Monday, April 11, 2011

How Markets Fail: Snooki Versus the Nobel Laureate

One of the most major flaws markets sometimes exhibit is their failure to value things properly. Market incentives sometimes make it more lucrative to invest in trivial goods such as expensive "designer" bags that can sometimes cost tens of thousands or hundreds of thousands of dollars rather than make investments that are truly worthwhile, for example, reducing worldwide malaria deaths or dealing with the problem of homelessness. Basically, markets can sometimes cause society to misallocate huge amounts of resources to trivial things while real human needs are not met.

An example is Rutgers University paying more for the trivial reality star Snooki to appear on campus than they are paying for a Nobel Laureate. As Catherine Rampell explains, paying Snooki vast amounts of money to talk about her hair at Rutgers University may make some sort of economic sense. But doesn't this just go to show that the way that markets allocate resources is often anything but sensible?

Remember, the next time an economist tells you markets allocate resources more efficiently, that using their incomplete definition of efficiency. Under that definition, it makes more sense to pay tens of thousands of dollars to bring Snooki onto the campus of a public university or into a night club than to use those scarce resources for, I don't know, a scholarship or actual education or for something that actually matters! This should tell you that there is something deeply incomplete with the definition of efficiency used by most economists.

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