(credit: Timothy Takemoto CC BY)

A fair price for everyone

Fairness is an important feature in our society. But is a fair price a fixed price, which is the same for everyone?

For billions of years, life on this planet has been subject to the iron law of the zero sum. Any resource that was appropriated by one organism was automatically unavailable for any other one. Win-lose was the name of pretty much every game — what you won, I lost and vice versa — until our distant ancestors discovered trading, and with it the ‘win-win’ concept. But there is something that complicates matters.

At the heart of every transaction are two key variables: willingness to pay (WTP), and willingness to accept (WTA). If you have something I would like, and the maximum I am prepared to give you in return (my WTP) is greater than the minimum you will take for it (your WTA), we can do business. The difference between my WTP and your WTA is the economic surplus, a measure of the wealth that is being created by the transaction. It doesn’t matter exactly how it is shared: together we are better off after the transaction than before. This is almost miraculous — it is the closest to a true perpetuum mobile humanity has got so far.

Determining our WTP seems simple enough. In mainstream economics, it should reflect the perceived value to us, the worth we attach…