Class #5, 2/2/12

• You love the environment, should you necessarily buy a fuel-efficient car?
• Two choices:
• Rent a used Buick: $600 and 20 mpg
• Rent used Toyota: $400 and 40 mpg
• We need to know annual driving costs. Suppose the price of gas =$3.00/gallon. So the annual cost= rental cost + fuel cost
• Buick cost= $600 +miles*$3 gallon/20mpg
• Toyota cost = 1400+ 3/40M
• If we set these equations equal to one another, we get: 600 +3/20M = 1400+/40M
• This equals M= 10,667 Miles. So, the Toyota would be cheaper if we drive more than this. The Buick would be cheaper if we drive less.
• The moral of this? When I make a choice, I'm changing everyone's budget constraints. If I buy a Toyota, there is 1 less Toyota for someone else to buy, etc.
• If we are talking about homo-economics here, you need to buy the cheapest car. But cheapest car has a different meaning for different people. You need to do what's in your homo-economicus self-interest. By doing this, we are all better off.
• For example, let's say grandpa has a Toyota. This is dumb if he never drives because now he might make someone else who could make better use of the car not be able to get the car. Thus, that person is forced to buy a less fuel efficient car.
• Also, remember the rules of scarcity. If everyone is buying Buick because the price seems cheaper, the price will eventually go up. This will in result knock people out of the market. In the meantime, the Toyota price would go down until an equilibrium with the Buick sales is met.
• Keep in mind: What might be efficient for you might not be efficient to everyone else due to opportunity costs. In the example of the grandpa, it might be more useful to give a certain car to someone else, but by the grandpa buying the Toyota, he is preventing that from happening.
• We also talked about littering policies. If there is a stiff penalty for littering, this makes the cost of committing an even worse crime lower. For example, lets say the government enacts the penalty that for anyone who litters, they will be killed by the death penalty. Well, not if someone does litter, and someone witnesses the littering, the litterer might be coerced to physically harm/kill the witness so as to prevent himself from being given the death penalty. Think about it- if he is going to be killed anyway, his best chance of survival is to eliminate the witness. Thus, the cost of killing someone else has lowered dramatically all because of a stiff penalty on littering.