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Maxed Out

What’s the most you’d be willing to pay for a glass of water? Good economics students will quickly have an answer: “it depends!” And they are right. To ask such a question requires context. We economists muddy up understanding by referring to this context as “the margin” but I do not think at all that this is a concept that should be tough for us to convey to lay audiences.

What margins/contexts matter? Well, it depends on how much income and wealth I have. It depends on my expectations about whether I will be able to access water and at what prices in the near future. It depends on how hot I am now and how hot I expect to be. It depends on whether I can find anything similar enough to make me happy (such as the yummy grapefruit I am eating right now). And so on.  But what should be clear is that there is some point where I cannot or would not pay a particular amount for a glass of water.

In other words, I suggest that there is a maximum price that any good can obtain. Confusion about this point, I think, derives from economists’ limited discussions of the origins of prices and what constitutes actual economic activity. Let me try to do this tersely. A price is a generic concept that exists regardless of whether we have market economies, socialist economies, families or any other arrangement. A price “emerges” when people face a tradeoff and the magnitude of the price of a good is simply the amount of a tradeoff that they are able and willing to make to obtain a good (I am grossly simplifying here). So, if you want a glass of water while you are out backpacking in the wilderness, it certainly has a “price” even though there is no Aquafina dealer in site. And this price is not so straightforward because it depends on previous capital investments made by the person.

For example, I was out backpacking a few weeks ago and had a pretty long day ahead of me and many thousands of feet of ascent and descent. I couldn’t carry the amount of water I would need (I packed in 5 liters and wanted to drink somewhere closer to 8). So, looking at maps and trip reports I was able to figure out where reliable streams would offer up water along the way. The time I spent researching the water is part of the price of a glass of water. But there’s more. I had to obtain the water. Fortunately for me I had several (non-BPA free) water bottles and two bladders with me and I also had a micro-filter pump with some chlorine. Part of the price of the glass of water was the expended energy I had to trek with the filter and bottles in my pack. I then had to get into the stream and spend 10 minutes pumping, filtering and sanitizing the water. That puts a little strain on the feet, knees and back and also takes time away from enjoying summit views. That is part of the price. Note that this price would have been much higher had I not made the capital investments in bottles, filters and sanitizers earlier in my life. In that case with fewer bottles I would have had to make more water stops, including possibly changing my routes of descent and ascent to accommodate this. I would have had to carry in more fuel and a pot so that I could boil my water to purify it. I could have purchased a high tech pen which has just been created that I think uses some fancy EM radiation to purify water. I could have done it the old fashioned way with iodine tablets. But I find the taste of iodine to be oppressively yucky. Or I could even have risked ghiardia and cryptosporidium by drinking straight out of the stream. All of those are tradeoffs.

Note that none of these involves a direct money payment, particularly once I owned the capital goods. The price of a glass of water for me on those mountains was merely the effort I was willing to make to get it. And it was pretty high even though the money price was zero.

Goods obtain money prices when we engage in trade with others. When we are self-sufficient there is no need to use a medium of exchange in order to secure goods and services, as the only medium that matters is my own work effort. But these money prices, as our students know, are just numerical representations of what I was doing at the stream beds last week. If a bottle of water is free, that means I require virtually no tradeoff to get it (such as filling my bottle at the water fountain over where I am sitting right now). If a bottle costs $1 for `6.9 ounces, that simply means that I have to sacrifice $1 worth of other goods and services (hence effort) to secure this bottle of water.

But can that bottle of water ever cost $10,972,628,972.99?

Probably not. I am sure the federal government can manage to spend that kind of money to put water on a military vessel, but it is hard to imagine that bottled water could cost that much. This is what I mean when I say that there are natural maximum prices for goods and services. At some particular money price, the cost of engaging in the extended order exceed what one either can do on their own, or simply it means that the good is totally unaccessible. When we hit that price there is no price for that good in the market sense, but there is still a price for the good in the natural sense. If Dasani starts selling for $91 per bottle or the Monroe County Water Authority starts selling me water for $5 per gallon, then I start collecting rain in buckets and I make more frequent trips to the hills to collect water from streams. So no Dasani would get sold, but I sure would still make tradeoffs to get the water I want.

One interesting application of this, at least for me, is that pointing to a lack of an increase in a price does not necessarily imply that we are getting better off. In fact, you can imagine that money prices for goods stagnate as a result of people going totally self-sufficient, and that such price stagnation is indicative not of abundance but of the opposite. I’ll try to dig up illustrations in the coming months.

4 Responses to “Maxed Out”

  1. Speedmaster says:

    >> ” Fortunately for me I had several (non-BPA free) water bottles …”

    You’re a monster. 😉

  2. Speedmaster says:

    Also, have you ever tried one of these? Had my eye on them.

    http://www.steripen.com/

  3. wintercow20 says:

    Funny, as I was pumping water from a stream a hiker was sorta laughing at me as he used his new Steripen … it really does seem worth it. If I were able to hike more than once or twice per year (outings) I would probably get it … it’s over $100 I think.

  4. Michael says:

    You can also use a couple drops of bleach to purify water. 8 drops per gallon, from a website I looked at. If the stream isn’t muddy, then I’d probably not worry to much about filtering; the minerals will do you good.

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