Suppose you have an estimate of the size of a particular realm of human activity, or a social issue, that just adds up the magnitudes all the dollarized cost and benefit estimates. Since the costs and benefits are getting added up in magnitude, the *net* size of the issue (cost - benefit) could be a lot smaller. My question is: how many orders of magnitude do you lose when going from gross size to net size? Heres a toy example for illustrative purposes. Lets say that a good costs $38 to manufacture, and then gets sold for $40. The consumer values it at $42. The size of the good is proxied by the price, which is $40. But the economic surplus created by the sale is $4 -- one order of magnitude lower than the price. If we view the economic surplus as the correct measure of net size, then thats one order of magnitude lower than the gross size in this case. My general question is: how many orders of magnitude should we expect to lose (upper bound) in these types of analyses? Im inclined to think its highly unlikely well lose more than two orders of magnitude (losing more than that suggests some sort of market hyperefficiency, that I dont think exists in the world today). Some exceptions may be financial transactions, where we might lose 3-4 orders of magnitude (from the money moved in finance to the size of the value added by moving it). Note: I understand that the sign may become negative. Im interested in the overall magnitude, not the sign. This is relevant to the discussion at https://facebook/vipulnaik.r/posts/10202880549470689?stream_ref=10
Posted on: Mon, 14 Apr 2014 01:27:05 +0000
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