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July 28, 2011
Is there any room for morality in economics?
By Cindy Ivanac-Lillig and Laura Perez
Recently, Russ Roberts of EconTalk** spoke with Duke Professor Michael Munger about the relationship between morality and economic choices. Munger makes a distinction between what we call “voluntary” in economics with what he dubs “euvoluntary.” Munger’s term, euvoluntary, describes a voluntary transaction that among other criteria has the unique characteristic of not having too great a difference between the agreement (in a voluntary transaction) and the next best alternative.
Munger goes on to provide an example in which the transaction is voluntary but not euvoluntary. A man is wandering in the desert, lost with $5,000 in his pocket. Suddenly Tony’s Taco Truck comes over the hill with a sign reading: “Today’s Special: Three tacos for $5, one bottle of water for $1,000 or three bottles of water for $2,500.” The lost man tells Tony that his prices are ridiculous and watches as Tony starts up the truck to drive away. Faced with either dying or paying the exorbitant price, the man reluctantly enters into the transaction. This is not a euvoluntary transaction because the disparity in the next best alternative is enormous. In this case, the next best alternative to the negotiated agreement is death.
Many black market transactions are not euvoluntary (organ sales, price gouging after a disaster, etc) due to the disparity between the agreement and the next best alternative, but the interesting question is should they be legal? And, if so, where should the line be drawn? In other words, if you made it illegal to charge $1000 for water, would better choices emerge or would we be left with no water in the desert?
What do you think?
**EconTalk is a weekly podcast put on by the Library of Economics and Liberty. Check it out at:
http://www.econtalk.org/archives/2011/06/munger_on_excha.html
Posted by Cindy at July 28, 2011 10:26 PM
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Comments
Even with a law in place, Tony could simply price his water $1 less than the legal limit. By setting his price well above his cost for the water, he is setting himself up for a pretty large tax bill which would be the consequence of Tony's action. Competition or the high tax bill should be motivating factors in Tony's pricing decision. Knowing the price of the water, the wandering man should ask how much Tony would charge for a ride out of the desert.
Posted by: Chuck Bretzels at July 29, 2011 2:21 PM
A contract is voidable if it can be proven that there was either physical or **economic** duress. In the example with the desert where one party would die without the water, the contract would be considered voidable because one party was in duress and had no other practical choice but to agree to the contract. One of the elements of economic duress is having a lack of a reasonable alternative.
The morality of the organ market is a whole different story. There is so much demand and such little supply that if the market is not externally regulated, it would be pretty chaotic.
On a side note, there are government regulations on certain markets and also on monopolies/monopolistic competition. Other than that, I think most transactions are morally acceptable and should be legal as they are driven by natural market forces.
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