I get that basic economics can be explained in ways that make intuitive sense, but isn't the fact that so many people get it wrong without explicit education in the topic evidence that it is nevertheless counterintuitive, or at least unintuitive?
Yeah… these replies are off base so far. Who bears the tax burden is a function of the elasticity of both supply and demand. You can’t make this intuitive by saying business will pass through all costs, it’s inaccurate.
If you apply a $5 sales tax to a good that’s currently selling at $10, and collect the tax from the seller, the price will increase to somewhere between $10 and $15. In most cases it won’t increase all the way to $15. The new market clearing price will be X such that the seller wants to supply an equal quantity at X-5 as the buyer wants to purchase at X. That will be a lower quantity, somewhat higher price.
The result will effectively be the same if the government collects the tax from the buyer. The sticker price will be X-5 causing sellers to net X-5 and buyers to pay X-5+5 or X total.
I’ve yet to meet any lay person who finds that super intuitive. Including past legislatures that have claimed to split the burden of payroll taxes 50/50 by collecting half from employers and half from employers.
Well, nuts. I am not an economist, but I've been reading blogs and books for the last 10-15 years for my project, and maybe it's soaked in enough that I just don't see the problem. I've talked to people about the 50-50 FICA tax split, and they understand as well as I do that if FICA were to suddenly disappear, there's no guarantee that the employer would suddenly give everyone that 7.65% raise.
I was looking up French payroll taxes the other day, and employers have to pay (I think!) 45% of the employee's pay as tax; would French employees suddenly get almost double the pay if it were to disappear? Some might get all, most would get some, few would get none.
It still seems intuitive to me.
ETA: Maybe I am only looking at the big general picture, like my "dollars in == dollars out" generalization. Everything has corner cases and weird little exceptions, and I put elasticity into that same category. It's just not important in the big general picture where intuition comes into play.
What's the fastest part of a locomotive wheel? You might say the top of the wheel, and be close. No one's going to quibble about whether you mean the top of the wheel surface or the top of the flange. Yet if you ask what is the slowest and someone says the bottom of the wheel where it touches the rail and is at a dead stop, they are wrong. The slowest part is the bottom of the flange, below the rail surface, which is actually going backwards. It's not intuitive, no one guesses it, but once you explain it, they laugh and call it a trick question. That's what elasticity feels like to me, in these scenarios -- nothing to do with the big picture, just a lawyer's quibble about the difference between a restraining order and an injunction.
Sorry I don’t follow how elasticity is a quibble. It’s THE determinant of how much of a tax is born by consumers or by producers. And depending on the shape of the supply and demand curves, the answer can vary wildly.
It has nothing to do with the basic story that customers pay business expenses. You may as well argue that a bankrupt business’s customers obviously did not pay all the business expenses. Or argue about the exact curve followed by a bullet when you take the atmosphere into account.
You are arguing for perfection, which is irrelevant to the question of what intuition understands.
I agree with Salemicus. Customers in a shop pay all business expenses, and of course that includes taxes - income taxes, property taxes, business taxes, everything. When a package is delivered, of course I know I am paying for his fuel, and that includes fuel taxes.
About the only non-intuitive part might be not thinking about it beforehand, but I can't imagine anyone remaining surprised for long once they are told of it.
You most certainly do not know that. The relevant comparison--whether it be taxes or delivery costs---is with the price that would have otherwise existed (not directly observable in most cases since the tax is already in place) without the tax/transaction cost with the price with tax/transaction cost (which is observable). That is what a S&D graph is for. As another response has noted, how much price rises due to tax/transactions depends on elasticity of S&D. Also, not all taxes are per-unit, some are ad valorem. You would fail a principles course with your logic.
Somebody ELSE (Amazon?) might HELP pay for the fuel just to snag your business from a competitor who doesn't do that. Same thing with cutting costs (efficiency) and EVEN paring profits here and there. Volume/market share, y'know?
That's not counterintuitive at all. Suppose I'm considering whether to rent out my spare room, and it's worth the trouble if I get at least £500 per month, and not otherwise. If the government imposes a £100 pcm tax on renting a room, it doesn't matter if the legal incidence is on the landlord or the tenant - my tenant is going to pay £600 pcm, or I won't rent the room out.
Note this also intuitively demonstrates how taxation reduces supply.
If you were only willing to let at 500 and that was already the prevailing market rent, congrats! You’re THE marginal unit of supply.
For most people they’re going to have a reservation price that is below market clearing, so they will continue to let even if the after tax proceeds dip below 500. This is what elasticity is… and one reason why a 100 pound tax won’t necessarily drive the price up 100 pounds.
I didn't say the room was rented at £500 before, or at £600 afterwards. You seem to have made that up entirely. The point is that, either the room gets rented at >£X, or it doesn't get rented at all, and the tax changes X from 500 to 600 *regardless of the legal incidence*. That should be clear and intuitive to everyone, and should *gesture* at the broader point.
That isn't the same thing as where the *total burden of the tax* falls, but your initial claim is overblown anyway in a world of hysteresis, transaction costs, etc.
NO. You MIGHT take $599 or even less, and pick up $1 or more of the tax just to get a tenant. (Yes, I know you better than you do, even if I can't easily produce a Sterling symbol on my TKL keyboard. At least I know how many shillings in a pound.) (20)
A perfectly elastic curve would only be required for the rental price to go up by the full £100. Please use your reading comprehension to point out where I suggested that would happen.
That's not counterintuitive at all. Suppose I'm considering whether to rent out my spare room, and it's worth the trouble if I get at least £500 per month, and not otherwise. If the government imposes a £100 pcm tax on renting a room, it doesn't matter if the legal incidence is on the landlord or the tenant - my tenant is going to pay £600 pcm, or I won't rent the room out.
1. Tax incidence is independent of who is officially charged the tax.
2. Labor supply curves can bend backwards due to competing income and substitution effects. (Also, thinking clearly about income vs substitution effects in general.)
3. Pass through under monopoly can easily exceed 1 (though this might not count as *basic* economics).
4. Person A always has a comparative advantage relative to person B, even if person B has an absolute advantage in everything.
5. The Coase Theorem. (People really struggle to see that both parties contribute to the existence of an externality and that “blame” is economically arbitrary and irrelevant.)
Comparative advantage is quite intuitive. If I'm in the kitchen with Gordon Ramsay, he's better at everything than me. But we're more productive overall if I do *something* (let's say, the washing up), rather than expect him do everything.
Your attempt to separate comparative adv from absolute adv is not successful--if by successful it is meant that it is intuitive and it is certainly not "quite intuitive". It is hard to explain this without a numerical example, albeit a simple numerical example. You also need to bring in time constraints (resource constraints) and opportunity costs, otherwise some student in the back row will ask--why not have Gordon do it all if he is absolutely more productive in everything.
Haha, I think this was intuitive to anyone with a mental model of a busy kitchen with Gordon Ramsey! The professor could just say: "I think you can answer that question yourself".
I think lots of macro is, if not counterintuitive, definitely non-intuitive.
Micro is appealing because it sharpens your intuitions: supply and demand, marginal trade-offs, opportunity cost etc. And it suddenly makes people who don't understand this model seem incredibly silly.
Macro feels like a rabbit-hole of second-order effects and strategic uncertainty. You raise interest rates to curb inflation, but then saving behaviour shifts, expectations adjust, and you might get the opposite outcome... or maybe not because we can't reliably use past policy outcomes to predict future ones, because economic agents are already anticipating the model itself!
I once had a work colleague who had a BA in economics from the University of Bombay, India. I recall her saying, "economics is just common sense, made complicated." Peg
Maybe try an easy one 1. Economics is not a sum-zero game. And a more complicated one 2. Except for maybe some products or services that occupy a big chunk of someone's budget, agents who are willing to pay a higher price derive more utility from it, increasing overall utility. People don't pay higher prices just because they have more money.
Intuitive version: We’d be better off if other countries gave us stuff for free. Isn’t “really cheap” the next-best thing?
Perhaps it isn't "really cheap" when you consider the people who lost their jobs when their industry moved offshore, or the human safety or environmental impacts in the foreign country. I appreciate that a free market economy should sort these issues out in the long term, but the long term can be a very long way off.
It is a definition, but there is still a behavioral part behind it. I would say that for every transaction, one is both a buyer and seller. If I am not getting another good in return for the car I send abroad, then I am getting something else such as a claim on the other country's assets. Even gifts/aid can be thought of as exports and imports of "good will".
I think of it as dollars out must equal dollars in, where in my non-economist world, dollars in includes imports and investments. Of course it could be upset by foreigners burning those dollars out they received, but that's just getting silly. And if you switch to gold or other non-fiat currencies, their value goes up and down in response to imports and exports, but that doesn't affect the basic premise that dollars out have to equal dollars in.
Ooh I have a good one! Not sure whether it's a true story, but Xerox once build a commercial printer and charged a high price for it. They wanted a slower model so they could price discriminate. So they took the fast model and made modifications to slow it down, and sold it for a lower price to customers who didn't care about speed.
So, the model that was more expensive was actually less costly to make. This makes economic sense. But it's super counterintuitive. Try to explain it :)
I wouldn't be surprised if that's a true story. I worked with a company whose products were excellent but expensive due to being pioneers in the field. We eventually sold a cheaper system, same hardware, but crippled with less software. Still made a profit, still a good system, but the only difference was one internal configuration bit.
I still think your Myth of the Rational voter gets it right. People are very biased to thinking a) the best goal is more jobs for their country men, and b) that sellers will overcharge given half a chance. That competition really does bring prices down to very low levels and brings up quality to very high levels isn't something that comes naturally to people. I don't know why people deny it when it's obviously true, maybe because inflation makes it so nominal prices rise even as real prices fall? I feel like people going "if McDonald's really was in competition and trying to sell as cheap as possible, a burger would be a dollar like it was when I was a kid". And given that people think businesses overcharge anyways and markets won't being prices down, they become very biased to prioritizing better/more jobs over more efficient production that could bring down prices.
Any intuitive explanation has to work very hard to overcome *those* intuitions
Comparative advantage – Two countries can both gain from trade even when one is more productive at every task.
No graphs allowed, I don't think comparative advantage makes sense without introducing hypotheticals or generally reasoning about stuff in a way that seems counter-intuitive
"Intuitive version: We’d be better off if other countries gave us stuff for free. Isn’t “really cheap” the next-best thing?"
I'd even argue that really cheap is better than free. We value more things that had a cost and if there's a cost there's an incentive to be efficient and innovate. Getting fee stuff has not made Africa wealthy, for example.
Actually most people wouldn't find these "intuitive" arguments you submit convincing. Most people wouldn't even agree to your first one, "We'd be better off if other countries gave us stuff for free".
The most basic one of all “Why do some people get to be rich and some don’t?” Isn’t that unfair? Sure some rich people are predisposed to work harder or be more intelligent but that just luck. And what about the dumb rich folks who just inherited their wealth?
I get that basic economics can be explained in ways that make intuitive sense, but isn't the fact that so many people get it wrong without explicit education in the topic evidence that it is nevertheless counterintuitive, or at least unintuitive?
Agree.
Such as the idea that decentralized activity can lead to order.
That competition, reputation and exit options can incentivize cooperative fairness and quality.
That people aren’t just consumers but also creative producers.
That labor is not the predominant source of economic contribution.
That the intent of regulation doesn’t necessarily match the effects.
That voluntary trade tends to be value producing for both parties rather than zero sum.
And of course the idea of comparative advantage.
Can you make this intuitive? Who bears the burden of a tax is independent of whom it’s statutorily collected from
Yeah… these replies are off base so far. Who bears the tax burden is a function of the elasticity of both supply and demand. You can’t make this intuitive by saying business will pass through all costs, it’s inaccurate.
I am no economist. But it seems to me you've switched the non-intuitive part to elasticity, not the pass through of the tax burden.
If you apply a $5 sales tax to a good that’s currently selling at $10, and collect the tax from the seller, the price will increase to somewhere between $10 and $15. In most cases it won’t increase all the way to $15. The new market clearing price will be X such that the seller wants to supply an equal quantity at X-5 as the buyer wants to purchase at X. That will be a lower quantity, somewhat higher price.
The result will effectively be the same if the government collects the tax from the buyer. The sticker price will be X-5 causing sellers to net X-5 and buyers to pay X-5+5 or X total.
I’ve yet to meet any lay person who finds that super intuitive. Including past legislatures that have claimed to split the burden of payroll taxes 50/50 by collecting half from employers and half from employers.
Well, nuts. I am not an economist, but I've been reading blogs and books for the last 10-15 years for my project, and maybe it's soaked in enough that I just don't see the problem. I've talked to people about the 50-50 FICA tax split, and they understand as well as I do that if FICA were to suddenly disappear, there's no guarantee that the employer would suddenly give everyone that 7.65% raise.
I was looking up French payroll taxes the other day, and employers have to pay (I think!) 45% of the employee's pay as tax; would French employees suddenly get almost double the pay if it were to disappear? Some might get all, most would get some, few would get none.
It still seems intuitive to me.
ETA: Maybe I am only looking at the big general picture, like my "dollars in == dollars out" generalization. Everything has corner cases and weird little exceptions, and I put elasticity into that same category. It's just not important in the big general picture where intuition comes into play.
What's the fastest part of a locomotive wheel? You might say the top of the wheel, and be close. No one's going to quibble about whether you mean the top of the wheel surface or the top of the flange. Yet if you ask what is the slowest and someone says the bottom of the wheel where it touches the rail and is at a dead stop, they are wrong. The slowest part is the bottom of the flange, below the rail surface, which is actually going backwards. It's not intuitive, no one guesses it, but once you explain it, they laugh and call it a trick question. That's what elasticity feels like to me, in these scenarios -- nothing to do with the big picture, just a lawyer's quibble about the difference between a restraining order and an injunction.
Sorry I don’t follow how elasticity is a quibble. It’s THE determinant of how much of a tax is born by consumers or by producers. And depending on the shape of the supply and demand curves, the answer can vary wildly.
It has nothing to do with the basic story that customers pay business expenses. You may as well argue that a bankrupt business’s customers obviously did not pay all the business expenses. Or argue about the exact curve followed by a bullet when you take the atmosphere into account.
You are arguing for perfection, which is irrelevant to the question of what intuition understands.
I agree with Salemicus. Customers in a shop pay all business expenses, and of course that includes taxes - income taxes, property taxes, business taxes, everything. When a package is delivered, of course I know I am paying for his fuel, and that includes fuel taxes.
About the only non-intuitive part might be not thinking about it beforehand, but I can't imagine anyone remaining surprised for long once they are told of it.
The relevant audience is 6th-graders, not university econ students reading textbooks.
You most certainly do not know that. The relevant comparison--whether it be taxes or delivery costs---is with the price that would have otherwise existed (not directly observable in most cases since the tax is already in place) without the tax/transaction cost with the price with tax/transaction cost (which is observable). That is what a S&D graph is for. As another response has noted, how much price rises due to tax/transactions depends on elasticity of S&D. Also, not all taxes are per-unit, some are ad valorem. You would fail a principles course with your logic.
Somebody ELSE (Amazon?) might HELP pay for the fuel just to snag your business from a competitor who doesn't do that. Same thing with cutting costs (efficiency) and EVEN paring profits here and there. Volume/market share, y'know?
Good one. I've been trying to get this across to people in regards to Social Security taxes. I don't have an answer.
That's not counterintuitive at all. Suppose I'm considering whether to rent out my spare room, and it's worth the trouble if I get at least £500 per month, and not otherwise. If the government imposes a £100 pcm tax on renting a room, it doesn't matter if the legal incidence is on the landlord or the tenant - my tenant is going to pay £600 pcm, or I won't rent the room out.
Note this also intuitively demonstrates how taxation reduces supply.
If you were only willing to let at 500 and that was already the prevailing market rent, congrats! You’re THE marginal unit of supply.
For most people they’re going to have a reservation price that is below market clearing, so they will continue to let even if the after tax proceeds dip below 500. This is what elasticity is… and one reason why a 100 pound tax won’t necessarily drive the price up 100 pounds.
I didn't say the room was rented at £500 before, or at £600 afterwards. You seem to have made that up entirely. The point is that, either the room gets rented at >£X, or it doesn't get rented at all, and the tax changes X from 500 to 600 *regardless of the legal incidence*. That should be clear and intuitive to everyone, and should *gesture* at the broader point.
That isn't the same thing as where the *total burden of the tax* falls, but your initial claim is overblown anyway in a world of hysteresis, transaction costs, etc.
NO. You MIGHT take $599 or even less, and pick up $1 or more of the tax just to get a tenant. (Yes, I know you better than you do, even if I can't easily produce a Sterling symbol on my TKL keyboard. At least I know how many shillings in a pound.) (20)
Again, not successful. You are implicitly assuming a perfectly elastic supply curve--one special case.
I assumed no such thing.
Yeah, you do. Just don't understand why you are implicitly assuming it.
A perfectly elastic curve would only be required for the rental price to go up by the full £100. Please use your reading comprehension to point out where I suggested that would happen.
🤣
That's not counterintuitive at all. Suppose I'm considering whether to rent out my spare room, and it's worth the trouble if I get at least £500 per month, and not otherwise. If the government imposes a £100 pcm tax on renting a room, it doesn't matter if the legal incidence is on the landlord or the tenant - my tenant is going to pay £600 pcm, or I won't rent the room out.
1. Tax incidence is independent of who is officially charged the tax.
2. Labor supply curves can bend backwards due to competing income and substitution effects. (Also, thinking clearly about income vs substitution effects in general.)
3. Pass through under monopoly can easily exceed 1 (though this might not count as *basic* economics).
4. Person A always has a comparative advantage relative to person B, even if person B has an absolute advantage in everything.
5. The Coase Theorem. (People really struggle to see that both parties contribute to the existence of an externality and that “blame” is economically arbitrary and irrelevant.)
Comparative advantage is quite intuitive. If I'm in the kitchen with Gordon Ramsay, he's better at everything than me. But we're more productive overall if I do *something* (let's say, the washing up), rather than expect him do everything.
Your attempt to separate comparative adv from absolute adv is not successful--if by successful it is meant that it is intuitive and it is certainly not "quite intuitive". It is hard to explain this without a numerical example, albeit a simple numerical example. You also need to bring in time constraints (resource constraints) and opportunity costs, otherwise some student in the back row will ask--why not have Gordon do it all if he is absolutely more productive in everything.
Haha, I think this was intuitive to anyone with a mental model of a busy kitchen with Gordon Ramsey! The professor could just say: "I think you can answer that question yourself".
Have you ever taught basic econ to the kids now coming out of HS? Believe me, very little is intuitive to them.
I think lots of macro is, if not counterintuitive, definitely non-intuitive.
Micro is appealing because it sharpens your intuitions: supply and demand, marginal trade-offs, opportunity cost etc. And it suddenly makes people who don't understand this model seem incredibly silly.
Macro feels like a rabbit-hole of second-order effects and strategic uncertainty. You raise interest rates to curb inflation, but then saving behaviour shifts, expectations adjust, and you might get the opposite outcome... or maybe not because we can't reliably use past policy outcomes to predict future ones, because economic agents are already anticipating the model itself!
1. Racial discrimination is only a minor cause of labor market disparities.
2. Minimum wages hurt the workers who are least able to compete.
I once had a work colleague who had a BA in economics from the University of Bombay, India. I recall her saying, "economics is just common sense, made complicated." Peg
Maybe try an easy one 1. Economics is not a sum-zero game. And a more complicated one 2. Except for maybe some products or services that occupy a big chunk of someone's budget, agents who are willing to pay a higher price derive more utility from it, increasing overall utility. People don't pay higher prices just because they have more money.
Intuitive version: We’d be better off if other countries gave us stuff for free. Isn’t “really cheap” the next-best thing?
Perhaps it isn't "really cheap" when you consider the people who lost their jobs when their industry moved offshore, or the human safety or environmental impacts in the foreign country. I appreciate that a free market economy should sort these issues out in the long term, but the long term can be a very long way off.
How about competition is good for society, even when it's you that's being competed with.
A trade deficit must have a corresponding investment surplus.
That's not a question of intuitiveness. It's just the definition. The only confusing aspect is the name.
It is a definition, but there is still a behavioral part behind it. I would say that for every transaction, one is both a buyer and seller. If I am not getting another good in return for the car I send abroad, then I am getting something else such as a claim on the other country's assets. Even gifts/aid can be thought of as exports and imports of "good will".
I think of it as dollars out must equal dollars in, where in my non-economist world, dollars in includes imports and investments. Of course it could be upset by foreigners burning those dollars out they received, but that's just getting silly. And if you switch to gold or other non-fiat currencies, their value goes up and down in response to imports and exports, but that doesn't affect the basic premise that dollars out have to equal dollars in.
Ooh I have a good one! Not sure whether it's a true story, but Xerox once build a commercial printer and charged a high price for it. They wanted a slower model so they could price discriminate. So they took the fast model and made modifications to slow it down, and sold it for a lower price to customers who didn't care about speed.
So, the model that was more expensive was actually less costly to make. This makes economic sense. But it's super counterintuitive. Try to explain it :)
I wouldn't be surprised if that's a true story. I worked with a company whose products were excellent but expensive due to being pioneers in the field. We eventually sold a cheaper system, same hardware, but crippled with less software. Still made a profit, still a good system, but the only difference was one internal configuration bit.
I still think your Myth of the Rational voter gets it right. People are very biased to thinking a) the best goal is more jobs for their country men, and b) that sellers will overcharge given half a chance. That competition really does bring prices down to very low levels and brings up quality to very high levels isn't something that comes naturally to people. I don't know why people deny it when it's obviously true, maybe because inflation makes it so nominal prices rise even as real prices fall? I feel like people going "if McDonald's really was in competition and trying to sell as cheap as possible, a burger would be a dollar like it was when I was a kid". And given that people think businesses overcharge anyways and markets won't being prices down, they become very biased to prioritizing better/more jobs over more efficient production that could bring down prices.
Any intuitive explanation has to work very hard to overcome *those* intuitions
Comparative advantage – Two countries can both gain from trade even when one is more productive at every task.
No graphs allowed, I don't think comparative advantage makes sense without introducing hypotheticals or generally reasoning about stuff in a way that seems counter-intuitive
"Intuitive version: We’d be better off if other countries gave us stuff for free. Isn’t “really cheap” the next-best thing?"
I'd even argue that really cheap is better than free. We value more things that had a cost and if there's a cost there's an incentive to be efficient and innovate. Getting fee stuff has not made Africa wealthy, for example.
Actually most people wouldn't find these "intuitive" arguments you submit convincing. Most people wouldn't even agree to your first one, "We'd be better off if other countries gave us stuff for free".
They terk er jerbs!
The most basic one of all “Why do some people get to be rich and some don’t?” Isn’t that unfair? Sure some rich people are predisposed to work harder or be more intelligent but that just luck. And what about the dumb rich folks who just inherited their wealth?