STEVE TROST

So I am preparing my lectures on economic efficiency and deadweight loss for my principles class and am having a bit of an existential crises.

I’ve always considered myself to be on the “progressive” side of econ - making sure I give full voice to market failure, pointing out troublesome assumptions, etc. But I have never really thought about how we measure economic surplus.

For those who have seen it, we basically take the area between supply and demand, up to the equilibrium quantity and call it surplus. It’s the difference between what consumers are willing to pay (represented by the demand curve) and what firms are willing to accept (represented by the supply curve). 

BUT, when we teach demand, we say that the demand curve shows us what people are willing and ABLE to buy at each price (or what they are willing an able to pay at each quantity). That “able” does a lot of work here. It also means that what we define as economic surplus is only weakly connected to any usable idea of social utility or well-being.

Let’s take an extreme example. Suppose Jeff Bezos wants a solid gold house and rocket car. And let’s say he’s willing to pay $20bn for the house and $4bn for the car. And let’s say a builder is willing to build the house for $15bn and Elon Musk can make him a car for $2bn. Well, according to econ, that’s $7bn of “economic surplus”.

But really? Is it really the best use of resources?

My point is that the demand curve we use is not really a “marginal benefit” curve in the way we want it to be. Sure, it makes sense for an individual, but for the market, that curve is weighted towards those who are willing and ABLE to buy the goods and services in question. It is weighted toward the wealthy. So whose surplus are we maximizing?

It’s not even about equity vs. efficiency. It’s how we implicitly favor the rich in our very definition of efficiency.

I'd love it if we did this.  Many people do not major in econ (and other "hard" majors) because they do poorly in the intro class - they get turned off right away.  I got a B in intro (which was good for the college I went to) but loved it enough to stick to it.

Economists have studied the stock market extensively, but that does not necessarily make them good stock pickers.

Forget the dumbed-down garbage most economists spew. Their myths are causing tragic results for everyday Americans

Interesting article. I agree with some of it but not all.  

In my opinion, a good econ prof will be careful to point out the simplifications we make and the breaks from reality that make ECON 101 work.  We should also caution against the dogmatic use of ECON 101 (free trade is always good, free markets are efficient, efficiency is always good, etc).  These are things that I do with my nearly 2000 students a year.  At best, ECON 101 gives students a tool set with which to analyze the complex world around them - gives them ways to approach problems and better determine the nature of cause and effect. I encourage my students to embrace the complexity of the world and not to assume it away.  

One of my wife's students will begin Harvard this fall. He plans to major in economics so he wrote to her and asked if I had suggestions for "Ways to learn material, books to read, important classes to take?" Here's...

"I'd like to talk to you about my grade..."