Monday, April 13, 2015

Memo to the NYT: Consumer Surplus is not a "social return"

In Sunday's NYT "Economic Views" column, I was stunned to read, fairly early in the piece, this error of basic economics:

"Every profession produces both private returns — the fruits of labor that a person enjoys — and social returns — those that society enjoys. If I set up a shop on Etsy selling photographs, my private returns may be defined as the revenue I generate. The social returns are the pleasure that my photographs provide to my customers."

People, private returns are the returns enjoyed by market participants both producers AND consumers. Consumer surplus is not a "social return". It flows to the buyer alone.

Social returns are returns that accrue to people outside the market. People other than the buyers and sellers.

Let's try an example of our own.

If I paint people's houses, the private returns are the producer surplus (which is not my revenue) I enjoy AND the consumer surplus my customers enjoy. The social returns could be (A) zero, (B) positive because the newly painted house raises my neighbors' property values, or (C) negative because my customer had the house painted purple and it is causing disutility for the neighbors.

If that quote above was given as an answer to a question about the difference between private and social benefits in my principles class, it would fail.

The worst part of the whole thing is that, to introduce the offending quote, the columnist says, "As an economist, I look at it this way".



Anonymous said...

I think you misread the original. The social returns here are not those to the buyer of the item, but to the browsers who see the photos. I hope you grade exams more carefully!

Angus said...

LOL Anon: I think YOU misread the original:

"The social returns are the pleasure that my photographs provide to my customers."

Please don't take any of my classes

Jack G said...

The writer is a professor of economics at Harvard--ouch! Ivory tower indeed.

Tom said...

The writer has a political agenda to which all logic must bend. If you insist that 2+2=4, then you are just an unfeeling brute.

The social benefit in the house painting example is in the market itself. As Angus noted, the "social return" of a particular transaction is problematic, but the general availability of services like house painting is enormously valuable.

Kevin Erdmann said...

I thought the funniest part was where he said that American financiers should become more like lenders in developing economies, like India.

Dr. Tufte said...

Angus: you lived in New Orleans for a while. Surely you know the worst house color is not purple ... it's (pepto-bismol) pink.