Tuesday, December 27, 2011

Third Party Satisfaction Bandits

The term “Utility“, in economics, is basically the amount of satisfaction one receives from the consumption of a good, service or action. Marginal utility is the amount of satisfaction one receives from consuming additional units of the same good, service, or action. Since marginal utility drops off regarding consumption of additional units of the same good, service or action, the general proposition is that consumers consume a basket of goods, services, and actions of which each item has maximum utility hence reaching maximum total utility.

For example, rather than a basket comprising twenty identical packages of chocolate chip cookies with diminishing marginal utility regarding each addition package of cookies, one has a basket comprising a variety of items such as cookies, milk, coffee, lettuce, tomatoes, a haircut and a book with each item having maximum marginal utility thus yielding maximum total utility for the particular basket.

Let us assume on a given day consumer A acquires basket X of goods, services, and actions and has achieved maximum total utility. That the particular basket yields maximum satisfaction given price and the allocation of scare resources with alternative uses. All is tidy and neat as consumer A has reached maximum total utility!

-Or- did A not reach maximum total utility due to market intervention-distortions by third parties? The assumptions in the example above is that A reaches maximum utility given “market constraints“. However, if market constraints become market constraints and market intervention-distortions by third parties, does A reach maximum total utility?

What if third party decisions, resulting in market intervention-distortion, cause consumer A to acquire basket X3P [where X3P represents the assortment of goods, services, and actions available due to third party market intervention-distortion]. That is to say, consumer A wanted to reach maximum total utility by having the freedom to choose and hence acquiring basket X of goods, services, and actions. However consumer A was unable to actually find X.

Consumer A could not find X as third party market intervention-distortion precluded X and substituted X with available option X3P.

Therefore consumer A does not reach his particular maximum total utility as he never acquired X. In essence, A acquires X3P due to third party market intervention-distortion. A is not at the point of maximum total utility. If A is not at maximum total utility where did the difference go?

Before we examine the missing maximum total utility, we need to consider a statement by Harold Demsetz, department of economics UCLA, from his book From Economic Man to Economic System, Chapter 10, pages 141 -159, entitled The Public Corporation: Its Ownership and Control. Demsetz writes on page 158:

‘A tax levied on corporate profit reduces the care and effort owners put into its operation, since part of the return that would have been received by owners will go to the state. Defacto, private owners of the corporation are saddled with a shirking partner, the state, which takes part of the revenue and provides none of the effort to improve the firm’s return. Consequently the greater is the corporate tax rate, the greater the incentive for corporate owners and management to pursue the “quiet life”.’
If state [government] acts as a “shirking partner” (which takes part of the revenue and provides none of the effort to improve the firm’s return) then do third party market intervention-distortions also act as a “shirking partner” in regards to A‘s quest for maximum total utility? Since A is not at maximum total utility did the difference go to the shirking partner represented by a third party advocating market intervention-distortions?

Now examine these observations by Thomas Sowell from his book The Vision of the Anointed, pages 74 and 75:

‘One of the problems faced by “consumer advocates” in general is how to make the consumers’ own preferences disappear from the argument, since consumer sovereignty conflicts with moral surrogacy by the anointed.’

‘Displacing responsibility from the consumer to the producer has been a crucial part of consumer advocacy.’

‘…approach boils down to is that third parties should preempt the consumer’s choice…’

Sowell is basically stating that third parties that advocate their particular choices know its poor politics to attack the consumers’ particular preference hence they preempt the consumers’ preference at the producer level. That its much better politics to attack the producer. By attacking the producer the third party advocate superimposes their particular choices on the producer and hence preempts the choices of the consumer.

Now we return to the question:
If A is not at maximum total utility where did the difference go?

The missing utility is captured by the third party. The third party might merely be do-gooders that capture utility in the form of “satisfaction” [utility] that they have somehow, some way, solved/improved the consumer’s preference by morphing the preference into their particular preference. Other third parties, acting as economic rent seekers, benefit from the morphing preference. Stated alternatively, a second set of third parties directly benefit from the preference being directed to the preference they in fact produce.

1 comment:

  1. I hope that many will take the time to read and digest this. It is not gibberish.