Counterintuitive Economics: Why People Are Often Confused About High Prices

 

High costs are not necessarily good or bad; it depends entirely on how things are being measured. The cost is what the consumer sacrifices when they decide on a transaction. If I want solar powered garden lights, I pay the cost; if I want my roof fixed, I pay the cost. Now, suppose there are three types of light I like - spike lights, bollard lights and meteor shower lights. Suppose my preferential order is meteor shower lights, spike lights and then bollard lights. If I buy meteor shower lights, I sacrifice the opportunity to enjoy spike lights and bollard lights - and that forgone experience, plus the retail price of the meteor shower lights, is the cost I incur for my favourite lights. If I love spike lights nearly as much as meteor shower lights, then my cost of choosing meteor shower lights is higher than if I don't really like spike lights then bollard lights at all.

Now, which position of the two do you think is most beneficial to you? Evidently, it's the first option - the one in which you like spike lights nearly as much as meteor shower lights. Even though the first option is a higher cost, it's more preferable than option 2, where you are indifferent to the other 2 options. The take home economic wisdom here is that the better your range of choices, the higher your cost in choosing your favourite, but the higher quality the thing usually (but not always) is.

This can be applied to many other walks of life - employment offers, marriage offers, dating, holiday offers, and so on. Let's take online dating. Suppose you have two scenarios. In the first scenario, you have the choice of dating Fantastic Fay and Amazing Amy. Let's suppose overall quality (looks, intelligence, personality, kindness, trustworthiness, wit, occupation, etc), can be measured out of 100, and say Fay is 95 out of 100 and Amy is 92. The cost of choosing Fay over Amy is 92. In the second scenario, you have the choice of dating only Fantastic Fay or Reasonable Ruby, who scores 63 to Fay's 95. Assuming that you'd rather date Ruby than be single, choosing to date Fay costs you 63. In other words, the cost of choosing Fay over Ruby in scenario 2 (where Amy doesn't exist) is 29 points cheaper than choosing Fay over Amy in scenario 1 (where Ruby doesn't exist).

Clearly, if you date Fay in both scenarios, you're as intrinsically well off in each scenario, but you're not as extrinsically well off in each scenario, because your next best option is better in scenario 1 than in the scenario 2. That is to say, the cost of being in scenario 1 is higher than scenario 2, but it's still better to be in the higher cost scenario. To see why, suppose Fay takes a job abroad, and your relationship ends abruptly just as it begins. You're gutted, but now you look at your next option. In scenario 1, it's Amy at 92 points, whereas in scenario 2, it's Ruby at 63. You are better off in the higher cost scenario (scenario 1), even though here, 'higher cost' is synonymous with 'a more preferable scenario'.

All this we've covered constitutes one of those counter-intuitive things about economics - things that are true yet few people believe because on the surface they appear false. After all, how can the option we don't choose cost anything? That's not how we ordinarily measure cost. When we go shopping in the supermarket and buy £100 worth of goods, we don't think up a bill in our heads of all the items we neglected to buy, and what that opportunity cost amounted to. But to understand opportunity costs in relation to consume and producer surpluses means understanding that as the options get better and more plentiful, so do the costs.

I deliberately saved this one until last, but here's a scenario that should make all the above even more plainly obvious. If you're told you can go to a car showroom and pick a free car of your choice as you have the winning ticket, it would be easy and not feel very costly to go and pick out the Lamborghini if it was alongside rusty old bangers. You would hardly give what you left behind a second's thought. But if you had to select a car from a range of superb, luxury cars of all different kinds, you'd take a lot longer to choose one, and you'd spend more time thinking about the ones you left behind. That's an understanding you should bring to the considerations around high prices.