Author: Gary Grimes

Market Failures, Taxes, and Subsidies – Episode #21, Part 2

We’re back for the second part of Crash Course Economic’s episode on Market Failures, Taxes, and Subsidies.  In this post we’ll cover the second half of the video, which talks about externalities, pollution, and the education system.  Let’s rock and roll:

Negative Externalities

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Remember, sometimes markets misallocate resources because they don’t have the right price signals. There is no better example of this than what economists call externalities. Externalities are situations when there’s an external costs or external benefits that accrue to other people or society as a whole.

Market misallocation of resources is something we covered last week in episode 20, so I won’t go into it here.  What Mr. Clifford is trying to say here is that markets don’t take into account negative externalities when pricing a product, since the companies don’t have to pay for these externalities.

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Let’s look at a TV factory that pollutes a river with toxic chemicals. This is definitely a negative externality […] There are also external costs associated with polluting the waterways, like dead fish, contaminated drinking water, and people getting sick […] The free market assumes that all the costs associated with producing TVs are accounted for within the price of those TVs, but, in this case, the market is wrong. The end result is a market failure because the factory is producing too many TVs.

This is a textbook example of a negative externality.  An entity is directly responsible for a lot of bad things, but the entity never has to take legal responsibility for it.  Something is clearly wrong here, but what’s the solution?  Crash Course offers one that’s used most often:

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Economists often look to the government to step in and solve the problem. For example, the government could tax the TV factory.

The taxes will increase the cost of producing each TV, and thus reduce the supply and raise the price of each one.  This bring the supply and price closer to what Mr. Clifford and many government economists have determined to be the appropriate supply/price for a TV, since according to them, the free market could not do it on its own.

While this solution may bring the supply and price closer to what the real market would be if the TV factory had to account for the negative externalities, it doesn’t clean the river, and it doesn’t incentivize the TV factory to stop polluting the river.  In the end, the river is still polluted, but now the government has more money.  Is this the trade off economists are looking for?

Instead, some economists suggest, the problem is one of property rights.  If someone owned the river or the right to use it, he could sue the factory for violating his property rights.  Since rivers are owned by governments (remember tragedy of the commons?), no private individual could sue the factory.  The government is satisfied with the taxation solution since it means a new stream of cash flow, but it probably doesn’t mean much to the people who have use the polluted river.  But where would the money collected from these taxes go (at least, in theory)?  To the positive externalities, of course.

Positive Externalities

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More education is great for you. You’ll likely generate more income and it makes you more interesting to talk to at parties. But there are also external benefits of your education. Everyone is actually made better off. With more education you’re more likely be a positive and productive member of society. And if you earn a higher income, that means more tax revenue.

Funding education would, in theory, produce graduates with much greater productive value.  This increase in value would be better off for the economy at large, since more wealth is now created.  That wealth would also be taxed.  If you’ve ever heard someone say that “subsidized education pays for itself,” this is the theory behind it.

Of course, this is assuming that putting money towards any school system is a good return on investment.  Considering the extremely high price of college tuition, is each dollar really spent wisely on improving the productive capacity of its students?

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If the government didn’t get involved, all education would be provided by private schools that would charge tuition; there might not be enough affordable schools to educate young people.  The government funds education because they think that the external benefits, like literate, well-informed, erudite citizens, are so high it’s worth forcing everyone to pay.

Well-informed, erudite citizens.  Is that the world we live in?  According to the most recent statistics, about a quarter of the United States is functionally illiterate.

Of course, it’s very difficult to speculate about what the market would look like if there were not any public education.  The education market as a whole is so heavily influenced by the public school system, economists can only theorize about what low-cost private schooling choices would appear if they were not crowded out by no-cost public schools.

But what economists always ask themselves is “compared to what?”  Would people be better off if the government put the money (wherever it comes from) toward education, some other project, or back in the hands of the citizens?  That’s very hard to tell, but for spending over $12,000+ on every elementary and secondary school student, would the students would be more literate, well-informed, and erudite if that money went to private tutoring?

Thanks for sticking around for part two of this week’s episode.  Please come back every Thursday for a fresh new post on a new episode.  And don’t forget to join our newsletter and our facebook group, and comment below!

Market Failures, Taxes, and Subsidies – Episode #21, Part 1

This week Crash Course takes a step in the pro-government direction, despite concluding at the end of this episode that neither markets nor government is “better,” but rather that the two must work together for everyone’s benefit.  This episode is such a doozy that it’ll be broken into two parts.  Let’s get started:

Prisoner’s Dilemma

The episode begins with a variation of the prisoner’s dilemma situation in game theory.  In short, the game offers someone a choice between something that will benefit them a lot vs. something that will benefit them a little, but if that person and other people (who are given the same choice) also choose the more beneficial option, then all parties end up with a very bad result.

 

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The [prisoner’s dilemma] question alludes to one of the biggest problems with free markets: sometimes people have a personal incentive to do something that is against the collective interests of the group.

I found this connection pretty attenuated, since this problem doesn’t really have anything to do with free markets.  In fact, this problem could be just as easily (or more easily) be connected to the tragedy of the commons than to the free market.  We’ll better explain these terms (market failures and the tragedy of the commons) later in this post.

Market Failures

Despite it being so important that it’s named in the title of the episode, the term Market Failures is only briefly defined before moving on.  Let’s look at how Crash Course introduces it:

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Things that are for our collective well being, like fire protection, schools, and national defense are often funded by the government. When markets alone fail to provide enough of these things, that’s called market failures.

The term “Market Failure” is used to describe when the market does not produce something (or enough of something) to meet consumer demand.  Markets are always adjusting to meet consumer demand, but the term Market Failure is usually used for allegedly huge discrepancies between supply and demand.

For example, Crash Course purports that if government fire departments did not exist, then there would not exist any fire protection for people.  Since people need fire protection, the government must step in during these Market Failures.

Confusingly, evidence of privately-owned and operated Fire Departments is so abundant, I’m surprised that Crash Course would use this as one of their examples where the market cannot provide.  National Defense is a much harder example to argue against, so I’m wondering why Crash Course extrapolated on their weakest example.  Of course the market can provide for fire protection services, since it does in many areas for less cost.

Public Goods

Crash Course gives the textbook definition of public goods:

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The technical definition of a public good is anything that has two characteristics: non-exclusion and non-rivalry. Non-exclusion is the idea that you can’t exclude people that don’t pay. For example, it’s impossible to limit the benefits of national defense to only people that pay their taxes. People who pay no federal taxes still get the benefit of protection from bombs, and people who pay a lot of federal taxes don’t get extra protection.  Non-rivalry is the idea that one person’s consumption of the good doesn’t ruin it for other people. So, public parks are a great example. You can use it today, I can use it tomorrow; it can be shared.

It’s hard to improve upon this definition.  One particular area to note, however, is that things like Fire Departments would not be considered public goods, since they are not non-rival.  One city cannot adequately provide fire protection services to 50 buildings that are on fire in different locations at the same time.

 While the definition of public goods is accurate, some schools of economic thought may have a problem with a common conclusion regarding public goods, which Crash Course gives immediately after defining it:

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If a good or service meets these two criteria it’s unlikely that private firms will produce it, no matter how essential it is.  Street lights and organizations that track and prevent the spread of diseases are pretty important, and if the government doesn’t step in, we probably won’t get them.

First, while Crash Course (and other economists) argue that it is unlikely the private firms will produce items that fit the definition of public good, there are plenty of examples to the contrary, especially today.  Any software or website made available for free or funded by donations (Wikipedia, WinRar, etc.) meet the definition of public good and were created privately.

Additionally, Crash Course’s two examples (street lights and the CDC) might not be the best examples to give.  Street lights would fall into the Tragedy of the Commons category (which we’ll get to, I promise), since they are on public property, and there exist plenty of private organizations that track and prevent the spread of diseases.

Tragedy of the Commons

Crash Course next talks about Tragedy of the Commons, one of the most important principles to any free market economist:

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The incentive to do what’s best for you, rather than what’s best for everyone is the root cause of something economists call the Tragedy of the Commons. This is the idea that common goods that everyone has access to are often misused and exploited.

The best visual understanding of The Tragedy of the Commons comes from William Forster Lloyd, whose example is still used to this day (via Wikipedia):

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In 1833 the English economist William Forster Lloyd published a pamphlet which included a hypothetical example of over-use of a common resource. This was the situation of cattle herders sharing a common parcel of land on which they are each entitled to let their cows graze, as was the custom in English villages. He postulated that if a herder put more than his allotted number of cattle on the common, overgrazing could result. For each additional animal, a herder could receive additional benefits, but the whole group shared damage to the commons. If all herders made this individually rational economic decision, the common could be depleted or even destroyed, to the detriment of all.[5] 

The Tragedy of the Commons is often used as an argument against public ownership of goods and for private property.  After all, if you are a farmer and owned your own parcel of land, it’s unlikely that you’ll let it become overgrazed, since that will hurt you in the future.  However, the writers at Crash Course see it a different way.  To them, Tragedy of the Commons is not a argument for privatization, but rather one for regulation.

The Tragedy of the Commons explains why fish stocks get depleted, the rainforest get cut down, and why endangered species get hunted for their hides or horns […]  The problem here is that unregulated markets sometimes don’t produce the outcome that society wants.

As Crash Course will talk about later in the video, there are two ways to look at the solutions to problems such as these: one is a regulatory solution, and the other is a market-based solution.

In general, economists tend to prefer market-based policies.

Despite admitting (and later explaining why) market-based policies are preferred, when talking about examples of Tragedy of the Commons problems, their proposed solution is nonetheless regulatory.  Crash Course never explains why they recommended the admittedly less preferable solution.

There’s still a lot to talk about with Crash Course’s analysis of externalities, the education system, and Cap & Trade, so be on the look out for a bonus blog post this Saturday.  And as always, you can expect a fresh post every Thursday.  Don’t forget to join our newsletter and our facebook group, and comment below!

Episode #20 – Price Controls, Subsidies, and the Risk of Good Intentions

Two weeks ago, when we last reviewed an episode, I was hoping that this week would be the third week in a row of solid and accurate economics from the good people at Crash Course.  Episode 18 talked about the rather non-controversial topic of principles of microeconomics, and episode 19 chopped down common arguments against what is commonly referred to as “price gouging” and “predatory pricing”.  Will they continue their streak in episode 20?

The answer is sort of, but not really.  In this episode, Crash Course starts strong by railing against government-imposed price ceilings and floors (including rent control), but gets a little weak when talking about the use of subsidies.  Let’s get started:

Price Controls

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Let’s say the government forced gas stations to charge a dollar per gallon for gas. This might seem like a good idea, right? Mandated lower gas prices mean we all benefit. Not really. Society is actually made worse off. When the gas prices fall consumers will want to buy more, but producers will no longer find it profitable to sell gas. The lower price will decrease the amount of gasoline produced, and we’ve got a shortage.

This relates to last week’s point on price gouging.  When the market price of a good is above what people are allowed to sell it for, sellers are not incentivized to increase their supply, and this results in a shortage.  If you’ve been following what’s happening in Venezuela, you’ll see that price controls results in long lines for essential goods (including toilet paper).

Crash Course makes a similar argument against price floors:

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Assume the government set a price floor for a bushel of corn at $7 when the actual equilibrium price is $4. The higher price would give farmers an incentive to produce more, but, at that high price, consumers would go buy substitutes […] The farmers wouldn’t necessarily be better off. They could sell corn at the higher price, but they wouldn’t have as many customers.

High prices naturally make fewer people buy a good. And fortunately, since consumers are not forced to buy any good (well, almost any good), they are more likely to take their money elsewhere, giving the sellers fewer customers and making them worse off overall.

Crash Course targets a specific type of price control popular in many urban areas, rent control:

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The lower rent discourages renovation and new construction, reducing the quantity supplied. The result is a shortage of apartments with landlords that have few incentives to maintain their buildings or be responsive to their tenant’s needs.

If you’ve ever tried to look for an apartment in a big city like New York or San Francisco, you’ll notice that prices are ridiculously expensive.  And for that expensive price, you receive a not-that-great apartment.  Those fortunate enough to live an a rent controlled building become very discouraged from leaving, since they would have to pay the market rate if they moved apartments.   Meanwhile, everyone not in a rent control building is subjected to high prices, low supply, and poor living conditions.

Note: At the end, Crash Course mentions that the economic rules of price controls do not apply to the minimum wage, which they promise they will get to in a later episode.  We’re looking forward to that.

Subsidies

Crash Course comes out in favor of subsidies in an argument summed up perfectly in the last line of the episode:

Sometimes, markets fail. And that’s when the government needs to step in.

Let’s get into the real meat of their argument:

Crash Course briefly touches on the common arguments for and against subsidies.  Proponents argue that subsidies help the producers by giving them free money, and they help the consumers because the subsidies also make the goods cheaper.  Opponents argue that there are unintended consequences from taking money from consumers and giving it to producers (remember the broken window fallacy?) and farmers are not encouraged to improve their businesses through market forces.

At this point, it seems that Crash Course is undecided as to if subsidies are good or bad, and then this happens:

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A market’s going to produce the equilibrium quantity and, in most cases, that is exactly the amount society wants. But what if the amount society actually wants is much greater? What if there is something special about this product that buyers and sellers aren’t factoring in? In this case, the amount being produced is less than the amount society wants. The result would be deadweight loss, the inefficiency caused by the underproduction of this product. A subsidy would make society better off and improve efficiency.

In other words, what if the market doesn’t accurately reflect consumers’ demands and producers’ supply?  Then a subsidy would be helpful to move the supply and price to better meet the real consumer demands.

Let’s take a step back to talk about this very specific scenario when a subsidy would benefit society.  In this case, the market would have to be wrong, which happens, but it usually corrects itself.  So the impact of the subsidy’s would likely have to take place in the short time before the correction.

Second, people in the government would have to notice that the market is not accurately reflecting supply and demand.  Now if you can tell how the market is wrong and will correct in the future, you should not be working in government, but instead, trading commodities and making millions, because very few people can accurately predict the market consistently.

Third, you have to write the legislation, pass it through both houses of congress, have it signed by the president, and then have it implemented, all before the market corrects itself.  Also, if the subsidy is wrong and either 1) the market accurately reflects supply and demand, or 2) the market is wrong in the reverse (there is an oversupply of the good in the market), the subsidy will certainly do harm to the consumer.

This scenario of all the right things happening correctly and before the market corrects itself is completely preposterous.

But what’s really strange is that Crash Course said the exact opposite about government subsidies in week 4.  Does anyone remember this?:

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Farmers might go to the government for assistance, but most economists argue there is no reason to bail them out […] If the government helps the farmers by giving them a subsidy, it would be putting resources toward something that society doesn’t value.  That would be inefficient.

What happened to that Crash Course?

I really wanted this week to be the hat trick, the 3-peat, the triple crown of online economics lessons.  But unfortunately, it was not, and that makes us at Crash Course Criticism a little disappointed.  But then again, if Crash Course said everything right all the time, there would be no need for this blog.

Thanks for reading, and you can look forward to a new episode reviewed every Thursday! And don’t forget to join our newsletter and our facebook group, and comment below!

Creator of Crash Course, Hank Green, on Government

Hi Friends of CCC,

This video isn’t on the Crash Course channel, but it is worth a watch if you’re are a reader of this blog.  Hank and his brother John Greene started the whole Crash Course operation, so you might be interested in hearing one of the creators thoughts on the government, its size, and its efficiency.

The federal government is effective, efficient, and surprisingly small.

Ron Swanson gave his rebuttal:

No episode in review this week (I’m going on vacation for a few days), but come back every Thursday for a new post on a really fantastically polarizing episode of Crash Course Economics.

-Gary

Episode #19 – Markets, Efficiency, and Price Signals

Back again for another week of Crash Course Economics!  Aren’t you loving it?  We sure are here at Crash Course Criticism.

This week’s episode was, for the most part, a pretty accurate explanation of the roles of markets, and prices versus a planned economy.  Crash Course does make a few generalizations, but on the whole, this episode surprised me in a good way with its refutation of common economic arguments on “price gouging” and “predatory pricing.”  Let’s get started:

Markets and Efficiency

The problem with central planning is that it’s inefficient.  Now, when economists talk about efficiency, they’re talking about a couple different types of efficiency.

Crash Course doesn’t beat around the bush when talking about government inefficiency.  They don’t tell the audience that governments are usually less efficient, or that there are exceptions to the rule.  And while there are articles that claim this not to be true (like here, here, and here), this is an economic truth, and Crash Course does a great job at explaining why:

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The first is productive efficiency: the idea that products are being made at their lowest possible cost […] Central planners in general, aren’t that focused on cost. But in the free market an individual business owner has an incentive not to be wasteful because they want to maximize profit.

Governments agencies do not have a “bottom line” to meet, so to speak.  They are not worried about the threat of corporate bankruptcy or investors making sure that the organization is making the best decisions.  If someone makes a wrong decision about how many widgets to order or the estimated cost of a project, there is unlikely to be the same negative reaction from superiors that would be seen at a private company.  And when the employees aren’t incentivized to do the best job or produce the greatest value, the entire organization will naturally be more inefficient than its private counterpart.

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The second type of efficiency is called allocative efficiency This means that the things we’re producing are the things that consumers actually want. In other words, our scarce resources are being allocated towards the things we value.  Central planners are less likely to be allocatively efficient because they have a harder feedback about what people want.

Customer service and feedback are a big part of any large business.  Have you ever complained to Uber about a bad ride experience you had?  Uber would usually apologize, refund your ride, and may even give you a discount on future rides.  Now have you ever complained to the DMV about a bad customer experience?

Businesses focus on meeting consumer needs because they don’t want to lose you to their competitor.  They are incentivized to take care of you, since a satisfied customer will likely continue to do business with that company.

Planned Economies do not pay much attention to the consumer in these areas, since there is no incentive to.  If the government controls a sector of the economy, and there is no alternative for consumers, why would they need to take care of the customers?  Where else are they going to go?

Prices

Crash Course explained the role of price signals very well with their example of Skinny Jeans:

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If people are paying high prices for skinny jeans, it tells producers “Society wants more skinny jeans, start making them.” If no one wants skinny jeans, producers start making something else instead.  Here’s another example: tablet computers weren’t really popular until Apple introduced the iPad. After that, boom! The market exploded.

Price signals play an important role of signaling to producers what people want and how much they want it.  These signals allow for more competitors to enter the market and compete on quality and price.

The market decides what the price is, and consumers decide if a price is too high by not buying it.

Price Gouging

But what about when companies charge high prices in times of emergency?  Aren’t they just trying to maximize profit at the expense of everyone’s well-being?  Crash Course deals with the “price gouging” complaint surprisingly well:

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[Economists] argue that allowing prices to increase in times of crisis encourages others outside the disaster zone to haul in and sell essential goods.  If prices aren’t allowed to increase, then there’s less of an incentive to bring this stuff in. Furthermore, higher prices for things like batteries, sleeping bags, and generators mean that people who don’t really need them won’t buy them, making them more available to people who do.

Using the supply/demand model, an emergency decreases the supply of goods, thus increasing the price.  By artificially holding down the price (which many states do with anti-price gouging laws), the supply quickly disappears with no incentive for suppliers to enter the emergency to increase supply.  Even with rationing (which anti-price gouging laws must implement to prevent supplies from disappearing), the price will not direct the goods to those who really need them.

Predatory Pricing

Similarly, “predatory pricing” is another complaint that some may have when they think a company’s price of goods is too low.

Side note: I’d like to take a moment to recognize that we live in a world where normal people (not just business competitors) complain about a company’s prices being too low.  What a world!

The Predatory Pricing argument is similarly dealt with very well by Crash Course:

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[Predatory Pricing] is the idea that a business can drive out competitors by charging lower prices even at a short term loss. Competitors that can’t sustain such low prices will be forced out of the market, giving the surviving businesses market share and the ability to raise prices.

When a business successfully eliminates their competitors by selling products at a loss, they’re eventually gonna need to increase their prices above the market price to make up for those losses. In the short run, consumers would have to pay more. But eventually, other businesses would be attracted by the higher prices and enter the market. The end result is that there’s no guarantee that predatory pricing is worth it in the long run.

Perfectly put by Crash Course.  In short, predatory pricing wouldn’t work, and if companies try it, they do so at their own eventual peril.

Regulation

Crash Course makes a very small note on the need for regulation by talking about rat pellets in our wheat:

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In the United States, which is often mistaken for a free market economy, it turns out just about everything is regulated. For example, FDA regulations reject any wheat that contains nine milligrams or more rodent excreta pellets and/or pellet fragments per kilogram.

After this remark, the show immediately changes to talking about the market, without ever coming back to this point.  If the point here was to show that the United States is not a free market economy, I get it.  But if, however, this is meant to show that government regulation is the only way to keep rat poop out of our lunch, well, we’ll have to deal with that when their future episode on regulation in general.

Consumer Choice

Crash Course finishes the episode with a really nice note on consumer choice and ethical business practices, which I would like to reprint in full:

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Here’s the big takeaway: Capitalism, with its system of price signals, is basically crowdfunding. We collectively choose what we want and how we want it made when we spend our money. After all, companies can’t force you to buy their stuff, they have to earn your money. Now if you want to see real changes in the world, don’t just complain that corporations are greedy; expect more from them.

You also need to expect more from ourselves. If you disagree with the way a retailer treats its workers, then don’t buy from them. Even if they do have the lowest prices and convenient delivery options.  If we as consumers want our purchases to have a positive impact, it’s on us to seek out companies that try to improve the world. This might mean paying more for the stuff we buy or it might mean buying less stuff. A market based society still has shared social goals. They just don’t come from a central planner.

I thought this was a great note to end on.  Markets do the best job at responding to customer needs, but it’s also up the consumers themselves to decide what those needs are.  Feel free to boycott businesses you don’t like.  Consumer demands is what keeps them in line.

But if you’re the only one who is boycotting Bed, Bath, and Beyond (just an example), maybe that’s because people just don’t care about the cause as much as you do.  Instead, try to persuade others in refusing to patronize their business.

Two weeks in a row of excellent (by that, I mean accurate) Crash Course episodes.  Can they make it a hat trick?  Come back next week to find out!

Don’t forget to join our newsletter and our facebook group, and comment below!

Episode #18: Marginal Analysis, Roller Coasters, Elasticity, and Van Gogh

After last week’s polarizing (and pretty political) episode on wealth inequality, Crash Course decided to take it easy on us here at CCC by talking about an area of economics that is relatively noncontroversial (at least currently): Microeconomics.  This episode was very solid on basic content, but as always, we have some critiques to make.  Let’s do it!

Marginal Analysis and Utils

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For economists, the word “marginal” is pretty much the same as “additional”. Marginal analysis looks at how individuals, businesses and governments make decisions. Basically, they’re interested in additional benefits and additional costs.

Businesses do the same thing when they decide how many workers to hire. They compare the additional revenue that an additional worker will likely generate for their company, and to the additional cost of hiring that worker: wages and benefits.

I couldn’t have said it better myself.  When a person makes a decision, it is assumed in Economics that he weighs the cost and benefits, and a person would never make a decision where he believed the costs outweighed the benefits.

It’s important to note here, that these costs and benefits cannot be measured, since the decision comes down to one person’s action, and what matters to him is his subjective belief of what the costs and benefits are.  We, as economists, cannot quantify what a person’s costs and benefits are from what they should be.

Speaking of this subjectivity, let’s talk about Utils:

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Economists have even made up a new word to help quantify satisfaction called ‘utils’.  Utils are like happiness points and they are completely subjective.  So one person might get 100 utils of satisfaction from the first slice of pizza and another person might only get 10 utils.

Some economists, namely from the Austrian School, have problems with the idea of Utils.  Economists might be able to guess how much value a person puts on a slice of pizza, but they can never know.  In fact, the person himself might not be able to quantify it accurately.

To Austrians, the idea of Utils is helpful for explaining that people have different subjective values for things, but Utils should not be used to quantify the comparative difference between two things.  As an observing economist, we can only notice when someone chooses one option over another, but we can’t quantify how much someone prefers one option over another.

This is the problem that one runs into when considering Mr. Clifford’s park example:

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Instead, the government looks at the additional benefit or satisfaction generated by the fourth city park and compares that to the additional cost, and here, when we’re talking about cost, we’re talking about the use of city land, and the tax money spent on building the park.

In this case, the government has to guess as to what is the additional benefit or satisfaction generated by the park.  The general dollar cost can be predicted (assuming the money has already been collected from taxpayers and is sitting in the treasury), but the benefit must be arbitrarily determined by someone judging how people feel about parks.

Imagine you are grocery shopping for a friend.  You might know your friend pretty well, and you probably know what he would generally pick up at the grocery store.  However, even though you might get close to what he would buy, it probably would not match what he would have bought had he been shopping.

This is the problem that many economists have with government decisions for spending taxpayers’ money.  Although in the end, people might really like the park, we have no idea what they would have preferred to spend the money on.

Diamonds and Water

Crash Course does a great job at extrapolating the idea of marginal utility to the supply and demand curve.  For the major examples of how supply affects price, they compare the goods of water (high supply, low price) and diamonds (low supply, high price).

Before we get into a discussion about the De Beers diamond company and how they are artificially keeping the supply of diamonds low, for this example let’s just assume that the natural supply of diamonds is low.

Crash Course pretty much nails it in this segment, although they do slip up in their wording:

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It might seem irrational that society values diamonds more than water, but using marginal analysis, it sort of makes sense.

Whoa, whoa.  No one is saying society values diamonds more than water, but they do value an additional diamond more than an additional gallon of water.  I don’t want to be a nitpicker here, but in this case, there is a big difference and it’s important to keep the terminology consistent.

This episode was pretty spot on (aside from the few hiccups I mentioned), and I would say it’s mostly recommendable for economists from all different schools.  Thanks for going easy on us this week, Crash Course!

Like what I wrote?  Hate it?  Have anything to say about the episode?  Drop some feedback in the comments.