Name what stays outside a price, however efficient the market.
A factory can produce more cheaply by dumping waste in a river. Nobody is charged for the river. What does the price of its goods reflect?
Yes.A price is a record of an agreement between two parties. Anybody harmed who was not in the room has no way to appear in it.
Not quite.The full cost includes the river. The price includes only the part somebody had to buy.
Not quite.That is the strongest claim made for prices, and it holds only when everyone affected is a party to the trade.
A price can only carry what somebody had to pay for. Everything else — the river, the future, the person not in the room — is outside it by construction.
Which of these does a market price carry well, and which does it miss?
What buyers will pay this week.
How scarce something is right now.
Harm to people who are not trading.
What matters to those not yet born.
What the marginal buyer believes about next year.
Yes.Markets are extraordinary at aggregating the views of people who are trading. Every miss on this list has the same cause: someone affected who is not a party to the trade.
A cost is moved from outside the price to inside it. Slide to see what happens.
NoneHalfAll of it
Paid by the buyer£10 per unit · 63%
Paid by everyone else£6 per unit · 38%
NoneCheapest goods, and the damage is real and paid by somebody else.
Paid by the buyer£13 per unit · 81%
Paid by everyone else£3 per unit · 19%
HalfThe price rises, demand falls a little, and half the damage now has an owner.
Paid by the buyer£16 per unit
Paid by everyone else£0 per unit
All of itThe price tells the truth. Some of the production stops, because it was only worth doing while somebody else paid.
In the last frame some production stops. What does that tell you about it?
Yes.That is the whole argument for pricing an external cost, and it is also why it is fought so hard: the activity that disappears is real, and so were the jobs in it.
Not quite.It was viable on a subsidy nobody voted for. Whether ending it is worth the disruption is a real argument — about values, not about the arithmetic.
Not quite.Every price already sits inside rules about property, contracts and liability. The question is which costs the rules require somebody to carry.
Move the control to see what changes.
"The market has priced in the risk of a rare disaster." What should you make of that?
Yes.Prices aggregate beliefs, and beliefs about events that happen once a century rest on almost no data. The price is confident-looking because it is a number, not because it is well founded.
Not quite.It has been guessed at, by people with money on it. That is better than nothing and much weaker than a measurement.
Not quite.Pricing a risk is not preventing it. It only says what somebody was willing to pay to avoid or carry it.
Put in order what you now know a price to be.
Tap them in order — first to last.
One trade→Two opposite views→Only surprises move it→Nothing about outsiders
What a price is, and where it stops.Yes.Read in that order, a price stops being a verdict and becomes evidence — evidence about a specific thing, gathered in a specific way, with known gaps.
What is the fair summary of what a market price is good for?
Yes.Both halves are needed. Treating a price as truth ignores everything in this course; treating it as noise throws away the most informative number available about what people actually expect.
Not quite.Of value TO THE PARTIES, at that moment. The river has no bid.
Not quite.Prices carry a great deal of real information, quickly, from people with something at stake. That is exactly why their gaps are worth knowing.
Lesson complete
A price can only carry what somebody had to pay for.