The value-price gap

I often read or hear journalists, economists and just regular people discussing an industry’s importance in terms of its annual turnover, share of GDP and/or the total capitalization of its major companies. 

These price measures are useful for making “objective” comparisons, but they are misleading if one wants to think of the industry’s value to individuals or society. (Economists say that “consumer surplus” rises as the  gap between value and price increases.)

As a simple example compare the price that you pay to the value you get for gas, electricity and/or water. For me, value is a huge multiple of price for these services. I pay about €1/day for gas and electricity, but I’d be willing to pay 10-30x that price if I was deprived of heat and power. For water, I pay a flat charge per month (!), but I would definitely be willing to pay 10-50x the €2/1,000 liters that metered customers pay. (Assuming we use 50 liters each/day, that’s €0.20/day, so 50x would be €10/day.)

Turning to other industries, you can see a similar huge gap between value and price for food, drink and airline tickets but much smaller gaps for, say, restaurant meals, hardcover books or university tuition. In some cases (bankers, lawyers, social media, insurance and taxes — a huge share of which goes to the military and special interests in the US) value is often below price, but we are often unable to avoid such “charges.”

My one-handed conclusion is that we should think of the value of goods and services rather than their price when thinking about purchases but also (and especially) when making political decisions regarding the relative importance of  industries.

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

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