Monday, August 1, 2022

Money and prices efficiently allocate scarce resources

 One of the functions of money is the allocation of scarce resources.

The classic example of this involves parking meters. It seems unlikely that the money from the meters pays for the cost of collecting the money nor that the cost of prosecuting infractions pays the administrative costs.

The purpose of parking meters is to restrict "luxury consumption" of parking spots in highly desirable spots. Luxury consumption involves somebody parking in a prime spot all day long. The advantage to society is that the one person who parked there all day long might only be ten steps from the entry to their place of employment and save 50 paces of walking from the perimeter of the parking lot. 

The disadvantage is that if the nine-hours between 8:00 AM and 5:00 PM were metered out in 15 minute increments then 36 people could enjoy the benefits of that shorter walk. As a merchant near the prime parking space, you might notice patrons choosing to not buy large (potentially profit generating) items if they have to carry them 60 paces back to their vehicle.

Prices pull resources

Allowing prices to float is the mechanism that causes resources to percolate toward the highest value end-uses. If the price of baby formula moves upward, then the factory extracting protein from soybeans will sell it to plants making baby formula rather than cheap, canned chili because plants making baby formula can afford to pay the highest prices.

Mandating prices destroys that mechanism and kills any incentive to increase supplies of products and services that are in high demand.

The next thing that politicians do as price mandates fail to work as envisioned is to subsidize low-income buyers. That results in people buying products just because they can. Getting back to baby-formula, women who can breast feed (and who would breast feed if they were paying for formula out-of-their-own-pocket) buy subsidized formula because they like the convenience. Or, they buy the formula and resell it.

Stevie Wonder could have seen it coming

The cascading failures of the Socialists may have been triggered by Covid but the end results (shortages) were entirely predictable.

Ham-handed regulations coupled with freezes on evictions (basically a form of rent-control) and handing out money willy-nilly caused shortages. It is no longer a question of "If?" but a question of "What next?"


  1. Fundamental economics is not all that complicated. At least for those who work and live in the real world. That group has never included politicians.

  2. Particularly given we have least 7-8 more months of our current trajectory, if not longer, its prudent to put some essential supplies up for a rainy day.

  3. To play Devil's Advocate, using price this way to allocate scarce resources is one of the primary complaints of those socioeconomic less-well-off classes. And they have a point. Why should something that is essentially public property (e.g., a parking spot) be priced in ways that make it more painful for them to utilize? There are lots of prices that are so high that they shut out whole groups of people from gaining access.

    This is a well-recognized problem, for instance, in the legal community. The solution so far has been publicly funded legal aid societies and pushing pro bono work onto the legal community.

    You see it in the pharmaceutical industries, who in their advertisements almost always mention their programs for those who cannot afford the market prices. This, however, is not really dealing with public property, but is private goods being allocated. So maybe not quite the same. I think you could argue that enough drug R&D and medical research is publicly funded though, that all taxpayers have some stake in those products.

    It's a fundamental problem that a reasonably large segment of the population just does not seem capable of generating enough wealth or income to be self-supporting.

    The real question is how much effort should be expended in keeping the non-swimmers afloat. Particularly when they refuse to learn to swim, versus are just incapable of swimming. And when the seas get rough and the economic winds howl, the question becomes existential.

    I don't have the answers, but I sure understand the question.

  4. Corn and fertilizer are two more items...


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