Munich Personal RePEc Archive

Deriving utility: consumers’ diligence under externalities and technical progress

Malakhov, Sergey (2020): Deriving utility: consumers’ diligence under externalities and technical progress.


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If we present sales items or trade units, cars and apartments, in the units of consumption, miles and nights, like it takes place in the sharing&rental economy, we can get the model of the optimal consumption-leisure choice, where the efforts on pre-purchase search and after-purchase care produce non-monetary costs before the use of a trade unit. The paper argues that the productivity of these efforts differs from the efficiency of consumers’ efforts on the workplace. The consumer searches diligently the quantity to be purchased, he spends money earned by his labor or high-productive industry on the purchase and, following his willingness to take care of the purchased item, he takes low-productive diligent efforts in order to finally enjoy it. While the purchase price of the trade unit is equal to consumer’s willingness to pay, the total costs of his industry and diligence become equal to his willingness to accept or to sell the trade unit, the car and the apartment, where his marginal and average costs become equal to the equilibrium price of the unit of consumption, a mile or a night, and total costs become equal to the equilibrium price of the trade unit. The consumers’ productivity function really gets the S-shape, which slows the growth of monetary costs and accelerates the growth of non-monetary costs. While the consumers’ diligence derives the utility from the trade item at the equilibrium level, it enlarges also the spectrum of solutions for the Coase theorem, because the consumers’ diligence copies also with externalities. The trade-off between quantity of consumption units to be purchased and non-monetary efforts for its’ efficient use appears. The assets are redistributed for its more efficient use, from slight to great diligence, or from low to high willingness to take care of the trade unit just in accordance with the Black’s Law Encyclopedia where the great or high diligence is defined as the diligence that a very prudent person exercises in handling his or her own property like that at issue. The model demonstrates that the labor augmenting technical progress decreases the marginal monetary costs of consumers’ industry and increases non-monetary costs of consumers’ diligence at the equilibrium level that can be explained by the loss in the quality of trade units, cars and apartments. The outcome of the service augmenting technical progress is ambiguous. While it raises the equilibrium price, the consumption falls. But the fall in consumption reduces consumers’ diligence and results in the development of the sharing&rental economy. However, if the production and services are gross complements, the consumption growths and Veblen effect is to be expected where consumption becomes “bad” with respect to leisure and the consumers’ diligence becomes excessive.

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