Class Summary #32 for 11/16/11

In today's class, we learned about rationing goods- a very interesting lecture.

Class began with Prof. Rizzo explaining to us "The Challenge".

Simply put, "The Challenge" has to do with scarcity and not having enough stuff to go around. This is the fundamental economic problem.

This brings up the question: How do we figure out who gets those scarce goods?

To show us this, Prof. Rizzo explained to us examples of rationing mechanisms. The list of these rationing mechanisms are all below, with a description of each:

1. Need
1. Refers to the neediest person shall get the good
2. Problem with this is that there is no measurable metric for neediness and it is very hard to determine who is the most needy. 
3. The way we, as a society, convey our needs for something to a producer is by a needs index. People who want/need fish the most won't get it if we allocate fish by wants/needs. 
2. Queues
1. This refers to a line- the first people up in line get the good.
2. For example, lets say Dave Matthews comes to UR and there are only 150 seats. We also say that we won't let him overcharge us. So, how do we determine who gets tickets:
1. Those who want to go the most camp out. As the line lengthens for tickets, some people will say that it's not worth the wait. This ends up being a cost relative to money- by waiting in line, there is a huge opportunity cost because you are waiting in line for so long that you are giving up a chance to be productive in other sectors. Thus, this is very costly and we generally don't do this.
3. Lottery
1. We all have an equal chance to get the good. People who need/value the good the most might not get it, which is an economic issue in many ways.
4. Equal Shares
1. Everyone gets an equal piece of the pie, which is the meaning of pure communism. 
2. The problem with this: some goods, such as a car, can't be split efficiently or even at all.
3. Sometimes cutting up a good so much, such as a fish, would make the good useless. If we split up 1 fish with everyone in the country, we'd all go starving.
5. 'Kickin' Ass
1. Whoever wins a fight gets the good.
2. This is unfair to certain people who are weak.
3. There is a big cost because people will be wasting their time trying to get strong to win the fight, thus wasting time where they could be productive doing something else for society
4. It is impossible to plan in this world, because you will never truly know if you will win the fight
6. Merit
1. Refers to, for example, those people who are most beautiful or smart will get the good.
2. Impossible to define who is the most meritorious at something.
3. If we ration on merit, we'd end up like the 100 mile suit- very little production because we're not rewarding those who produce effectively.
4. In result, we'd be much poorer.

Important: Producer costs--> must consider that producer costs also consider prices people would BE WILLING t pay. If I'm willing to pay $300 for hotel room and they charge me $60, it is a huge disservice to themselves because of the giant opportunity cost to them. The hotel wouldn't charge $300 if no one else was willing to pay that price because then they'd get no business. They can charge at a high price like that because I don't buy it, someone else likely will. If a business doesn't capitalize on these high prices, then the business might not exist anymore.

Evaluation of Rationing Mechanism

1. What is native of competition: destructive or constructive?
1. Whether a certain rule will channel our behaviors into something that is positive/productive or negative/destructive.
2. Price system leads up to constructive behavior. 
2. How does mechanism impact supply (Q)?
1. Need to give incentives to people to make more tomorrow: prices do this.
3. Other considerations