Tag: utility

Are consumers ‘rational’ is the sense of trying to maximise consumer surplus? In some circumstances the answer is yes. When we go shopping we do generally try to get best value for money, where value is defined in terms of utility. With limited incomes, we don’t want to waste money. If we were offered two baskets of goods costing the same amount, we would generally choose basket A if its contents gave us more utility than basket B.

So why do we frequently buy things that are bad for us? Take the case of food. Why do we consume junk food if we know fresh produce is better for us? To answer this we need to look a little closer at the concept of utility and what motivates us when we consumer things. The following article does just that. It reports on writings of Michael Pollan. Pollan looks at our motivation when choosing what and how much to eat. For much of the time our choices are governed by our subconscious and by habit.

“Millions of humans, while believing they govern their actions with conscious intelligence, clean every morsel from their dinner plates, mainly because their parents told them to. And we do this even if we don’t particularly like the food on the plate and even if we know we should be eating less of it. Unthinkingly, we follow a habit we would condemn if we looked at it clearly.”

You mar what you eat and the politics of Michael Pollan National Post (Canada), Robert Fulford (18/1/10)

Questions

  1. What is meant by ‘rational behaviour’? Is it reasonable to assume that people are rational in most circumstances?
  2. Is eating junk food consistent with the attempt to maximise consumer surplus?
  3. How relevant is the principle of diminishing marginal utility in explaining the amount of junk food we eat?
  4. To what extent are the problems that Pollan identifies examples of (a) imperfect information; (b) irrationality?
  5. What does people’s eating behaviour reveal about their preferences for the present over the future and hence their personal discount rate?
  6. What are the policy implications of Pollan’s analysis for governments trying to get people to eat more healthily?

In a recently published book, Scroogenomics, Joel Waldfogel, Professor of Business and Public Policy at the University of Pennsylvania, examines the economics of giving presents and considers whether we would be better off being Scrooges. This book brings to a general audience some of Professor Waldfogel’s work on giving. In a 1993 paper, he argued that holiday gift-giving involves a deadweight welfare loss. “I find that holiday gift-giving destroys between 10 per cent and a third of the value of gifts.” (See The Deadweight Welfare Loss of Christmas. Note: you should be able to access this from a UK university site if you are logged on.)

The core of his argument is that many gifts we give are not really what the person receiving it would have chosen. If you give someone a gift costing £10 for which the person would not have paid more than £6, then that is £4 wasted – a deadweight loss of £4.

So should we all be Scrooges and stop giving? Think of all money that would be saved and which could be spent on things that were more wanted. But wait a minute. What about the pleasure (i.e. utility) of giving? And what about the pure pleasure of receiving a gift, irrespective of the gift itself? Should these be added in to arrive at the total utility? Then there is the pleasure (or hassle) of shopping for the gift. Shouldn’t this be taken into account too? In other words, to establish deadweight loss, we need to take into account all the pleasures and displeasures of the process of giving and receiving.

Finally there is the question of whether better research on the part of the giver into the tastes of the receiver would enable them to choose more wanted gifts. Or should we simply give cash or gift tokens: at least these can be used by the recipient for whatever they choose?

Interview with Joel Waldfogel Princeton University Press, on YouTube

See also the following articles:
It’s not just Scrooge who wants Christmas abolished Financial Times, Tim Harford (20/11/09)
Stop blaming Grandma for cruddy Christmas presents Seattle Times, Joel Waldfogel (20/11/09)
It may not be the thought that counts Washington Post (22/11/09)
Economics of gift vouchers BBC News Magazine, Ruth Alexander (17/12/07)
The high cost of ugly, useless Christmas gifts Globe and Mail (Canada), Erin Anderssen (13/11/09)
Author’s argument that unappreciated gifts drag down economy isn’t Scroogish, it’s foolish Mlive.com, Nancy Crawley (8/11/09)
Give gold, not myrrh The Economist (21/12/09)

Questions

  1. What factors would need to be taken into account in attempting to measure the true deadweight loss of giving? Would this involve inter-personal comparisons of utility and, if so, what problems might arise from this?
  2. Examine whether it is better to give cash or gift tokens rather than a physical gift?
  3. Consider whether charitable donations would be the best form of gift to a friend or relative?
  4. One practice used in many families is the ‘secret Santa’. This is where everyone in the family secretly draws the name of another family member at random. They then buy a gift for this person and put the gift under the tree (or in a box). Thus each person gives just one gift and receives one gift and nobody knows who has given them their gift. Normally a maximum value of the gift is determined in advance. Consider the advantages and disadvantages of such as system. Is it a more efficient way of giving?
  5. What are the macroeconomic arguments for giving presents at Christmas time or at other festivals?

The US Institute of Medicine of the National Academies has recently published a 92-page on report on childhood obesity and the use of taxes on junk foods to tackle the problem. In the report, titled Local Government Actions to Prevent Childhood Obesity, “a panel of experts suggested such taxes could play an important role in helping children make healthier eating choices”.

Meanwhile, in Australia, the Federal Government’s preventive health taskforce argued, amongst other things, that “junk food advertising should be phased out, the cost of cigarettes should be more than $20 a packet, and soft drinks and cask wine should be hit with higher taxes”.

So how effective are higher taxes in achieving a reduction in ill health associated with eating, drinking and smoking? If adopted, what is the socially optimum design and rates of such taxes? What other complementary policies could be adopted? The following articles consider the issues.

More support for a junk-food tax Los Angeles Times (2/9/09)
Tax junk food, drinks to fight child obesity-report Reuters (31/8/09)
Could Raising Taxes on Junk Food Curb Obesity? eMaxHealth (2/9/09)
Junk food and tobacco under fire The Age (Australia) (2/9/09)
What price health? The Australian (2/9/09)

Questions

  1. For what reasons does the free market fail to achieve an optimum level of consumption of junk foods, alcohol and cigarettes?
  2. How would you determine the socially optimum level of consumption of such products?
  3. How are the price, income and cross-price elasticities of demand, and the price elasticity of supply, relevant to assessing the effectiveness of taxes for reducing the consumption of unhealthy products?
  4. What determines the incidence of taxes on unhealthy products?
  5. What other policies would you advocate to tackle the problems associated with consuming unhealthy products? How would they affect the price elasticity of demand for such products.
  6. To what extent do the objectives of social efficiency and equity conflict when designing appropriate policies to discourage unhealthy consumption?

Behavioural economics looks at the way in which people behave when making economic decisions about spending. It looks essentially and what people buy and why they buy it. Research in behavioural economics has started to question some of the traditional economic assumptions of rationality and argues that habits and other psychological factors may be more important than conventionally assumed.

Why we buy what we buy Guardian (20/5/08)

Questions

1. Explain what is meant by ‘behavioural economics’.
2. Evaluate the principal factors that people take into account when choosing to buy a consumer good.
3. “….. average people are all far more irrational and more human than economists allow”. Discuss the extent to which this might be true.

In the article below Tim Harford (the Undercover Economist) looks at rationality in the purchase of cigarettes. He consider whether healthy and happy smokers are the same thing and the extent to which smokers would be happier if cigarettes were more expensive.

Why smokers are happier when cigarettes cost more MSN Slate (17/5/08)

Questions

1. Identify the principal factors that determine the level of demand for cigarettes.
2. Given the factors identified in part (a), discuss the likely value of the price elasticity of demand for cigarettes.
3. Discuss the extent to which higher cigarette prices would make smokers happier.