The Inefficiency of Inequality

The Inefficiency of Inequality.

To understand why, consider what happens when economic opportunities are in short supply. When any market has a shortage, not everyone gets the things they want. But who does get them also matters, because it’s not always the people who value those things the most.

Economists Edward Glaeser and Erzo Luttmer made this point in a 2003 paper about rent control. “The standard analysis of price controls assumes that goods are efficiently allocated, even when there are shortages,” they wrote. “But if shortages mean that goods are randomly allocated across the consumers that want them, the welfare costs from misallocation may be greater than the undersupply costs.” In other words, letting the wrong people buy the scarce goods can be even worse for society than the scarcity itself.

I use a pretty simple business example.  Assume you are a business that sells pretty basic widgets.  Something about $10-20/widget.  Do you want to have one customer who makes $1,000,000,000 year or 10,000 customers who make $100,000/yr.

When we see an economy that is rebounding on paper, but real world demand lags what would be expected, there become real questions about how things are supposed to work vs how they actually work.

 

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