Consumer Surplus vs Consumer Honesty

Comment on: Why valuation economics are messing up the Internet, Inequality, and Productivity debates by Tim Kane

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This blog entry is a digital good.  I just read it and derived $0.25 cents of value from it.  But, unfortunately, the payment costs of giving you 25 cents are too high.  So I'm not going to do so.  Which makes me a free-rider.  But... not by choice.  It's not my fault that your blog doesn't facilitate micropayments.  Therefore... I'm not a free-rider... I'm a forced-free-rider.  My consumer surplus is 25 cents... but it's not my fault!

Let's say that your blog did facilitate micropayments.  Right above the comment section would be some coin buttons... a penny, nickle, dime and quarter.  I could click the quarter button.  Doing so would instantly transfer 25 cents from my digital wallet to your digital wallet.

On the one hand... I would be accurately communicating my valuation of your blog entry.  But on the other hand... I wouldn't be getting any consumer surplus!

Which is more important?  Accurately communicating valuations... or getting consumer surplus?  The free-rider problem clearly indicates that too much consumer surplus is undesirable because it will result in goods being undersupplied.  Therefore... it should seem like goods can only be optimally supplied when consumer surplus is minimized.

If you get a chance I'd appreciate your thoughts on my solution (sectornomics)...

http://forum.nationstates.net/viewtopic.php?f=20&t=370167

Sectornomics Simply Illustrated

Reply to reply: Should we create a digital sector?

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If you're right, and having consumer surplus hides information and makes the economy inefficient... then that means you think every society has been continuously and actively engaged in an activity for the last 10 millennia that makes them less efficient. Yet the evidence appears to be the opposite. So either prehistoric man had some Godlike level of efficiency and we somehow still haven't managed to spiral from there to rock bottom... or your theory about consumer surplus is wrong. - Maqo

Rake is a pretty wonderful Australian show about a lawyer. A while back it would have cost you $24.28 to purchase the first season on Amazon. Here's how I illustrated this...

The less expensive the show is... the more people that would be willing to purchase it. Lots of people would buy it if it only cost a penny. A lot less people would buy it if it cost $100 dollars. I'm sure you agree with this pretty straightforward economic concept.

Amazon decided that $24.28 was a good price for the show. This is the Value Conveyed (VC) line. This is the seen. What's the unseen?

A. Everything to the left of the VC line (all the people who would have purchased the show for less money)
B. Everything to the right of the VC line (all the people who would have purchased the show for more money)

B is the consumer surplus. If you would have been willing to purchase the show for $30 dollars... then you derived $5.72 worth of consumer surplus from your purchase.

You're perfectly happy with what we currently see. And it's certainly good that we can see some valuation... but if it's good to see some valuation... then it's better to see more valuation.

A cup has a drop of water in it and you say, "Hey! The cup is .01% full!" And I'm like, "Yeah... the cup is .01% full... but it's also 99.99% empty."

If we created a digital sector then the cup wouldn't be 100% full... but we'd certainly have a far better idea of the true value of Rake and all the other digital goods.   Everybody's valuations would be far more accessible... which means that everybody's decisions would be far more valuable.

Trait A: Right now everybody (with some exceptions) is forced to spend Z% of their income in the public sector.
Trait B: However, people can not choose which public goods they spend their taxes on.

Trait C: Right now nobody is forced to spend Y% of their income in the non-profit sector.
Trait D: However, people can choose which charitable goods they spend their donations on. - Xero

To be honest, Trait A is bad. We know it's not optimal. That's one aspect of your Lord and Savior Buchanan's paper that I can agree completely with. We should be trying to minimize the areas that are affected by A.
But we know (or at least, have very significant theory and empirical evidence to believe) that A+D is worse. It has to be A+B. We accept the problem to some extent with normal taxation because we haven't yet found a way around it (and no, you haven't found that way). But for normal, private goods (or public goods which can be privatized) then we don't need to introduce the problem where none exists. - Maqo

Really... "WE" know that A+D is worse? Who's WE? I have my lord and savior James Buchanan. Who's your lord and savior? Paul Krugman? Paul Krugman's your lord and savior... because... why? Because he defeated my lord and savior in battle? Krugman has completely refuted Buchanan? No, he really hasn't. So if not Krugman... then who? The only person you consistently cite is Galloism. So Galloism is your lord and savior? If not, then who is your lord and savior?

Forcing people to spend some % of their income on some product is going to be wrong for EVERYONE. It is going to hide EVERYONE's preferences. - Maqo

If this is what you clearly see in your head... then it should be so super easy for you to draw a diagram for the rest of us. If it's hard for you to diagram it... then either....

A. you're not clearly seeing it
B. you're incompetent

I don't think you're incompetent. So if you can't quickly and easily draw a diagram... then you're not clearly seeing what you're telling us.

On the off-chance that you don't realize how easy it is to create and share a diagram... you simply go to Google Docs... select Google Slides... create a new slide and draw a diagram. Then you can download the slide as a jpg, upload it to imgur and share it with the rest of us.

Here's an illustration that I just quickly and easily created using Google Slides...

Sectornomics

Forum thread: Creating A Digital Sector

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There are lots of goods that we treat like private goods... photos, books, music, movies, software... but they aren't actually private goods.  Maybe they aren't technically public goods either.

In any case, hopefully most of you intuitively appreciate that sharing a couch really isn't the same thing as sharing an ebook.  Just like sharing an apple really isn't the same thing as sharing an mp3.  Just like sharing a cab really isn't the same thing as sharing a jpg.

Personally, I'm pretty sure that it's extremely detrimental to try and treat digital goods like private goods.  One solution would be to create a digital sector.  Nobody would ever have to buy anything digital ever again.  Instead... everybody would have to spend X% of their income on digital goods.  It would be entirely up to each and every person to decide which digital goods they spent their X% on.

If we created a digital sector... then it would be the epitome of "sharing is caring".  With the current system... in many cases... "sharing is criminal".  Digital pirates can end up paying hefty fines if they get caught.  We've all been thoroughly warned that "piracy is not a victimless crime".

Can you imagine living in a world where sharing digital goods was really encouraged rather than extremely discouraged?  Can you imagine living in a world without any more paywalls?  This world is entirely possible.  Concentrate concentrate... it's in your reach.   We can disrupt the shit out of the current system.

A digital sector wouldn't be without its challenges though.  What would prevent two friends from creating blogs just so that they could pay each other?  How could we minimize cheating?  I'm sure there's a solution.  Given enough eyeballs, all solutions can be found.  Given enough eyeballs, all cheaters can be caught?

One particularly fascinating challenge would involve determining the percentage of income that should be spent on digital goods.  Everybody would have to spend X% on digital goods... but what's the best X?  What's the optimal X?  Clearly there would be problems if X was suboptimal.  If X was too small... then we'd suffer from a shortage of digital goods.  But if X was too large... then we'd suffer from a shortage of non-digital goods.

One possible solution would be to create a non-profit organization dedicated to deciding what X should be.  For convenience sake we can call this non-profit the Digital Balance Society (DBS).  Let's say that you were suffering from a shortage of non-digital goods.  In order to communicate your predicament, you'd simply boycott the DBS and let them know why you were doing so.  With this financial feedback mechanism... the optimal X would be whichever X maximized the DBS's revenue.

I'm sure there's a better solution.  There's always a better solution.

Another challenge would be enforcement.  Perhaps there would have to be a government organization called the Digital Revenue Service (DRS).  Their job would be to ensure that people pay their digital "taxes" (daxes).  The DBS would determine the dax rate and the DRS would enforce it.

Of course... just like with taxes... there's absolutely no reason that the dax rate couldn't be progressive... or even extremely progressive.  Maybe people with incomes under say, $25,000 dollars, would not be required to spend any percent of their income on digital goods.

Let's imagine that poor people no longer spent any money on digital goods.  What impact would this have on digital goods?  What impact would this have on non-digital goods?

I think it's really important to understand that consumers use their cash to direct the economy like a conductor uses a baton to direct an orchestra.  Consumption is a function of direction.  Being able to read a ton of sci-fi books depends on consumers directing enough cash to sci-fi books.

This idea of creating a digital sector falls under the category of "sectornomics".  I would say that I just made this word up but a Google search for "sectornomics" reveals that there are currently 807 results for this word.  It doesn't seem like any of those uses of the word are what I have in mind.  There are relatively few search results though so I'll throw my own definition into the ring.

Just like we could create a digital sector... we could also create a non-profit sector.  Well... we already have a non-profit sector.  However, people are not currently required to spend Y% of their income in the non-profit sector.

Right now we are required to spend Z% of our income in the public sector.  Fully applying sectornomics to the public sector would only involve allowing people to choose where their taxes go.  And again, we've already had plenty of threads about pragmatarianism so please feel entirely free to not to discuss it in this thread!  Although, I would certainly be the last person to stop you from doing so!  :D

Based on what we've covered... the sectornomics breakdown would look something like this...

1. Digital sector: X%
2. Non-profit sector: Y%
3. Public sector: Z%
4. None-of-the-above sector: A%

X% + Y% + Z% + A% = 100%

Initially I wanted to create this thread to survey members about what the optimal dax rate would be.  But I suppose it's more logical to first establish how many members would even want a digital sector.


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Your concept of 'making your valuation more accessible', in real economic terms, means 'voluntarily eliminating your personal consumer surplus'. If you can't see how idiotic that is I don't think anything can save you. - Maqo

Here's what a socialist economist had to say about capitalism...

The system of free competition is a rather peculiar one. Its mechanism is one of fooling entrepreneurs. It requires the pursuit of maximum profit in order to function, but it destroys profits when they are actually pursued by a larger number of people. - Oskar Lange, On the Economic Theory of Socialism: Part Two

How are profits destroyed when they are pursued by a large number of people?

Let's say that it's extremely profitable to grow and sell dragon fruit.  This means that the demand for dragon fruit is far greater than the supply of dragon fruit.  In other words... a lot of people want dragon fruit but it is very scarce.

Because it's extremely profitable to grow/sell dragon fruit... we can expect that more and more farmers would start growing/selling dragon fruit.  But what happens when the supply of dragon fruit increases?  The profitability would decrease.

This is how profits are destroyed when they are pursued by a large number of people.  On the one hand... profits were destroyed...but on the other hand... dragon fruit went from being scarce to being abundant.  Which is beneficial for consumers.

A straight line is the shortest distance between two points.  Here are the two main economic points...

Point A: scarcity
Point B: abundance

The larger the consumer surplus (the smaller the profits for producers).... the longer the distance between these two points.  The smaller the consumer surplus (the larger the profits for producers)... the shorter the distance between these two points.

Sacrificing consumer surplus means giving up momentary pleasure for future benefit.

When dragon fruits were super expensive (Point A)... who purchased them?  Poor people?  Nope.  Rich people did.  Rich people can afford luxuries.  But even though dragon fruits were expensive luxuries... we can guess that there were quite a few rich people who received some amount of consumer surplus when they purchased them.  In other words.... many rich people's valuation of dragon fruits was greater than their allocation to dragon fruits.  This makes sense to you.  You think it would be idiotic to eliminate consumer surplus.  This means that you think it's better when poor people have to wait longer for dragon fruits to become a lot more affordable (Point B).  

From my perspective... intelligent movies are super scarce right now (Point A).  Does this mean that intelligent movies are super expensive?  Nope.  This is because we pretend that movies are private goods when actually they are digital goods.  Therefore.... we should create a digital sector.  The optimal dax rate would eliminate consumer surplus.  Rich people wouldn't pay $10 dollars for intelligent movies.  Instead, they would spend $1000s of dollars on intelligent movies.  This would be the shortest path to Point B.

Would poor people benefit if we had an abundance of intelligent movies?  Of course they'd benefit.   Intelligent movies educate the public... and public education has many positive externalities.  

Everybody would really benefit if there was an abundance of movies about Adam Smith...

When by an increase in the effectual demand, the market price of some particular commodity happens to rise a good deal above the natural price, those who employ their stocks in supplying that market are generally careful to conceal this change. If it was commonly known, their great profit would tempt so many new rivals to employ their stocks in the same way, that, the effectual demand being fully supplied, the market price would soon be reduced to the natural price, and perhaps for some time even below it. If the market is at a great distance from the residence of those who supply it, they may sometimes be able to keep the secret for several years together, and may so long enjoy their extraordinary profits without any new rivals. Secrets of this kind, however, it must be acknowledged, can seldom be long kept; and the extraordinary profit can last very little longer than they are kept. - Adam Smith, Wealth of Nations

Entrepreneurs want to try and cheat by hiding their profits from other entrepreneurs.  Who does this cheating hurt?  Consumers of course.  What about when consumers try and hide their true valuations from all the entrepreneurs?  Is this cheating?  It really is.  Who does this cheating hurt?  Again... consumers!  But in this case, consumers are inadvertently hurting themselves.

It's true that right now we have lots of abundance... and we also have consumer surplus.  But our hidden valuations really didn't facilitate any of the abundance that we do have.  All the abundance that we do have is the result of entrepreneurs acting on the information that they did have access to.  Entrepreneurs really did not act on information that they did not have access to.  If a decade ago we had been far more forthcoming about our true valuations then we would now have a lot more abundance.  With this in mind... we should really sacrifice momentary pleasure for future benefit.