Note this requires market failure by definition—otherwise if an action provides me a a small gain for a huge loss to you, you would be willing to pay me some amount of money not to take that action, benefiting us both.
As a concrete example of how this plays out in practice. If you require Bob to wear a tuxedo costing 5000 dollars, and other similar companies don’t, in a perfect market for labour you would need to pay Bob 5000 dollars more than other companies to cover the tuxedo or he’d just work for them himself.
The fact that he doesn’t suggests that other things are going on—for example finding an alternative job might haven take more than the amount of time it takes to earn 5000 dollars, or he didn’t know when he signed the contract that a tuxedo was required, and the contract makes it difficult for him to switch.
Seems to me that there is always some friction, some lack of information, etc., so “this requires market failure by definition” basically means “this happens in the real world”.
I’d point out that the magnitude of the “exploitation” is the magnitude of the incentive for market players to find the better solution. If Bob is the one guy for whom making him wear a tuxedo isn’t worthwhile, and if it’s close to worthwhile—e.g. him wearing it produces $4000 of value to the company over the time he wears it—then that’s $1000 being left on the table. If there are 100 employees being “exploited” like Bob, for whom making them wear tuxedos is extremely wasteful—say it produces only $100 of value for them to wear tuxedos—then there is $490,000 being left on the table, which may be enough to justify making a new company if the existing one is for some reason stubborn about the issue. (Also, the more employees there are in that situation, the more likely it is that someone will complain and someone else will notice the opportunity.)
The problem with words like “better” and “left on the table” is that better globally is not necessarily better for me, and leaving value on the table is not a problem for me if it all comes from your part.
Option A: I get 5 units of utility, you get 5 units of utility.
Option B: I get 6 units of utility, you get 3 units of utility, 1 unit of utility gets burned.
Option A is clearly better for me out of these two.
It seems like there should be an option C: 6.5 units of utility for me, 3.5 units of utility for you. But maybe there isn’t . Maybe it actually costs me 1 unit of utility to keep a gun pointing at your head. And without the gun, you might turn the table and demand 5 units of utility or bust.
In theory, if you were a robot, you could commit to act as if the gun is pointed at your head, even if there is none, and then we could split the money I saved by not having to buy the gun. In practice, humans don’t seem to work that way sufficiently reliably.
Note this requires market failure by definition—otherwise if an action provides me a a small gain for a huge loss to you, you would be willing to pay me some amount of money not to take that action, benefiting us both.
As a concrete example of how this plays out in practice. If you require Bob to wear a tuxedo costing 5000 dollars, and other similar companies don’t, in a perfect market for labour you would need to pay Bob 5000 dollars more than other companies to cover the tuxedo or he’d just work for them himself.
The fact that he doesn’t suggests that other things are going on—for example finding an alternative job might haven take more than the amount of time it takes to earn 5000 dollars, or he didn’t know when he signed the contract that a tuxedo was required, and the contract makes it difficult for him to switch.
Seems to me that there is always some friction, some lack of information, etc., so “this requires market failure by definition” basically means “this happens in the real world”.
I’d point out that the magnitude of the “exploitation” is the magnitude of the incentive for market players to find the better solution. If Bob is the one guy for whom making him wear a tuxedo isn’t worthwhile, and if it’s close to worthwhile—e.g. him wearing it produces $4000 of value to the company over the time he wears it—then that’s $1000 being left on the table. If there are 100 employees being “exploited” like Bob, for whom making them wear tuxedos is extremely wasteful—say it produces only $100 of value for them to wear tuxedos—then there is $490,000 being left on the table, which may be enough to justify making a new company if the existing one is for some reason stubborn about the issue. (Also, the more employees there are in that situation, the more likely it is that someone will complain and someone else will notice the opportunity.)
The problem with words like “better” and “left on the table” is that better globally is not necessarily better for me, and leaving value on the table is not a problem for me if it all comes from your part.
Option A: I get 5 units of utility, you get 5 units of utility.
Option B: I get 6 units of utility, you get 3 units of utility, 1 unit of utility gets burned.
Option A is clearly better for me out of these two.
It seems like there should be an option C: 6.5 units of utility for me, 3.5 units of utility for you. But maybe there isn’t . Maybe it actually costs me 1 unit of utility to keep a gun pointing at your head. And without the gun, you might turn the table and demand 5 units of utility or bust.
In theory, if you were a robot, you could commit to act as if the gun is pointed at your head, even if there is none, and then we could split the money I saved by not having to buy the gun. In practice, humans don’t seem to work that way sufficiently reliably.