Class Summary #15 for 10/5/11

Prof. Rizzo began class today explaining the Broken Window Fallacy.

Three problems with the "it's stimulating" notion:

1. I didn't choose the roof to begin with, and therefore, I lose the opportunity of preference. Consumers didn't choose the roof, and thus, society is poorer by the pleasure I would've gotten by getting something else. In short, there is a steep opportunity cost here. I lost out on the opportunity to get something I really wanted because I had to pay for a new roof.
2. We also lose the value of the resource that was used to repair the roof. We are losing resources that could've been used by other people, resources in our world that weren't necessary to be used had there not been a natural disaster.
3. Then, the final question is: what if the roofer was unemployed? Answer(s): What isn't seen is the other person who isn't getting a job now because you had to spend the $1,000 on a new roof. If you didn't spend the money on the roof, maybe you would've spent it on a new driveway. Thus, it is job displacement- no job is gained, just a different one is made. 

• Ignore the $. What is relevant is that I need wood for the roof, and now I am forced to use wood for my house that could've been used other ways. Thus, someone who has a better need for wood can no longer get it. By employing roofer, I also just raised the price of wood and other roofers- b/c the more exchange (money for wood) I make, the higher the cost of wood goes. If I stick a roofer on my roof, I just raised wages for wood and such. Resources get used up and prices go up, so really, not a great thing for the economy.

Here is a good diagram to consider:

Before Storm, I have:

$1,000 and a roof

After Storm, I have:

$0 and a roof

Thus, as you can see, I am actually poorer from having to buy a new roof because there is no net change in what I received, and I now have no money in my pocket.

Increasing taxes can also be looked at in the same light: The government takes more $ from people and there are then less expenditure by people which in turn causes there to be less jobs created because people have less money to hire. Causes job losses somewhere else.

A VERY IMPORTANT NOTE: THIS BROKEN WINDOW FALLACY ONLY APPLIES WHEN THERE IS AN EXCESS OF UNEMPLOYED RESOURCES/WORKERS OR IF A SOCIETY IS IN THE MIDST OF RECESSION (BECAUSE THE WHOLE IDEA IS TRYING TO CREATE MORE JOBS).

Later on in class, Prof. Rizzo discussed how jobs are not a benefit, but rather a cost. The benefit of a job is to get income and use on necessities/luxuries. People are paid to work a job, therefore it is a cost. It is also a cost to the person working because he/she gives up the time to do other things in his/her life to work. If the worker would prefer to work than do anything else in the world, then it is not as much of a cost, but it is still a little bit of a cost because the worker is giving up the time to eat, drink, and do other necessities.

Another example Prof. Rizzo discussed was the belief of some people that war is good because it creates jobs. Prof. Rizzo argues, however, that it would be better if the government just paid people money and not fight a war to not incur the cost of deaths. War does help spur immediate economic progress by giving people jobs, but why not just not fight a war and give money to people. Same result.

Important to note that if the government gave money away for free, it would reduce the incentive for people to work. But this might be acceptable in times of crisis, Prof. Rizzo argues.

Finally, Prof. Rizzo concluded class with going over some of the key economic principles we are learning in class:

4. Cost is subjective---> values are subjective (opinionated).

• Example: The cost I spend my paying attention in class differs for different people. For me, the cost is that I am giving up time to space out and not focus. For others, it might be giving up the chance to sleep.

5. Marginal Analysis---> Should I do more of x or less of y? (Should I pay attention for more than 2 miniutes, for example).

• Water-Diamond Paradox: 
1.  Something high in usage has a low exchange value (water)
2. Something low in usage has a high exchange value (a diamond)
• This has to do with value and scarcity. Diamonds more scarce, so valued at a higher amount. But important to note that if all diamonds/water became extinct, people would pay more for the first cup of water than the first diamond.

MARGINAL COST/BENEFIT: THE CHANGE IN YOUR COST/BENEFIT FROM TAKING A CERTAIN ACTION