It would be best if we had zero crime, or zero pollution, or zero inequality (of wealth, income, health, beauty, intelligence, lifespans), or zero transportation deaths, et cetera. That is, it would be best if we could obtain the best and not have to pay too much for it. But, alas, the real world refuses to comply with our wishes. For anything good that the real world grudgingly gives us, it exacts a cost.
To gain any benefit one has to pay a cost. The best may come at such a high price that it may not be worth it. How much of a good thing we actually end up having depends on a cost-benefit analysis. That particular amount of a desirable good for which the cost balances the benefit at the margin is the optimal amount of that good. The optimal amount is almost never at one or the other extreme of the case.
As an aside, the Buddha recognized this universal truth and advised against extremes. He preached moderation in everything, and therefore Buddhism is known as the “Middle-wayed Way.” I think that the Buddha would have made a pretty good economist. He thought at the margin. Continue reading “The Best is not Optimal”
Prabhudesai referred to JEE (Joint Entrance Exam) in a comment and wrote, “An examination that has too much of competition resulting to very high cost of producing one engineer. For a poor country like India it is a massive blow.”
Is that type of competition good? That is socially wasteful competition. It belongs to a broad class of activities that are technically known as “rent seeking.”
One of the principal ways of obtaining wealth is by earning a profit. Profits are the difference between the cost of producing something and the price obtained from its sale. Profits indicate that wealth has been created and value delivered. Rent seeking occurs when one attempts to obtain some wealth without actually creating wealth.
Continue reading “A Bit on Rent Seeking”