Class Summary #33 for 11/18/11

Today in class, we learned more about rationing mechanisms.

When you use pay rationing mechanisms, it gives people incentives to produce more stuff. This wouldn't be the case if we rationed by other systems.

For example, if we were going to provide healthcare to everyone, it would be a duty of ours to become doctors. It would be a moral obligation of ours to become doctors to make sure everyone received health care. But this is not economically good.

The main reason why we need to use the price system over other mechanisms: you expand people's freedoms to make decisions about what they want.

Not having moral persuasion causes people to economize and act morally. Cheating on an exam even though it says not to on syllabus and exams is an example of how giving directions to do something does not necessarily mean someone will act morally because as we have seen in class, people still cheat.

Here are some more important facts we learned about the price system:

1. If water cost a penny, we would overuse water uncaringly 
1. If water is expensive, we will start to economize. We would be free to shower as long as we want but we'd think otherwise about doing so. We'd start ranking our values and not use water for things we don't value as much. Thus, the price system is what would preserve our water, not our government banning use of it during drought seasons.
2. This is a perfect example of how the price system forces us to consider the values that people put on water and other goods. This is the most ethical part of the price system. 
1. Lets say price for a gallon of water is $30. This shows that someone out there really wants water, so if I don't but it because I don't need it as much, I'm leaving the water for someone else who is willing to pay that price because they value and need it much more than I do.
2. Let's say there is no need for water here. Well, we can bring water to where it is needed because they value it more there than us. This is an opportunity for us to gain from a transaction.
3. Bottom line: not using the price system is immoral.
4. Money reduces transaction costs because there is no time being wasted looking for someone with whom to barter (barter economy).
5. The price system gives companies incentives to produce water and thus, it is a preservation mechanism because having this incentive could incentivize people to make new mechanisms to develop water. This wouldn't happen without the price system because there would be no incentive.
1. Thus, we can say that without the price system, water might potentially be all gone by now
6. If you don't allow sales of certain things such as a kidney, the marginal value of kidneys is much, much higher because they aren't readily available.

Prof. Rizzo ended class with explaining the economic importance of having money:

A world with no money is not good. Let's say I am a guitar maker. I would need supplies to make it. Without money, I'd have to barter to get these supplies. But money changes how the transaction takes place. If you need a tooth bush, I'd need to barter so I'd be spending significant time looking for a tooth brush provider who wants a guitar.

 

Also, there is the issue of an unfair trade occuring. I can't split up certain products like guitars. So, this would make it that much more difficult to get a fair trade when trading a guitar. This is also why bartering makes us poorer- because by bartering, we're wasting time that could be used producing and/or on leisure time by looking for someone who has what we want and wants what we have.

This is why money improves the situation and the price system is the best rationing mechanism.