Pat's WTP for going to the movies and her WTA for walking in the woods.

    If the two things are bundled then perhaps the amount she enters for her preferred option is $100 dollars.

    Alex: Wow, you REALLY want to go to the movies!
    Pat: Naw, I just REALLY don't want to take a walk in the woods!

    But in reality, Pat would probably ask Alex to choose an alternative activity that didn't involve the chance of being eaten by wolves.

    The main issue is where/when it's beneficial to use sacrifice (or willingness to sacrifice) to accurately signal the value of things. Ariely's article, while interesting, doesn't really address this issue. He doesn't say, "Here's exactly when, where and why we're better off NOT knowing the social value of things."

    From my perspective, it's always necessary to know the social value of things because society's resources are always limited. The time that Alex and Pat spend walking in the woods can't also be spent going to the movies... and vice versa. In order to spend their time as beneficially as possible, it's necessary for them to use sacrifice to accurately signal/reveal their valuations.

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