We have challenge, consumers compare how much they value staff to the price, that’s how consumers make decisions. Suppliers compare their cost to price. When I say price system allocate goods and services to people who need them most, I assume that it’s the best way to do it. I assume that’s the way we ration scarce good.
Before the lecture of rationing system, I want to remind you one thing about producer cost. Producer cost is opportunity cost. What other consumers are willing to pay for your product is the very opportunity cost to you. When you see a room priced $279, it tells you that somebody else is valuing it at $279. What will the price then force me to do? We economize! The high price encourages much more to be delivered during a period of time if you permit that kind of pricing.
Moving on to rationing:
Think about how consumers value goods, and think about how we compare price to get what we want. There’re many ways you can imagine to allocate scarce resources to people. How do you get 5 fish in some reasonably fair, efficient way to those 12 people? I’ll tell you why price system works well and some other ways of doing it.
Price System:
Goods is actually allocated through who PAYS and who DOESN’T pay, rather than who CAN pay and who CANNOT pay. So, it’s based on the ability and the willingness to pay.
Other ways than price:
I. Ration by need:
What does that mean? It seems right, but if you think about the arbitrary nature of the definition, you realize it might be really hard to do such a thing on a grand scale. Etc,
i. Who determines who is needy? You can’t just come and say I’m needy and I declare this amount. Someone has to be there to make that determination. What exactly is needy?
ii. How could we tell consumers to produce more based on changes of perceived need?
iii. How could people compete in that kind of world? Determining needy is very costly, it’s expensive. There’s certainly no way to ensure that those people who need the staff most will get it. We’re more certain that if you ration by need, the people who really want them more will certainly not get it.
II. Queuing: first-come-first-serve
Doing this is at least as costly as charging money prices, even if the money price of standing in a line is zero. In a queue, the price you pay is the time and effort to get what you want, etc. not going to bed, not studying. The length of the line is a signal that tells you how long it takes to get sth. Some of you may still want to go, but you have other things to do so that you cannot stay in the line. What’ll happen? Queue-waiting-for-money kids! You may have to pay for the kids $15 for a ticket worth %20. In the second market, the price is always higher than the original price. Thus queuing is at least the same costly and certainly less convenient. People who value the most may get it, but only with greater effort. What’s more? Again, how do people compete and what’s the incentive that encourages producers to produce more.
III. Lottery:
We might say that this is really fair. However, people who value them the most may or may not get it and people who need the most may or may not get it. It’s totally a random issue that you see when it comes to standing in line. Every time you set lottery, you see secondary market, black market, all kinds of that.
IV. All in equal amount (pure communism)
It tends to appeal us on fairness ground. It’s a very low cost rule, it’s very clear. It does have advantages over the previous ones. But there’re still two problems:
i. What if the good cannot be cut up?
ii. The value of certain things is diminished when you share them.
V. Free for all-might be right (physical force)
i. It might be good for people who are tall and strong. But not really, even for this kind of people he still has to fight each single time. It’s not only costly for people who cannot get the car; it’s also costly for people who win the fight in terms of medical care problem and all the other things.
ii. You cannot make you plan since yon don’t know who you are going to fight.
VI. Merit (have a moral connections)
So you ration scarce goods to people who deserve them. How do you find merit? What constitutes it? Who decides it? How many merits does each person possess? Merit is just a moral allocation of who deserve it most. It says nothing about who value it the most. People may just aim to make a maximum of merit rather than efficiency. People may do the staff that’s exactly opposite to what society wants.
Evaluations of rationing system:
i. Where does competition come from: competition doesn’t come from the rationing mechanism, it can’t. Competition derives from scarcity. Every rationing mechanism set up rules to people and you are going to compete according to that rule! You compete because things are scarce and you want them. So when we value rationing mechanism, we need to think about the rule set by the mechanism is destructive or constructive. EG. Date of Kelly, only one can get her. All people go to the gym to get big bichop. Only one can get, and the other people cannot get other girls for their big bichop. This competition is destructive. One winner, the others are loser. All other effort to make people stronger left no value to the society. Price system might be not really fair, but at least it’s constructive. In price system, you compete by produce sth. of value to society.
ii. Is there any incentive that makes producers to deliver more because of the way you ration?
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