Chapter 18

Chapter 18 - Chapter 18 Elasticities, Price-Distorting...

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Unformatted text preview: Chapter 18 Elasticities, Price-Distorting Policies and Non-Price Rationing We have demonstrated in the last few chapters how prices form in competitive markets. 1 Prices, we have argued, send important signals to all the relevant actors in an economy allowing each individual actor to then choose how to behave in the market while ensuring that the market produces output at the lowest possible cost and channels it to those that value the output the most. In a world defined by scarcity, prices therefore represent one way of rationing scarce resources, a way of determining who gets to consume what, how much everyone works, how much consumption will occur now as opposed to in the future and how much risk each individual faces. We may not always like the way in which the competitive price system rations scarce goods in the world. Maybe we do not like the fact that, in an unregulated labor market, some individuals will be able to earn only very low wages, at least until they get more experience or acquire more skills or education. We may not like the fact that housing in some areas is so expensive as to preclude the poor from consuming it, or that innovations in agriculture are pushing aside the traditional small family farm. As a result, we often ask the government to tinker with the price system to come up with ways of getting toward outcomes that we like better. Examples of this include minimum wage laws, milk price regulations, rent control and a variety of other policies aimed at improving in some way on the market outcome. In the end, there may be good reasons why people disagree on the wisdom of such policies. But much of the disagreement comes from not understanding sufficiently the economics behind markets and policy interventions, and to the extent to which this is the cause of differing opinions, the economist has a role in clarifying the trade-offs involved. The most fundamental of these trade-offs rests on an understanding of the fact that, in a world of scarcity, something will always lead to rationing of goods. Put differently, there will always be some mechanism that determines who gets what goods and who is left out. Market prices represent one such rationing mechanism, and when we add other institutions in attempts to improve on market mechanisms, we will explicitly or implicitly add other rationing mechanisms on top of it. As some economists have put it, there is no free lunch no magic wand that eliminates the problem of scarcity, at least not in the world 1 This chapter is built on a basic understanding of demand and supply as treated in Chapter 14. It furthermore uses the ideas of consumer and producer surplus as developed in Chapter 15, with distinctions between marginal willingness to pay and demand assumed away (through quasilinearity). 650 Chapter 18. Elasticities, Price-Distorting Policies and Non-Price Rationing we occupy....
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This note was uploaded on 05/13/2010 for the course ECON 105D taught by Professor Cur during the Fall '09 term at Duke.

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Chapter 18 - Chapter 18 Elasticities, Price-Distorting...

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