The point of your tweet was to consider the issue of framing?

Yep: show the proportion of sugar, rather than just list the amount on the label.

Would this be a better balance?

Better according to what criteria? There are multiple stakeholders here, each of which has a set of preferences, some of which may even be in internal conflict with each other. The consumer may want something that tastes nice, but is also healthy. More sugar serves the first one, but not the second. The manufacturer wants profit, but also brand image, so they cannot just put in any old junk. The government wants to combat obesity (because it’s expensive to treat people with diabetes and coronary heart disease) but also wants happy citizens.

I don’t think it is easy (or even possible) to determine what is ‘better’ in the complex landscape of Nutella!

My argument is that our payment for these two activities should equal our valuation of them. In other words, honesty is the best policy.

Unless we’re in a pragmatarian market, we should also take into account what the willingness to accept is for each of these two activities. I may be particularly good at spotting crabs, or prefer doing that over spotting ships.

I think the problem with your argument is that there is one, and one price only that clears the market. This is not the case whenever there is a transaction surplus, i.e. when the producer’s WTA < the consumer’s WTP.

Perhaps it will be helpful to start by considering the top down approach.

Yes, I get all that: even someone with a superior intellect like me :-) could not possibly divine the optimum balance between crab and ship spotting. (I do like the thought experiment!). And we need some way of quantifying preferences, and not the colourful language you refer to!

So far so good.

So what about consumer surplus?

Let’s say that you want to trade your shells for my crabs. Your maximum WTP is 5 shells for 1 crab. My minimum WTA is 2 shells for 1 crab. If you gave me 5 shells this would maximize my producer surplus. If you gave me 2 shells this would maximize your consumer surplus. Well… actually, giving me 0 shells for my 1 crab would maximize your consumer surplus. Just like me taking all your shells and giving you 0 crabs would maximize my producer surplus.

If I offered you no shells for your crab, you’d either sell it someone else, or you’d simply not fish it. There can only be a surplus if the transaction takes place, and therefore the price needs to be between WTA and WTP.

My argument that honesty is the best policy is based on my perception that how you spend your shells should accurately reflect and communicate how you truly want the island’s limited labor to be divided between crab catching and ship spotting. How important is each activity to you? Your answer will help to determine the allocation of the island’s limited labor so it would behoove you to use your shells to answer the question as honestly as possible.

But it is no more ‘honest’ for me to reveal that I’d pay “up to 5 shells” for a crab than it is for you to reveal that you’d be willing to sell me a crab for “at least 1 shell”.

If you are willing to sell me your crab for one shell, I have four shells more than if I had given you all five, and so I could buy four other crabs if I was feeling particularly hungry, or I could buy some ship spotting as well.

Your argument is that there’s a range of mutually beneficial trades. Well yes. This is true. I concur. But just because there’s a range of mutually beneficial trades really doesn’t mean that there’s a range of optimal allocations of labor.

Sorry, no.

  1. The optimal allocation of labour should not be decoupled from the maximization of the total benefit. If you do decouple it, you may be sacrificing one for the other, which is of course nonsense: how could we have an optimal allocation of labour that fails to maximize the overall benefit?
  2. So we’re trying to maximize overall benefit. Let’s start by maximizing my personal benefit. Say I typically need one crab per day, but occasionally I am quite hungry and I could eat two or even three. I am willing to pay up to five shells for one, but if they’re cheaper, I might buy more than one. So if you are willing to offer me a crab for one shell, I can easily buy two or three if I want, and I have shells left over with which I can buy more ship spotting. In other words: my benefit is higher if you sell me the crab for 1 shell than if I am somehow forced to be ‘honest’ and pay you five shells for a crab.

There can only be one allocation of labor that will maximize total benefit.

Well, no. That optimum allocation of labour to maximize my (and the total) benefit depends on the price of the labour just as much as on my valuation of what the labour produces.

You seem to ignore that part of the equation. How much crab I want and how much ship spotting depends on the price of each activity, i.e. the WTA of the crab fishers and horizon starers.

A. how you want the island’s labor to be allocated
B. how you spend your shells

X. what you want the supply to be
Y. what the supply is

The bigger the disparity between A and B… the greater the disparity between X and Y.

What I want the supply to be is not just dependent on my valuation (as a consumer) but also on the valuation of the producer.

Imagine if nobody on the island made the effort to try and spot ships. There would be less work to do… but everybody would be trapped in a world that they really didn’t want to live in. Which is more important… working less or increasing the chances of living in a better world?

That depends entirely on the suppliers of the labour. If they prefer to work less, perhaps giving them more shells would persuade them to spend time spotting ships? Their WTA is just as material as the WTP of the other island dwellers.

All of the above is of course the situation in a non-pragmatarian system. In a pragmatarian system there is indeed no surplus, because there is not really a transaction taking place. But you introduced private goods (the crabs), and these are the subject of individual 1:1 transactions.

When you buy a car… you trade your money for the car. It might seem mind-numbingly obvious, but the car that you purchased has already been produced. So the money that you spent to purchase your car will be used to produce another car. Therefore, you can think of your spending decision in two different ways…

Here’s what I’m getting (a car)

Here’s what I’m doing (encouraging the production of cars)

I think we need to be careful extrapolating overall market insight and behaviour from a single transaction. (And of course, quite a few car purchases involve the car being made to order!) Sales forecasting is a black art, and the purchase of one item should definitely not be seen as a signal to produce a further identical item.

Imagine that on the island, we were super lucky that somebody happened to have some viable seeds of corn with them. For sure we could simply cook the corn seeds and eat them now. This would provide us with X amount of immediate benefit. Or, we could plant the corn seeds and then have an abundance of corn within a year. This would provide us with Y amount of future benefit. I’m sure that you’d agree that X is a lot less than Y…

Of course. But the problem here is the short-sightedness of the individual preferences, not of the system. It is only by getting people to make the right choice for the longer term, i.e. to take the longer term into account in their preferences, that you solve this. If the island dwellers really couldn’t care less if the corn is all gone when it’s all eaten straight away, they’re acting perfectly rationally.

From my perspective, this is exactly the same issue with consumer surplus. With consumer surplus we fail to give up a smaller immediate benefit for a larger future benefit. It’s certainly a problem but it really isn’t a problem of human behavior. The problem is entirely structural. If we change the structure then the focus will quickly shift from the present to the future. As a result, the future will be much better.

No, I really disagree here. The surplus in a transaction means that there are resources left over that can be used for something else — i.e. there is additional benefit.

Let me try to explain. Imagine I grow lettuce and you grow tomatoes — both for our own consumption, and to sell to others.

  • My income from selling the lettuces I don’t need is $10 per day.
  • You are spending 11 hours per day growing your tomatoes, one hour for your own consumption, and 10 hours to produce 50 tomatoes to sell. You need an income of $10/day to buy other stuff. So your WTA for your tomatoes is $1 for 5 tomatoes.
  • I like tomatoes, and I would be prepared to pay $3 for 5 tomatoes.

Let’s look at 3 scenarios:

  1. I am ‘honest’ and put my money straight on the table: “Here’s $3 for 5 tomatoes, please!” You are happy, because you’ve already made $3 and you still have 90% of your stock left. Even if you sell all the rest at $1, you have a surplus of $2, so either you can spend $2 more on stuff you want, or tomorrow you only need to produce 40 tomatoes to earn a further $8, which means you have an additional 2 hours to do something else with. That additional benefit is your producer’s surplus.
  2. You are ‘honest’ and you price the tomatoes at $1 for 5. I had been prepared to pay $3, so I now have $2 I can spend on something else, or I can produce less lettuce tomorrow and so save time in the same way as you. That additional benefit is my consumer’s surplus.
  3. Your tomatoes are not priced, but we haggle. “$1 for 5 tomatoes”, I offer — you decline: “Nope, they’re $3 for 5”. I then say “How about we split the difference?” I buy 5 tomatoes for $2, thus saving $1 compared to my WTP, but you also save $1 compared to your WTA. We can either spend $1 more today, or save it for tomorrow and work an hour less each. We have now split the additional benefit into a part consumer surplus and a part producer surplus.

In all three scenarios there is an additional benefit compared to selling at the WTA and buying at the WTP. And that is inevitable in every situation where WTA < WTP (which is the case in almost all real world transactions).

Written by

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

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