In a recent post, I imagined a hypothetical situation in which cranberries turned out to be a surefire way to prevent cancer. I described how this would cause a massive shift in demand, which would lead to an increase in prices, which in turn would lead to an increase in supply:
Suppose that scientists announce tomorrow that it has been proven that eating 100 grams of cranberries per day makes someone immune to developing cancer. What would happen in the short term? The demand for cranberries would increase dramatically – the demand curve would shift sharply to the right. Cranberries, in turn, would become much more expensive, so too ask will increase drastically, the requested quantity won’t rise that much, at least not in the short term. What would happen on the production front? For any cranberry farm, you would expect that some marginal adjustments could be made to increase production, but those changes were not worth the cost. But as the price rises, those adjustments become worthwhile. You would expect today’s cranberry farmers to immediately try to maximize their yields and push as many cranberries out the door as they can.
In the longer term, you would expect them to increase their cranberry production capacity, and you would also expect that many other people would move away from growing blackberries or marionberries and start growing cranberries instead. This, in turn, also shifts the supply curve to the right, causing the market price for cranberries to fall again. The adjustment process will take some time, but if your goal was to ensure that many people can benefit from cranberries and their cancer-fighting properties, implementing price controls on cranberries would be your biggest enemy because it would prevent these adjustments from taking effect. take place. prevent.
In any case, the process I describe above is what would ideally happen if it turned out that cranberries had such amazing properties. Realistically, I suspect that what would actually happen is that after the initial increase in demand and subsequent price spike, the government would step in with price controls and regulate the cranberry market into oblivion. And part of what would motivate this policy is the claim we often hear in favor of price controls for a good thing – that in the absence of price controls, “only the rich” can afford this and that. price controls to ensure that the good in question is ‘affordable’ to everyone. If the price of cranberries suddenly rose to $1,000 per serving, there would undoubtedly be outrage that “only the rich” can now afford cranberries and their anti-cancer properties. (This outrage often makes people think that price controls somehow ignore the distinction between “willingness to pay” and “ability to pay” – a basic but common mistake, because outrage rarely sharpens one’s reasoning skills.)
The problem with this way of thinking is that it (like Ferengi’s economic philosophy!) fails to think beyond step one. Yes, if something like this were to happen, “initially only the rich” would be able to afford cranberries. But the high price would encourage large numbers of people to enter the cranberry market, pushing the supply curve to the right and causing the price to fall again. When you’re stuck in a static, single-phase state of mind, it can seem disturbing to pontificate about how “only the rich” can afford this or that. But if you can think beyond phase one, you realize how much that vision is missing.
Given that the way we frame issues has a significant impact on how people view that issue, here’s a frame I think would be useful: High prices today allow the rich to subsidize access for the poor tomorrow. In the case of cranberries, increasing supply will require expanding existing farms and creating new farms. This entails many expensive upfront costs. Allowing cranberries to be sold at a high price to the wealthy today finances that process of expansion, shifting the supply curve and making cranberries available in abundance to everyone else. That is, allowing the rich to buy at high prices early on subsidizes the process of making long-term goods available to the poor at low prices.
This is not a fanciful process; this reflects what we can see throughout economic history. Whenever there is a new technology, product or breakthrough, it is usually very expensive in the early stages. But as time goes by, the cost comes down and it becomes more available and affordable. But to get to that stage it must first be able to go through the ‘very expensive’ step, to help offset all the costs involved in bringing the product to market, and the still high marginal production costs for doing so. new product. Take electric cars, for example.
A newcomer in the field of electric cars is Rivian. Their first two vehicles, the R1S and R1T, started at over $80,000 and could easily fetch over $100,000 if you added a few basic options. But now Rivian is preparing to launch newer, more mass-market vehicles at half the price of the first generation. In order for Rivian to produce cheaper electric cars that were more accessible to the average consumer, they first had to go through a process of selling expensive cars to wealthy consumers. The high-income earners who bought the first $100,000 Rivians allowed the company to produce cheaper versions of their vehicles.
Almost everything you enjoy today was once an expensive luxury affordable only to the wealthy. With this in mind, look back and ask yourself what would have happened if any of these things were immediately hit with price controls when they first hit the market to prevent “only the rich” from being able to afford them. If you understand why that would have been a bad idea in all those cases, you can understand the same thing today. The rich who pay top dollar for things today will make them affordable for you tomorrow – so keep that framework in mind when you’re upset about the high price of something. And remember to always think beyond step one.