Up to now, we just assumed that the market had a way of directing an extra unit of the good to the person whose willingness to pay was less than--but closest to--the market price of the good. We're now ready to explain this. Let's imagine ourselves observing the buying and selling of T-shirts in a large city. Suppose that a million T-shirts get sent to this city in a given year. Suppose further that the consumers in this city are free to purchase as many or as few T-shirts as they want, and that the retailers in this city are free to set any price they want. Finally, suppose the going price for T-shirts in this city is around $10.

What would happen if a million-and-one T-shirts were sent to this city rather than a million? Obviously, there would be somebody--one person--who would end up with a T-shirt if a million and one were sent, who would have not gotten a T-shirt if only a million had been sent. This is the marginal consumer. What do we know about this person's willingness to pay for a T-shirt?

The marginal consumer is not somebody whose willingness to pay is more than $10. Somebody who is willing to pay more than $10 for a T-shirt would buy one whether a million or a million-and-one were sent to that city. For example, if a consumer anticipated getting $25 of happiness from a T-shirt and its price was only $10, one would expect this consumer to be sure to go to the store and purchase a T-shirt. And he would do that even if only a million T-shirts were sent. But that means he can't be the "marginal consumer" because the marginal consumer doesn't buy a T-shirt if only a million get shipped to the city. The same logic holds for anybody with a willingness to pay for a T-shirt that is more than $10. Therefore we conclude that our marginal consumer does not have a willingness to pay larger than $10.

This is the situation that was represented in the previous chapters by the "Willingness to Pay--After" tables. Recall that after every consumer that wanted to buy a T-shirt at a price of $10 did so--and before we distributed an extra T shirt--only those consumers with willingness to pay values less than $10 were in the market. Thus the marginal consumer couldn't be somebody who had a willingness to pay greater than $10.

A similar logic leads us to the conclusion that the marginal consumer doesn't have a willingness to pay much less than $10. After all, an increase in the supply of T-shirts by one unit will exert only a minimally downward pressure on the price of T-shirts. As a result, the market price of T shirts will still be very close to $10. But if a consumer anticipated receiving much less than $10 of happiness from the T-shirt, he wouldn't be willing to shell out the $10 needed to buy it. Since we know the marginal consumer does end up purchasing a T-shirt, this must mean that his willingness to pay can't be much less than $10.

The careful reader will have noticed that the market mechanism which directs the good to the consumer with the highest willingness to pay is precisely the price system. When an extra unit of the good is sent to the market, the price drops just enough to induce one more person to buy the good. That is, the price drops just low enough until the consumer with the highest willingness to pay value finds it attractive to buy the good. When that happens, the price decrease stops, and all the other consumers find themselves still unwilling to buy the good. This is our basis for assuming that the market has a way of directing an extra unit of the good to the person whose willingness to pay is less than--but closest to--the market price of the good. If the market is reasonably large, this willingness to pay value is likely to be very close to the market price of $10.

Now it's time to put all of this together. If the marginal consumer is not somebody whose willingness to pay for a T-shirt is more than $10, and he is not somebody whose willingness to pay is much less than $10, then we are left with only one possibility: The person who ends up with the million-and-oneth T-shirt is somebody whose willingness to pay value for a T-shirt is right around $10. That is, if an extra T-shirt were sent to this city, it would go to somebody who would receive about $10 of happiness from the extra T-shirt.

Anybody here got a problem with this story?! We can think of some. For example, in real life, T-shirts aren't sold for exactly the same price in every store. They might be $9.97 at WalMart, $8.97 at Target, and $12.47 at Sears. Furthermore, not everybody who values a T-shirt at more than $10 is going to run down to the store this second and buy one at that price. Perhaps you can think of some other objections to our story. That's okay. We're willing to loosen up our story a little bit, because we know that in real life things aren't always so nice and clean as they are in theory.

Rather than saying that the marginal consumer can't have a willingness to pay more than $10, let's just say that the marginal consumer is probably somebody whose willingness to pay isn't much larger than $10. In real life it might be $11, or $12. But most likely not $20. Likewise, the marginal consumer is never likely to be somebody with a willingness to pay much less than $10. People with willingness to pay values of $5 just aren't going to be willing to dish out $10 for a T-shirt. So, as we translate our theory to the real world, recognizing that it's something of an approximation, we still end up with the same conclusion. THE PERSON WHO ENDS UP WITH THE MILLION-AND-ONETH T-SHIRT IS SOMEBODY WHOSE WILLINGNESS TO PAY VALUE FOR A T-SHIRT IS RIGHT AROUND $10, NOT A LOT MORE, NOT A LOT LESS.

At this point you might be tempted to be a little unimpressed by this amazing insight. However, recall that willingness to pay is a measure of happiness. So when we say that the marginal consumer has a willingness to pay right around the market price, what we are really saying is this: The price of a good tells us the approximate amount of happiness--measured in dollars--that society would receive from having one more unit of that good.

If the market price of T-shirts is around $10, then if one more T-shirt gets sent to that market, it will go to a consumer who will receive approximately $10 of happiness from that T-shirt. Of course, we have no idea who that person is. We do not know what they look like. We don't know where they live. We don't even know why they want the T-shirt, if they plan to wear it under a sweater by Ralph Lauren or if they plan to tie-dye it. But we do know this: if the market price of T-shirts is $10, and if one more T-shirt were shipped to that market, somebody is going to be made better off by about $10.

This is incredible information! It shouldn't be too difficult to see that this is the key to helping society know where to direct resources. For example, if the price of T-shirts is $10 and the price of Spam is $4 a can, we know that society will receive more happiness from an extra T-shirt than from a can of Spam. (You probably suspected this all along!) The beauty of the price system is that it provides an objective way to compare the happiness generated by two unlike goods. Still unimpressed? Then read the next chapter.