Image generated by GTP-4o of a woman singer performing at a concert.
The answer to the question in the title is “yes” according to a column by James Mackintosh in the Wall Street Journal. In the Apply the Concept “Taylor Swift Tries to Please Fans and Make Money,” in Chapter 11 of Microeconomics, we discussed how for her The Eras Tour, Taylor Swift reserved more than half of the concert tickets for her “verified fans.” The tickets sold to verified fans for an average price of $250.
On the resale market, prices of the tickets soared to $1,000 or more. Yet only about 5 percent of tickets purchased by verified fans were resold. Mackintosh’s wife and “eldest offspring” were in in the other 95 percent—they had purchased their tickets at a low price but wouldn’t resell them at a much higher price. Moreover—and this is where Mackintosh sees economics as breaking—if they didn’t already have the tickets they wouldn’t have bought them at the current high price.
Not being willing to buy something at a price you wouldn’t sell it for is inconsistent behavior because it ignores a nonmonetary opportunity cost. (As we discuss in Chapter 10, Section 10.4.) If Mackintosh’s wife won’t sell her ticket for $1,000, she incurs a $1,000 opportunity cost, which is the amount she gives up by not selling the ticket. The two alternatives—either paying $1,000 for a ticket or not receiving $1,000 by declining to sell a ticket—amount to exactly the same thing.
Mackintosh recognizes that the actions of his wife and offspring reflect what he calls a “mental bias,” which he correctly labels the endowment effect: The tendency to be unwilling to sell something you already own even if you are offered a price greater than the price you would be willing to buy the thing for if you didn’t already own it.
As we discuss in Chapter 10, the endowment effect is one of a number of results from behavioral economics, which is the study of situations in which people make choices that don’t appear to be economically rational. So, Mackintosh’s family—and other Swifties—didn’t break economics. Instead, they demonstrated one of the results of behavioral economics.
Supports: Microeconomics, Macroeconomics, Economics, and Essentials of Economics, Chapter 1.
Photo of Taylor Swift from the Wall Street Journal.
Suppose that as a “verified fan” of Taylor Swift, you are able to buy a ticket to one of her concerts for $215. The price of the ticket isn’t refundable. (We discuss how Taylor Swift handles the sale of tickets to her concerts in the Apply the Concept “Taylor Swift Tries to Please Fans and Make Money” in Microeconomics and in Economics, Chapter 10, and in Essentials of Economics, Chapter 7.) You had been hoping to work a few hours of overtime at your job to earn some extra money. The day of the concert, your boss tells you that the only overtime available for the next month is that night from 6 pm to 10 pm—the same time as the concert. Working those hours of overtime will earn you $100 (after taxes). You check StubHub and find that you can resell your ticket for $1,000 (afer paying StubHub’s fee).
Given that information, briefly explain which of the following statements is correct:
If you attend the concert, the cost of using your ticket is $215—the price that you paid for it.
If you attend the concert, the cost of using your ticket is $1,000—the amount you can resell your ticket for.
If you attend the concert, the cost of using your ticket is $1,000 + $100 = $1,100—the amount you can resell your ticket for plus the amount you would have earned from working overtime rather than attending the concert.
If you attend the concert, the cost of using your ticket is $1,000 + $100 – $215 = $885—the amount you can resell your ticket for plus the amount you would have earned from working overtime rather than attending the concert minus the price you paid to buy the ticket.
Solving the Problem
Step 1: Review the chapter material. This problem is about the concept of opportunity cost, so you may want to review Chapter 1, Section 1.2.
Step 2: Solve the problem by using the concept of opportunity cost to determine which of the four statements is correct. Economists measure the cost of engaging in an activity as an opportunity cost—the value of what you have to give up to engage in the activity. Using this definition, only statement c. is correct; if you decide to use your ticket to attend the concert you will give up the $1,000 you could have received from selling the ticket plus the $100 you fail to earn as a result of attending the concert rather than working overtime. Note that the price you paid for the ticket isn’t relevant to your decision whether to attend the concert because the price of the ticket is nonrefundable. (The amount you paid for the ticket is a sunk cost because it can’t recovered. We discuss the role of sunk costs in decision making in Microeconomics and Economics, Chapter 10, Section 10.4, and in Essentials of Economics, Chapter 7, Section 7.4.)
A job fair in Jackson, Mississippi (photo from the Associated Press)
As part of the Social Security Act of 1935,Congress created the unemployment insurance program to make payments to unemployed workers. The program run jointly by the federal government and the state governments. It’s financed primarily by state and federal taxes on employers. States are allowed to determine which workers are eligible, the dollar amount of the unemployment benefit workers will receive, and for how long workers will receive the benefit.
What’s the purpose of the unemployment insurance program? A document published the U.S. Department of Labor explains that: “Unemployment compensation is a social insurance program. It is designed to provide benefits to most individuals out of work, generally through no fault of their own, for periods between jobs…. [Unemployment compensation] ensures that a significant proportion of the necessities of life can be met on a week-to-week basis while a search for work takes place.”
But the same document also notes that unemployment compensation “maintains [unemployed workers’] purchasing power which also acts as an economic stabilizer in times of economic downturn.” By “economic stabilizer,” the Department of Labor is noting that unemployment compensation is what in Macroeconomics, Chapter 16, Section 16.1 (Economics, Chapter 26, Section 26.1) we call an automatic stabilizer. An automatic stabilizer is a government spending or taxing program that automatically increases or decreases along with the business cycle.
As shown in the following figure, when the economy enters a recession, the total amount of unemployment compensation payments increases without the federal government or the state governments having to take any action because eligibility for the payments is already defined in existing law. So, during a recession, the unemployment insurance program helps to keep aggregate demand higher than it would otherwise be, which can lessen the severity of the recession.
As we discuss in Macroeconomics, Chapter 9, Section 9.3 (Economics, Chapter 19, Section 19.3), the unemployment insurance program can have an unintended effect. The higher the unemployment insurance payment a worker receives and the longer the worker receives it, the more likely the worker is to delay searching for another job. In other words, by reducing the opportunity cost of being unemployed, unemployment insurance benefits may unintentionally increase the length of unemployment spells—the amount of time the typical worker is unemployed.
During and immediately after the 2020 recession, the federal government increased the dollar amount of the unemployment insurance payments that workers received and extended the number of months workers could continue to receive these payments. Under the American Rescue Plan, a law which President Biden proposed and Congress passed in March 2021, workers receiving unemployment insurance benefits received an additional $300 weekly from March 2021 until September 6, 2021. Also, under the law, people, such as the self-employed and gig workers, would receive unemployment insurance benefits even though they had previously been ineligible to receive them. (Note the resulting spike during this period in the total dollar amount of unemployment insurance benefits as shown in the above figure.)
Some state governments were concerned that the extended benefits might cause some workers to delay taking jobs, thereby slowing the recovery of these states’ economies from the effects of the pandemic. Accordingly, 18 states stopped participating in the programs in June 2021, meaning that at that time unemployed workers would no longer receive the extra $300 per week and workers who prior to March 2021 hadn’t been eligible to receive unemployment benefits would again be ineligible.
Were unemployed workers in the states that ended the expanded unemployment insurance benefits in June more likely to become employed than were unemployed workers in states that continued the expanded benefits into September? On the one hand, ending the expanded benefits would increase the opportunity cost of not having a job. But, on the other hand, because government payments to workers would decline in these states, the result could be a decline in consumer spending that would decrease the demand for labor. Which of these effects was larger would determine whether employment increased or decreased in the states that ended expanded unemployment benefits early.
Glenn, along with Harry Holzer of Georgetown University and Michael Strain of the American Enterprise Institute, carried out an econometric analysis to explore the effects ending expanded unemployment benefits early had on the labor markets in those states. They find that:
Among unemployed workers ages 25 to 54 (“prime-age workers”), ending the expanded unemployment benefit program increased the number of workers in those states who moved from being unemployed to being employed by 14 percentage points.
Among prime-age workers, the employment-to-population ratio in those states increased by about 1 percentage point.
Among prime-age workers, the unemployment rate in those stated decreased by about 0.9 percentage point.
These estimates indicate that the effect of ending the expanded unemployment benefit program raised the opportunity cost of being unemployed more than it decreased the demand for labor by reducing the incomes of some household. But what about the larger question of whether households were made better or worse off as a result of ending the program early? The authors find that ending the program early decreased the share of households that had no difficulty meeting expenses. They, therefore, conclude that the effects on household well-being of ending the program early are ambiguous.
The paper presenting these results can be found here. Warning! The econometric analysis is quite technical.
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