OKAY. WELL, LET'S GET STARTED TODAY. IF YOU'LL REMEMBER, WHAT WE'RE DOING IN THE EARLY PART OF THE SEMESTER IS JUST BASICALLY

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1 ECO LECTURE THREE 1 OKAY. WELL, LET'S GET STARTED TODAY. IF YOU'LL REMEMBER, WHAT WE'RE DOING IN THE EARLY PART OF THE SEMESTER IS JUST BASICALLY TRYING TO INTRODUCE SOME CONCEPTS THAT WILL SERVE US OVER AND OVER AS WE MOVE THROUGH THE MATERIAL. ONCE YOU BECOME FAMILIAR WITH THESE CONCEPTS, IT'LL BE EASIER FOR YOU TO DEAL WITH THIS MATERIAL, I'M CERTAIN. WHAT WE HAD TALKED ABOUT LAST TIME -- I THINK I ENDED UP TALKING ABOUT THAT TERM TNSTAAFL. DIDN'T I DO THAT? I'M NOT GONNA WRITE THE WHOLE THING OUT AGAIN. BUT IF YOU'LL REMEMBER, THIS IS AN ACRONYM. THIS IS JUST THE FIRST LETTERS OUT OF SEVERAL WORDS: THERE AIN'T NO SUCH THING AS A FREE LUNCH. AND ACTUALLY SOMETIMES YOU CAN GET OTHER PEOPLE TO PAY FOR IT, THOUGH. BUT THIS IDEA OF NO SUCH THING AS A FREE LUNCH MEANS THAT EVERYTHING HAS A COST. EVERYTHING HAS A COST. EVERYTHING DESIRABLE, EVERYTHING WE WANT. THERE ARE THINGS THAT YOU DON'T WANT THAT MAYBE ARE NOT COSTLY. BUT THINGS THAT YOU DO WANT, THOSE THINGS HAVE A COST. TNSTAAFL, OKAY? NOW, WHY DOES EVERYTHING HAVE A COST? AND THE ANSWER WE WERE TALKING ABOUT PREVIOUSLY: DUE TO SCARCITY. THERE ARE SIMPLY NOT ENOUGH RESOURCES TO GO AROUND TO PRODUCE EVERY SINGLE THING EVERYBODY WOULD LIKE TO HAVE. PEOPLE WOULD LIKE TO HAVE MORE CLOTHES, MORE CARS, MORE HOUSES, MORE VACATIONS, MORE OF EVERYTHING, AND THERE'S JUST NOT ENOUGH RESOURCES TO GO

2 ECO LECTURE THREE 2 AROUND TO SATISFY ALL THOSE DESIRES. SO IN ORDER TO GET SOMETHING YOU HAVE TO FOREGO SOMETHING. IF YOU WOULD LIKE TO SPEND ANOTHER HOUR WATCHING TELEVISION, THAT'S AN HOUR YOU'RE NOT GONNA BE ABLE TO SPEND PLAYING SOCCER OR READING A BOOK. IN ORDER TO DO SOMETHING, YOU HAVE TO HAVE LESS OF SOMETHING ELSE. AND SO THAT IS THE SENSE IN WHICH WE'RE TALKING ABOUT THERE'S NO SUCH THING AS A FREE LUNCH. YOU HAVE TO MAKE A SACRIFICE TO HAVE THINGS. i THINK WHAT I TOLD YOU IS DUE TO SCARCITY -- I THINK THIS IS A REVIEW. I KNOW I SHOULD HAVE TOLD YOU. PEOPLE MUST DECIDE. YOU'VE GOTTA DECIDE WHAT DO I MOST WANT? YOU CAN'T HAVE EVERYTHING. AND I DON'T MEAN TO SAY THAT YOU CAN'T HAVE EVERYTHING. I MEAN NOBODY CAN HAVE EVERYTHING, NO GROUP OF PEOPLE CAN HAVE EVERYTHING THEY WANT. PEOPLE HAVE TO DECIDE WHAT'S THE MOST IMPORTANT. THEY'VE GOTTA PUT PRIORITIES ON THINGS. HERE'S THE MOST IMPORTANT THING FOR ME; HERE'S SOMETHING THAT'S LESS IMPORTANT. IN ORDER TO ACHIEVE THE THING MORE IMPORTANT, I'M WILLING TO GIVE UP THE THING THAT'S LESS IMPORTANT. IT'S ALL IMPOSED ON US BY SCARCITY. I WANT TO DRAW A DIAGRAM AND A LITTLE BIT OF A GRAPH THAT WILL ILLUSTRATE THIS IDEA. LET'S JUST SUPPOSE THAT IN THE WHOLE WORLD THERE ARE JUST TWO GOODS, X GOODS AND Y GOODS. THESE ARE UNITS OF X AND UNITS OF Y. WE'LL PUT A ZERO DOWN HERE. AND BY THE WAY, IF YOU'RE NOT COMFORTABLE WITH DIAGRAMS, I WANT TO URGE YOU TO READ

3 ECO LECTURE THREE 3 THAT APPENDIX IN YOUR TEXTBOOK THAT TALKS ABOUT WORKING WITH DIAGRAMS AND BECOME FAMILIAR WITH THEM. WE'LL BE TALKING -- DRAWING A LOT OF DIAGRAMS AS THE SEMESTER GOES ALONG. HERE WILL BE OUR FIRST ONE, THE FIRST OF MANY. SUPPOSE -- AND YOU REMEMBER THAT LIST I PUT UP HERE LAST TIME: LAND, LABOR, CAPITAL, AND ENTREPRENEURSHIP. THESE ARE THESE RESOURCES THAT ARE USED TO PRODUCE GOODS, GOODS AND SERVICES. SUPPOSE THAT WE TAKE ALL OF OUR RESOURCES, ALL THE LAND, LABOR, CAPITAL, ENTREPRENEURSHIP, EVERY BIT, AND PUT IT INTO PRODUCING ONLY THE X GOOD. WHEN WE GET SOME MAXIMUM AMOUNT LET'S CALL IT XM FOR THE MAXIMUM QUANTITY OF THIS X GOOD. THAT'S WHEN WE PUT ALL OF OUR RESOURCES, ALL THE EFFORT WE HAVE, INTO PRODUCING THAT GOOD. SUPPOSE THAT INSTEAD WE PUT ALL OF THE EFFORT AND RESOURCES INTO PRODUCING ONLY GOOD Y AND WE GET YM UNITS OF Y, THE MAXIMUM UNITS. AND NO X. THESE ARE -- I SHOULD PUT A DOT HERE. WHAT WE'RE SAYING HERE IS I HAVE LOTS OF UNITS OF X BUT ZERO UNITS OF Y IN THIS FIRST DOT. AND THEN IN THE SECOND ONE, WHAT WE HAVE IS WE'VE PRODUCED A LOT OF UNITS OF Y BUT ZERO UNITS OF X. NOW, IT'S NEVER BEEN THE CASE WHERE ALL RESOURCES IN THE ECONOMY ARE JUST DEVOTED TO PRODUCING ONE THING OR ANOTHER. IT'S MORE LIKELY THAT WE WOULD DO SOMETHING LIKE HALF AND HALF, OR TWO-THIRDS AND ONE-THIRD, OR THREE-FOURTHS AND ONE-FOURTH, AND

4 ECO LECTURE THREE 4 SO FORTH. AND AS WE DO THAT, WHAT WE DO IS WE TRACE OUT SOME MORE DOTS -- LET'S SEE IF I CAN -- YEAH, IT'S PRETTY CLOSE FOR A GOVERNMENT WORK. BUT WE CAN PRODUCE ALONG THESE VARIOUS POINTS HERE AS WE MOVE RESOURCES BACK AND FORTH BETWEEN GOOD X AND GOOD Y. FOR EXAMPLE, AT THIS POINT -- LET ME CALL THIS POINT A -- WHAT WE'RE DOING IS WE'RE PUTTING A FEW RESOURCES INTO PRODUCING GOOD X AND WE'RE PUTTING MOST OF OUR RESOURCES INTO PRODUCING GOOD Y. THAT'S AT POINT A. YOU CAN IMAGINE ANOTHER POINT DOWN HERE AT THE OTHER END OF THE EXTREME. WE'RE USING MOST OF OUR RESOURCES FOR X AND NOT MANY FOR Y. THAT'S POINT B. AND, LIKE I SAY, IT CAN BE HALF AND HALF, 64/36, YOU COME UP WITH ANY NUMBER YOU WANT: 31/69 PERCENT AND SO FORTH. AND IT'S THAT VARYING THE AMOUNT OF RESOURCES THAT GO INTO ONE GOOD VERSUS ANOTHER THAT TRACES OUT ALL THESE DIFFERENT POINTS ALONG HERE. THIS CURVE IS THE PRODUCTION POSSIBILITY CURVE OR FRONTIER. SOME TEXTBOOKS CALL IT PRODUCTION POSSIBILITY FRONTIER, OTHERS CALL IT A PRODUCTION POSSIBILITY CURVE. I'LL CALL IT THE PP CURVE. DON'T FORGET WHAT WE'RE TRYING TO UNDERSTAND HERE. WE'RE TRYING TO UNDERSTAND THIS IDEA OF COST AND TRYING TO UNDERSTAND THIS IDEA OF SCARCITY AND HOW THAT OPERATES. WHAT WE JUST STARTED OFF WITH IS ALL THE RESOURCES PRODUCING GOOD X AND WE'RE JUST AT THIS

5 ECO LECTURE THREE 5 POINT HERE, AT ONE END OF THE PP CURVE. ALL OF OUR RESOURCES PRODUCING GOOD Y WOULD PUT US AT THE OTHER END AND VARYING THOSE RESOURCES A LITTLE MORE OR A LITTLE LESS WOULD MOVE US ALONG THE CURVE, ACTUALLY TRACE OUT THAT CURVE. OKAY. NOW, IF WE STARTED OFF AT A POINT LIKE POINT A -- LET ME DO A LITTLE BIT OF ERASING JUST SO WE DON'T HAVE QUITE SO MANY RANDOM LINES GOING THROUGH HERE. LET'S SAY WE START OFF AT POINT A. AND WE SAY, "YOU KNOW, AT POINT A WE'VE GOT A LOT OF GOOD Y AND A LITTLE BIT OF GOOD X. NOT VERY MUCH." AND SUPPOSE PEOPLE SAY, "I DON'T LIKE THAT. I THINK WE NEED TO HAVE SOME MORE GOOD X, WHATEVER GOOD X WOULD BE. WE NEED TO HAVE SOME MORE GOOD X." OKAY. WELL, WE START OFF RIGHT HERE, WE'LL SAY, WITH XA, UNITS OF GOOD X. UP TO YOU. LET'S PUT A NATURAL NUMBER THERE, NOT XA. BUT LET'S SAY WE'VE GOT TEN UNITS OF GOOD X AND TWO HUNDRED UNITS OF GOOD Y. AND PEOPLE SAY, "GOSH, I THINK WE OUGHT TO HAVE A LITTLE BIT MORE OF GOOD X. HOW DO WE GET MORE GOOD X?" WELL, AS I TOLD YOU LAST TIME, NATURE REQUIRES US TO DEVOTE RESOURCES TO PRODUCE IN THESE GOODS. SO IF WE WANT MORE GOOD X, WE'VE GOT TO PUT MORE RESOURCES OF PRODUCING GOOD X. MAYBE WE WANT TO MOVE UP TO THE POINT WHERE WE'VE GOT TWENTY UNITS OF GOOD X. WHERE DO WE GET THE RESOURCES TO PRODUCE TWENTY UNITS OF GOOD X? AND THE ANSWER IS, WE'D HAVE TO TAKE THAT OUT OF PRODUCING SOMETHING ELSE -- IN THIS PARTICULAR CASE, GOOD Y. AND SO

6 ECO LECTURE THREE 6 AS WE TAKE RESOURCES AWAY FROM PRODUCING GOOD Y IN ORDER TO PRODUCE MORE OF GOOD X, THERE'S GONNA BE LESS Y PRODUCED. SO WE MOVE TO SOME POINT LIKE -- I'LL PUT A C UP THERE -- AND AT POINT C WE HAVE -- INDEED, WE HAVE THE TWENTY ADDITIONAL UNITS OF GOOD X -- I'M SORRY -- THE TEN ADDITIONAL. WE HAVE TWENTY UNITS OF GOOD X NOW BUT WE'RE AT A POINT WHERE MAYBE WE ONLY HAVE, I DON'T KNOW, A HUNDRED AND SEVENTY-FIVE UNITS. LET'S MAKE THIS A HUNDRED AND SIXTY UNITS OF GOOD Y. WE'RE BACK TO THIS IDEA OF THE COST OF SOMETHING. IN ORDER TO HAVE MORE OF X, THE COST IS WE'RE GONNA END UP WITH LESS OF GOOD Y. WE GOT AN EXTRA TEN UNITS OF GOOD X BUT WE HAD TO GIVE UP FORTY UNITS OF GOOD Y. WHAT'S THE COST OF GOOD X? WHAT'S THE COST OF TEN UNITS OF GOOD X? FORTY UNITS OF GOOD Y, RIGHT? TEN MORE OF THESE, WE HAD TO SACRIFICE FORTY OF THOSE. THAT'S THE COST, THE SACRIFICE, THE FOREGONE PRODUCTION OF GOOD Y THAT WE COULD'VE PRODUCED BUT NO LONGER CAN. THAT'S THE COST OF HAVING THAT EXTRA X. WHAT'S THE COST OF ONE MORE X? WELL, IF WE'VE GOT TEN OF THESE X'S AND WE HAD TO GIVE UP FORTY Y'S, THEN THE COST OF ONE MORE X WOULD BE MINUS -- WELL, I DON'T HAVE TO PUT IN THE MINUS SIGN. BUT THE FORTY DIVIDED BY A TEN EQUALS FOUR. THE COST OF ONE MORE X IS FOUR UNITS OF Y. AS I SAY, IT DOES NOT MAKE ANY DIFFERENCE WHETHER WE'RE TALKING ABOUT A NATION OR AN INDIVIDUAL, THE COST OF ONE MORE HOUR

7 ECO LECTURE THREE 7 OF WATCHING TELEVISION IS FOUR UNITS OF SOMETHING ELSE. FOUR HOURS -- WELL, IT SHOULDN'T BE FOUR HOURS, BUT FOUR PAGES READ IN A BOOK OR FOUR CHECKERS GAMES OR, YOU KNOW, SOMETHING ELSE THAT YOU'D LIKE TO DO. WE HAVE TO MAKE A SACRIFICE. WE SIMPLY DON'T HAVE ENOUGH RESOURCES TO PRODUCE MORE OF EVERYTHING. SO IN ORDER TO HAVE MORE OF SOMETHING, WE HAVE TO GIVE UP SOMETHING ELSE. THERE'S AN IDEA OF SCARCITY. SCARCITY IS FORCED ON US BY NATURE. AND THEN ONCE NATURE FORCES SCARCITY ON US, THE IMPLICATION IS EVERYTHING HAS A COST. OKAY. WE WILL COME BACK LATER ON AND WE'LL TALK ABOUT PRODUCTION POSSIBILITIES CURVES THAT HAVE A DIFFERENT SHAPE. LET'S TALK A LITTLE BIT MORE ABOUT THE IDEA OF COST, THOUGH. THIS COST THAT WE'RE TALKING ABOUT, ECONOMISTS OFTENTIMES USE THIS TERM: OPPORTUNITY COST. OPPORTUNITY COST. RATHER THAN JUST SAY THE COST OF SOMETHING, SOMETIMES ECONOMISTS WILL USE THAT PHRASE OPPORTUNITY COST. THE OPPORTUNITY COST OF SOMETHING IS THIS OR THAT. NOW, WHY DO WE USE OPPORTUNITY COST? AND THE ANSWER IS THIS -- WELL, THERE MAY BE SEVERAL REASONS, BUT ONE PART OF THE ANSWER IS THIS: ALL COSTS ARE NOT MEASURED IN DOLLARS. AND SINCE ALL COSTS ARE NOT MEASURED IN DOLLARS, IT'S AN AWKWARD THING SOMETIMES TO SAY, "WELL, WHAT'S THE DOLLAR VALUE OF THOSE COSTS?"

8 ECO LECTURE THREE 8 OVER HERE WE WERE SAYING TO GET ONE MORE UNIT OF GOOD X WE HAD TO GIVE UP FOUR UNITS OF GOOD Y. WELL, WHAT'S THE DOLLAR COST OF THAT? DON'T KNOW. WE HAVEN'T EVEN TALKED ABOUT DOLLARS YET, OTHER THAN RIGHT NOW SAYING WE HAVEN'T TALKED ABOUT DOLLARS YET. AND SINCE WE HAVEN'T TALKED ABOUT DOLLARS YET, WE'VE GOT TO UNDERSTAND THAT COST CAN BE IN THE FORM OF UNITS OF GOODS. COST CAN BE IN THE FORM OF TIME. I'VE ALREADY GIVEN YOU AN EXAMPLE THERE. IN ONE HOUR YOU COULD MAYBE WATCH A TV SHOW OR READ A BOOK, SO IT'S YOUR TIME THAT'S BEING REALLOCATED AWAY FROM BOOKS TO WATCHING TELEVISION. SO THAT OPPORTUNITY COST CAN BE MEASURED IN TERMS OF TIME OR BOOKS READ OR NOT READ, AND SO FORTH. OPPORTUNITY COST CAPTURES ALL THESE THINGS, WHETHER WE'RE TALKING ABOUT MONEY OR TIME OR OTHER RESOURCES. IT'S JUST A GENERAL TERM OF WHAT MUST BE GIVEN UP IN ORDER TO HAVE SOMETHING. IT'S WHAT YOU HAVE TO GIVE UP IN ORDER TO HAVE IT. AND A LITTLE BIT LONGER EXPRESSION HERE, THAT I HAVEN'T WRITTEN DOWN, IS THE HIGHEST VALUED THING YOU MUST GIVE UP. THE HIGHEST VALUE, THE MOST VALUABLE THING YOU GIVE UP IN ORDER TO HAVE WHATEVER IT IS YOU'RE OBTAINING OR ACHIEVING. SO WHAT'S THE COST OF GOING TO A MOVIE? WELL, THE COST OF GOING TO A MOVIE -- LET'S SAY A TICKET COSTS, I DON'T KNOW, FIVE BUCKS. THAT'S AN EASY NUMBER TO WORK WITH. IF A TICKET COSTS FIVE DOLLARS, PART OF WHAT YOU HAVE TO GIVE UP IN ORDER TO GO TO THE

9 ECO LECTURE THREE 9 MOVIE IS THE FIVE DOLLARS, WHICH IS REALLY NOT IMPORTANT BY ITSELF. YOU'RE GIVING UP THE FIVE DOLLARS THAT COULD'VE BEEN USED TO BUY SOMETHING ELSE, OKAY? BUT YOU'RE GIVING UP THAT SOMETHING ELSE. YOU'RE GIVING UP FIVE DOLLARS. IS THAT IT? NO. IN ORDER TO GO TO A MOVIE ANOTHER COST IS THE TWO HOURS OR WHATEVER THAT IT TAKES YOU TO WATCH THAT MOVIE. THAT TWO HOURS IS ALSO VALUABLE. IT'S SOMETHING YOU'RE GIVING UP. IT'S TWO HOURS THAT COULD'VE BEEN SPENT DOING SOMETHING ELSE. LET'S SAY YOU'RE AN EXTREMELY TIRED PERSON AND YOU SAY, "OH, MAN. I WOULD LOVE TO SLEEP." THEN GOING TO THE MOVIE IS GONNA COST YOU TWO HOURS OF PERHAPS SLEEP. WHATEVER YOUR NEXT BEST ALTERNATIVE IS, YOUR HIGHEST VALUED ALTERNATIVE THAT YOU'RE GIVING UP, THAT'S HOW WE WOULD EXPRESS THESE COSTS. YOU'RE GIVING UP THE MOST VALUABLE THING -- THE SLEEP. WHAT'S THE COST OF GOING TO COLLEGE? TOO HIGH. THE COST OF GOING TO -- LET ME TELL YOU ABOUT THE COST OF GOING TO COLLEGE. AND THIS IS SORT OF JUST AN ASIDE. I DIDN'T REALLY MEAN TO BRING IT UP TODAY. BUT I THINK EVERYBODY HAS HEARD THE COMPLAINTS ABOUT HEALTHCARE COSTS, HOW THEY'VE GONE UP SO MUCH OVER THE YEARS, AND THE HEALTHCARE CRISIS AND ALL THIS STUFF. ABOUT A YEAR OR SO AGO I WENT BACK AND DID A LITTLE BIT OF RESEARCH -- NOTHING REAL DEEP, BUT A LITTLE BIT OF RESEARCH -- AND WHAT I FOUND OUT IS THAT THE COST OF GOING TO COLLEGE HAS BEEN RISING MORE RAPIDLY THAN THE COST OF HEALTHCARE SERVICES.

10 ECO LECTURE THREE 10 AND SO THE CRISIS THAT WE'VE HAD IN HEALTHCARE SERVICES, IT'S BEEN REALLY JUST BEATEN BY ITS -- I DON'T THINK MANY PEOPLE CALL IT A CRISIS, BUT BY THE RISING COSTS OF GOING TO COLLEGE. AND THAT'S NOT THIS COLLEGE; THIS IS COLLEGE IN GENERAL. PRIVATE COLLEGE, PUBLIC COLLEGES, FOUR-YEAR, TWO-YEAR, THIS IS JUST A RAPIDLY -- WHAT, THE COST IS RAPIDLY RISING. HAS GONE UP ABOUT HALF AGAIN, I THINK, AS FAST AS THE CONSUMER PRICE INDEX, SO IT'S REALLY SOMETHING THAT IS BECOMING A PROBLEM. PEOPLE WHO PAY THE TUITION PROBABLY DON'T NEED TO BE TOLD THAT. MAYBE IT, YOU KNOW, PROVIDES SOME INSIGHT ABOUT HOW THE COSTS HAVE OUTSTRIPPED EVEN THE COST OF HEALTHCARE AND RISING. WHY IS THAT? IT'S NOT ALL JUST, YOU KNOW, LIKE WASTEFUL SPENDING BY UNIVERSITIES. ALSO STUDENTS WOULD LIKE TO HAVE SERVICES THAT WEREN'T PROVIDED ON COLLEGE CAMPUSES IN THE PAST. THEN THERE'S ADDITIONAL FINANCIAL AID THAT THERE DIDN'T USE TO BE AND SO THERE ARE ADDITIONAL SERVICES. AND PARTLY -- BECAUSE, YOU KNOW, FACULTY SALARIES AREN'T HIGH ENOUGH. AND THAT BEING THE CASE, I KNOW IT HASN'T BEEN WASTEFUL SPENDING. I WAS JUST KIDDING ABOUT THAT. I WOULD DO THIS FOR HALF THE MONEY -- BUT DON'T TELL MY BOSS. ANYWAY, WHAT'S THE COST OF GOING TO COLLEGE? WELL, IT'S THE TUITION. LET'S JUST PICK OUT A NUMBER HERE. LET'S SAY TUITION IS A THOUSAND DOLLARS A SEMESTER, AND OBVIOUSLY IT -- I DIDN'T MEAN TO

11 ECO LECTURE THREE 11 AMUSE YOU HERE, BUT LET'S JUST TAKE A NUMBER LIKE A THOUSAND DOLLARS A SEMESTER. LET'S SAY IT COSTS A THOUSAND. IS THAT THE COST OF GOING TO COLLEGE? AND THE ANSWER IS, WELL, THAT'S PART OF IT. BUT, YOU KNOW, THERE'S THE BOOKS. OKAY. SO THERE'S THE TUITION, THERE'S THE BOOKS. WHAT'S ANOTHER COST OF GOING TO COLLEGE? HOW ABOUT THE FOOD AT THE DORM? AND THE ANSWER IS, DID YOU GIVE UP AN OPPORTUNITY -- AND THAT'S WHAT WE'RE GONNA DO IS TRY AND RELATE THESE COSTS TO OPPORTUNITIES. WHAT'S THE OPPORTUNITY THAT WAS SACRIFICED? WHEN YOU WENT TO COLLEGE, DID YOU SUDDENLY DECIDE TO START EATING DINNER AT NIGHT? AND BEFORE THAT YOU DIDN'T EAT DINNER? AND THE ANSWER IS NO, YOU WERE EATING DINNER, EVEN IF YOU DIDN'T GO TO COLLEGE. YOU'RE EATING DINNER IN COLLEGE SO GOING TO COLLEGE DIDN'T IMPOSE AN EXTRA REQUIREMENT ON YOU IN TERMS OF "OH, NOW I HAVE TO EAT." YOU WERE ALREADY GOING TO EAT. SO THERE'S NO ADDITIONAL COST OF EATING DINNER THAT'S ASSOCIATED WITH GOING TO COLLEGE. HOW ABOUT LIVING IN THE DORM? AND THE ANSWER IS YES, A DORMITORY IS SHELTER -- I MEAN, THAT'S THE PLACE YOU SLEEP AND SO FORTH. BUT WHAT WERE YOU GONNA DO IF YOU DID NOT GO TO COLLEGE? WERE YOU GONNA SLEEP OUT ON THE STREET? AND IF THE ANSWER IS YES, AND MOST PEOPLE DON'T. BUT IF THE ANSWER IS YES, THEN YES, GOING TO COLLEGE MEANS YOU DO HAVE THESE EXTRA EXPENSES OF LIVING IN A

12 ECO LECTURE THREE 12 DORMITORY OR WHEREVER YOU LIVE. BUT IF THE ANSWER IS NO -- "I WASN'T GONNA SLEEP ON THE STREET. I WAS GONNA LIVE SOMEPLACE, HERE, THERE OR ELSEWHERE. I WAS GONNA LIVE SOMEPLACE. I WAS GONNA HAVE TO PAY RENT." SO WHEN I DECIDED TO GO TO COLLEGE, I DID NOT MAKE AN EXTRA SACRIFICE IN TERMS OF, "OH, NOW I'M GONNA HAVE TO PAY RENT." YOU WERE GONNA BE PAYING -- OR SOMEBODY WAS GONNA BE PAYING FOR YOUR HOUSING, SOMEPLACE OR ANOTHER, NO MATTER WHERE YOU WERE. SO ADDITIONAL COSTS OF ANOTHER OPPORTUNITY SACRIFICED? I DON'T THINK SO. HOW ABOUT THIS ONE AND THIS IS REALLY -- YOU THINK THAT TUITION'S A LOT, YOU THINK THAT BOOKS ARE A LOT. THE MOST VALUABLE, MOST EXPENSIVE PART OF GOING TO COLLEGE IS YOUR TIME. JUST TO PICK OUT A NUMBER. WELL, LET'S SAY YOU SPEND -- OH, I DON'T KNOW. LET'S SAY YOU SPEND THIRTY HOURS A WEEK GOING TO COLLEGE. AND THAT'S DRIVING TO AND FROM CLASS, OR WALKING TO AND FROM CLASS, IT'S SITTING IN CLASS, IT'S GETTING HOME OR WHEREVER YOU GO AFTER CLASS, IT'S GOING TO THE LIBRARY, IT'S DOING THE HOMEWORK AT NIGHT AND SO FORTH, THIRTY HOURS A WEEK. IT'S THE BIG PARTIES ON THE WEEKEND. NO, IT DOES NOT INCLUDE THE PARTIES ON THE WEEKEND. OKAY. THIRTY HOURS A WEEK. WELL, GEE. WHAT COULD YOU SELL YOUR TIME FOR? LET'S JUST PICK A NUMBER OUT AND LET'S SAY SIX DOLLARS AN HOUR. A HIGH SCHOOL GRADUATE, SIX DOLLARS AN HOUR. WELL, GEE. THAT'S ABOUT A HUNDRED AND EIGHTY DOLLARS A WEEK, ISN'T IT? AND THEN LET'S JUST

13 ECO LECTURE THREE 13 SAY -- AND THIS IS JUST SORT OF ROUNDED OFF -- LET'S SAY THERE'S THIRTY WEEKS IN THE SCHOOL YEAR, A LITTLE BIT MORE THAN THAT BUT ABOUT FIFTEEN WEEKS PER SEMESTER PLUS FINALS WEEKS. WELL, LET'S SAY THIRTY BECAUSE I CAN MULTIPLY BY THIRTY PRETTY WELL. FIVE THOUSAND, FOUR HUNDRED DOLLARS. NOW, THIS REALLY UNDERSTATES IT BECAUSE IF YOU GO TO WORK, PROBABLY A LOT OF YOU WOULD EARN MORE THAN SIX DOLLARS AN HOUR AND YOU WOULD GET FRINGE BENEFITS ON TOP OF THAT. YOU WOULD HAVE SOME SOCIAL SECURITY BENEFITS PAID IN TO THE GOVERNMENT. YOU WOULD HAVE SOME WORKMEN'S COMPENSATION. YOU WOULD HAVE DISABILITY COVERAGE. THERE WOULD BE CERTAIN FRINGE BENEFITS THAT YOU WOULD RECEIVE, PERHAPS A VACATION. PERHAPS HEALTHCARE, INSURANCE. AND SO JUST SAYING SIX DOLLARS AN HOUR, THAT'S VERY LOW. THE EMPLOYER'S COST OF HIRING YOU IS GONNA BE HIGHER THAN THAT. BUT EVEN AT SIX DOLLARS AN HOUR, WE'RE TALKING FIFTY-FOUR HUNDRED DOLLARS A YEAR. WELL, GEE. THAT'S A LOT MORE THAN YOUR TUITION. THAT'S A LOT MORE THAN YOUR BOOKS. IT'S MORE THAN THE TUITION AND BOOKS PUT TOGETHER. SO THIS IS SOMETHING THAT YOU SACRIFICE BY GOING TO COLLEGE -- YOUR TIME. IT'S AN OPPORTUNITY LOST. IF YOU WERE NOT IN COLLEGE, YOU WOULD HAVE THAT THIRTY HOURS BACK AND YOU'D BE ABLE TO DO SOMETHING ELSE WITH IT. AS I SAY, GET A JOB OR COULD BE THAT YOU'D JUST STRIKE OUT FOR CALIFORNIA AND MEET PEOPLE ON THE WAY. I DON'T

14 ECO LECTURE THREE 14 KNOW WHAT YOU'D DO. WHATEVER YOUR NEXT BEST ALTERNATIVE IS. THIS ASSUMES YOUR NEXT BEST ALTERNATIVE IS TO GET A JOB. BUT, AS I SAY, YOU DO LOSE THE OPPORTUNITY TO HAVE THAT THIRTY HOURS AS A RESULT OF GOING TO COLLEGE. BUT WHEN YOU DECIDE TO GO TO COLLEGE, YOU DON'T LOSE THE OPPORTUNITY TO LIVE FOR FREE, EAT ALL YOU WANT -- UNLESS YOUR PARENTS ARE JUST WILLING TO PUT UP WITH YOU FOREVER. BUT IF THEY'RE NOT WILLING TO PUT UP WITH YOU FOREVER, SOMEPLACE OR ANOTHER YOU'RE GONNA HAVE TO PAY THOSE COSTS. AND EVEN IF YOUR PARENTS WERE WILLING TO PUT UP WITH YOU FOREVER, THEY'RE GONNA HAVE TO PAY THOSE COSTS. SO THE COSTS ARE GONNA EXIST OF YOUR EATING AND YOUR SLEEPING AND SO FORTH. THOSE COSTS ARE GONNA EXIST, WHETHER YOU'RE IN COLLEGE OR NOT. THERE'S NO ADDITIONAL LOST OPPORTUNITY AS A RESULT OF GOING TO COLLEGE. THESE ARE THE BULK OF YOUR COSTS, AND YOU COULD PROBABLY THINK ABOUT SOME ADDITIONAL THINGS THAT ARE COSTLY ASPECTS OF GOING TO COLLEGE. MAYBE YOU HAVE TO NOW DRIVE A CAR FROM ST. LOUIS TO HERE AND SO THERE'S THE GASOLINE, AND THAT'S UNDOUBTEDLY TRUE BECAUSE YOU WOULD NOT BE DRIVING UP AND DOWN THE HIGHWAY THE SAME IF YOU WEREN'T IN COLLEGE. BUT THE POINT IS, THOSE ARE MUCH SMALLER COSTS. THESE ARE THE BULK OF THE COSTS OF GOING TO COLLEGE AND TIME IS BY FAR THE LARGEST. OKAY. WHAT'S THE COST OF BUILDING A HIGHWAY? WELL, YOU CAN BUILD A HIGHWAY -- AND THIS IS A BALLPARK NUMBER -- BUT YOU CAN BUILD A

15 ECO LECTURE THREE 15 HIGHWAY FOR ROUGHLY THREE MILLION DOLLARS A MILE. SO YOU SAY THE COST IS THREE MILLION DOLLARS A MILE? YES AND NO. THREE MILLION DOLLARS, BUT IT'S REALLY --- TO BE MORE SPECIFIC, IT'S REALLY WHAT COULD THAT THREE MILLION DOLLARS HAVE BEEN SPENT ON INSTEAD. BECAUSE THE THREE MILLION DOLLARS -- MONEY IS NOT DESIRABLE FOR ITS OWN -- WELL, THAT'S ALMOST TRUE. THERE ARE SOME PEOPLE THAT ARE JUST CRAZY. BUT FOR THE MOST PART, MONEY IS NOT DESIRABLE FOR ITS OWN PURPOSE. WE DON'T JUST GO, "OH, I'VE GOT MONEY." WHAT WE'RE THINKING IS, "OH, I'VE GOT MONEY AND NOW I CAN BUY A CAR." AND SO IT'S REALLY THE CAR THAT'S DESIRED, NOT THE MONEY THAT BUYS THE CAR. AND SO IF WE SAY THREE MILLION DOLLARS A MILE TO BUY A HIGHWAY, IT'S WHAT COULD'VE BEEN BUILT WITH THE THREE MILLION DOLLARS IF THAT MILE OF HIGHWAY HAD NOT BEEN BUILT. AND THAT'S THE COST OF THE HIGHWAY. IT'S WHAT WE'RE HAVING TO SACRIFICE IN ORDER TO GET IT. MAYBE THREE MILLION DOLLARS WOULD BUILD A SMALL ELEMENTARY SCHOOL, AND SO WE COULD'VE HAD ANOTHER ELEMENTARY SCHOOL IF NOT FOR BUILDING THAT HIGHWAY AND SO FORTH. SO WE'RE ALWAYS LOOKING FOR THOSE THINGS THAT ARE BEING GIVEN UP OR FOREGONE IN ORDER TO HAVE THE -- OH, THERE'S THE CLOCK. IN ORDER TO HAVE -- I WANTED TO KNOW WHETHER I WAS RUNNING OUT OF TIME. PEOPLE ARE STARTING TO LOOK AT THEIR WATCHES. IN ORDER TO HAVE THIS HIGHWAY OR WHATEVER IT WOULD BE, WE WANT TO KNOW

16 ECO LECTURE THREE 16 WHAT'S THE NEXT BEST ALTERNATIVE. WHAT DID WE HAVE TO GIVE UP IN ORDER TO GET IT? WHAT YOU SHOULD GET IN THE PRACTICE OF DOING, NOT ONLY THIS SEMESTER BUT THROUGHOUT LIFE, IS DO A GOOD JOB OF SPOTTING THOSE COSTS. PEOPLE WHO SPOT -- WHO CAN SPOT THE COSTS OF THINGS, WHAT DO I HAVE TO GIVE UP IN ORDER TO GET THAT, THE PEOPLE WHO'RE ABLE TO SPOT THOSE COSTS, THEY ARE IN A BETTER POSITION TO MAKE DECISIONS. IS THIS A RATIONAL THING? DO WE WANT TO BUILD THAT HIGHWAY IF WE HAVE TO GIVE UP A SCHOOL, YOU KNOW, AND MAKING THESE TRADEOFFS. DO I WANT TO GO TO COLLEGE? LET'S SAY YOU THINK THAT -- YOU HATE COLLEGE AND YOU DON'T THINK YOU'RE GONNA LEARN ANYTHING OF USE, AND YOU DON'T THINK IT WILL HELP YOUR CAREER, THEN YOU HAVE TO ASK YOURSELF, "GOSH, I'M GIVING UP, YOU KNOW, SIX, SEVEN THOUSAND DOLLARS A YEAR HERE. IS THAT WORTH IT? I HATE THE SCHOOL. IT'S NOT GONNA HELP ME GET A BETTER JOB. THAT'S JUST A LOT OF COST AND NOT MUCH BENEFIT." AND I CERTAINLY DON'T ENCOURAGE YOU TO COME TO THAT CONCLUSION, BUT THAT'S THE TYPE OF BALANCING ACT THAT WE DO, IS THAT WE NEED TO COMPARE THOSE COSTS AGAINST THE BENEFITS. THIS IS KIND OF A STRANGE THING RIGHT HERE, TIME. IT'S PART OF THE COST. YOU KNOW, EVERYBODY PRETTY MUCH PAYS THE SAME TUITION BILL, RIGHT? THEY DON'T SAY TO YOU, "WELL, YOU KNOW, YOU'RE TALLER THAN SIX FEET. I THINK YOUR TUITION'S GONNA BE AN EXTRA TEN DOLLARS A CREDIT HOUR." AND THEY DON'T SAY, "OH, YOU KNOW, YOU ARE A GIRL

17 ECO LECTURE THREE 17 RATHER THAN A BOY SO YOUR TUITION'S GONNA BE TEN DOLLARS AN HOUR LESS." THEY JUST SAY, "HERE'S HOW MUCH THE TUITION IS." AND IF IT'S A THOUSAND DOLLARS FOR A FULL LOAD -- I KNOW; IT'S MORE THAN THAT. BUT IF IT'S A THOUSAND DOLLARS FOR A FULL LOAD, THEN THEY JUST SAY, "TUITION'S A THOUSAND DOLLARS." THAT'S PRETTY MUCH THE SAME FOR EVERYBODY. BOOKS? PRETTY MUCH THE SAME FOR EVERYBODY. YOU GO TO THE BOOKSTORE, YOU PAY WHAT I PAY FOR BOOKS. TIME. THAT'S THE ONE THAT'S KIND OF STRANGE. YOU KNOW, THE TIME COST IS NOT THE SAME FOR EVERYBODY. I PUT DOWN SIX DOLLARS AN HOUR THERE AND THAT'S JUST A NUMBER THAT I'VE THROWN OUT. BUT IF YOU WOULD DROP OUT OF COLLEGE AND GO GET A JOB, YOU MIGHT BE EARNING SIX DOLLARS AN HOUR. MAYBE YOU'D EARN TEN DOLLARS AN HOUR. I DON'T KNOW. BUT SOMETHING ON THAT NATURE. SUPPOSE THAT ONE OF YOU IS LIKE THIS REALLY TALL GUY WHO COULD MAKE FIFTEEN MILLION DOLLARS A YEAR PLAYING PROFESSIONAL BASKETBALL BUT INSTEAD SAID, "I WANT MY COLLEGE DEGREE." SO IF YOU WANT YOUR COLLEGE DEGREE AND YOU GO TO COLLEGE AND DECIDE NOT TO PLAY PROFESSIONAL BASKETBALL, THEN FOR YOU YOUR TIME DEVOTED TO COLLEGE IS TIME YOU CAN'T PUT SOMEPLACE ELSE. THAT TIME SOMEPLACE ELSE IS WORTH FIFTEEN MILLION DOLLARS A YEAR. SO YOUR TIME WOULD BE EXTREMELY HIGH. YOUR TIME COST WOULD BE EXTREMELY HIGH ON GOING TO COLLEGE. THEN YOU'D HAVE TO ASK YOURSELF, "HMMN. IT'S GONNA COST ME

18 ECO LECTURE THREE 18 FIFTEEN DOLLARS A YEAR -- FIFTEEN MILLION DOLLARS A YEAR, FOUR YEARS. IT'S GONNA COST ME SIXTY MILLION DOLLARS TO GO TO COLLEGE IN TERMS OF LOST WAGES." SIXTY MILLION DOLLARS TO GET A COLLEGE DEGREE. IS THAT GONNA COME BACK TO ME IN THE FORM OF HIGHER WAGES LATER ON? WHAT'RE YOU TRAINING TO BE? MAYBE YOU'RE TRAINING TO BE AN ACCOUNTANT. WELL, GOSH. YOU'RE NOT GONNA GET BACK SIXTY MILLION DOLLARS BY BEING AN ACCOUNTANT AND HAVING A COLLEGE DEGREE AND NOW YOU CAN BE AN ACCOUNTANT. AND I'M SAYING AFTER THE BASKETBALL CAREER IS OVER. WHAT'RE YOU GONNA DO THAT'S GONNA BRING BACK SIXTY MILLION DOLLARS? AND THE ANSWER IS, NOT VERY MUCH. THAT BEING THE CASE, DROP OUT OF COLLEGE. NOW, I'M NOT ADVISING THIS. I'M JUST SAYING THAT'S THE CONCLUSION MANY PEOPLE COME TO. WHY DO SOME PEOPLE STAY IN COLLEGE, THOUGH, EVEN THOUGH THEY'RE THESE BASKETBALL PLAYERS AND THEY'RE GONNA HAVE THESE GREAT CAREERS? WHY DO THEY STAY IN COLLEGE? AND THE ANSWER IS, A LOT OF THEM WILL STAY IN COLLEGE IN ORDER TO BECOME BETTER BASKETBALL PLAYERS. GET SOME COACHING, GET SOME EXPERIENCE, PUT A LITTLE BIT OF MEAT ON THE BONES, AND SO FORTH, TO BE A BETTER BASKETBALL PLAYER LATER ON. DO YOU HAVE A LOT OF PEOPLE THAT'S GOT THIS POTENTIAL OF BEING A GREAT BASKETBALL PLAYER AND EARNING FIFTEEN MILLION DOLLARS A YEAR, AND THEY GO TO COLLEGE ONLY FOR THE COLLEGE AND THEY'RE NOT PLAYING BASKETBALL WHILE IN COLLEGE

19 ECO LECTURE THREE 19 BECAUSE THEY DON'T WANT THEIR ATTENTION TO BE DIVERTED FROM THEIR ECONOMIC STUDIES? I DON'T THINK SO. I HAVEN'T SEEN A LOT OF THAT. SOME PEOPLE HAVE GOT THE MEAT ON THEIR BONES, THEY'VE GOT THE MATURITY, THEY'RE READY TO GO PLAY PROFESSIONAL BASKETBALL WHEN THEY'RE EIGHTEEN, NINETEEN YEARS OLD, AND SO THEN THEY SKIP COLLEGE. SO WHAT I'M SAYING TO YOU IS THAT THIS TIME COST, FOR SOME PEOPLE IT'S A LOT HIGHER THAN FOR SOMEBODY ELSE. AND FOR THE PEOPLE WHO THE TIME COST IS HIGHEST, THEY'RE THE FIRST ONES TO SAY, "I'M GONNA DO WITHOUT COLLEGE." NOW, FOR THE PEOPLE WHOSE TIME COSTS ARE LOWEST, THEY'RE THE ONES WHO, OTHER THINGS EQUAL, WILL SAY, "YEAH, I CAN GO TO COLLEGE. WHERE ELSE WOULD I BE?" THAT WAS SORT OF MY LOGIC WHEN I WAS GOING TO COLLEGE. IF I'M NOT IN COLLEGE, WHERE WOULD I BE? AND THE ANSWER IS I'D BE MAKING MINIMUM WAGE SOMEPLACE, HAVING SOME GUY YELL AT ME TO STOP BEING LAZY, AND GOSH, I DON'T THINK I WANT TO DO THAT. MY OPPORTUNITY COSTS WERE VERY LOW. AND ALSO TUITION WAS A LITTLE BIT LOWER WHEN I WENT TO COLLEGE. LET'S SAY THAT WE HAVE TWO PEOPLE AND ONE OF 'EM IS, LET'S SAY, A GIRL NAMED JANE AND JANE'S FATHER. AND JANE SAYS TO HER FATHER, "HEY, LET'S TAKE OFF AND TAKE A ONE-WEEK VACATION." AND SHE SAYS, "I'M READY TO GO." AND WHAT JANE'S THINKING IS, YOU KNOW, "MY TIME'S NOT VERY VALUABLE. IF WE DON'T TAKE THE VACATION I CAN GO DOWN TO

20 ECO LECTURE THREE 20 WORK. BUT I'M ONLY GONNA BE EARNING ABOUT SIX DOLLARS AN HOUR, AND SO IN FORTY HOURS A WEEK THAT'S TWO HUNDRED AND FORTY BUCKS." JANE'S FATHER IS AN ATTORNEY. JANE'S FATHER GETS PAID A HUNDRED AND FIFTY DOLLARS AN HOUR. JANE'S FATHER IS THINKING, "A HUNDRED AND FIFTY DOLLARS AN HOUR, FORTY HOURS A WEEK -- YOU KNOW, THAT'S SIX THOUSAND DOLLARS. JANE, I CAN'T TAKE THE WEEK OFF. THAT'S SIX THOUSAND DOLLARS OUT OF MY POCKET." AND SHE'S THINKING, "IT'S ONLY TWO HUNDRED AND FORTY DOLLARS OUT OF MY POCKET. LET'S GO." AND HE'S SAYING, "CAN'T DO IT." TIME COSTS VARY A LOT FROM ONE PERSON TO THE NEXT. IF YOUR TIME COSTS VARY SO MUCH, THEN JANE IS MORE LIKELY TO DRIVE A CAR ON THIS VACATION 'CAUSE TIME IS NOT ALL THAT VALUABLE TO HER. HER FATHER SAYS, "LET'S TAKE AN AIRPLANE. WE CAN GET THERE JUST LIKE THAT AND SAVE OURSELVES TEN HOURS OF DRIVING." TEN HOURS -- WHAT'D I SAY, A HUNDRED AND FIFTY DOLLARS AN HOUR? "THAT'S FIFTEEN HUNDRED DOLLARS I CAN SAVE. AN AIRPLANE TICKET JUST COSTS A LITTLE BIT. LET'S FLY." SHE SAYS, "WELL, ARE YOU PAYING FOR THE TICKET?" AND HE SAYS, "YES." AND THEN SHE GOES ALONG. BUT IF SHE WAS ON HER OWN SHE SAYS, "NO, I'M NOT GONNA FLY. THE AIRPLANE TICKET WOULD COST ME A COUPLE HUNDRED DOLLARS. I CAN -- IN TEN HOURS, AT SIX DOLLARS AN HOUR, I CAN DRIVE THAT FOR SIXTY DOLLARS WORTH OF MY TIME." EACH ONE OF US HAS A DIFFERENT TIME COST AND SO THAT IS GONNA CAUSE EACH PERSON TO BEHAVE A LITTLE BIT DIFFERENTLY THAN OTHERS.

21 ECO LECTURE THREE 21 HERE'S ONE FINAL EXAMPLE I'LL GIVE YOU. PEOPLE WHO EARN HIGH WAGES -- AND STUDIES HAVE BEEN DONE ON THIS. I'M NOT JUST SORT OF TELLING YOU MY BEST GUESS. PEOPLE WHO EARN THE HIGHEST WAGES SLEEP THE LEAST AT NIGHT. THEY ARE GONNA GET LESS SLEEP THAN PEOPLE WHO EARN LOWER WAGES. WHY IS THAT? "GOTTA GET UP AND GO TO WORK. I'M EARNING MONEY. IF I EARN A HUNDRED AND FIFTY DOLLARS AN HOUR AND I'M TAKING A NAP, THAT NAP'S COSTING ME A HUNDRED AND FIFTY DOLLARS. A ONE HOUR NAP, A HUNDRED AND FIFTY BUCKS." IF YOUR TIME IS WORTH SIX DOLLARS AND YOU'RE TAKING A NAP, THEN THAT NAP COSTS YOU SIX DOLLARS. WELL, I CAN'T AFFORD TO HAVE AS MANY NAPS AS YOU CAN. WELL -- OR MAYBE IT'S THE OTHER WAY AROUND. I'M GETTING SIX AND YOU'RE GETTING A HUNDRED AND FIFTY. BUT THE POINT IS, THE PERSON WHOSE TIME IS MOST VALUABLE, THEY'RE THE ONE -- THEY WANT TO GET UP IN THE MORNING AND GO TO WORK, EARN SOME MONEY. THEY MAYBE DON'T LIKE WORK ANY MORE THAN THE OTHER PERSON DOES, BUT IT'S THE MONEY. I MEAN, EVERYBODY LIKES MORE MONEY, RIGHT? NOT EVERYBODY, BUT MOST EVERYBODY. AND SO YOUR OPPORTUNITY COST OF SLEEPING LATER IS HIGHER, MORE LIKELY TO GET UP. SOME RESEARCH WAS DONE BY A COUPLE OF ECONOMISTS A FEW YEARS AGO. HERE'S WHAT THEY FOUND OUT. IT'S NOT A HUGE EFFECT. BUT IF WAGES WERE TO DOUBLE, PEOPLE WOULD SLEEP TWENTY MINUTES LESS EACH NIGHT. THAT'S NOT EVERY NIGHT AND THAT'S NOT EVERY PERSON,

22 ECO LECTURE THREE 22 BUT THOSE ARE THE GENERAL TRENDS THAT WE OBSERVE. IF THE WAGES GO UP FROM, LET'S SAY, SIX DOLLARS TO TWELVE DOLLARS, THEN THAT PERSON WOULD MAYBE GO FROM TEN HOURS OF SLEEP A NIGHT TO NINE HOURS AND FORTY MINUTES. THAT'S A LOT OF SLEEP, ISN'T IT? OKAY. SO THE LESSON? THE MORE VALUABLE SOMETHING IS, THE MORE EXPENSIVE IT IS, THE MOST COSTLY IT IS, THE LESS LIKELY IT IS THAT WE'D LIKE TO HAVE IT, OTHER THINGS BEING EQUAL. WE'VE TALKED A LITTLE BIT ABOUT SEVERAL THINGS HERE, ABOUT SCARCITY AND NECESSARY -- NECESSITY OF CHOOSING OR DECIDING. I SAID HERE "PEOPLE MUST DECIDE." REALLY A BETTER TERM, I THINK, WOULD BE "PEOPLE MUST CHOOSE." OKAY. WE'VE TALKED ABOUT SEVERAL OF THESE. LET'S PUT UP ANOTHER RELATED CONCEPT: BECAUSE OF SCARCITY A RATIONING DEVICE -- LET'S SAY MECHANISM -- IS REQUIRED. RATIONING MECHANISM. USUALLY WHEN YOU HEAR THAT TERM RATIONING, SOMEBODY MAY SAY SOMETHING LIKE, "OH, YOU HAVE GASOLINE RATIONING." AND WHAT THEY MEAN BY THAT -- AND I'M SAYING THIS BECAUSE I'M USING THE TERM A LITTLE BIT DIFFERENTLY. WHAT THEY MEAN BY GASOLINE RATIONING, YOU CANNOT BUY GASOLINE UNLESS YOU ARE GIVEN AN ALLOTMENT OF IT. MAYBE THEY GIVE YOU SOME LITTLE COUPON AND SAY, "OKAY, YOU CAN GET TEN GALLONS OF GASOLINE." THAT'S WHAT MOST PEOPLE WOULD THINK BY A RATIONING OF GASOLINE. ALL WE MEAN HERE REALLY IS, WE NEED SOME WAY OF DECIDING WHO GETS WHAT OR HOW MUCH. A RATIONING MECHANISM. WHAT I'M

23 ECO LECTURE THREE 23 SAYING TO YOU IS SCARCITY, LIMITED RESOURCES, UNLIMITED DESIRES AND WANTS CREATE SCARCITY. EVERYBODY CANNOT BE SATISFIED. WE CAN GO OUT AND USE ALL OF OUR RESOURCES TO PRODUCE, YOU KNOW, CARS AND HOUSES AND BOATS AND AIRPLANES AND CLOTHES, AND SO FORTH -- COLLEGE BUILDING. THIS IS A NICE BUILDING WE'RE IN HERE. WE CAN GO OUT AND PRODUCE ALL THESE THINGS WE CAN AND THERE'S STILL NOT ENOUGH TO GO AROUND. SO ONE MORE THING WE HAVE TO DO IS, OTHER THAN JUST RECOGNIZE IN ORDER TO GET SOMETHING YOU HAVE TO GIVE SOMETHING UP, WE ALSO HAVE TO RECOGNIZE THAT WE'VE GOT TO DECIDE WHO'S GONNA GET THESE THINGS THAT WE PRODUCED. WE PRODUCE ONE MILLION SHIRTS, TWO MILLION BASKETBALLS, THREE MILLION CELL PHONES. WHO'S GONNA GET THE THREE MILLION CELL PHONES? WHAT DO WE HAVE, TWO HUNDRED AND SIXTY, TWO HUNDRED AND SEVENTY MILLION PEOPLE IN THE UNITED STATES. WHO GETS THE THREE MILLION CELL PHONES? DO YOU JUST TELL PEOPLE TO LINE UP AND THE FIRST THREE MILLION PEOPLE THROUGH THE LINE GET 'EM? THAT IS AN EXAMPLE OF A RATIONING MECHANISM. COULD JUST BE FIRST COME, FIRST SERVED. THAT'S A RATIONING MECHANISM. IT JUST SAYS TO PEOPLE, "LINE UP." THAT'S A WAY OF DECIDING WHO GETS WHAT. HOW DO YOU LIKE THAT ONE, THAT RATIONING MECHANISM? FIRST COME, FIRST SERVED. YOU KNOW, YOU STAND IN A LINE A LOT WHEN WE HAVE THIS RATIONING MECHANISM. THAT'LL HAPPEN LIKE, OH, LET'S SAY THERE'S A BIG

24 ECO LECTURE THREE 24 CONCERT OR A BIG BASKETBALL GAME, OR SOMETHING LIKE THAT. AND THEY SAY, "OKAY. WE'VE GOT TICKETS FOR THIS CONCERT OR THIS BASKETBALL GAME. THE TICKETS ARE FIFTEEN DOLLARS APIECE. COME ON DOWN AND GET 'EM." AND PEOPLE RUN -- AND MAYBE THEY'VE GOT TEN THOUSAND TICKETS. THE ARENA WILL HOLD TEN THOUSAND PEOPLE. SO PEOPLE RUN DOWN THERE AND GET IN LINE. BUT IT'S NOT JUST TEN THOUSAND PEOPLE THAT GO DOWN THERE AND GET IN LINE. EVERYBODY WHO WANTS ONE OF THOSE TICKETS, THEY GO GET IN LINE. AND THEY STAND IN LINE AND THEY WAIT AND THEY WAIT AND THEY WAIT AND THEY WAIT, AND FINALLY THEY EITHER GET A TICKET OR THEY DON'T GET A TICKET. BUT THE POINT IS, THEY SPEND A LOT OF TIME IN LINE. SOME PEOPLE WILL SHOW UP ONE OR TWO DAYS IN ADVANCE AND SLEEP ON THE GROUND OUTSIDE THE ARENA. I'VE SEEN THAT OVER HERE AT THE STUDENT CENTER BEFORE THERE'S GONNA BE A CONCERT. I'VE HEARD SOME STRANGE STORIES ABOUT PEOPLE SPENDING -- HEY, I'VE BEEN OVER THERE A LITTLE BIT LATE AT NIGHT, WAITING FOR TICKETS TO GO ON SALE THE NEXT MORNING. I DON'T LIKE SPENDING TIME SLEEPING IN THE PARKING LOT OVER THERE. BUT THAT'S THE WAY IT WORKS WITH FIRST COME, FIRST SERVED. NOW ALL OF A SUDDEN WHAT WE HAVE IS THIS: YOU HAVE TO PAY TWENTY DOLLARS TO GET THE TICKET, OR FIFTEEN, OR WHATEVER I SAID A MOMENT AGO. BUT YOU ALSO HAVE TO SPEND SEVERAL HOURS WAITING OUT THERE IN LINE, RIGHT? WELL, THOSE SEVERAL HOURS -- WE'RE NOT

25 ECO LECTURE THREE 25 INCLUDING IN THE COST. AND I DON'T MEAN TO SAY WE ECONOMISTS DON'T. WE WOULD INCLUDE IN THE COST. BUT WHEN SOMEBODY SAYS, "OH, THE TICKETS ARE FIFTEEN DOLLARS APIECE." AND THEY SAY FIFTEEN DOLLARS, PLUS SIX HOURS OF YOUR TIME. WELL, SIX HOURS OF YOUR TIME MIGHT BE WORTH SIX HUNDRED DOLLARS. THOSE TICKETS ARE EXTREMELY EXPENSIVE. SO WHAT I'M SAYING IS THAT LAWYER WHO'S MAKING A HUNDRED AND FIFTY DOLLARS AN HOUR, OR WHATEVER, HE SAYS, "I'M NOT GONNA STAND IN LINE. WHAT I'M GONNA DO IS BUY THOSE OFF OF SOMEBODY ELSE." SO YOU'VE BEEN WAITING IN LINE ALL NIGHT BECAUSE YOUR TIME IS WORTH SIX DOLLARS AND HOUR. YOU GET UP TO THE FRONT, YOU BUY FIVE TICKETS, YOU'RE WALKING AWAY. THERE'S THIS GUY STANDING OVER THERE WITH A HANDFUL OF MONEY, SAYS "HEY, KID. YOU WANT TO SELL THOSE TICKETS?" AND YOU GO, "UHHH, HUNDRED DOLLARS APIECE." AND THE GUY SAYS, "HERE YOU GO." HE'S BETTER OFF. IT WAS GONNA COST HIM A HUNDRED AND FIFTY DOLLARS AN HOUR, IF THAT'S WHAT HIS TIME IS WORTH, TIMES SIX HOURS OF WAITING IN LINE. THAT'S NINE HUNDRED DOLLARS. HE GIVES YOU A HUNDRED DOLLARS APIECE FOR FIVE TICKETS. HE'S ONLY PAID FIVE HUNDRED BUCKS. YOU -- YOUR TIME IS WORTH SIX DOLLARS AN HOUR, YOU SPENT SIX HOURS, THAT THIRTY-SIX DOLLARS WORTH OF TIME. AND THE TICKETS ARE SEVENTY-FIVE DOLLARS WORTH. OH, MAN. I WISH I HAD A SMART BRAIN AND I COULD ADD THAT ALL UP RIGHT IN MY HEAD. BUT ANYWAY, YOUR COSTS

26 ECO LECTURE THREE 26 ARE A LITTLE BIT OVER A HUNDRED DOLLARS. YOU SOLD 'EM FOR FIVE HUNDRED. YOU'RE BETTER OFF. SO THAT TENDS TO BE WHAT HAPPENS WHEN WE HAVE THIS LIMITED SUPPLY OF TICKETS AND THEY'RE UNDER- PRICED. WHAT HAPPENS IS PEOPLE WITH SORT OF A LOT OF TIME ON THEIR HANDS, THEY BUY TICKETS AND THEN THEY DO THE SCALPING THING WHERE THEY SELL 'EM OFF TO SOMEBODY ELSE AND GET A HIGHER PRICE. OFTENTIMES. I DON'T MEAN TO SAY THAT'S ALWAYS. THIS IS A RATIONING TECHNIQUE, THOUGH, OR MECHANISM THAT THEY USED IN THE OLD SOVIET UNION. WHAT THEY WOULD SAY IS, "OH, THIS IS A WORKERS' PARADISE. WE DON'T CHARGE HIGH PRICES FOR OUR MERCHANDISE." NO, THEY DIDN'T CHARGE HIGH PRICES. BUT WHAT THEY DID IS THEY TOLD YOU YOU HAD TO STAND IN LINE IN ORDER TO GET THE MERCHANDISE. THERE WAS A MOVIE A FEW YEARS AGO -- WHAT WAS THAT? DON'T REMEMBER THE TITLE OF THE MOVIE. BUT IT WAS A MOVIE THAT TOOK PLACE IN THE SOVIET UNION, MOSCOW. AND THE GUY IS WALKING DOWN THE STREET AND HE SEES A BUNCH OF PEOPLE STANDING IN LINE, AND HE JUST RUNS OVER THERE AND GETS IN LINE. AND HE'S BEEN STANDING THERE FOR A COUPLE OF MINUTES AND HE SAYS TO THE PERSON IN FRONT OF HIM -- HE SAYS, "WHAT'S THIS LINE FOR?" HE DIDN'T EVEN KNOW WHAT THE LINE WAS FOR, BUT HE KNEW A LINE HAD FORMED REAL QUICK AND HE WANTED WHATEVER IT WAS. WELL, IT WAS TOILET PAPER. TOILET PAPER ITSELF WAS CHEAP. THE ONLY THING IS IT WAS ONLY AVAILABLE LIKE ONE DAY A MONTH. AND SO AS SOON AS PEOPLE HEARD

27 ECO LECTURE THREE 27 THAT THE TOILET PAPER WENT ON SALE, THEY GET IN LINE. THAT TOILET PAPER IS VERY VALUABLE BECAUSE A PERSON COULDN'T GO TO WORK. THEY COULDN'T DO CERTAIN THINGS IN ORDER TO GET IT. IT JUST DIDN'T COST 'EM A LOT IN TERMS OF MONEY. IT COST 'EM A LOT IN TERMS OF TIME. WHAT ARE OTHER WAYS OF RATIONING THINGS OUT? HOW CAN WE DECIDE -- OKAY. WE GOT THE THREE MILLION CELL PHONES. WHO GETS THE THREE MILLION CELL PHONES? WELL, GOSH. WE COULD DO IT BY RELIGIOUS AFFILIATION. WE COULD SAY, "YOU MUST BE A MEMBER OF THE METHODIST CHURCH TO GET A CELL PHONE." AND THAT WOULD GET RID OF THE PROBLEM. YOU KNOW, THERE'S NOT ENOUGH TO GO AROUND. OKAY, WE JUST GIVE 'EM OUT TO METHODISTS. AND IF THERE'S MORE THAN THREE MILLION METHODISTS, WE'LL PICK ANOTHER RELIGION AND HAND 'EM OUT AFTER THAT. I'M NOT SAYING WE DO THAT, BUT CERTAIN COUNTRIES IN THE WORLD PLACE A GREAT EMPHASIS IN THEIR SOCIETY ON RELIGION IN TERMS OF YOUR RIGHTS TO RECEIVE CERTAIN MERCHANDISE OR LIVE IN A CERTAIN PLACE AND YOUR POSITION IN LIFE. AND SO RELIGION IS A RATIONING METHOD IN CERTAIN COUNTRIES. HOW ABOUT YOUR POLITICAL AFFILIATION, YOUR POLITICAL PARTY? THAT WAS -- THE OLD SOVIET UNION WORKED THAT WAY. IF YOU WERE A MEMBER OF THE COMMUNIST PARTY, THEN YOU GOT TO SHOP IN STORES THAT HAD MERCHANDISE THERE. IF YOU WERE NOT A MEMBER OF THE COMMUNIST PARTY, THEN YOU HAD TO JUST GO OUT THERE AND DO THE BEST YOU COULD DO. AND THAT'S LIKE THAT GUY I JUST DESCRIBED HERE A

28 ECO LECTURE THREE 28 MOMENT AGO, STANDING IN LINE TO GET TOILET PAPER. IT'S JUST LIKE, "OH, MAN. I WOULD DO ANYTHING TO GET TOILET PAPER." IF YOU'VE EVER BEEN OUT OF TOILET PAPER, I THINK YOU KNOW THAT IT IS VALUABLE. OKAY. BUT YOUR POLITICAL AFFILIATION -- WE WOULD RATION THINGS OUT THAT WAY. OKAY. WE HAVE THREE MILLION CELL PHONES. YOU MUST BE A DEMOCRAT TO GET ONE AND IT WOULDN'T HURT IF YOU WERE A METHODIST. HOW ABOUT THIS ONE: PHYSICAL ATTRACTIVENESS. WE COULD SAY, "WELL, WE HAVE THE THREE MILLION CELL PHONES TO HAND OUT AND WHAT YOU HAVE TO DO IS BE GOOD-LOOKING TO GET ONE. WE DON'T WANT UGLY PEOPLE MAKING TELEPHONE CALLS. AND IT DOESN'T HAVE TO BE WE DON'T WANT UGLY PEOPLE MAKING PHONE CALLS. ANYBODY CAN MAKE A PHONE CALL. BUT WE WANT THE PEOPLE WITH CELL PHONES TO BE THE BEAUTIFUL PEOPLE." YOU KNOW, PEOPLE -- WHAT WOULD THEY DO THEN? THEY WOULDN'T BE STANDING IN LINE TO GET A CELL PHONE. THEY'D BE STANDING IN LINE OVER AT THE BEAUTY SHOP OR WHATEVER, TRYING TO GET KIND OF SPRUCED UP, YOU KNOW, AND PUTTING ON THESE FALSE FACES AND MAYBE WEARING A MASK OR WHATEVER. BUT THEY WOULD BE DOING THINGS -- STANDING IN LINE SOMEPLACE ELSE, TRYING TO QUALIFY TO GET A TELEPHONE. YOU KNOW, EACH ONE OF THESE AS YOU GO ALONG, SOME OF THESE ARE JUST OUTRIGHT DISTASTEFUL. YOU KNOW, MAN, I DO NOT WANT CELL PHONES OR CARS OR ANYTHING ELSE RATIONED OUT ACCORDING TO DO YOU BELONG TO THE RIGHT CHURCH. PEOPLE WOULD BE CHANGING THEIR

29 ECO LECTURE THREE 29 CHURCH AFFILIATION, RIGHT? IF YOU HAD TO BE A METHODIST TO GET MERCHANDISE FIRST, THEN PEOPLE WOULD STOP BEING BAPTISTS AND CATHOLICS AND OTHER THINGS. AND I DON'T MEAN TO SAY EVERYBODY, BUT SOME PEOPLE -- THAT WOULD SWAY THEM OVER TO ANOTHER RELIGION. I DON'T WANT MY RELIGION CHOSEN THAT WAY. I DON'T WANT MY POLITICAL PARTY CHOSEN THAT WAY -- YOU KNOW, BY ME TRYING TO GET THE CELL PHONE BEFORE YOU. PHYSICAL ATTRACTIVENESS? I CAN'T CONTROL THAT. I COULD COMB MY HAIR ONCE IN AWHILE. BUT THE IDEA THERE IS, YOU KNOW, SOME OF THESE THINGS ARE -- THEY SEEM ARBITRARY OR UNDESIRABLE. THERE'S DIFFERENT WAYS OF RATIONING THESE GOODS OUT. HOW ABOUT THIS ONE: THE STRONGEST GET THE MERCHANDISE. IF YOU'RE JUST BIG AND STRONG, YOU JUST GO UP AND KNOCK SOMEBODY DOWN AND TAKE THEIR CELL PHONE AWAY FROM 'EM. WE COULD HAVE THAT SYSTEM. THAT'S NOT TOO DESIRABLE. THIS IS LIKE, YOU KNOW, OUT IN THE STATE OF NATURE MAYBE. BUT I DON'T WANT TO REALLY BE LIVING OUT THERE IN THE STATE OF NATURE, JUST LIKE WONDERING WHEN SOMEBODY IS GONNA KILL ME AND TAKE AWAY MY CELL PHONE. BUT WE COULD DO IT THAT WAY. THAT WAS -- I DON'T KNOW IF THERE'S EVER BEEN A PLACE WHERE THAT'S BEEN JUST OUTRIGHT DARWINIAN -- YOU KNOW, LIKE GRAB EVERYTHING YOU CAN AND BEAT UP EVERYBODY ELSE. BUT IT'S THE FEAR OF THAT, IT'S CERTAIN PEOPLE THAT BEHAVE THAT WAY, THAT -- YOU KNOW, WE HAVE LAWS AGAINST THAT. BUT THAT IS A WAY OF RATIONING

30 ECO LECTURE THREE 30 THINGS OUT. SOMEHOW OR ANOTHER, WE HAVE ONLY SO MANY CELL PHONES AND CARS AND HOUSES. WE HAVE ONLY SO MANY. WE'VE GOTTA TO DECIDE WHO GETS WHAT. WHAT DO WE DO IN A MARKET ECONOMY? WILLINGNESS TO PAY THE HIGHEST PRICE. WHAT WE DO IN THIS COUNTRY IS WE SAY, "YOU KNOW, WE'VE ONLY GOT SO MANY CELL PHONES AND SO MANY CARS. WHOEVER IS WILLING TO PAY THE MOST, THAT'S WHO GETS 'EM. IF THERE'S FOUR MILLION OF YOU WANT TO BUY CELL PHONES AND WE HAVE ONLY THREE MILLION CELL PHONES, YOU KNOW WHAT WE'RE GONNA DO? WE'RE GONNA OPEN THE BIDDING RIGHT NOW FOR CELL PHONES. AND WHOEVER'S WILLING -- THE THREE MILLION OF YOU WHO'S WILLING TO PAY THE MOST, YOU GET THE CELL PHONES. AND THE ONE MILLION WHO'S NOT WILLING TO PAY THE MOST, YOU DON'T GET ONE." THAT'S OUR APPROACH. IS THAT THE BEST APPROACH? YOU KNOW, EACH PERSON'S GOT THEIR OWN ATTITUDE, THEIR OWN OPINION. PERSONALLY, I LIKE THIS APPROACH QUITE A BIT. IT MEANS THAT I'M NOT GONNA GET EVERYTHING I WANT BECAUSE OBVIOUSLY I DON'T HAVE THAT KIND OF MONEY. BUT ON THE OTHER HAND, I WASN'T GONNA GET EVERYTHING I WANTED ANYWAY. IF IT WAS BASED ON WHO'S THE STRONGEST, I WAS GONNA END UP WITH NOTHING. THE BEST LOOKING? THEY WOULD TAKE AWAY, I MEAN, MY SHIRT. POLITICS? I REALLY DON'T LIKE THESE MAJOR POLITICAL PARTIES VERY MUCH. I'LL LEAVE THIS ISSUE OF RELIGION ALONE BECAUSE I DON'T WANT TO SAY ANYTHING THAT WOULD

31 ECO LECTURE THREE 31 GET ME IN TROUBLE OR MAKE YOU ANGRY. FIRST COME, FIRST SERVED? I DON'T WANT TO SPEND MY LIFE STANDING IN LINE. OF ALL THE CHOICES -- AND THERE ARE OTHER CHOICES, OF COURSE, OF HOW TO RATION THE GOODS AND SERVICES OUT. OF ALL THE CHOICES I KNOW OF, THE ONE I LIKE THE MOST IS WILLINGNESS TO PAY THE HIGHEST PRICE. NOW, I KNOW WHAT A LOT OF PEOPLE THINK AND LET ME JUST SORT OF ADDRESS THAT RIGHT NOW. A LOT OF PEOPLE THINK, "OH, YOU KNOW, WHEN YOU'VE GOT THAT SYSTEM, THAT MEANS THAT RICH PEOPLE GET EVERYTHING." WELL, IT IS TRUE THAT RICH PEOPLE GET A LOT. I MEAN, IF YOU DIDN'T, WHAT WOULD BE THE POINT OF BEING RICH? IT'S TRUE THAT RICH PEOPLE GET A LOT BUT EVEN RICH PEOPLE HAVE TO DECIDE. LET'S SAY YOU'VE GOT A MILLION DOLLARS A YEAR COMING IN. YOU GO OUT AND BUY YOURSELF A MANSION; YOU BUY YOURSELF A BIG BOAT; YOU BUY YOURSELF A NICE BIG CAR; YOU TAKE YOURSELF A VACATION. AFTER AWHILE YOU START GOING, "MAN, I HAD A MILLION DOLLARS IN MY CHECKING ACCOUNT BEFORE AND NOW I'M DOWN TO A HUNDRED AND ELEVEN THOUSAND DOLLARS." THEN MAYBE YOU'D TAKE SOME PEOPLE OUT AND HAVE A FEW PARTIES AND NOW YOU'RE DOWN TO TWENTY THOUSAND DOLLARS. AND YOU START SAYING, "MAN, DID I NEED TO BUY SUCH A BIG HOUSE?" AND YOU START ASKING YOURSELF, "MAYBE I COULD GIVE UP A LITTLE BIT OF THAT HOUSE TO HAVE A FEW MORE PARTIES." ALL OF A SUDDEN -- YOU SEE THIS -- WE'RE GIVING UP HOUSES TO HAVE MORE PARTIES. WE'RE BACK ON THAT PRODUCTION POSSIBILITY

32 ECO LECTURE THREE 32 FRONTIER. WE'RE SAYING IF WE WANT MORE OF SOMETHING, WE'VE GOT TO GIVE UP SOMETHING ELSE. BEING RICH MEANS YOU GET MORE THAN OTHER PEOPLE DO BUT IT DOESN'T MEAN YOU CAN HAVE EVERYTHING YOU WANT. YOU'RE STILL IN A POSITION OF HAVING TO GIVE UP SOMETHING TO GET SOMETHING. AND SO RICH PEOPLE DON'T OWN MY HOUSE. IF RICH PEOPLE GOT EVERYTHING, THEY WOULD OWN MY HOUSE AND OWN YOUR HOUSE AND OWN EVERYTHING ELSE, AND THEY DON'T. WHY DON'T THEY OWN MY HOUSE? AND THE ANSWER IS THEY JUST DON'T WANT IT ENOUGH TO GIVE UP WHAT THEY WOULD HAVE TO GIVE UP IN ORDER TO HAVE MY HOUSE. AND SO WILLINGNESS TO PAY DOESN'T REALLY MEAN THAT RICH PEOPLE GET EVERYTHING. IT MEANS THAT RICH PEOPLE, IF THEY DECIDE TO PUT THE RESOURCES IN AND INVEST THE MONEY, THEY CAN HAVE MY HOUSE. BUT IT JUST DOESN'T MEAN THAT MUCH TO THEM. AND SO THEY DON'T END UP WITH EVERYTHING. THERE'S TOO MANY THINGS FOR RICH PEOPLE TO BUY EVERYTHING. SO A LOT OF US WHO ARE NOT RICH, WE END UP WITH THESE THINGS ALSO. SO WHAT ABOUT THIS? THESE THINGS RIGHT HERE -- WELL, LET ME GET ALL THREE OF THEM. IF THESE WERE OUR RATIONING TECHNIQUES -- RELIGION, POLITICS, PHYSICAL ATTRACTIVENESS -- YOU KNOW WHAT WE'D SAY. WE'D SAY DISCRIMINATION. WE'D SAY, "THIS IS DISCRIMINATORY. THOSE METHODISTS ARE GETTING ALL THE CELL PHONES AND WE GOT A RULE THAT SAYS THAT US NON-METHODISTS DON'T GET CELL PHONES. THERE OUGHT TO BE A LAW AGAINST THAT." WE DO HAVE LAWS AGAINST

33 ECO LECTURE THREE 33 THINGS LIKE THAT. AND POLITICS? SAME SORT OF A DEAL. AND PHYSICAL ATTRACTIVENESS, SAME. STRONGEST? YOU KNOW, THAT'S PRETTY UNDESIRABLE. WE HAVE LAWS AGAINST THAT AND HAVE HAD LAWS WAY BEFORE THE ANTI-DISCRIMINATION LAWS. WE'VE HAD LAWS AGAINST JUST GOING OUT AND TAKING THINGS AWAY FROM PEOPLE. FIRST COME, FIRST SERVED? THIS IS SOMETIMES DONE, BUT THEN WE END UP SEEING, AS I MENTIONED A MOMENT AGO, THE TICKETS TO THE CONCERT GET BOUGHT UP BY SOMEBODY WHO'S MAYBE REALLY POOR AND SOLD TO THE RICHER GUY. THE RICHER GUY THEN IS GONNA GET THIS BASED ON WILLINGNESS TO PAY. EVEN THOUGH THERE'S BEEN SOME STANDING IN LINE, THE RICH GUY DIDN'T STAND IN LINE. THE RICH GUY IS GONNA BUY THOSE TICKETS OUT OF LINE. AND SO ANYWAY, WHAT I'M SAYING TO YOU IS THERE'S SOMETHING DISTASTEFUL ABOUT A LOT OF RATIONING METHODS. THERE'S SOMETHING DISTASTEFUL ABOUT WILLINGNESS TO PAY TO MANY PEOPLE, BUT IT VERY OFTEN IS BETTER THAN THE ALTERNATIVE. HERE'S WHAT WE TRULY ARE WORRIED ABOUT IN TERMS OF A MARKET ECONOMY. WE ARE TRULY WORRIED ABOUT THIS: THAT THERE WILL BE SOME PEOPLE WHO, THROUGH NO FAULT OF THEIR OWN, ARE POOR, HAVE VERY LITTLE INCOME, VERY LITTLE MONEY, THROUGH NO FAULT OF THEIR OWN, AND THEN THEY'RE NOT ABLE TO AFFORD NOT THE LUXURIES, BUT THINGS THAT ARE NECESSARY FOR THEIR HEALTH AND THEIR SAFETY. IF YOU'RE POOR THROUGH NO FAULT OF YOUR OWN AND YOU CANNOT BUY A MEAL, AND YOU DON'T HAVE A

34 ECO LECTURE THREE 34 PLACE TO SLEEP, THEN THERE'S A GREAT DEAL OF SYMPATHY FOR THAT JUST AMONG THE POPULATION AND IN WASHINGTON, D.C., STATE CAPITOLS, AND WE GET LAWS WHERE WE SAY, "YOU KNOW, THIS MARKET ECONOMY WORKS OUT PRETTY WELL MOST OF THE TIME. BUT IN THIS PARTICULAR INSTANCE, WHERE WE HAVE PEOPLE WHO ARE POOR THROUGH NO FAULT OF THEIR OWN, AND THEY CANNOT AFFORD THINGS THAT ARE IMPORTANT FOR THEIR HEALTH AND SAFETY, WE DO NOT LIKE A MARKET ECONOMY TO OPERATE IN THAT PARTICULAR CASE. WE WANT TO DO SOMETHING ABOUT THAT." AND THAT'S WHEN WE HAVE POLICIES THAT GIVE MONEY TO PEOPLE, OR FOOD STAMPS OR WHATEVER, AND WE SAY, "WE'RE GONNA TRY AND OVERCOME MARKET FORCES IN THIS PARTICULAR INSTANCE. WE'RE NOT SATISFIED WITH THE MARKET OUTCOME." SO -- AND I'LL CLOSE WITH THIS -- IN THIS PARTICULAR INSTANCE WE'D USE THE TERM MARKET FAILURE. THE MARKET'S NOT PERFECT AND SOMETIMES IT FAILS TO DO THINGS THAT MOST OF US WITHIN SOCIETY THINK IT SHOULD DO. AND WHEN THE MARKET FAILS TO DO THOSE THINGS, WE TALK IN TERMS OF MARKET FAILURE AND THAT IS THE JUSTIFICATION FOR BRINGING GOVERNMENT ONTO THE SCENE. WHAT WE WILL DO NEXT TIME IS TALK ABOUT A FEW MORE OF THESE INTRODUCTORY TERMS AND THEN WE'LL GO ON TO THE FOLLOWING CHAPTER ON MATERIAL. SO LONG. SEE YOU NEXT TIME.

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