Wednesday, July 15, 2009

For the econ nerds... the market for kidneys

There's an interesting discussion in the comments section of a recent Economists Do It With Models post. The question on the table is: How much would you pay for a kidney? That is, if you had kidney disease, how much would you pay for someone else to donate a kidney?

The easy answer is "a lot of money." The not-so-easy-answer is whatever the market price turns out to be. So, what would that be?

The post makes a really good point that the market price will depend on how responsive suppliers of organs are to changes in the price. If organ donors respond a lot to the price, the price won't have to increase by that much to get the right number of organs on the market (there's currently a waitlist with 80,000 names). If organ donors do not respond much to the price, the market price will be higher.

I'm a sucker for a fun/morbid discussion. So, I made a comment on the post. I pointed out that the market price will also depend how responsive demanders of kidneys are. If demanders want a kidney at pretty much any cost, the price is going to have to be higher (all else equal). If changes in the price induce demanders to consider alternative treatments, the price won't have to increase by that much.

This point is general. In any market, an increase in price does two things:

First, increasing prices induce suppliers to the market.
Second, increasing prices fend of demanders who don't value the good all that much.

The end result is the quantity supplied and quantity demanded are equal, just so long as there aren't any silly prohibitions in place.

Another comment for the econ nerds
The comments after mine went into a discussion of how elastic is demand for kidneys. [Review: elastic is economist-lingo for responsive, inelastic is economist-lingo for not responsive. As with all comments, we economists have a formula... see below] In the comments, people generally thought that demand for kidneys would be inelastic. And, then Justin Ross of The Perfect Substitute made this comment:

If there is a perfectly inelastic good, it seems like it would be kidneys (perhaps chemotherapy also). If they make it cheaper, I probably don’t want more. If they make it more expensive, I probably don’t want any less.
I agree that demand for kidneys is likely inelastic, but I don't think it would be perfectly inelastic. As the price increases, some people will substitute away from kidneys and toward alternative treatments like dialysis (Jodi Beggs made this point in a later comment, too).

Granted, dialysis isn't "the perfect substitute" for a kidney transplant, but that just means that the price for kidney donations would have to increase by a lot before people would be indifferent between the two options.

A really nerdy comment...
On the other hand, there's an annoying nerdy/techy detail: At a price of zero, the demand for any good is guaranteed to be inelastic... That's because the formula for elasticity (E) is:

E = (percent change in quantity)/(percent change in price).

Changing the price from zero to any positive number means that the price increased by "infinity" percent. That means E=0, which means the good is perfectly inelastic.

This detail is annoying because (1) it's true, and (2) it misses the point. The point is that it matters whether the demand curve is steep (inelastic demand is related to steepness, but it's not quite the same thing).

Nevertheless, we economists frequently say the word inelastic when steep would do. Sure... elasticities are unitless, but sometimes the right tool is rise/run.

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