Reading Assignment #6- "The Most Unusual Day" and "An Academic Episode"

"The Most Unusual Day"

A.


Overall, I found the article to be extremely interesting. We have been learning in class about the "Law of Unintended Consquences" and this article can absolutely be applied to the law because of the fact that there were consequences the government wasn't necessarily expecting: that people would alter their births to get the bonus, which in turn, increased the amount of people delaying their births and made the hospital very crowded in July. I found it very interesting how a policy can indeed have inverse effects, and this article was proof in the pudding.

I also found it interesting how Gans pointed out how usually, governments try to avoid giving citizens an incentive for fraud on medical decisions. The government in Australia, in Gans words, did this to save $100 million. It is interesting because clearly the Australian government weighed the costs/benefits of its policy, and in the end, came to the conclusion that the benefit in ultimately promoting medical fraud outweighed the cost they would endure.


B.


1. What was the ultimate goal of the Australian government to pass this policy? What, besides saving money, did they think they would get out of the policy?
2. This is more of a question that would require research, but I am interested to know the answer nonetheless: Did this policy cause any babies to pass away from parents trying to prevent a birth to take place later than expected?
3. Why is it that people value money so much, they are willing to risk the health of their baby to gain extra money? Why is having a healthy baby not an incentive enough to give birth?


C.


Josh Gan's article starts off discussing how there are several unusual days in the world. According to Gans, however, none is more unusual than July 1, 2004- the day the Australian government began paying $3,000 for every baby born.

The Australian government was doing this to save money, but their reasoning was to offset the costs that mothers incur when having a new/not being able to work because of maternity leave.

This policy passed by the Australian government is called "The Maternity Payment" or the "Baby Bonus" and it was set to rise to a $5,000 bonus by July 2008.

Gans, who was expecting his third baby, talked to his wife about having his baby in July to get the bonus. The author believe that he was not the only one thinking this way- he was expecting that ultimately no births would occur on June 30 because people would want to get extra bonus.

The data about child births since that policy was passed is now officially out. The results show that over 1,000 births across the country were shifted as a result of the new policy. He knows that this was the case because "normal" delivery statistics remained unaffected, but all the inducement and cesarian statistics went up. Also, June was a low month for births while July was unusually high. In fact, 25% of all births were shifted by more than 2 weeks.

A result of all of this? When Gans went in to have his baby born, the hospital was completely overwhelmed. This shows an unintended consequence- perhaps the Austrialian government didn't expect people to create fraud. Next time, Gans pointed out, he hoped that the hospitals would be better prepared/staffed.

The end lesson Gans pointed out was that the Australian government shouldn't introduce policies this was so as not to create such an incentive for people to produce fraud- and alter birth dates.
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"An Academic Episode"

A.


I found Stigler's article to be quite interesting in one particular way: how he tried to show the results/effects of unintended consequences. In class earlier today and last week, we talked a lot about the effects of unintended consequences. This article perfectly illustrates them.

Throughout the article, Seguira continues to make new policies that he thinks will fix the problems that are going on in his university. While the policies do indeed fix the problems in one regard, other problems are born from these new policies. This is the perfect description of unintended consequences, because Seguira did not in any way expect these issues to arise when he enacted his new policies.


Thus, I found the clever way that Stigler was able to weave the concept of unintended consequences into a story the most interesting part of the article.

B.


1. Why is it that Seguira did not comprehend that by continuing to make new policies, more issues were caused? Why did he feel the need to change something that already ran somewhat smoothly?
2. How much do unintended consequences play into policy maker's decisions to enact a policy? Do policy makers even try to consider what unintended consequences might come about from enacting a certain policy?
3. In the end, did Seguira honestly think everything was better than it was before he enacted his policy? What does the end result of all of his policies say about trying to change the landscape of the labor force?


C.


George Stigler starts off his article mentioning how he believes we run our universities backward and then progresses into a story about a president (Seguira) of a university in South America.

In June of each year, any member of the faculty (including graduate students) could challenge the person who had the position immediately above him to a competitive examination. Impartial judges would judge the competition and whomever won would get the higher position/salary.

This new policy at the school led to many unintended consequences, something we have been learning about in class a lot.

Some results of the new policy included:

1. Libraries had an unprecedented rush- the older professors who had higher positions started working harder and studying more.
2. People began to hoard their knowledge, worrying that sharing any knowledge could lead to someone getting an upper hand in the competition
1. A result of this was that the graduate students started to receive less sufficient education

Seguira was understandably concerned about the lack of teaching that was taking place after his new policy was put into effect, so he began granting 5 points per teacher whose students won a challenge. The points would go towards a teacher's point total in the competition, and Seguira believed all of this would promote teachers to teach again. But then this led to a paradox in one instance:

• One professor was challenged by seven of his grad students, they all did better than him on the exam, but his 35 points he received helped him win the victory.

The ensuing fall, less grad students enrolled because all who could afford to do so went to study in the US. People then realized that the grad students were doing this to study the examinations in another country. This proved to be a smart idea for the grad students: Of the 61 students who spent the year in the US, 46 won their challenge the following spring.

To prevent this from happening again, Seguira presented more policies which led to unintended consequences:

1. The exam would be given by professors chosen at random from the US, England, France, Sweden and German. Now, if a grad student went out of the country to study, 4 times out of 5 he'd guess the wrong country.

In the 3rd year, it became apparent that research almost stopped completely because all the professors were putting their time towards preparing for the challenge. Thus, Seguira made a new policy, giving the professors more of an incentive to publish work: 2 points for every article and 7 points for each book published. 

1. More unintended consequences: research did revive a bit, but the research was not nearly as good since the professors were rushed to get it completed before the following year's challenge.

This all probably would have continued on forever but Seguira received a new presidential position at a very good South American university. He accepted, but before he left, he made one final amendment: A man could receive a permanent number of points the department chairman deemed fit when an offer was received from another university.

This allowed Seguira to move up to a higher position.

Class Summary #17 for 10/12/11

Today in class, we learned a lot more about unintended consequences, and how the "Law of Unintended Consequences" can wreak havoc on policy makers.

Here are some examples of unintended consequences that Prof. Rizzo shared in class today:

1. In the country Bavaria, there was a law that mandated couples couldn't have children unless they were considered financially stable by the Bavarian government. If a couple wasn't financially stable, they couldn't get married in the country and have kids. The policy was created to make sure children are sufficiently taken care of. By the end of the policy, however, there were actually more issues with childcare then there were prior. The reason behind this was because 50% of kids' parents were divorced because people weren't getting married anymore, they just had kids.
2. 1914- US bans drugs. The ban on drugs led to an increase in hypodermic needle usage. Needle usage has been linked to the spreading of AIDS. Perhaps if there was not the 1914 drug ban, AIDs would never have spread like it has today.
3. 1992- Americans with Disabilities Act- government threatens that bad things will happen to companies if they discriminate in payments/labor opportunities for people with disabilities. What resulted from this? There was a sharp decrease in the amount of disabled people who were hired for jobs because employers didn't want to risk getting in trouble with the government. Anytime a company had the need to fire a disabled person, the disabled person would be able to claim they were being discriminated against. Thus, there was more of a potential cost for companies to hire disabled people because of the ramifications that could happen if they had to fire a disabled person for whatever reason.

So, what exactly is this law? It is basically occurs when people try to fix a complex process with a simple process. The Law of Unintended Consequences may take place due to:

1. Limited Information
2. Little feedback
3. Incentives get mixed up

Unintended consequences change incentives in many instances, and thus, usually increases costs to do something in at least one regard.

Then, we went over some more basic principles of economics.

1. Trade is not zero sum---> we are all better off when we trade.
1. "Pie Fallacy"- the idea that wealth is fixed (similar to mercantilist thought). It's the idea that if one person gets the bigger slice of pie, someone must be losing out. We have come to learn today that this is untrue.
2. Exploitation= when one person gets the better deal than the other person. Exploitation doesn't in any way raise living standards.
3. Consequences of Exploitation: 
1. Slows down economic growth because policies are than made to penalize work/innovation, which is vital to economic growth
4. Wealth vs. Income is different
1. Wealth= "stock"- value of stream of income one has produced through his/her life
2. Income= "flow"
5. Bill Gates/Tiger Woods/Paul McCartney (all billionaires)- their billion dollars (which is income) is only a small indicator of how much value they are to society. Take Woods for example. He might have a billion dollars, but think how much more value he brings to society- because of him, golf clubs, clothing, shoes, shaving cream, etc. is sold because of his endorsements of certain products. Also, must take into account how much value people get when watching him play golf. It might cost $3 to go see him play live, but people probably get more value than just $3 watching him. People who watch on TV also value watching him. If they value watching him at $1, think about how much money/value/worth he is generating for all of the millions of fans who watch him.
1. Thus, one could make the argument that none of these billionaires are actually being paid ENOUGH!

Reading Assignment #5-Theaters and Fine Arts

A. 
I thought that Bastiat provided a couple interesting viewpoints pertaining to subsidizing certain professions, specifically art. Overall, I found the article be quite interesting.

One of the most interesting parts of the article was how Bastiat talks about how subsidizing one profession lowers the wages for other professions- I never really thought about the act of subsidizing by the government in this matter.

If one profession is subsidized, it comes at the expense of other profession's wages unless taxes are increased. Because increasing taxes to subsidize artists is not really a pragmatic idea in many instances, it is just not feasible to easily subsidize artists as Bastiat argues against.

I thought that this point by Bastiat really points out how in economics, there is always a cause and effect- one economic decision effects economic outcomes in many ways.

I also found it very interesting how Bastiat argues how subsidizing artists would not be a great idea because regulating that industry could come at the expense of creativity. He points out that by regulating the art industry, there would be less freewill to make certain art because maybe the government would refuse to compensate certain artists for certain types of paintings (if let's say, the paintings were considered inappropriate by governmental standards).

In short, I really do agree with Bastiat's point- not subsidizing art allows for more freedom among artists. Artists can create whatever they want based on their feelings and receive compensation from people who buy their work. By not having governmental regulation, artists do not have to worry about whether or not their paintings will be "accepted" or subsidized by the government.

B.
1. Why is it that some people believe that economists want art to be abolished when economists claim that art should not be subsidized by the government?
2. What would be the economic result of subsidizing artists? As in, would doing so hurt or help our economy?
3. Do artists actually need to be subsidized for their work? Would doing so promote more or less artistic innovation/creation?

C. 
This article covers whether or not the government should support- and subsidize- the arts. The author, Bastiat, believes that the desire to make art should not come from the government subsidizing artists, but rather, from "below", or in other terms, from the desire within artists to create. He doesn't believe that artists should be motivated by state compensation- he feels that they should be motivated by the artists themselves.

Bastiat goes on to claim that many people consider economists who argue against the state subsidizing artists to be against art altogether. But Bastiat argues that economists who think this way don't want art to be abolished at all.

In fact, Bastiat wants no governmental subsidation because he wants the state to protect the free development of those types of human activity, so that artists can create whenever, and about whatever, they want.

Bastiat then goes on to how how people who are against Bastiat's economic thinking believe that if an activity is not subsidized, it will eventually be abolished. In the case of art, Bastiat argues, this is not the case at all.

The final argument Bastiat goes on to make is that by taking tax money to subsidize artists, there will be lower wages of other jobs such as plowmen, road construction workers, etc. Thus, more money would be given to artists than these other workers. And who is to say that these other workers are less important than artists?

Class Summary #16 for 10/7/11

Today, we went over a couple important topics, topics that will pertain to today's exam.

First, we went over subjectiveness. Almost everything in this world is subjective. If Prof. Rizzo says he is selfish, that only means something when we have something to compare it to- the margin. Selfish is different to everyone, so by saying that, we don't really know what selfish means unless we know about the margin.

Margin- the influence of the next thing.

A good example of the margin is Bruce Springsteen. In 1972 and 1973, he produced albums in back to back years. But then, he waited to release his next album in 1975. He understood that by waiting an extra year to release a new album, his album would have a great margin because of its added scarcity, and thus, would make him more money.

The same could be said with Puxatony Phil and Santa Claus- if they appeared every day, as opposed to once a year, they wouldn't be valued nearly as much as they are today.

Another great example is when some people make the argument that teachers deserve to be paid more money than professional athletes.

The bottom line: The skills necessary to be a teacher are far more abundant than the skills necessary to be a great baseball player. Not many people can throw the ball 90 MPH. Very many people can acquire the skills to be a teacher. Simply but, baseball skills are far more scarce than teaching skills. This explains why baseball players are valued so much higher at the margin.

What I mean by margin- the next baseball player is valued at the average MLB salary, which is about $3 million. The next teacher is valued at the average teacher salary- lets say $40,000. Therefore, the next MLB player is valued much more at the margin.

But, the total value of teachers is far more- if you add up all the salaries of teachers and compare to all the salaries of baseball players, we will value the teachers as a whole more.

Therefore, if all baseball players and teachers became extinct, we would pay much more for the very first teacher than the first baseball player.

The margin is also subjective, as the values at the margin differ for different people depending on how much something matters to us.

Another key concept: Why do we pay for water bottles when we can get it basically free from tap? It is because we are paying for the convenience of having it in a bottle so we don't have to carry around tap water sources, such as a sink or river, etc.

Then we went over what a sunk cost is.

Sunk cost: resources that are not recoverable at all when I make my decision.

A good example of this is a buffet. You pay $12 for a buffet, and go in to eat. There is not point in trying to stuff your face to get $12 worth of food because you already paid that amount. Any overeating you do just for the sake of getting $12 worth of food would just come at a greater cost, because you could get fat/sick from eating too much.

Good economists never pay attention to sunk costs- they just look forward and see how they can make the best decisions going forward.

Finally, Prof. Rizzo concluded class with going over some important notes:

1. Humans act with a purpose. We tend to behave in a way that relieves burdens in our lives.
2. People respond to incentives. Behavior will change when benefits/costs to you change.
3. Law of Unintended Consequences- Because people respond to cost/price/benefit changes, it is impossible for economists to accurately predict exactly how people will respond to certain things. People have an idea of what might happen generally, but not specifically. 
1. Perfect example of Law of Unintended Consequences: Seat belt law. While seat belts have saved many lives, there are actually more deaths due to car related incidents since wearing a seat belt became law. One is much more likely to survive accident, but much more people are driving carelessly or even drunk because they think having a seat belt will always protect them. Therefore, more accidents are occurring as people are also driving faster, and more people on sidewalks, pedestrians, etc. are getting killed by cars as a result.
2. This wasn't an expected consequence of the new seat belt law, which explains the Law of Unintended Consequences.
3. Also, just because there was the opposite effect of what policy makers planned doesn't mean seatbelts are bad, but it is all part of this phenomenon.

EWOT Goggles #5

My EWOT goggle entry for this week is about something that happened last week in recitation during the Ultimatum Game.


During the ultimatum game, there was one student who constantly rejected offers that were as high as 4-6, which in my opinion is a tremendous offer. As my TA Alex taught us following the game, one should pretty much accept every single offer presented to him/her because it is better to get something than to get nothing.


But this one student (I will call him Joe) rejected several offers that Alex advocated against doing. Joe's argument for doing this was because he felt like he was being taken advantage of, and didn't want to give other people a better deal.


But as we have learned in economics throughout the semester, it is important as an economist to focus on one's self-interest over one's feelings.


Adam Smith, the great economic philosopher, advocated the belief that looking out for one's self-interest is the key to accumulating wealth/success. Prof. Rizzo explained in class that Smith believed that the way to get rich and increase production is by making rational decisions that benefit one's self-interests.


And if you think about it, this makes a lot of sense. But Joe did not do this in class. He let his emotions get in the way of his decision making. I suppose some people would argue that Joe's was smart by the rejections he made, but according to Smith's theories, he was completely wrong.


This is because Joe had an opportunity to better himself (get extra-credit), but he let his emotions get in the way of his decision making. Thus, he wasn't acting in his best interest. It didn't matter how many points the presenter offered- the bottom line is that by rejecting the 6-4 deal, Joe was accepting 0 extra-credit points instead of 4, which hurts him because now he ends up with nothing.


It is interesting to point out that if Joe actually values his feelings more than becoming wealthier in terms of extra-credit, he may have actually made the right decision. But as Alex pointed out in our recitation, it is very important in the business world to not let emotions take over decisions. 


The bottom line is that in today's world, it is imperative to act in your best interest, and that pretty much always means trying to get SOMETHING as opposed to NOTHING.

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

Class Summary #14 for 10/3/11

Today in class, we learned about the bulk of what economics is about.

First, Prof. Rizzo posted a diagram on the board that depicted economics.

Basic Economic Principles:

1. How people make decisions
2. How people interact
3. How "aggregates" work (i.e. the economy)

Then, Prof. Rizzo put a list of five things that we are going to learn about this semester. They are:

1. People face tradeoff (tanstaafl=there ain't no such thing as a free lunch (a person/society can't get something for nothing) )
1. What is a cost?
2. Opportunity costs
1. Application: Breaking Windows
3. "Marginal" Analysis
1. Application: Subjectivism
4. Sunk Costs
5. People respond to incentives

Important note: We live in a world of scarcity and there is not enough stuff to go around. A good example of this: If there were 10 ice cream cones for 30 people to share.

We then went on to learn about two of the first five topics above.

1. People face tradeoff

• When resources are scarce, it is required/inevitable that we trade off one thing for another.
• For example, if I spend an extra hour with my friends, the trade off is that I have 1 less hour to spend on my economics studying.
• Tradeoffs can also involve money. For example: If I spend $10 on a burrito, the trade off is that I have $10 less to spend on other items. This shows that I value a $10 burrito more than spending $10 on anything else.
• Thus, trade-ff reveals a lot about our values.
• Prof. Rizzo gave us another example of a tradeoff. Prof. Rizzo used to be a banker and had a $1 million income with a $250,000 tax. Now he makes $50,000 with a tax of $15,000 teaching. His job change hurts the economy because since he has less money to spend, there is less money being spent in the market and thus, his change in jobs hurts the economy. But for him, the tradeoff was worth the job change. Yes, he makes a lot less money teaching, but he traded off making more money for the satisfaction/happiness he gets teaching students. Thus, he values helping students learn economics more than he values making $1,000,000.

After this, we began to learn about what exactly a cost is and how nothing in this world is actually free. Prof. Rizzo supplied us with another example:

• The library is free right? No- people pay taxes that goes to the library, one has to drive to the library to get books (this cost is the cost of time to drive over and wasting gas), and the $12 million dollars that were spent on the library costed the community having something else- such as a new school, police station, etc. The use of paper for all the books cost us trees as well. 
• Thus everything in this world has a cost in one way or another.
• Is there anything that is free? No, there is no such thing as free. In fact, there is even a cost when one has "too much" of a good thing. If you have too much of a good thing, you lose other good things. For example, lets say we increase the amount of student who go to college. A result of this might be that roads on the street get destroyed more from more students having to drive to school. Thus having too much of a good thing (more students), could lead to the loss of another good thing (well-built roads).
• The cost of spending too much time to accomplish/get something good can also cause a serious cost. Consider this: If I spend too much time getting an A, I would be giving up time that I need to eat, go to school, and exercise. Thus, you are paying a cost if you give up your time to do something.
• Another example of something that may seem to be free that really is not: the FDA. There is two problems with the FDA keeping us safe.
1. Drug lab: It takes many years to test a drug before it gets to the market. The longer it takes to get to the market, the higher the cost. Lets say a medication is being tested, a medication that might save many people from a deadly disease. During that testing time, people are dying because a drug is not yet out to save them. Thus the cost is the peoples' lives.
2. Drug loss: Drug testing by the FDA is very expensive. The FDA spends $50 billion a year on testing new drugs, and yet only 20 new drugs come out per year. That is $2.5 million per drug for testing. Because of the high costs for mandatory testing of drugs, this might prevent other drugs from being created that can be life-saving because of the fact that all drugs can't be tested since it is too costly.
• VERY IMPORTANT: TRADEOFF=COST AND COST=ANYTHING THAT CONSUMES RESOURCES

Next we learned about opportunity costs, which are simply when we make choices, we must understand what we give up for that choice.

***Opportunity Costs= the net benefit/value/please one would have gotten from the next best opportunity***


An example of an opportunity cost: Coming to class cost me my extra sleep. It may not necessarily be a monetary cost, but there is a cost in coming to class. Thus, I lost my sleep.


A VERY IMPORTANT EXAMPLE PROF. RIZZO SHARED WITH US TODAY:


Lets say you win Bruce Springstein Tickets. There is also a Barry Manilow concert that same night that costs $40, but your WTP (willing to pay) for the Manilow concert is $50- Which do you go to? Assume you cannot resell the Springstein tickets. Here are your options using opportunity costs:

1. Barry Manilow costs $40, but WTP=$50. Thus, 50-40=10. If you go to Manilow, you are making $10 based on value (or saving $10 depending on how you look at it).
2. Thus, the cost of seeing Springstein is $10 because if you go to Springstein, you are giving up the $10 you would have saved if you went to Manilow. So, for you to actually go to Springstein, you need to find $10 worth of value of the Springstein concert, which would then make sense to choose Springstein over Manilow. 
3. If you just go to the Springstein concert because the tickets were "free" and not because you find value in going, then you are actually losing $10 because that is how much value you are giving up by going to Springstein.
4. Thus, if you are doing something that you do not value over doing something else, you are paying a cost besides actual costs like paying for transportation, etc.

Finally, Prof. Rizzo explained the Broken Window Fallacy:

• Some people claim that causing a problem such as destroying a person's roof is good for the economy because if we do this, he has to pay $1,000 which creates more work. But this isn't the case, because if his roof didn't blow off, he'd have $1,000 to spend on other things, such as a new driveway, which would also pay money into our economy. Thus, blowing Rizzo's roof off doesn't stimulate the economy one bit. It is just an example of job displacement. One net, there is no change in economy because same amount of money is being spent that would've been spent other wise.
• For Rizzo, there is a big cost. Before this happened, he had a roof and $1000. After, he had a roof that is fixed and a loss of $1000. Thus, he had to pay a cost of $1000 because it is something he wouldn't have had to pay for otherwise. He valued a driveway more, but couldn't buy that because he had to deal with paying for new roof. So really, it doesn't stimulate economy at all.