Economic Insight

Nov 26, 2010 • 202 Views

Have you ever looked at “The 3 Little Pigs” through an economic lens? Referring to the third little pig, Harvard economist Edward Glaeser suggests the fairy tale is about investing wisely. In my econ class, a student used opportunity cost analysis to show that the first little pig actually made the wisest decision. His straw home gave him shelter and provided time for other worthwhile activities. The alternative, building a more resilient home, would not have provided as many benefits. Like all of us, when the first little pig made his decision, he did not know its consequences.

Similarly, when we wear an economic lens, we might see that Jon Krakauer’s Into Thin Air is about more than a tragic attempt to climb Mount Everest. For example, using marginal cost/benefit analysis we might conclude that certain decisions were better than their consequences indicate. Perhaps unintentionally, Krakauer also gives us a tragedy of the commons lesson. in The Literary Book of Economics, economist Michael Watts quotes Krakauer saying “…Everest had been turned into a garbage dump by the ever increasing hordes…but in recent years it had been turned into a fairly tidy place…” Why? The incentives changed. Instead of the tragedy of the commons where climbers experienced no cost for littering, “…expeditions had to post a $4000 bond that would be refunded only if a predetermined amount of trash were carried back…”

The Economic Lesson

We should remember that opportunity cost analysis is about decision making at the time the decision is made. It is not about the consequences that only someone with a crystal ball could know. By identifying the benefits of a decision at the time it was chosen, we can better understand why it was made.

You can look at the table of contents of The Literary Book of Economics here.

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