my valuation of the WON is super high… which means that I perceive this type of book to be extremely scarce

I don’t think the consumer surplus in a trade is a reliable indicator of the actual or perceived scarcity of that which is being traded. We have two things here. First: the willingness to pay (which reflects the perceived value) is only indirectly reflected in the surplus (if the price is low, then the surplus will be high; if the price is high, the surplus approximates zero or even negative territory — see overenthusiastic eBay bidders!). Second: scarcity, which is sometimes one factor in the value of something.

Should we not separate value and scarcity? It is quite possible to ascribe a high value to something that is by no means scarce (e.g. oxygen, daylight), and to perceive as valueless that which is scarce (my old razor, my exercise book from when I was 6 years old).

I think that from an economics perspective, it is also useful to consider scarcity and abundance as relative concepts, reflecting the relationship between supply and demand. Oxygen and daylight are in high demand, but the supply is ample, so while we all value it highly, the price at which we obtain it is very low, making the consumer surplus very high. Likewise, there is no demand for my old razor and exercise books, so even the fact that the supply is very low (they are unique pieces!) makes their market value very low — even at £0.00 the consumer surplus might be negative.

The fact of the matter is that producers aren’t mind-readers. Consumer surplus is love for products that we hide from producers. But if they can’t see how much we truly love certain products… then we can’t expect them to incorporate this information into their decisions.

This is a striking point. The power of price being a signal to producers to supply more is eroded by a large consumer surplus. The question is then: how does it come about? How come prices are so low?

I think one answer is in the aggregate consumer surplus. Maybe you and I and a handful of others get tremendous value out of the WON, but the majority of the world doesn’t — even if they can read it for free, they still don’t. So in the world of books, another WON is not going to happen, because the aggregate demand is not there, however much you’d be willing to pay for a new WON.

Another answer is that there is already abundance. There is plenty to read on economics, in books, and even more so in freely available online media: papers, articles and blogposts.

Coming back to the idea that high valuation implies scarcity (or at least a desire for more abundance), my thoughts just wandered to airline seats. This is a product that has been quite successfully differentiated in recent years (compared to 30 years ago). A businessman willing to pay £400 to fly from London to Amsterdam can now do so for £40, and so enjoys a huge consumer surplus. Does this mean he wants such seats to be available more abundantly? I don’t think so.

If what truly matters is the incentive to produce… then, given that consumer surplus diminishes the incentive to produce, it stands to reason that consumer surplus is counterproductive.

The price is the signal. But the real incentive for the producer is the producer surplus. That is partially a function of the consumer surplus, but also of the production cost (and the price). All else being equal, a lower consumer surplus would lead to a higher producer surplus and so more supply. But it would also lower aggregate demand — marginal customers would stop buying if the product became more expensive.

I believe that conventional economic theory holds that equilibrium is reached when the aggregate producer surplus is maximum (it’s sometime since I studied microeconomics!).

The problem is indeed that the price is not a very good signal. Producers could (and do) experiment with the price to see if that transfer from consumer to producer surplus can happen, but it’s clumsy.

But look at it from the consumer point of view: you are well aware of your consumer surplus. But of course it allows you to allocate scarce funds somewhere else, and so maximize your utility. Paying more for WON-like books would possibly increase your utility in that domain, as you get more reading material, but it would inevitably reduce your utility elsewhere as you’d have less to spend.

Given widespread loss aversion, consumers are not likely to be prepared to hand over money just as a signal in anticipation of more desirable product, while immediately being poorer.

In a sense, it’s akin to investing in a futures market!

Accidental behavioural economist in search of wisdom. Uses insights from (behavioural) economics in organization development. On Twitter as @koenfucius

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