Market efficiency is perhaps one of the most important topics in any principles course. Yet the very related concepts of consumer and producer surplus are two of the most difficult topics for students to grasp. They are difficult because of the high level of abstraction required from students in order to master them; in particular consumer surplus. Yet, it is critical for students to understand these concepts well if they are to understand market efficiency and deadweight loss. So I usually have one overriding goal when teaching market efficiency to principles students: how can I make the deadweight loss concrete enough for them?
The case study of the market for organs (for instance the market for human kidneys), is a great way to achieve this goal.
I usually like to begin the discussion referring to a famous article in the NYTimes describing the now famous (or infamous), auction of a human kidney on ebay.
After describing the auction for students, I present the following clicker question to them:
Take a guess of how much was the bidding for this auction when e-bay took it down three days after it started:
d) 1 million
e) More than 1 million
Students are always shocked to learn the auction for a kidney had reached almost 6 million in two days! From this point the discussion could go in many different and very interesting directions:
Why did ebay took down the auction?
Answer: as you know, it is illegal in the U.S. to sell your organs.
Why does the U.S. ban the sale of organs?
Answer: many possible answers. But, probably the reason has to do more with ethics than with economics. It is interesting, though, that the sale of blood is not prohibited.
Is the market for organs in this country efficient?
Clearly not. Usually the number of donors is way below the number of people waiting for an organ. In the market for kidneys, the waiting time is about 3.5 years, which is many times longer than what the patient could wait. The best place to get data on this market is the Organ Procurement and Transplantation Network. They offer real time data on the demand and supply data for human organs.
What is consumer and producer surplus in the market for kidneys? What happens to producer surplus when there is no way to legally profit from selling an organ?
What can we do to increase the efficiency in this market?
What is the deadweight loss in this market? How does advances in medicine change the deadweight loss in this market?
The answer to this last question is what makes this case study fundamentally useful to teach this concept. In this market, deadweight loss is not an abstract idea, but it is actually human lives!