Saturday, June 2, 2007

Marginal Benefit

While thinking about equity (equality) and efficiency of the markets I have some trouble understanding marginal benefit.

In the marginal benefit analysis we say that if I need something desperately I should expect to pay more for it. However, this does not take into account whether I can afford to pay more for it.

An example if you are thirsty and stranded in a desert what is worth more diamond for a nickel or water for 100 bucks. We would all pick water. This I can understand.

What I don't understand is if I don't have 100 bucks but only have 20. I still value water more. But I cannot afford it. How does marginal benefit take this into account?

Or consider 2 person equally thirsty, one has 100 bucks and another one has 20 bucks. They both value water equally. Only because the 1st one can afford to pay for it does not make it more valuable to him.

Therefore, I believe there are cases when market efficiency fails and we need government to step in to equally divide goods (or put price caps).

Let me know what you all think.

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