Why the Resistance to Prices?

25 October 2007 at 8:56 am 5 comments

| Peter Klein |

When the quantity demanded exceeds the quantity supplied — causing shortages, delays, congestion, misallocation — the solution is to raise the price. Every freshman economics student knows this. Why, then, are regulators, industry groups, and consumer representatives so often opposed to rationing by the price mechanism? Is it simply Bryan Caplan’s anti-market bias? Is it interest-group politics? Or is there something specific people don’t like, or don’t understand, about prices?

Two examples: (1) Airline landing slots. I worked on this problem with Dorothy Robyn back at the CEA in 2000. The US FAA prices airport landing slots, and access to the air traffic control system, on a per-passenger basis, regardless of time of day, season, overall stress on the system, and so on. In other words, the price charged has no relation to the marginal cost of provision. The obvious solution is some kind of congestion pricing mechanism. But the major players are generally opposed. Mike Giberson provides details on the latest attempt to use prices to reduce air-travel delays. Time-of-day pricing? “We are unalterably, adamantly opposed to it,” says the head of the Air Transport Association, the airlines’ lobby group.

(2) Internet bandwidth. The WSJ recently ran a piece on internet congestion. “Its Creators Call Internet Outdated, Offer Remedies,” shouts the headline. Among the solutions considered: better and fatter pipes; faster connections from private networks to backbones; routers that prioritize packets based on file type (video, audio, text). All purely technological remedies. No mention of pricing. What happenend to those Varian and Mackie-Mason papers from the 1990s on real-time auctions and other pricing mechanisms for packet prioritization? Where is it written in stone that “the internet must be free”? (As a friend of mine, head of a major university internet-security team, recently noted, “If each email cost 1 cent to send, spam would disappear overnight.”)

Entry filed under: - Klein -, Classical Liberalism, Institutions. Tags: .

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5 Comments Add your own

  • [...] Peter Klein put an intriguing blog post on Why the Resistance to Prices?.Here’s a quick excerpt:Mike Giberson provides details on the latest attempt to use prices to reduce air-travel delays. Time-of-day pricing? “We are unalterably, adamantly opposed to it,” says the head of the Air Transport Association, the airlines’ lobby … [...]

  • 2. davd  |  26 October 2007 at 8:22 am

    I was listening to a talk on water issues and the shortages in Atlanta came up. The speaker made the following observations:

    (1) we use about 150 gallons per capita
    (2) we pay about $0.065 cents per 1000 gallons of water (locally, he didn’t have in Pittsburgh
    (3) most of the population of Atlanta is eventually going to have to relocate because there isn’t enough water.

    Huh

  • 3. ad  |  26 October 2007 at 12:42 pm

    It occurs to me that those with most lobbying power must be reluctant to institute changes that will reduce the value of their lobbying power.

    The freer the market, the lower the value of your lobbying power.

    So what happens?

  • 4. Richard O. Hammer  |  27 October 2007 at 11:07 am

    The previous commenter “ad” makes a valid point which I would generalize.

    The representatives whom you could reach in existing organizations (regulators, industry groups, and consumer representatives) will speak on behalf of present, already existing, institutional arrangements. On the other hand, those people who would benefit from new institutional arrangements have not been organized into a group which speaks through the voices of representatives, so you are unlikely to hear those voices until they are organized by entrepreneurial action.

  • 5. michael webster  |  28 October 2007 at 5:43 pm

    Uh, perhaps the freshman in economics might want to try to understand how traffic signals work to reduce congestion.

    No market here, nothing to see, move along people.

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