Picture you are in a room with 10 people. Each of them has a slice of cake. How much you are willing to pay for a slice of the cake is the ‘marginal utility’ of having it, and the more cake you have the less any more cake is worth to you. You’d be willing to pay a $1 for the first slice of cake, but you’d only be will to pay 90 cents for the second slice. You’d only be willing to pay 10 cents for the 9th slice, and a penny for the 10th slice. Eating the 10th slice of cake in that room would probably make you sick, hence you want it a lot less than the first slice, which is delicious. That’s declining marginal utility.
Now picture you are in a room with 10 people screaming. You hate it when people scream, and you can pay a person to get them to stop screaming. Would you pay in a similar way to the cake example? Would you pay a $1 to get the first person to stop screaming, and a penny for the 10th person to stop screaming?
No. Getting one person to stop screaming would make very little difference in how much you dislike being in the room. Modern psychology tells us you might not even notice it. You’d probably only pay a penny to get that first guy to stop screaming. However getting the second guy to stop screaming might be worth 10 cents. And the last guy, the difference between some screaming and no screaming, might be worth the full dollar to you. The more quiet it got, the more a marginal difference in how quiet it is would be worth to you. There’s increasing returns to this good; the 10th guy not screaming is worth more than the first guy not screaming, which is the exact opposite dynamic of the 10th cake being less delicious than the first.
Persistence of Poverty, and Increasing Marginal Utility
This is an interesting story, but I’m not sure if we should really call this increasing marginal utility. I think of the screaming above as a public-bad in contrast to the more common public-goods. The classic example of a public good is national defense because it is clearly non-rivalrous (covering extra Americans costs nothing) and non-excludable (how can the military exclude you from protection when the enemy attacks). Here things are a little wobbly because screaming is a bad. Screaming is non-rivalrous because it can bother 10 people just as well as 9. Similarly, it is non-excludable. I cannot reduce the screaming people for you without reducing it for someone else. We have whole economic literatures devoted to understanding public goods and goods/bads.
Screaming is a bad. The more of it you have the less you marginally suffer just as in a good the more you have the less you gain. It is a public good so the private provision of silence should be smaller than the efficient level. We don’t really need to overhaul all of economics to do it. I’d be more interested in this line of reasoning if his example was something that you want (a good not a bad) where you have increasing marginal utility.