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>That does not provide the same utility for riaa as the avatar.mp4 did for Joe blow. Good old Adam Smith teaches us that value in exchange is often the opposit

by zeteo 15y ago

>That does not provide the same utility for riaa as the avatar.mp4 did for Joe blow. Good old Adam Smith teaches us that value in exchange is often the opposite of value in use. (His example is that we pay very little for water, which is vital for survival, but lots for a diamond that has very limited value in use, in comparison.) Joe's utility for watching the movie is thus almost irrelevant to the question of how much he should pay for the privilege. >The question comes down to how much Joe blow WOULD have paid for avatar.mp4 had his only option been to purchase a DVD Not true, considering our entire economy runs on consumer surplus: http://www.cliffsnotes.com/study_guide/Consumer-Surplus.topicArticleId-9789,articleId-9756.html http://www.cliffsnotes.com/study_guide/Consumer-Surplus.topi... For example, a rabid "Twilight" fan may readily spend a hundred dollars to see the movie, but will actually end up paying just as little as the guy who was dragged in by his fiancee.

CWuestefeld 15y ago
Good old Adam Smith teaches us that value in exchange is often the opposite of value in use. (His example is that we pay very little for water, which is vital for survival, but lots for a diamond that has very limited value in use, in comparison.) That's because, as brilliantly as Smith was able to demonstrate his ideas, the concept of marginal utility wasn't among them. Nearly a century later, Jevons, Wenger, and Walras brought about the "Marginal Revolution", which gave us the understanding that the reason water is so cheap for us is because we've already got so much of it. And this, in turn, allows us to understand that both sides of a transaction are unloading something they hold in (relative) excess for something that would increase their total utility function.
- zeteo 15y ago
  Ah, but I didn't say anything about the reason why water is so cheap. (Smith would explain it takes little effort to procure it - not that different from the marginalist argument.) What matters for the issue at hand is that its utility can be a very small factor in its price.
  - pdonis 15y ago
    You're missing the point of marginal utility. Because the price of water is so low, the marginal use of water is not for purposes vital to survival. People water their lawns, fill swimming pools, wash cars, etc. In other words, they use water for things whose utility is equal to its current price, because there's plenty of water left over at that price after all the vital-to-survival needs are met. If the price of water went up, people would stop using it for purposes with lower utility, in order to be sure to have enough for purposes with higher utility (like drinking and cooking). So the marginal utility of water would still be equal to its price. See David Friedman's text, Price Theory; in particular Chapter 4: http://www.daviddfriedman.com/Academic/Price_Theory/PThy_Chapter_4/PThy_Chapter_4.html http://www.daviddfriedman.com/Academic/Price_Theory/PThy_Cha... He discusses this exact case (diamonds vs. water).
    - zeteo 15y ago
      An introductory text - thank you, but I've taken microeconomics in college. After carefully considering both points of view, I tend to rather agree with Smith, for the following simple reason. Suppose the more frivolous uses of water were somehow restricted. (There are cities that do pass such regulations sometimes.) Its marginal utility would increase, but its price would most likely drop, due to lower demand. Alternatively, consider that blood plasma and many life-saving medicines that have no other use are still cheaper than diamonds. In any case, let's go back to the original issue. And, for the sake of argument, let's agree with the marginalists. Aren't all the marginal values and costs for a digital creation, which can be easily replicated millions of times, practically zero?
      - pdonis 15y ago
        > Suppose the more frivolous uses of water were somehow restricted. Then you would no longer have a free market; people would be prohibited from engaging in transactions that they would have chosen to engage in without the prohibition. In that case, yes, price is no longer equal to marginal utility. > Alternatively, consider that blood plasma and many life-saving medicines that have no other use are still cheaper than diamonds. A better example, yes. I would tend to say the "market" in these things is not exactly free either. Somebody should ask Friedman about that one. :) > And, for the sake of argument, let's agree with the marginalists. Aren't all the marginal values and costs for a digital creation, which can be easily replicated millions of times, practically zero? Yes.

by zeteo 15y ago

CWuestefeld 15y ago

Good old Adam Smith teaches us that value in exchange is often the opposite of value in use. (His example is that we pay very little for water, which is vital for survival, but lots for a diamond that has very limited value in use, in comparison.) That's because, as brilliantly as Smith was able to demonstrate his ideas, the concept of marginal utility wasn't among them. Nearly a century later, Jevons, Wenger, and Walras brought about the "Marginal Revolution", which gave us the understanding that the reason water is so cheap for us is because we've already got so much of it. And this, in turn, allows us to understand that both sides of a transaction are unloading something they hold in (relative) excess for something that would increase their total utility function.

zeteo 15y ago
Ah, but I didn't say anything about the reason why water is so cheap. (Smith would explain it takes little effort to procure it - not that different from the marginalist argument.) What matters for the issue at hand is that its utility can be a very small factor in its price.
- pdonis 15y ago
  You're missing the point of marginal utility. Because the price of water is so low, the marginal use of water is not for purposes vital to survival. People water their lawns, fill swimming pools, wash cars, etc. In other words, they use water for things whose utility is equal to its current price, because there's plenty of water left over at that price after all the vital-to-survival needs are met. If the price of water went up, people would stop using it for purposes with lower utility, in order to be sure to have enough for purposes with higher utility (like drinking and cooking). So the marginal utility of water would still be equal to its price. See David Friedman's text, Price Theory; in particular Chapter 4: http://www.daviddfriedman.com/Academic/Price_Theory/PThy_Chapter_4/PThy_Chapter_4.html http://www.daviddfriedman.com/Academic/Price_Theory/PThy_Cha... He discusses this exact case (diamonds vs. water).
  - zeteo 15y ago
    An introductory text - thank you, but I've taken microeconomics in college. After carefully considering both points of view, I tend to rather agree with Smith, for the following simple reason. Suppose the more frivolous uses of water were somehow restricted. (There are cities that do pass such regulations sometimes.) Its marginal utility would increase, but its price would most likely drop, due to lower demand. Alternatively, consider that blood plasma and many life-saving medicines that have no other use are still cheaper than diamonds. In any case, let's go back to the original issue. And, for the sake of argument, let's agree with the marginalists. Aren't all the marginal values and costs for a digital creation, which can be easily replicated millions of times, practically zero?
    - pdonis 15y ago
      > Suppose the more frivolous uses of water were somehow restricted. Then you would no longer have a free market; people would be prohibited from engaging in transactions that they would have chosen to engage in without the prohibition. In that case, yes, price is no longer equal to marginal utility. > Alternatively, consider that blood plasma and many life-saving medicines that have no other use are still cheaper than diamonds. A better example, yes. I would tend to say the "market" in these things is not exactly free either. Somebody should ask Friedman about that one. :) > And, for the sake of argument, let's agree with the marginalists. Aren't all the marginal values and costs for a digital creation, which can be easily replicated millions of times, practically zero? Yes.