Should that guy be compensated for being such a good entertainer?? If yes, in what way?
Today, I went and had a good chat with a few friends. We sipped coffee and talked about all sorts of things ranging from something as trivial as how delicious Beer with lime is, to economic ideas and development challenges. Heck, we even talked about theoretical physics like string theory (even though, I believe none of us had any idea what we were talking about). At the end, everyone enjoyed the good conversation and I came back home feeling great.
In economic sense, I just derived huge utility from my friends. If you think about it, a part of this is made possible because they are all highly educated individuals who spent a great amount of time learning and contemplating various topics pertaining to their fields of study.
Did they do it to entertain me? No, of course not. They did it for their own interest, for the bright future of their own. This is how powerful personal interest is, and that is why capitalism works so well. Individual working to make themselves better off can sometimes end up making other people better off, a totally positive but unintended consequences. This helps explain why an economy grows rapidly once capitalism is adopted.
Anyway, these people ended up boosting my utility and relieving my stress (if there was any). Yet, the issue is I did not pay them even a single penny. In other words, the free market mechanism does not compensate individuals for the spillovers or positive social benefits (positive externalities) they produce. Of course, they will get a high-paid job with high education, but that only reflects the “private benefit/compensation” and NOT the social benefit/compensation.
And what’s the problem? The problem is that when price does not reflect the total benefits of a certain product (i.e. lower price that it should be), that product tends to be under-supplied. Thus, the market becomes inefficient (i.e. market fails).
This is when non-market mechanism, devised by the government, jumps in to save the day. Products or activities, like education, with huge positive externalities have been (and should always be) encouraged through some sorts of reward/compensation, be it subsidies or various other non-pecuniary supports (like making building disable access friendly, making educational resources free and easily accessible, educating parents to value education, encouraging education-related activities like reading and highly rewarded competition, etc).
There is also another side of externalities, and you guess it, the “Negative Externalities”. As an example, smokers impose health risks to those around them. This is why we have high cigarette tax and various other products like explicit image of the lung of a smoker to discourage others from smoking.
But, smoking also has positive externalities. Smokers die younger, so they would be working and paying tax for the society, and live shorter to claim back benefits like pensions, leaving more for the rest of us. Just to also show that economists like to look at both sides of the coin, and that is why if you ask any economist any question, he/she always says “It depends…”.
So, don’t judge them too fast. They have a solid excuse!