Steve Landsburg is an utter cretin. He thinks the 'book-keeping', or financial cost of production is the 'opportunity cost' to Society. Actually, the financial cost doesn't matter. What matters is the 'best alternative foregone'. In the case of a perishable good- e.g. fruit- the opportunity cost of eating a particular fruit isn't the cost of producing that fruit, it is the fact that someone else could have eaten it.
Furthermore, in consumption decisions, only your marginal utility matters. True, you can decide that you get utility by buying from a virtuous person whereas you experience disutility from buying from an evil bastard. But that is a matter of taste- for which there is no accounting.
Landsburg has the following exam question.
Q. Apples are provided by a competitive industry. Pears are provided by a monopolist. Coincidentally, they sell at the same price. You are hungry, and would be equally happy with an apple or a pear. If you care about conserving societal resources, which should you buy?
Apples and pears are perishable. They can't be conserved. Either they are eaten or they go to waste. What about maximizing Social Benefit? Should you chose one fruit over another on that basis? No. True, if you think some other person would enjoy the fruit more than you, you are welcome to give it to them.
Alex Tabarrok is as stupid as Landsburg. He thinks the following is the correct answer-
The social cost of producing a good is the opportunity cost of the resources used in its production.
Not for fruit which already exists. The opportunity cost of me eating the apple is someone else eating it or its rotting away in my fridge (which is what normally happens to fresh fruit I buy).
One could say 'which fruit would you buy on an ongoing basis?' Here, if you are indifferent between the fruit, then you may boycott the fruit produced by the evil Israeli competitive market while making it a point to nosh on the virtuous product of the Hamas monopoly. But this means you are no longer indifferent between the two commodities.
In a competitive market, price equals marginal cost,
not in the market for perishables like fresh fruit. Price need only exceed cost of delivery and display.
so the price reflects the social cost of production.
Nope. It reflects exogenous shocks- e.g. weather conditions. As for the 'social cost', who the fuck knows what that is? Ecologists may discover decades from now, that there was a very high social cost in producing apples on a particular terrain.
However, in a monopoly market, the price is higher than the marginal cost, so the price does not reflect the social cost.
No. A fruit monopolist would deliberately reduce acreage devoted to pears or else destroy a portion of the crop so as to hit the 'sweet spot' on the demand curve. The customer can't do shit about this. Only the Government or the Courts can force the monopolist to increase acreage or bring the entire crop to market even if this means the price collapses.
Given:The price of apples (Pa) equals the price of pears (Pp)
Apples are produced competitively, so Pa = MCa
The marginal cost is zero. Price is determined by where the totally inelastic supply schedule hits the demand curve. Long run, with 'Muth Rational' expectations, one could say that expected price should equal expected incremental cost from the marginal acre brought under a particular fruit. But, the Muth Rational equilibrium (one which gets rid of 'cobwebs') for perishables like fruit involves crop insurance or buffer stocks or other methods of getting Income equalization absent which there would be entry or exit. Once again, consumers can't do shit about this though no doubt they could boycott particular products or take other action to directly change the demand curve.
Pears are produced by a monopolist, so Pp > MCp
Therefore, MCa = Pa = Pp > MCp
The marginal cost of producing a pear (MCp) is lower than the marginal cost of producing an apple (MCa).
No. Even if the market is in steady state equilibrium, and the monopolist is restricting acreage under pears, the result is that the (presumably highly productive for pears) pear acreage has a higher price or imputed rent. The marginal cost is still zero plus the incremental transport cost. By finding a superior way to dispose of excess pears- e.g. turning them into Schnapps- Society has a Pareto improvement. But my eating apples rather than pears will have no effect.
From society’s perspective, the cost of producing an additional pear is lower than the cost of producing an additional apple.
No. Acreage under pears is less than it would be if there was no monopolist. But this tells us nothing about Social Costs or Benefits. It may be that pear production has some positive externalities- more pollen and thus more honey- and some negative externalities- e.g. higher need for freon based refrigerants in the cold chain. But the solution is supply side. The consumer can do nothing.
The resources needed to produce a pear (MCp) are less than the resources needed to produce an apple (MCa).
There could be a 'tragedy of the commons' if there is free entry. All sorts of nutters think they are gonna strike it rich by growing apples. They weep bitter tears when the price collapses. But the solution is better 'public signals' promoting an improved correlated equilibrium.
Therefore, if you want to minimize the societal cost of your fruit consumption, you should choose the pear. By consuming a pear, you are using up fewer societal resources than if you consume an apple.
Nonsense! All you are doing is, at the margin, increasing monopoly profit while the little guy who brought his apples to market hoping to buy his malnourished child bride a vibrator weeps bitter tears.
The monopoly pricing of the pear is a separate issue from the social cost of production. The higher price of the pear reflects a transfer from consumers to the monopoly producer, but it does not affect the underlying cost of the resources used to produce the pear.
If there is a negative externality or a 'repugnancy' market, we may prefer a monopoly. It may be better if Opium or Tobacco or Alcohol is a Government monopoly.
So in conclusion, if your goal is to minimize the cost to society of your fruit consumption,
you need to know a lot about agriculture and ecology and sustainability etc. It may be that I should eat less avocadoes and quinoa for complex ecological and geopolitical reasons.
you should buy the monopoly produced pear, as it has a lower marginal cost of production than the competitively produced apple, despite being sold at the same price.
At the margin, you should buy the apple for 'distributional' reasons. It is not the case that consumers should minimize marginal production cost by buying access to my farts (which cost nothing to produce) rather than purchasing real estate.
Alex gives us another 'brilliant' question from the nutter Landsburg-
Q. The town of Mayberry is thinking of expanding its airport. One problem with the expansion is that it would result in more airplane noise. For people who live near the airport, hearing that noise would cause as much unpleasantness as the collective loss of $100,000 every year. True or False: When Mayberry weighs the costs and benefits of its airport expansion, that $100,000 should count as a cost
True. If Mayberry ignores this cost and builds the airport it is likely that it will be dragged into court and will have to pay punitive damages. This is because there is a property right in Common Law and thus the matter is justiciable.
A. True, the $100,000 in collective unpleasantness experienced by residents near the airport due to increased noise should be counted as a cost when weighing the costs and benefits of the airport expansion. Here’s why:
Externalities: The airplane noise is a negative externality – a cost imposed on third parties (the nearby residents) who are not directly involved in the economic activity (the airport expansion). Externalities lead to market inefficiencies because the full costs are not being accounted for by the decision-makers.
….a bunch more similar reasoning, all correct.
Once again, Claude (an AI) gives a textbook answer and yet the answer is wrong.
In a way this is more surprising than failing the first question because Coase got a Nobel prize for giving the correct answer (and it’s not, bargaining will solve the externality if that is what you are thinking.)
Transaction costs are high. Thus Coase is irrelevant. Moreover there are uncorrelated asymmetries dictating 'bourgeois strategies'. In this case, property owners have an incentive to band together and sue the pants off Town Hall.
I will let commentators work this one out. Do read the question carefully, it’s subtle. Again with Socratic prompting Claude got there eventually.
I wouldn’t underestimate the GPTs, textbook answers can be of great value, especially when the textbooks are long and diverse. Medical diagnostics, legal reasoning and coding are ideal tasks for GPTs. Economic reasoning less so, at this stage.
Congratulations to Steve Landsburg for the excellent questions.
Alex got both questions wrong. What he didn't realize is that Landsburg (unlike Coase) doesn't get that opportunity cost is a 'global' concept. There is a high cost to not defending property rights which is why punitive damages are likely if the thing goes to court.
However, this does not alter the fact that people have to look at actual costs and benefits they receive. A town which builds an airport and which then has to shell out millions in punitive damages is a town which has shat the bed. As for a nutter who thinks buying from a monopolist- or paying me to smell the farts I produce for free rather than buying a house- such nutters will go fucking extinct quickly enough.
Hopefully, AI's won't be trained by stupid economists. Let them have access to real world data and work out correlations for themselves.
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