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We teach our children to share, an activity we see as a virtue. But it isn't just about altruism. Sharing maximizes the benefit we get from scarce resources. Let me use an example from a TV show: Two and a Half Men. For those not familiar with the show the premise is simple: Alan, a middle class chiropractor, is bankrupted by his divorce and moves in with his millionaire brother Charlie, a jingle writer, who owns a spacious house on the beach in Malibu. Alan's son spends the weekends at the home as well. In one episode it is made clear that Alan by himself could never afford a home like Charlie's (which costs about $4.5 million based on a mention of its real estate tax in one episode). Needless to say, Alan gains tremendously by getting to live in a multi-million dollar Malibu-beachfront home. Charlie also has a maid, whose services also benefit Alan. His son also benefits from getting to spend his weekends at Charlie's stately home. In sum , Alan and his son are big-time winners from getting to live at Charlie's, especially Alan who lives there full-time. Charlie doesn't really lose anything. Sure he has to share is home. But his home is spacious, and the person with whom he shares it, is one whom he loves - his brother (and on the weekends his nephew). The law of diminishing marginal utility dictates that the more a person has of something, the less benefit he or she gets from an additional unit of that something. This also means that a person, who has a lot of good A, will lose little when sacrificing some of it. Someone who has little of good A, however, will gain a lot. Thus, the gain to the one who has little of good A will be larger than the loss encountered by the person who already has a lot of A. In our story of Charlie and Alan, that means that whatever Charlie sacrifices in sharing his house with his brother, Alan, is less than what Alan gains. Think about it. What is Charlie giving up? A few square feet, compromising on some decorations in certain parts of the house, having a little less privacy. These losses are small since Charlie has a very spacious, luxuriously appointed home. He has more square feet and amenities he could use, so sharing some of his house with Alan will cost him next to nothing (If his house was small, the cost would be greater - e.g. he doesn't have to share his bathroom because his house has several). Most of Charlie's comforts aren't compromised at all: he still lives in a clean, climate controlled environment in a highly desirable location. But, as we established earlier, Alan's gains are huge! He gets to live in home in a location he could never afford. The result is what economists call a state of Pareto optimality, or more precisely, near-Pareto-optimality. There is virtually no loss to anyone, but someone does gain. Charlie isn't any worse off, but Alan is a lot better off. If Alan was to move out, the result would almost inevitably be a less efficient allocation of resources, since he could never afford a similar home - in nearly any case, he would have to move to a far more humble home, that is make a great sacrifice. But Charlie wouldn't gain much. That allocation of resources is clearly inefficient. Lastly, the two bothers might grow closer and both draw great benefits from a closer relationship. This "positive externality" might completely off-set any cost encountered by Charlie as a result of sharing his home with Alan. So, lets sum it all up in beautiful economics jargon: owing to the law of declining marginal utility, Charlie sharing is home with Alan will result in near-Pareto optimality, with the considerable positive externality of a closer relationship.
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