The previous chapters have established that the price of a good tells us the willingness to pay of the marginal consumer. Since willingness to pay is a measure of anticipated happiness, and since the marginal consumer is the one who would purchase an additional unit of the good if it were supplied, we can restate our finding as follows: The market price of a good tells us the approximate gain in happiness--measured in dollars--that society expects to receive from the consumption of one more unit of that product. So far so good. There is however, more to this story, and as they say, the plot thickens.

It is straightforward to demonstrate that the market price of a good also tells us the approximate expected loss in society's happiness--measured in dollars--from consuming one less unit of that product. We encourage you to go back to Chapters 5 through 7 and repeat the analysis for T-shirts with a market price of $10. This time however, ask yourself what would happen if 999,999 T-shirts were sent to the city rather than 1,000,000. Obviously, there would be somebody--one person--who would end up with a T-shirt if a million were sent, who would not get one if only 999,999 are sent. What do we know about this person?

The person who ends up not getting a T-shirt when only 999,999 are sent is somebody whose willingness to pay value for a T-shirt is right around $10 (not a lot more, not a lot less--how do we know this?). Since that is how much pleasure he would have gotten from the T-shirt, not getting a T-shirt means that he's out about $10 in happiness. That is, having one less T-shirt lowers society happiness by about $10. (From here on out, we drop the drop the distinction between "expected happiness" and "happiness." While consumers will sometimes be disappointed--or pleasantly surprised--by the amount of happiness they receive from the consumption of a good, we would expect their expectations to be reasonably accurate on average.)

Perhaps by now you've noticed something that bothers you about our story. While it's true that somebody is out a T-shirt if one less gets sent, don't they still have their ten dollars? Can't they spend those ten dollars on something else? Then how can we say that society has just lost $10 in happiness? DANGER...DANGER...ECONOMIC FALLACY IN THE MAKING! While the objection appears reasonable on the face of it, it leads to economic error. The fallacy arises when "we take our eyes off the ball." In this context, the "ball" is the happiness gained from consumption. When we focus our attention on dollars, we are bound to get into an error. While we all push, shove, kick, and scratch to get them, dollars themselves don't give pleasure. They're just little, green pieces of paper, incapable of producing any happiness on their own. It is the goods and services that dollars buy that yield happiness.

Suppose a tough punk walks up to a consumer who just bought a T-shirt for $10. Suppose this consumer's willingness to pay for a T-shirt was right around $10. Now suppose that punk rips the T-shirt off this consumer and completely shreds it to pieces so that it is now good for nothing. But then--consumed by guilt--the punk reaches into his pocket and gives the consumer a $10 bill to compensate him (we're supposing he's a tough, sensitive punk). Let's do a social accounting of this transaction.

The consumer views himself as being largely unaffected by this chain of events. While it is true that the consumer lost something that he valued at around $10 (the T-shirt), he also received $10 in compensation. Thus, from the individual consumer's perspective, the transaction is a wash. However, it is not a wash from society's perspective. The undeniable fact is that there is now one less T-shirt available for enjoyment. This T-shirt would have brought about $10 in happiness. Hence, the absence of this T-shirt now means that society has lost $10 in happiness.

How do we reconcile the individual's ambivalence against society's loss? When the consumer takes his $10 in compensation and buys something else with it, that's one less good that some other guy gets to consume. We can do all kinds of things to try and disguise this fact. We can put out more green pieces of paper (dollars) to try and hide the loss. We can shuffle goods between different consumers to try and compensate the victim. But there's no changing the reality that there is now one less T-shirt in the world. This T-shirt would have produced about $10 in pleasure. Thus having one less T-shirt has cost society $10 in happiness.

The recognition that the price of a good tells both the gain in society's happiness of having one more unit of the good and the loss in happiness of having one less unit of the good allows us to see some astounding things. For example, suppose a Nissan car dealer has show lots in both Dallas, Texas and Albuquerque, New Mexico. Suppose further that a Sentra, four-door sedan with the basic amenities sells for around $11,000 in Dallas, but fetches $16,000 in Albuquerque. Lastly, just to make it interesting, suppose this car dealership is owned by Mother Theresa, and her sole purpose in life is to increase society's happiness. Would she make society better off by taking one of her Sentras in Dallas and sending it to her lot in Albuquerque, or by transferring a Sentra from Albuquerque to Dallas?

The Answer is...moving one of her Sentras from Dallas to Albuquerque. The explanation is simple. Sentras are selling for a higher price in Albuquerque. Price provides a measure of happiness. If Sentras are selling for around $11,000 in Dallas, then there is a loss of $11,000 in happiness from having one less Sentra in the Dallas area. However, if the same car is selling for $16,000 in Albuquerque, there is a gain of $16,000 in happiness from having one more Sentra in the Albuquerque area. Thus, transferring a Sentra from Dallas to Albuquerque increases society's happiness by $5000.

Isn't that amazing? We didn't have to know anything about the car markets in the two respective areas. We didn't have to do any research on why the price of a care is higher in Albuquerque. All we need to know is the price of the car in the two cities. Once we have that nailed down, we used our knowledge of the information contained in prices to draw our conclusion: Society's happiness would be increased by transferring a car from the low price city to the high price city. With that knowledge, Mother Theresa can proceed accordingly.

But there's something else you should have noticed. Suppose the car dealership wasn't owned by Mother Theresa? Suppose it was owned by Ebenezer Scrooge, a money-grubbing, filthy rich, dirty capitalist whose sole purpose in life is to make himself the richest man in the world. How would Ebenezer Scrooge have behaved had he been the owner of the car dealership? Do you see that he also would have transferred a car from Dallas to Albuquerque? That is, he would have done the very thing that the economy would have wanted him to do to help it achieve its goal of allocating resources to their highest valued use. Ebenezer Scrooge would have acted just like Mother Theresa. Very interesting. As we'll see several chapters from now, this is more than just a mere coincidence.

Up to this point, the story we have told concerns the information contained in the prices of output goods and services. Output goods and services are consumables that yield direct pleasure. In contrast, input goods and services are factors used in the production of output goods and services. They aren't consumed directly by consumers and they don't yield pleasure by themselves. Output goods and services are things like hot dogs, roller coaster rides, Ford Tauruses, and personal home computers. Input goods and services are things like delivery trucks, electronic circuit boards, steam-powered generators, accountants, and downtown office buildings. Properly understood, all goods can be classified as either output or input goods. In fact, some things, like labor, can be both an "input" (work) or an "output" (leisure). Whether a good or service is an output or an input simply depends on how it is used.

To recap then, we have demonstrated that prices contain information that is absolutely crucial for deciding where resources have their highest valued use. In particular, THE PRICE OF AN OUTPUT GOOD IDENTIFIES THE GAIN IN HAPPINESS--MEASURED IN DOLLARS--THAT SOCIETY RECEIVES FROM CONSUMING ONE MORE UNIT OF THAT GOOD. ALTERNATELY, THE PRICE OF AN OUTPUT GOOD IDENTIFIES THE LOSS IN HAPPINESS--MEASURED IN DOLLARS--THAT SOCIETY SUFFERS FROM CONSUMING ONE LESS UNIT OF THAT GOOD.

But what about the prices of input goods. There's some good news and some bad news. The good news is that the information contained in input prices is very similar to that contained in output prices. Specifically, the prices of input goods identify the gain in happiness that society receives from employing one more unit of the input good. Alternatively, they identify the loss in happiness from employing one less unit of the input good. The bad news is that the demonstration of this truth is considerably more complicated. But don't worry, it's not anything that you can't handle. Even so, we'll save it for the next chapter.