Monday, August 10, 2009

How a sandwich becomes lunch

Last week, I wrote an article entitled Is free ice cream free? where I demonstrated a surprising implication for the time you spend waiting in line for a rationed good like an ice cream cone on a "free" ice cream day: it doesn't matter how efficient your server is. This insight -- from a theory called rationing by waiting -- came from a famous paper by Yoram Barzel.

The idea of rationing by waiting is that for goods that are rationed without a market price mechanism, something other than money fills the gap. It turns out that even with well-functioning markets, market goods are not fit to be consumed until something other than money (namely, time needed to consume the good) fills the gap. In a nutshell, this is the intuition for Gary Becker's theory of household production.

To see this more concretely, consider an example of a zero marginal cost good. Every year, Montana State and Montana square off in one of the longest-lasting rivalries in all of college football (You Michigain and Ohio State fans think you've got the monopoly on college rivalry, not so). Students at Montana State are given "free" tickets to the game, but there are only so many available.

Understandably, a line forms. Some students even wait for hours to get their tickets for The Brawl of the Wild. But, is the time waiting in line the only cost that people pay for watching the annual rivalry game? Definitely not. You get a ticket, but you also have to forego an afternoon to actually watch the game. That's not even mentioning the travel time to the stadium.

How do we value such time? Does this time go into the cost of the thing we consume? What's the deal? How do we think about this? Fortunately, Gary Becker came to the rescue with his household production model. He came up with the concept that households use inputs to produce things called commodities. Then, the household consumes what it produces.

Of course, households don't use factories, but they are producers nonetheless, using time and market goods as inputs to what they really want. In the context of our example, to enjoy a rivalry football game (a commodity), the student buys market goods (tickets, hot dogs, gasoline, tailgate materials, beverages, etc.) and spends some of his own time to actually enjoy the football game.

Using the math of economics, it's most natural to model this mixing of time and goods as production (just as factories mix labor and capital, households mix time and market goods). Hence, we call Becker's model household production. And, this model gives us a great way to understand time-intensive commodities like golf and football, but it may also shed some light on more commonplace commodities like lunch.

Viewed through the lens of household production, we can consume a commodity only when we combine our time with market goods. In other words, it's impossible to consume a good from the marketplace without some form of household production.

You might be skeptical. Perhaps, you're thinking Surely, you could buy a lunch without producing it. Right? It turns out, that's wrong. Try buying a sandwich, and then enjoying that sandwich as lunch without allocating any time. Even if you are a hot-dog-eating champion, I'll guarantee that you'll have to allocate some time to converting that sandwich into lunch.

This process is known as eating to most people, but now you can call it by an economic name: household production.

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