Something toThink About

From the Sports Economist comes this rebuttal to Matthew Zemek.

First Matthew Zemek,

This trend of rapid upward escalation in coaching salaries — while evidently necessary to land or keep big-name coaches, as this Alabama deal proves — is simply not a healthy development in American society. While loads of problems exist in the world of primary education, this country's secondary institutions are throwing around ungodly sums of cash so that King Football will succeed on Saturdays.

Then the reply,

Saban's high salary is *not* a sign of an unhealthy society. .....the diamond-water paradox applies. According to the paradox, water is necessary for life but diamonds are not, yet the price of diamonds is much higher than water. Understanding the solution to the paradox comes from understanding two things: 1. the value of any good is determined by the satisfaction consumers obtain from it at the margin; 2. the price of anything is determined by its relative scarcity. It's quite possible for there to be quite a gulf between the two (the so-called consumer surplus).

Diamonds are more pricey than water because they are relatively scarce while water is relatively abundant. The price that people pay for diamonds is much closer to the marginal satisfaction they obtain from them while the difference between the marginal satisfaction obtained from water and the price of water is much greater. The fact that water is necessary for life and we can get it for a cheap price is a cause for celebration, not general alarm.