High cost value

One of the great joys of mastering the economic system of thought is gaining access to the currents of a curious wonder. Undoubtedly, the most famous and important of these wonders is the realization that productive economic discipline can arise without anyone planning such an order. In a reasonably functional system of personal property rights, each individual pursuing his or her own chosen goals contributes to a pattern of resource use that better enables the satisfaction of countless strangers’ individually selected goals.

But strong economic reasoning reveals much more, if much less important, surprising truth.

Here’s a: High cost Good. This claim sounds ridiculous. After all, don’t we all prefer low cost over high cost? Yet the truth of the claim that high costs are good becomes clear when the nature of costs is properly understood.

The late Nobel laureate economist James Buchanan explained in his 1969 book, Cost and choice, Cost constraint. Cost is the advantage that a picker believes he or she sacrifices whenever he or she chooses.

Suppose you want a scoop of ice cream and discover the availability of three different flavor options: chocolate, vanilla and anchovies. You dislike anchovy and immediately dismiss it as an alternative, letting you choose between virtually chocolate and vanilla, both of which you really like. Suppose, though, that you have little choice for vanilla. When you choose vanilla, you miss the opportunity to enjoy a scoop of chocolate. The satisfaction you imagine when choosing a scoop of chocolate is the cost of choosing a vanilla scoop. (Note that you forgot the experience of eating chocolate ice cream at that moment, so you can never be sure that your choice of eating vanilla ice cream was really the best. The cost you feel is just you To imagine You could enjoy chocolate ice cream if you chose differently. Although quite real, this cost is ultimately measured only in your imagination.)

Since you love chocolate ice cream, the cost of choosing your vanilla was ‘high.’ Compare this to the cost you would spend if you only had two options, chocolate and anchovies. Choosing your chocolate in such a situation is not expensive at all, because the only other flavor option is anchovies, which you totally dislike.

So in what situations would you like to find yourself? Which one is your alternative vanilla or chocolate? Or which one is your alternative chocolate or anchovy? Obviously, the best situation is the former, because we have already established that, among the three flavors, you prefer vanilla. But the cost you incur in the first case is higher than what you incur in the second case. When you choose vanilla over chocolate, what you offer is worth more to you than when you choose chocolate over anchovies.

The key lesson here is that the better your options, the more valuable you will be when you choose your preferred option from the available options. In other words, rejecting an extremely costly option is a very valuable option; But rejecting an extremely valuable option means choosing and feeling an option that is more valuable than the rejected option.

If the cost is higher when making a choice, then the option you choose is worth more to you.

A slightly different example is the employment offer involving two different situations.

In one situation you will get two offers of a full-time job. From an ABC corporation, which pays an annual salary of $ 200,000. Another offer is XYZ Inc. From, which pays an annual salary of $ 199,000. If the jobs are otherwise equivalent, you will accept the offer from ABC Corporation. It will cost you $ 199,000 to choose your $ 200,000 job.

It will cost you less to choose an offer from ABC Corporation if your next best job offer is worse than the $ 199,000 offer.

So suppose in scenario two that your job offer from ABC Corporation (like Scenario 1) pays 200,000, but XYZ Inc. From your job offer – which is your next best offer – pay only $ 30,000. Assuming you prefer to work for $ 30,000 instead of being unemployed, it will now cost you only $ 30,000 to get a job with ABC Corp. for $ 200,000. The second scenario for accepting an ABC job offer will cost you significantly less than a scenario – precisely, $ 169,000 less – you are obviously no better in both scenarios than one scenario. In either case, you can choose a job with ABC Corporation by paying 200,000. You will appear in two scenarios which is not good Or worse The scenario is closer than one.

This look, though, is confusing. When your second-best employment option pays significantly less than your first-best option, if you lose your first-best job, the job you get will be significantly worse than your lost job. If ABC Corp. If your employer loses one week after this job, then your next best employment option will be XYZ Inc. A এর 30,000 job. You are better in one scenario than two scenarios because your options are better in one scenario. Yet “advanced option” is another term for “high cost”.

We all want more options, and rightly so. Our instincts accurately tell us that more options are better than less options. Options, after all, just that: options. They are not requirements. No specific option can be rejected, and Will be Rejected if it is not best available. But as the number of our options grows, so does the cost of our preferred options. The reason is that the greater the number of our options, the more likely the second-best option is to be very close to the price of the first-best option.

And of course we welcome improvements in our options. Yet the better our options, the higher our costs.

The effect of public policy in this insight into the aspirations of high spending is not as significant or as obvious as the effect of insight that the complex economic system can often emerge spontaneously. But I submit that this insight into the high cost aspirations still has some significant implications for policy. I challenge each reader to identify some of the implications of this policy and to email me their thoughts. (My email address is [email protected] .) In the next column I will share some of these effects.

Donald J. Boudrox

Donald J.  Boudrox

Donald J. Boudroux is a Senior Fellow at the American Institute for Economic Research and with an Advanced Study of the FA Hayek Program in Philosophy, Politics, and Economics at George Mason University’s Mercatas Center; A Mercatus Center board member; And Professor of Economics and former chair of the Department of Economics at George Mason University. He is the author of books The Essential Hayek, Globalization, Hypocritical and half-wittedAnd his articles appear in such publications The Wall Street Journal, The New York Times, U.S. News & World Report As well as numerous scholarly journals. He writes a blog called Cafe Hayek and a regular column on economics Pittsburgh Tribune-Review. Boudreaux holds a PhD in economics from the University of Auburn and a law degree from the University of Virginia.

Donald J. Receive notifications of new articles from Boudrox and AIER.

Leave a Reply

Your email address will not be published.