(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 217

192 PART 2 • Producers, Consumers, and Competitive Markets

E XA MPLE 5.9 SELLING A HOUSE
Homeowners sometimes sell their homes because
they have to relocate for a new job, because they
want to be closer to (or farther from) the city in which
they work, or because they want to move to a bigger
or smaller house. So they put their home on the market. But at what price? The owners can usually get a
good idea of what the house will sell for by looking at
the selling prices of comparable houses, or by talking
with a realtor. Often, however, the owners will set an
asking price that is well above any realistic expectation of what the house can actually sell for. As a result,
the house may stay on the market for many months
before the owners grudgingly lower the price. During
that time the owners have to continue to maintain
the house and pay for taxes, utilities, and insurance.
This seems irrational. Why not set an asking price
closer to what the market will bear?
The endowment effect is at work here. The
homeowners view their house as special; their

ownership has given them what they think is a
special appreciation of its value—a value that
may go beyond any price that the market will
bear.
If housing prices have been falling, loss aversion could also be at work. As we saw in Examples
5.7 and 5.8, U.S and European housing prices
started falling around 2008, as the housing bubble deflated. As a result, some homeowners were
affected by loss aversion when deciding on an asking price, especially if they bought their home at a
time near the peak of the bubble. Selling the house
turns a paper loss, which may not seem real, into a

loss that is real. Averting that reality may serve to
explain the reluctance of home owners to take that
final step of selling their home. It is not surprising,
therefore, to find that houses tend to stay on the
market longer during economic downturns than in
upturns.

Fairness
People sometimes do things because they think it is appropriate or fair to do so,
even though there is no financial or other material benefit. Examples include
charitable giving, volunteering time, or tipping in a restaurant. Fairness likewise affected consumer behavior in our example of buying a snow shovel.
At first glance, our basic consumer theory does not appear to account for fairness. However, we can often modify our models of demand to account for the
effects of fairness on consumer behavior. To see how, let’s return to our original
snow shovel example. In that example, the market price of shovels was $20,
but right after a snowstorm (which caused a shift in the demand curve), stores
raised their price to $40. Some consumers, however, felt they were being unfairly
gouged, and refused to buy a shovel.
This is illustrated in Figure 5.12. Demand curve D1 applies during normal
weather. Stores have been charging $20 for a shovel, and sell a total quantity
of Q1 shovels per month (because many consumers buy shovels in anticipation
of snow). In fact some people would have been willing to pay much more for
a shovel (the upper part of the demand curve), but they don’t have to because
the market price is $20. Then the snowstorm hits, and the demand curve shifts
to the right. Had the price remained $20, the quantity demanded would have
increased to Q2. But note that the new demand curve (D2) does not extend up as
far as the old one. Many consumers might feel that an increase in price to, say,
$25 is fair, but an increase much above that would be unfair gouging. Thus the
new demand curve becomes very elastic at prices above $25, and no shovels can
be sold at a price much above $30.
Note how fairness comes in to play here. In normal weather, some consumers

would have been willing to pay $30 or even $40 for a shovel. But they know that