My Most Awesomest PrawfsBlawg Post Ever

“Why can’t we end a successful video game series at its peak? Here’s the problem: It’s hard to keep a property fresh and exciting over a long period of time. Memorable gameplay elements are joyful the first time they happen, but their allure wanes each time they are implemented…. Economists call it declining marginal utility.”

-Ben Reeves, "Why Some Franchises Need to Accept Death," Game Informer, Sept. 2009

The idea that the more you have of something, the less the next bit of it is worth, that the next dollar is always worth less to a wealthier person than to a less wealthy person--that is, the idea of declining marginal utility--seems intuitively right, even obvious.  And declining marginal utility is a key assumption in tax policy and scholarship, because (as is probably obvious, and as I will discuss in a future post) it provides an easy justification for redistributive taxation. 

But is it true that everyone experiences declining marginal utility of income?  As I explain after the jump, intuitive support for declining marginal utility is not actually as strong as it might initially seem.  (This is not to deny, however, that while Lego Indiana Jones for the Wii is awesome, it is not as awesome as Lego Star Wars.)

We might begin by noticing that many commodities have declining marginal utility: the first chocolate chip cookie tastes wonderful, the tenth not as good, and the hundredth downright unpleasant.

 

But not all commodities are like chocolate chip cookies.  Some commodities might even have increasing marginal utility.  You might crave heroin, for example, more and more over time.  And your desire for chocolate chip cookies would change if you could not only eat them, but also trade them for almost anything else.

It does seem, though, that income has declining marginal utility.  If you buy the things you value more first, and buy less important things later, it seems like you must get more pleasure from the first dollars you spend. But this is true only if people's wants and needs don't change.  Rigorous field study (i.e., an interview with my seven-year-old) suggests that desires aren't in fact fixed: 100% of participants in my study wanted Bakugan balls last June and Pokemon cards this September.

A third common defense of declining marginal utility is that some rich people buy very expensive, frivolous, strange things. Malcolm Forbes, for example, threw himself an extravagant 70th birthday party in Morocco that cost about $2 million (in 1989 dollars). Forbes chartered jets to fly 800 friends to Morocco where he presented them with, among other attractions, a firework display, 600 belly-dancers, a staged Moroccan cavalry charge, and Beverly Sills singing “Happy Birthday.”

Surely a dollar that buys a poor person bread does more good than a dollar buys one two-millionth of Malcolm Forbes’ birthday party. But even if comparing the tastes of a few very wealthy people to the needs of the very poor shows that the wealthy (at least, certain very wealthy people) have lower marginal utility than the poor, this doesn't give us a way to compare the marginal utility of the vast majority of income levels, which fall between the extremes of impoverished and blindingly wealthy.

So, if intuition doesn't provide a knock-down argument for declining marginal utility, what do actual studies and research say?  Tune in next time, for what will be, if declining marginal utility always holds, a somewhat less enjoyable post.

Image credits: Cookies: modified and original versions of cobalt123, Epic Cafe Chocolate Chip Cookies (Flickr.com); used under a Creative Commons Attribution-Noncommercial 2.0 Generic license; Bakugan balls: Neeta Lind, IMG-8943 (Flickr.com); used under a Creative Commons Attribution 2.0 Generic License; Pokemon cards: Kichigai Mentat, Pokemon Trading cards; used under a Creative Commons Attribution-Share Alike 2.0 Generic License.