Economics and Public Policy – A Useful Opportunity (at a Small Cost)

  1. Go to the Crooked Timber blog.
  2. Scroll down to John Quiggin’s post "Most "Economists’ Aren’t" (currently 8 posts down – I don’t want to give you the direct link, since the answer is over the fold).
  3. See whether you can answer the opportunity cost question correctly.
  4. Bonus exercise: see if you can explain it to some of the commenters.
This entry was posted in Uncategorized. Bookmark the permalink.

18 Responses to Economics and Public Policy – A Useful Opportunity (at a Small Cost)

  1. Sinclair Davidson says:

    What does ‘Assume there are no other costs’ mean?

  2. Andrew Leigh says:

    I think the suggestion is that the two concerts are identical with regard to other costs – eg. parking fines, passive smoke consumption, probability of shin injury caused by being hit by walking frames, etc.

  3. Russell says:

    This is really annoying. Opportunity cost has a meaning to all us non-economists: what you forego by choosing to do one thing rather than another. In plain English this thing reads to me as – I can go to Clapton for free or pay $40 to see Dylan. (What I’m willing to pay is irrelevant – the cost is $40). If I see Clapton I have saved $40.

  4. Sinclair Davidson says:

    … not to mention noise pollution. i can’t believe people pay money to see Dylan or Clapton.

  5. Sinclair Davidson says:

    Russell – I think what the question is saying that there are only two things you could do – see Clapton for $50 (first choice) or Dylan for $40 (second choice). What isn’t clear is what you’d do if neither option were interesting. In addition to saying there are no other costs, the question needs to say there are no other choices.

    In a previous life, at my previous employer, a committee would vet all multi-choice questions before they went into exams, I’m sure this one wouldn’t have survived that process. First, because it appears so many economists got it wrong (all members of the committee had to get all questions right, first time), and second because we’d all be arguing about what the question means.

  6. Russell says:

    Sinclair – I hate this thing ! “You won a free ticket to see an Eric Clapton concert” You won the Clapton ticket – it didn’t cost you anything. You’re going to that concert for free. Your second preference would be to go to the Dylan concert which would cost you $40.

  7. Sinclair Davidson says:

    sure you got the ticket for free (or won it etc), but it is actually worth $50 to you (apparently).

  8. Russell says:

    “Apparently”, “apparently” ? you’re just being cruel, because it’s not apparent to me. It doesn’t say how much the Clapton ticket would have cost, or how much I would have been willing to pay for it. But it’s beside the point – I had 2 options and I chose to use the free ticket to go to my preferred concert, and saved myself the $40 the other option would have cost me.

  9. Sinclair Davidson says:

    LoL. no sorry, not being cruel – trying to make the point that a Clapton ticket would never be worth $50 to anyone. Me, personally, would have to be paid to go to see Clapton, or Dylan, or any other performer except Meatloaf.

    On a more serious note, I wouldn’t worry too much if you can’t solve the problem. It’s too contrived to be of much practical use. For most purposes your basic understanding would serve you well. (This can be described as a Type III error – right answer, wrong question.)Economic problems in the real world don’t have ‘assume no other costs’ in them.

  10. Christine says:

    I used this on the first day of a second year Eco class as an opportunity cost review, and to try to point out that lots of people find economics hard. They did a bit better than the PhDs/Profs.

    I don’t think there’s a problem with the question. The big issue seems to be that people automatically want to use only the opp cost info to decide whether the hypothetical peson should go see Clapton or Dylan. The standard economics approach to that decision is be to compare the benefits of going to see Clapton (unstated) to the opportunity costs of seeing Clapton.

    Russell – you’re exactly right, opp cost is the value to you of the other thing you didn’t get to do because you went to see Clapton – in this case, going to see Dylan.

    So, what is the value of going to see Dylan? You get $50 in ‘value’, but you have to pay $40 which you could otherwise have spent buying a good book or two or whatever else you wanted, so your net benefit is $10. This is the opportunity cost. The money cost of going to see Clapton is zero. So the total cost of going to see Clapton (money plus opportunity) is $10. The question does help people get the right answer by setting the money costs to zero so total cost = opp cost.

    You should go see Clapton if you get at least $10 value out of it. So Sinclair’s not going. (Really – Meatloaf???)

  11. Jason Soon says:

    I pray for your soul, Sinclair. And Bob does too. He forgives your trespasses.

  12. Sinclair Davidson says:

    Yeah, Meatloaf. And the CD and DVD of the same event.

    The problem I have with the question is that it’s great for people who study economics, but crap for people who don’t. Once you’re in the contrived mind-set of test questions and exams the question might work. BUT real people, like Russell, don’t face a choices of either a or b, but not c,d or e. This is a truncated choice set with unrealistic costs (zero). So how did you get the ticket?, why can’t you sell it? what would you do if neither a or b is desirable? In economics tutes we say don’t worry about those things just answer the question – but the question is contrived. It highlights a principle, not a real-world choice. Indeed, but trying to be ‘real-world’ (i.e. Clapton and Dylan) instead of abstract, it detracts from understanding insread of enhancing understand.

  13. Russell says:

    The question is unfair ! Thanks Christine, that was a very clear explanation of how to get the $10 answer.

    But if you bring subjective value into it – I valued the Dylan concert at $50, when it costs $40, giving me an intangible, subjective benefit of $10, then shouldn’t you give equal info for the other choice: the Clapton cost is $0, plus my value of it which is “X” ….. in this case we can’t say how much the intangible benefit would be. If X=$70 ?? Anyway, it seems a false question without being given the value of X. The $10 answer might be right, but it’s meaningless.

  14. Christine says:

    You’re right, the question really is only good for people who’ve actually had to study or teach economics (ie the people who were being surveyed). Any time you bring some real world example in, it’s almost impossible to ignore the real world complications or your own preferences.

    I had one prof who put the following question (paraphrased as well as I can recall, though I’m sure it’s not quite right) on a first year economics exam.

    It’s Christmas, and you have a choice between giving your girlfriend a diamond necklace, or giving her the cash value of the necklace. Which would maximise her utility?

    Easy from a (mindless first year) economics perspective: give her the money and she can buy the necklace or something else she prefers, so she’d be at least as well off with the cash.

    Apparently, most of the women in the class got the answer ‘wrong’. Most of the blokes got it ‘right’. And then no doubt got into big trouble at Christmas time.

  15. Jason Soon says:

    there are some cultures that enage in efficient gift giving practices. Like the Chinese. Google ‘ang pow’ (red packets)

  16. mmh the more interesting question this raises is: Do economists have crap music taste?

    Some true statements within the question. Clearly everyone, except Chris Sheil and Homer, know that a Clapton ticket will be a radio quiz giveaway because they are papering the house due to low ticket sales. The question correctly states: ‘You won a free ticket to see an Eric Clapton concert (which has no resale value)” – No Resale Value!

    Sinclair is surely winding us up by saying he prefers Meatloaf to Dylan.

    There is no “your next-best alternative”, to Dylan nor are there any close substitutes.

  17. whoops – on reading comments over at Harry Clarkes’s I may have unfairly maligned Homer with regard to Clapton. (usually he manages to malign himself without assistance)

    Your Honour, I beg leave to withdraw the remark.

  18. Russell says:

    “efficient gift giving practices”, I suppose economists were nodding approvingly at this phrase. A meaningless and a heartless discipline. Give me thoughful gifts, cunning gifts, surprising, extravagant gifts … but spare us “efficient gift giving practices” !

Comments are closed.