We are now ready to apply our knowledge about the information contained in input prices. Let's take Mother Theresa out of the car business and put her in charge of production at a large industrial plant. Once again, we're going to assume that Mother Theresa's one abiding passion is to increase society's happiness, and forget about the capitalistic dogs that run American industry. The plant that she runs produces pens. To be more specific, it produces those little metal clips that can be used to attach pens to the shirt pockets of their owners. Let's give this company a name, say Pen, Inc. Right now the production accountants for Pen, Inc. are trying to decide whether to use copper or steel in producing those little metal clips. The price of copper is $1000 a ton. The price of steel is $750 a ton. It looks like a no-brainer to the accountants: use the cheaper input and keep costs down.

But the CEO at Pen, Inc. isn't interested in keeping costs down. She wants to choose the input that will result in the greatest happiness for society. Market surveys have showed convincingly that consumers don't care whether the clips are made out of copper or steel. Either works equally well. Thus, the choice of copper or steel has no impact on the happiness of Pen, Inc.'s customers.

Who, then, will it affect? Think carefully now. If Pen, Inc. uses a ton of steel to produce the metal clips for their pens, that means there will be one less ton of steel available for other uses. One less of ton of steel to produce skyscrapers, Tonka Toys, Ford Rangers, steel-belted radial tires, steel cleats for soccer shoes, etc. How much happiness will be lost because there is now one less ton of steel available for these uses? How can we possibly answer this question? All we know about steel is its price. The market price of steel is $750 a ton. The beauty of it is, that's all we have to know.

If the market price of steel is $750 a ton, then we know that society will lose approximately $750 in happiness if that steel is withdrawn from the market to make metal clips for pens. We can't say for sure what that steel would have been used for if it wasn't used to make clips. To be truthful, we don't have a clue. However, we do know this. Somebody somewhere is going to not consume certain goods and services that they would have been able to enjoy if Pen, Inc. hadn't used up all that steel in making their metal clips. Probably a lot of somebody's somewhere are going to be doing with less. We don't know who they are. Those other goods and services will never be made, and so nobody knows who would have ended up with them. But here's what we do know: the price of steel tells us that having one less ton of steel means society loses the $750 of happiness that steel would have contributed. And the price of copper tells us that having one less ton of copper means society loses $1000 in happiness.

If Pen, Inc. has already decided to produce the metal clips and the only question is copper versus steel, then SOCIETY WANTS THE FIRM TO USE THE INPUT THAT WILL RESULT IN THE SMALLEST LOSS OF HAPPINESS ELSEWHERE IN THE ECONOMY. But THIS MEANS USING THE INPUT WITH THE LOWEST PRICE. And so, Mother Theresa makes her choice. Without a thought about the bottom line--concerned only about the happiness of the masses--she calls the Purchasing Department and tells them to place an order for a ton of steel. She sits back in her director's chair, filled with quiet satisfaction from the knowledge that because of her choice, the world is going to be a (slightly) happier place. The only thing disturbing her reverie is a memo on her desk from the firm's accountants. It recommends the very course of action she chose herself. Isn't that strange?