Market Power

Musings by an academic economist on the power of markets and the power over markets.

Sunday, January 16, 2005

Don Boudreaux on Salaries in Sports

Don has this comment on why the Carlos Beltran contract (in particular) is not a social injustice.

Basically, he argues that the skills that it takes to be a major league baseball players are in relatively short supply while teaching (and research) skills are in relatively abundant supply.

As such, his argument is a variation on the diamond-water paradox. Water is essential for life while diamonds most surely are not. But the price of diamonds is so much higher than the price of water. Why?

Basically, relative to the demand for each commodity, the number of diamonds available for purchase is small while the amount of fresh water available for drinking is much larger. Since diamonds are relatively scarce, the value of obtaining one more diamond is large: hence the higher price of diamonds. This paradox helps explain why the price of a product is not a measure of its social value. In the market, the price of something is determined by the interaction of how much it costs to "make" it and how much people are willing to sacrifice to obtain it. To an individual, the net value of obtaining something is the difference between how much that person values the thing and how much the person must to sacrifice to obtain it. To society, the value of the good is the sum of the individual net values: the so-called consumer surplus. Since water is so plentiful, it is relatively low in price even though it is so beneficial. Surely it is of more value than diamonds. Yes, it is - and the same argument goes for highly-talented baseball players.