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The ideal market maximizes utility production because economic actors expose their utility gain by pricing commodities. The assumption is that price and utility

The ideal market maximizes utility production because economic actors expose their utility gain by pricing commodities. The assumption is that price and utility are similar. But when there is wealth inequality this assumption breaks down. A person with large wealth can offer higher prices for less utility compared to a less wealthy individual. This biases markets to satisfy wealthy individuals, overall reducing total utility production.

robertlagrant 4y ago
This is too simple, and misleading, as it leaves out tiered pricing. A slightly better seat on an airplane is 10x the price of economy seats. Without those seats, economy seats would cost much more each. A slightly better car spec is 2x the price of the base model. Without the better spec model, the base model would cost much more. Additionally, just the development of new technology is often for the wealthy first, as it's prohibitively expensive, and then as manufacturing techniques work out the tech filters to a large group of people. E.g. Tesla cars; computers; pretty much everything, really.
- geysersam 4y ago
  Is your point that wealthy people subsidize air travel by paying relatively more for the space on the plane? That's a perfect example of when inequality biases a market to produce suboptimal outcomes. Why? Because if people wouldn't be willing to spend to pay the cost of an airplane ticket in perfect market conditions, then them not buying a ticket is the optimal allocation of resources. If they then buy a ticket in current market conditions, that's an example of a suboptimal allocation of resources. Same goes for the car example.
  - robertlagrant 4y ago
    > Because if people wouldn't be willing to spend to pay the cost of an airplane ticket in perfect market conditions, then them not buying a ticket is the optimal allocation of resources. Sorry, you've lost me. How do you define perfect market conditions?
    - geysersam 4y ago
      It's a common concept in economic theory: https://en.m.wikipedia.org/wiki/Perfect_competition https://en.m.wikipedia.org/wiki/Perfect_competition It requires a bunch of idealizing conditions that never holds in practice. But it's still useful to study what effects deviations from perfect competition has on efficiency. Think about it like this: subsidies lets you buy something you don't actually want, that's inefficient. For subsidies to make sense, they need to compensate some other deviation from perfect competition. For example, it can make sense to subsidize green energy because fossile fuels has external costs not accounted for by the market. But the fact that a rich individual is willing to pay your air ticket is not a good reason to subsidize something. An intuitive example: A rich guy enters a bar and yells "free ice cream for everyone!". That's nice. But if the same cash were distributed among the guests, some would've gotten beers and some wine. But when faced with the choice "pay for beer or get free ice cream" everyone choose ice cream despite that being a suboptimal allocation of resources.
      - robertlagrant 4y ago
        Thanks for elaborating. It seems now I don't understand your definition of efficiency. People choosing free ice cream over costly beer doesn't strike me as a loss of efficiency.
        geysersam 4y ago
        "Efficiency" is total Utility produced with the available resources. > People choosing free ice cream over expensive beer doesn't strike me as inefficient. But it is! With the total available resources we have two options: All get beer. Or all get ice cream. Total utility (value/happiness/whatever) is maximized when everyone gets beer. When resources are unevenly distributed, ice cream is subsidized, and all get ice cream. When resources are evenly distributed everyone can make the choice themselves, and they get beer. Clearly "resources evenly distributed" had the better outcome.
        robertlagrant 4y ago

robertlagrant 4y ago

This is too simple, and misleading, as it leaves out tiered pricing. A slightly better seat on an airplane is 10x the price of economy seats. Without those seats, economy seats would cost much more each. A slightly better car spec is 2x the price of the base model. Without the better spec model, the base model would cost much more. Additionally, just the development of new technology is often for the wealthy first, as it's prohibitively expensive, and then as manufacturing techniques work out the tech filters to a large group of people. E.g. Tesla cars; computers; pretty much everything, really.

geysersam 4y ago
Is your point that wealthy people subsidize air travel by paying relatively more for the space on the plane? That's a perfect example of when inequality biases a market to produce suboptimal outcomes. Why? Because if people wouldn't be willing to spend to pay the cost of an airplane ticket in perfect market conditions, then them not buying a ticket is the optimal allocation of resources. If they then buy a ticket in current market conditions, that's an example of a suboptimal allocation of resources. Same goes for the car example.
- robertlagrant 4y ago
  > Because if people wouldn't be willing to spend to pay the cost of an airplane ticket in perfect market conditions, then them not buying a ticket is the optimal allocation of resources. Sorry, you've lost me. How do you define perfect market conditions?
  - geysersam 4y ago
    It's a common concept in economic theory: https://en.m.wikipedia.org/wiki/Perfect_competition https://en.m.wikipedia.org/wiki/Perfect_competition It requires a bunch of idealizing conditions that never holds in practice. But it's still useful to study what effects deviations from perfect competition has on efficiency. Think about it like this: subsidies lets you buy something you don't actually want, that's inefficient. For subsidies to make sense, they need to compensate some other deviation from perfect competition. For example, it can make sense to subsidize green energy because fossile fuels has external costs not accounted for by the market. But the fact that a rich individual is willing to pay your air ticket is not a good reason to subsidize something. An intuitive example: A rich guy enters a bar and yells "free ice cream for everyone!". That's nice. But if the same cash were distributed among the guests, some would've gotten beers and some wine. But when faced with the choice "pay for beer or get free ice cream" everyone choose ice cream despite that being a suboptimal allocation of resources.
    - robertlagrant 4y ago
      Thanks for elaborating. It seems now I don't understand your definition of efficiency. People choosing free ice cream over costly beer doesn't strike me as a loss of efficiency.
      - geysersam 4y ago
        "Efficiency" is total Utility produced with the available resources. > People choosing free ice cream over expensive beer doesn't strike me as inefficient. But it is! With the total available resources we have two options: All get beer. Or all get ice cream. Total utility (value/happiness/whatever) is maximized when everyone gets beer. When resources are unevenly distributed, ice cream is subsidized, and all get ice cream. When resources are evenly distributed everyone can make the choice themselves, and they get beer. Clearly "resources evenly distributed" had the better outcome.
        robertlagrant 4y ago