Tuesday, June 15, 2010

Economics of Being Bert or Ernie

If you have a minute here is a classic Bert and Ernie, I suggest you watch it. No really watch it, it will be more fun than more short description that is at the end of the post.

One of the many differences between Bert and Ernie is their discount rate or how they value the future. Bert values the future more, preventing future rain problems, while Ernie values playing in the sunshine now more.

What influences the decision to repair the window? Not only how much they value the future, but also how likely it is to rain again and when. So Bert and Ernie will also take the probability of future events into account when figuring out the best time to repair the window.

Finally, since Bert and Ernie share an apartment fixing the window is a public good, that is once it is fixed both get the benifit of a working window and no rain. Ernie knows that Bert probably has a higher value of having a fixed window, so he's really just pointing it out in hopes of free riding on Bert fixing the window.

(OK if you can't watch it. Ernie won't fix the window that won't close because he has to go outside. Bert says Ernie should fix it once it stops raining. Ernie points out it is no longer a problem because the rain has stopped so he should go enjoy the sunshine)

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