Question

a) Briefly explain the concept of subjective benefit (utility) and subjective cost.

b) How do both limit our ability to compare states of action between individuals? An example may help.

Answer 1

A) Under the definition of subjective benefit of utility, economic theory argues that utility is subjective in nature which indicates that everybody has different valuation for a particular good based on their own satisfaction they receive from its consumption. This implies that the value of a good is not determined by the market judgement but by a personal judgement in the form of the importance/value given by the individual. In the same way, subjective cost is not the market market determined cost but is decided by the relative explicit and implicit cost experienced by the individual.

b) Whenever utility is subjective it becomes difficult to evaluate an economic action. Measurable utilities easily determine the market equilibrium where the objective utility and the objective cost are equal to each other at the market equilibrium. In case of subjective utility and subjective cost, there is a wide variation because the same individual can be placing different values on the good with regards to the benefit and the cost. This limits the ability to compare the states of actions between individuals.

For example, it leads to circular reasoning. Generally consumers are required to pay the price for a product and we can believe that if the consumer is purchasing the product he is placing a subjective value in the product which is equal to the price. Prices are determined by the marginal utility of the commodity which is again subjective. Now this is leading to a circular reasoning because marginal utility is the subjective and is determining the prices and these prices are supposed to reflect the subjective cost which in turn determine the subjective utility.