Why the Resistance to Prices?
| 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 “Its Creators Call Internet Outdated, Offer Remedies,” shouts the headline.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.”)