Can you Sell Something for More Than it’s Worth?

Speakers
Dan Russell,

Release Date
September 14, 2017

Topic

Basic Economics Economics
Description

What a rip-off! Here’s what you’re really paying for when you buy the stuff you want. Watch more with Professor Dan Russell.

    1. Is Price Gouging Immoral? Should It Be Illegal? (video): Prof. Matt Zwolinski argues that price gouging may be the best way to allocate scarce goods during an emergency. 
    2. What Is Subjective Value? (video): Prof. Don Boudreaux explains that the value of a good is subjective. 
    3. I Bet You Thought You Were Supposed to Hate These Guys (video): Prof. Steve Davies explains that ticket scalpers help connect tickets to those who value them most highly. 

Daniel Russell: Can you sell something for more than it is worth? Alan is headed downtown for an important job interview, but he can’t find a place to park on the street. All the meters are taken. Up ahead, he sees a parking garage with available spaces, but the sign at the gate says it costs $10 to park there. What a rip-off! That costs way more than parking at a meter.
Beverly wakes up in her hotel room only to find that she forgot to pack any toothpaste. She doesn’t have time to look for a supermarket, so she runs to the convenience store on the corner, and a tube of toothpaste costs $5. What a rip-off! They’re charging way more than the supermarket.
Hal walks past a jewelry store in a glitzy neighborhood, and in the window he sees a dog collar covered with diamonds. What a ripoff! Who in their right mind would pay thousands of dollars for something to put around a dog’s neck?
We encounter situations like these all the time, and they look like cases in which someone is selling something for more than it’s worth. That would be true if these cases involved force or fraud. But when people say that things are being sold for more than they’re worth, force and fraud are usually not what they’re thinking of. The thought is that things are sold for more than they are worth just as part of everyday business. However, it isn’t true. You can’t sell something for more than it is worth, because as long as there is no force or fraud, that person won’t pay more for it than it is worth to him.
When people trade, the prices they agree on depend on how much each person values what he gets out of the trade compared with the value he places on what he has to give up in the trade. In other words, prices reflect people’s subjective values. As long as each person values what he gets out, more than what he gives up, a trade can happen. Otherwise, it won’t. Believe it or not, you can’t even sell diamond-studded dog collars for more than they’re worth, because you can’t sell them for more than they’re worth to the people who buy them.
Of course, Hal thinks they’re not worth what buyers pay for them. You probably agree, and so do I. But that just means that you and I are not the ones the jewelry store can sell them to. A diamond-studded dog collar might be a silly thing to buy, but for better or worse, how sensible or silly something is doesn’t have anything to do with its value in the trade. It all depends on its value to the person who’s buying.
What about Beverly’s tube of toothpaste? Is it a rip-off to pay more for the same thing that it costs in the usual place just because you’re somewhere else, like the airport or a ball game or a convenience store? Here too, it’s not possible to sell Beverly something for more than it is worth to her. But what’s also important to see is that the $5 price tag isn’t just for the tube of toothpaste. It’s also for the service of making sure that that tube of toothpaste is always on the shelf and waiting for her, whenever she might need it, even if she’s in a part of town where shelf space is extremely expensive.
And it’s the same for Alan and the parking garage. A space in the garage is definitely available, and it’s available right now. There might be a metered space out there, or there might not. Even if there is, it might take a lot of time to find it. If Alan is in a big hurry, and prefers a sure thing right now, then a garage space might be easily worth $10 to him. And again, Alan is paying for much more than a parking space. Really, he’s paying for someone to hold that space for him until he gets there, just in case he finds himself in a hurry. That way, spaces remain available for people who value the time they save more than the extra money they give up, because other drivers with different preferences saw the price and chose to leave those spaces alone.
You can’t sell something for more than it’s worth, because prices reflect the value that buyers place on the things they buy. And it’s a good thing that prices work that way, because prices help people ration scarce goods. They help people get special services they need. And they leave people free to live by their own values, even if other people don’t agree.