Consider a post-apocalyptic scenario where zombies roam across the planet. The only two survivors to this event are Violet, a well renowned engineer, and Klaus, a young and very bright boy. They both live in Zone V and Zone K, respectively, and do not communicate with each other. Both of them have already found shelter in their respective zones. Zombies, with their brainless irrationality are afraid to enter their shelters, and our two survivors have enough supplies (water, food, etc) in their shelters to live for a month. After that, mankind ceases to exist.
Klaus has given up hope, so he would like to spend his last days reading books and playing videogames. Violet, on the other hand, is a fighter and her goal is to invent a “zombiebuster” which would instantaneously annihilate every zombie on Earth. She can produce this anti-zombie weapon using the knowledge provided by books and materials which are found in video game consoles.
Both zones have a limited amount of two goods scattered across them: books and video game consoles. The two heroes can effortlessly go search and collect these goods in their respective zones. However, each type of good takes a certain amount of time to be found and brought back to the shelter. Plus, if they spend more than a certain amount of time outside their shelter, zombies will surely ambush and eat them. They do not have time to exit their zone on foot. We call this a time constraint. Subject to this constraint, the amount of each good the two survivors will search and collect will depend on what they prefer to consume. In other words, they will consume the bundles of goods which give them the highest welfare. Both goods are scarce and in two weeks they will have collected every one of these goods in their zones.
Two weeks later, while doing his daily and hopeless search Klaus comes across a car. Thanks to his video game experience he manages to drive it to lands he had never been to and eventually gets to Zone V (within his time limit) and to Violet’s shelter. After they both celebrate each other’s existence, they reach the conclusion that in order to survive longer they should live separately in their respective shelters. Nevertheless, since they are both very clever they consider engaging in trade.
We are now in what economists call a general equilibrium framework. It turns out that since the amount of each good in each zone is different, that is, there are different endowments and their preferences also differ, trade will actually be mutually beneficial – the welfare of both survivors will be greater than before.
A few days later Violet realizes that even with trade she does not have enough resources to build her ultimate weapon. As a result she demands a higher volume of both goods from Klaus. He disagrees at first, but after listening to her argument he begins to reconsider her offer. Violet’s reasoning was as follows:
“While you waste your resources in reading and playing, I am trying to build a “zombiebuster” which will cleanse the world from these horrible creatures. I agree that we should be at peace with each other and respect each other’s rights, but wouldn’t you be happier if you didn’t have to die in a couple of weeks?”
Indeed, what Violet is referring to is called a positive externality, which is a type of market failure. In this case, it is defined by the fact that the actions of Violet could make Klaus better off and yet she does not receive the benefits of doing so.
So, Klaus has to make a choice:
- He either transfers some of his wealth to Violet and takes part in the rebuilding of the planet;
- Or he simply decides to read and play loads of videogames for a couple of weeks and die of thirst afterwards.
His choice should be the one that gives him the highest level of welfare.
Recalling a book he once read about a zombie apocalypse and how in the end the heroes triumphed and also because he is a very rational young man, he chooses the first option.
Violet and Klaus enter negotiations and decide on what the “social optimum” should be, that is the point in which the combined welfare of both survivors is the highest possible. In economic theory this is called a Coasian solution.
Moral of the story: In the event of a Zombie Apocalypse make sure you save engineers and smart people who have a sound economic reasoning.