David R. Henderson  

My Consumer Surplus Story

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I said here that I would tell my consumer surplus (CS) story that I often tell when I teach the concept. Here it is.

In September 1972, my friend Harry Watson (aka J.W. Henry Watson) and I were traveling from Canada to the United States to start the econ Ph.D. program at UCLA. We drove a 1962 Mercury station wagon that Harry had bought for $200 and towed a homemade trailer loaded to the gills with our stuff, including my already-sizable collection of books. Our whole get-up looked almost like something out of The Grapes of Wrath. Harry picked me up in Winnipeg and we took along a friend of mine, Duncan McMonagle, who wanted a ride to Vancouver. We were in the Canadian Rockies just outside of Lake Louise and, in early September, it was snowing. Our car broke down. Harry, who knows cars, figured out that it was--I'm going from imperfect memory here--the alternator. The service station we went to didn't have that alternator in stock and it would need to be ordered from Toronto, flown to Calgary, and bussed to Lake Louise. Price for part and shipping: approximately $90. Time: 2 or 3 days, during which we would pay about $25 a night at the cheapest motel we could find. So our overall cost for this needed repair would be > $150.

I was ready to say yes: what choice did we have? But Harry asked if it could still be ordered in time if we waited until mid-afternoon. It could. Then he hitchhiked east to Banff and found a junk yard. When he got there, it was noon and so the owner wasn't there. Instead, it was a teenage boy who, yes, did, have the part. The owner might have, assessing our situation, charged $20 or $30. The kid went with a standard price list (I'm assuming) and charged--are you ready?--$2. Harry was back within an hour, clicking his heels with joy. We installed the part and went on our way, having lost only about 3 hours. That's consumer surplus.

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COMMENTS (2 to date)
David N writes:

I have a concept in my mind that realates to consumer surplus. I'm not sure what to call it so I call it "pseudoimprovement." Pseudoimprovement is when a product is deemed improved but the improvement does not cause the (marginal? median? aggregate?) consumer to prefer it over the unimproved product. The disadvantage to consumers happens when the preferred original product is not available. I seem to find this situation all the time in retail and food stores.

As an hypothetical example, say you're in a restaurant and you want an iced tea. The waitress says, "No iced tea, we have iced yerba mate. Same price."

You are willing to drink yerba mate, but would have preferred orange pekoe. So you paid P to drink what you valued at P - S. S is obviously constrained to be smaller than the cost of choosing another alternate beverage or another restaurant. Nevertheless, what happened? Was a surplus S created? Did it go to the producer?

Foobarista writes:

Here's an extreme one. I was working at a big defense contractor (sorry, not a peacenik) many years ago. We had a NASA simulation that we used extensively, but that only ran on prehistoric 36 bit hardware. An old 'puter, which was kept running purely to run this software, was to be turned off because supporting it was costing $millions per year after something was done about the sim.

My boss assigned me to port this sucker to more modern 32 bit machines, and I was given a year to do it. It would have been lots of fun, particularly since they wanted the answers to be exactly the same, which ain't gonna happen if you have different and non-scalar multiples of bits in your calculations :)

Fortunately, before starting, I dug up an ancient hardcopy manual on this thing, and on a lark, called a phone number I found in one of the code comments. The number itself went to an auto-forward, but it went to a NASA program office that knew about this program, who gave me a "real" number to call.

It turned out that NASA had already done the port to the new hardware, the software was now public domain, and all I had to do to get it was send a fax and a bit of money to cover "shipping and handling". I had the tape within a week.

The company was quite willing to pay my salary and run this old system for another year, but they got it a week after I got the assignment. So, its "consumer surplus" was clearly a couple million bux. (Sadly, I didn't see any of it, although I got an attaboy in my personnel file)

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