The ideal market maximizes utility production because economic actors expose their utility gain by pricing commodities. The assumption is that price and utility are similar.
But when there is wealth inequality this assumption breaks down. A person with large wealth can offer higher prices for less utility compared to a less wealthy individual.
This biases markets to satisfy wealthy individuals, overall reducing total utility production.
This is too simple, and misleading, as it leaves out tiered pricing.
A slightly better seat on an airplane is 10x the price of economy seats. Without those seats, economy seats would cost much more each.
A slightly better car spec is 2x the price of the base model. Without the better spec model, the base model would cost much more.
Additionally, just the development of new technology is often for the wealthy first, as it's prohibitively expensive, and then as manufacturing techniques work out the tech filters to a large group of people. E.g. Tesla cars; computers; pretty much everything, really.
Is your point that wealthy people subsidize air travel by paying relatively more for the space on the plane?
That's a perfect example of when inequality biases a market to produce suboptimal outcomes.
Why?
Because if people wouldn't be willing to spend to pay the cost of an airplane ticket in perfect market conditions, then them not buying a ticket is the optimal allocation of resources.
If they then buy a ticket in current market conditions, that's an example of a suboptimal allocation of resources.
> Because if people wouldn't be willing to spend to pay the cost of an airplane ticket in perfect market conditions, then them not buying a ticket is the optimal allocation of resources.
Sorry, you've lost me. How do you define perfect market conditions?
It requires a bunch of idealizing conditions that never holds in practice.
But it's still useful to study what effects deviations from perfect competition has on efficiency.
Think about it like this: subsidies lets you buy something you don't actually want, that's inefficient.
For subsidies to make sense, they need to compensate some other deviation from perfect competition. For example, it can make sense to subsidize green energy because fossile fuels has external costs not accounted for by the market.
But the fact that a rich individual is willing to pay your air ticket is not a good reason to subsidize something.
An intuitive example:
A rich guy enters a bar and yells "free ice cream for everyone!". That's nice. But if the same cash were distributed among the guests, some would've gotten beers and some wine. But when faced with the choice "pay for beer or get free ice cream" everyone choose ice cream despite that being a suboptimal allocation of resources.
Thanks for elaborating. It seems now I don't understand your definition of efficiency. People choosing free ice cream over costly beer doesn't strike me as a loss of efficiency.
Ah! I understand. I agree that if you do that once, it works one time. But as soon as you take the money they all gave to the bartender and redistribute it, to maximise happiness, and they all buy more beer, you might start to spot where this falls down as a useful model, mightn't you?
I haven't said anything about redistributing wealth.
The point is not that redistribution is a good idea. The point is that wealth inequality makes the economy less efficient, and that it is something we should take into consideration.
Redistributing wealth might also make the economy less efficient, that's an argument that can be made.
From where I stand, it seems the inefficiency caused by wealth inequality is too rarely discussed relative to its harmful impact.
The problems caused by redistribution/taxes etc. are otoh extremely often raised.
But I do think your argument of efficiency is not persuasive, as the definition of utility relies on people making choices they never regret, or that don't harm their total lifetime utility.
E.g. some people might want to take that money and save it, and if you come back to the situation in a year's time they now have more money than the people that bought beer. Now there's wealth inequality and they can buy something the others can't. Viewing the original situation in microcosm makes buying beer the "efficient" thing to do, but it also makes the second scenario less "efficient".
But when there is wealth inequality this assumption breaks down. A person with large wealth can offer higher prices for less utility compared to a less wealthy individual.
This biases markets to satisfy wealthy individuals, overall reducing total utility production.