Armchair Economist (book)

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The Armchair Economist: Economics & Everyday Life

By Steven E. Landsburg

The following is a short economics report written by Ang Li for Coach David Frank's A.P. Economics Class.

There are many questions in everyday life that may appear rhetorical or even meaningless to us. But through an economics perspective, many of these questions can really be answered. In Landsburg’s book The Armchair Economist, Landsburg (an economist) pokes at the underlying economic theory and explains it further by means of stories and other interesting comments. Chapter 4 begins with the concept of the “Indifference Principle.” In this theory, except when individuals have differing tastes and likes/dislikes, all actions are equal. This theory is explained by several examples including an explanation of why busboy tips aren’t driven up (because any subsequent rises would force the establishment to decrease the wage of the busboy by the same amount; which would in turn cause a decrease in the price of the meal), and in a Simpson’s parody (where the town of Springfield discovered that due to the fact that everyone has similar likes, a new aquarium always has the same wait time and therefore the $10 million dollars that was spent on the building of the aquarium equated to total waste). To alleviate problems relating to an “Indifference Principle,” for the second example, residents in Springfield could be charged an entrance fee. This fee would decrease individual desires for the aquarium and thus decrease wait time. The Coase Theorem as listed in Chapter 9 associates the fact that judicial intervention does not matter in most cases. Professor Ronald Coase made the correlation of the fact that regardless of the allocation of property rights, the final distribution of resources will be the same. In the example listed, Dr. Sturges complains about Bridgman’s candy machine noise. In this case only one of the two parties can benefit as the ruling will inevitably shut down the other party. Supposing that Bridgman makes $100 a week and Sturges makes $200, by forcing Bridgman to retire by paying him $150 a week, both Sturges and Bridgman profit (though Sturges is forced to accept only $50 a week). In the second example, involving farmers whose crops were set aflame by sparks from a local railroad, entitlements do matter when logistical circumstances (the number of individuals involved is higher) are involved. A judge who is presiding over a case involving economic consequences must not rule lightly as the result of the ruling may be harmful for both parties. Advice for the judge would consists of letting her know that the end result will have little effect on the final allocations of the resource(s) and that if the parties can be made to negotiate, the best course of action can be found. A third parody of sorts questions why movie theater popcorn costs more than conventional popcorn. Supposing that in a town there was only a single location that supplied the good in question (popcorn), then that location holds a monopoly on that good. Movie theaters can be seen as monopolies in the sense that they are the sole provider of the resource. Because some individuals value popcorn more than others, they are willing to pay more and thus the movie theaters have an incentive to boost prices above normal. Entrepreneurs attempt to charge the highest amount of money an individual is willing to spend on a given resource. And it is through this means that they can hold a profit. In a perfect business society (involving price discrimination), each individual would be charged exactly the amount they were willing to pay for a given good. The Armchair Economist though not as modern as its contemporary: Freakanomics, holds many interesting economic concepts and is a decent read.