Thursday, July 31, 2014

Incentives and supply curves

I recently had thoughts about when exchanges between individuals are not exploitative. (I'm going to leave aside the issue of coercion though that is obviously related). Examples of "problematic" exchanges would be price hikes after events (like a storm) and blackmail. I think these are roughly in order of decreasing popularity. I'm going to steer clear of "repugnant markets" like organ sale.

The simplest thing to think of what happens in an exchange is that there is some surplus (as defined by their disagreement point or BATNA) from the transaction that should be shared evenly between the parties. This is the result from Nash bargaining. This setup, though, discounts the effects on possible future transactions. This is why many economists favor few price restrictions after calamities. If you don't allow people to profit, there won't be any supply response and the next time it happens (or later in the current after-math) the supply won't be improved. So in each case we are weighing the desire for equality with the desire to improve the world in the future. For price gouging we are then weighing a negative (short-term inequality) and a positive (improved future supply). Reasonable people could give different weights to these concerns and come to different conclusions (some events may be so particular that we don't think suppliers profiting now would cause any future benefit). Blackmailing is interesting because it is appears to be a negative in the short-term and long-term. The long-term is negative because if blackmailing was morally permissible it would incentivize people to violate the privacy of others.

  1. Strings Attached: Untangling the Ethics of Incentives by Ruth W. Grant
  2. Questions for Free-Market Moralists by Amia Srinivasan (
  3. Organ Sale - Stanford Encyclopedia of Philosophy

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