"Duked" Out of A Dorm Room

In Mungowitz’ blog post, he talks about how the Duke University housing lottery is unfair and a bad rationing mechanism. According to his story, Duke put the Iota Tappa Kegga (ITK) frat in a spot that the Baseball Stats Study Group (BSSG) while BSSG was in a spot that ITK wanted. The University refused to allow ITK to pay BSSG to switch dorms but would allow them to trade. Mungowitz addresses the fact that the University should not prevent this exchange because it makes the two parties better and no one worse off. But still the University says (in a vague and badly written letter that inspires contradiction) that the monetary exchange goes against the “intent and spirit” of the University and the housing committee and only a money-free trade would be allowed.

1. If the monetary exchange were to happen, what negative effects would plague Duke and the housing lottery in the future?

2. Should Duke replace the housing lottery with a better rationing mechanism? What if the system came on a first come first serve or force rationing mechanism?

3. Did the University officials do the right thing and if so what were the real reason they prevented the exchange?

This blog post article looks at how a “fair” rationing mechanism of the lottery can turn into a horrible rationing mechanism when “the assignment of a group to a space allocation has zero, zilch, bagel, nada to do with how much that group VALUES that location." In this case the lottery is a bad rationing mechanism. There is no doubt behind this.

Some people say the exchange should have money involved. When people are forced to barter, the trade will take a long time (if ever). ITK would have to go find some group who is willing to trade with no money involved. This time spent is an opportunity cost of time wasted, especially in college. With money involved in the trade, bartering is not needed and a trade can occur easily.

So why did Duke prevent a monetary exchange but allow a trade? The administrators at Duke University are smart enough to realize the law of unintended consequences. If groups are only allowed to trade dorms then there will be very little consequences, all transactions would require a majority vote for a trade. However, if the exchange was monetarily based then there would surely be unintended consequences. The first pick in the lottery would pick the most popular spot on campus or a spot they know someone wants (even though they do not want it) and force people to pay them for the switch. The housing lottery would turn into a game where the first picks in the lottery would attempt to get money. When we put money on a transaction that originally was based off of wants and a need to trade (like paying for Kidneys) there are unintended consequences that follow. Things become a market. Also, the marginal value behind the "best" house that the first pick in the lottery has is amazing and many people will want the dorm. A monetary exchange will cause students to drive up the price as they compete for the best house and the people who won the house in the lottery would gladly charge a high price that they know people are willing to pay. Look there may be many other unintended consequences but Duke still should have come up with a better reason than the exchange goes against “the intent and spirit” of the University. Come on!

Rationing Mechanisms on Black Friday

On Black Friday people line up in the middle of the night to get the best deals at stores with amazing sales. While everyone in America is starting to think about buying gifts for the holidays (and there is a fixed amount of goods in stores) the goods are rewarded to the Americans who camp outside stores on a fake holiday that comes the day after Thanksgiving.

The rationing mechanism for Black Friday is that of queues - it is first come fist serve. This mechanism is the most costly as people must pay the opportunity cost of standing in line. While people are standing in line and not dining other useful things (like sleeping), the fail of this mechanism is the fact that there is no sense of value.

Stores believe that if people truly valued a good then they would get in line but this isn't the case. Just because a rich person in front of me wants to buy one of twenty toys for their kid doesn't mean they should get it. What if the only thing my kid wants is that toy? Who values it more and who should get it? - Me. But who is in line first? - Mr Rich man.

So even prices fail to be a rationing mechanism here. Queues have taken over Black Friday and there is no sense of value that comes into play during this holiday. We have failed.

Class 35 - Decentralized Knowledge

Today we talked about the advantages of decentralized knowledge.

Centralized knowledge is an impossible dream but decentralized knowledge can work (doesn’t always) and well functioning markets and democracies help combine decentralized knowledge.

For example if on a supply curve: if it’s easy to find titanium and the price of titanium increases, then producers will dig up a lot of titanium. But if it’s hard to find titanium then the supply curve will be steeper.

Czar of titanium – needs to know everything about titanium – all the stuff he doesn’t and will never know.

The solution to the failure of the czar = prices.

Prices show that someone can make adjustments.

If you change your behavior, the price increases less and the quantity supplied doesn’t increase as much when demand is elastic.

Class 34 - Confucius Says: Be at Equilibrium

Today we looked at what happens when there are changes in supply and demand. We ask ourselves two questions: How the buyers and sellers respond to the changes and whose plans are satisfied?

These changes create either:

Surplus – quantity supplied > quantity demanded at a particular price

Shortage – quantity demanded > quantity supplied at a particular price

When these two conditions happen, forces work to reestablish equilibrium.

The high prices signify scarce goods. Prices increase to relieve a shortage.

The low prices signify non-scarce goods. Price decrease to relieve a surplus.

Scarcity talks about relative abundance – not absolute abundance.

Equilibrium is where neither buyers nor sellers have the incentive to change their behavior at a certain price.

There is market clearing equilibrium (good) where quantity demanded = quantity supplied.

Also there is non-market clearing (not good).