Pricing Problems:
The market’s most fundamental error is in its assumption that whoever purchases a particular good will use that good most efficiently. In the supply and demand curve, the person or company willing to pay the highest price for a particular good always receives that good and is expected to use it more efficiently than those who could not pay as high a price.
Say a manufacturing company attempts to purchase steel. This “automobile factory” purchases the steel and pays a higher price because it is expected to use that steel more efficiently than its competitors by producing an auto and then reselling the product for the most money possible. They will pay a higher price because they can sell the finished product for a higher price. This market mechanism assures that the most value possible is being added at each stage of production.
However, at the consumer level, this assumption breaks down. A consumer who is willing to pay $100 for an ice cream cone cannot reasonably be expected to receive 10X the satisfaction or 'utility' of someone who pays $10 for that same good. Another scary proposition could be bidding for a much more important resource: water. Will someone who just drank water 4 hours ago, but can purchase a bottle of water for $100, use that water more efficiently than someone who hasn’t had anything to drink for 2 days but can only pay $1?
Americans have been on the winning side of this bidding war; we’ve had our choice of products (agricultural, manufacturing, services). Most countries try to sell to the American market because it can offer the highest price. In a graphical representation of the world, we can see most products being produced throughout the world but shipped to the US market to be sold here. This way, we see most of the benefits and few of the downsides of the market. We are a net importer…of almost everything…natural resources, finished goods, and even food. In 2005, the US was expected to be a net importer of food.
I read awhile ago, in a National Geographic magazine, that the Japanese have used some technology (satellites or radar or sonar) to find the remaining big schools of fish in the oceans. This brought them to Africa to fish off the coast of Senegal. They brought in big and efficient fishing boats and put local fisherman out of business. They use the best resources to fish these waters because they can afford to....they can sell the fish they acquire in the wealthiest markets in the world. This isn’t just a tale of the market working towards greater efficiency. It means that the Senegalese are not getting enough protein in their diet because they aren’t eating enough fish. Their way of life is destroyed because someone can pay a higher price elsewhere.
It reminds me of the Biblical story of Nathan and David. Nathan tells David the story of a man who was very wealthy and had many sheep. He threw a celebration and instead of slaughtering his own sheep for the occasion, he went to his neighbor and slaughtered that neighbor’s only beloved sheep. David, enraged, says that this wealthy man certainly must die. Are we, as Japanese or Americans, guilty of this same sin?
Americans will see this problem more and more in the coming years…as it loses its pricing power (the dollar no longer reigns supreme). Or maybe when Americans start to see the divide widen in this country. The problem comes into focus as cities like Las Vegas can outbid farmers and smaller communities for water that is becoming privatized (more market-based). Does Las Vegas use water more efficiently than farmers or small towns in the Plains? Does it use it more wisely or produce a greater societal benefit than food production? It may technically recycle the water more than a farmer, but where do wave pools compare in importance to wheat crops (with the caveat that our crops are still grown for food and not for our gas tank)?
The ability to pay a higher price for a good rarely suggests that this good will be used better or more efficiently. It just shows what we value in our culture...whether its Vegas, DisneyWorld, or bottled water.
1 comment:
My libertarian econ prof always stressed how the free market "is the more efficient mechanism for taking resources from where they are less valued to where they are more highly valued". Of course, that language is loaded with the assumption that "value" also must correspond with purchasing power, or ability to afford a good. He finally conceded this technicality, but continued with his definition.
I've also been thinking a lot about efficiency and fiscal responsibility. Often these are positioned as being very important, esp. when you throw in the spiritual angle as Evangelicals would. It would be cheaper for me to buy groceries at Wal-Mart, but is that the best choice for my community? For Wal-Mart workers? For my health? One could argue that it allows me to give more to my church or local charity. Aside from the fact that I am not generous enough to give until it hurts, wouldn't more thoughtful consumption patterns eliminate the need for our beloved non-profits (environmental, charitable, etc). If a grocery store paid workers more, I would pay more for bread, but then again the worker might not need to visit the local food pantry.
We can put in energy-saving lightbulbs that will save us money - money that will be spent elsewhere on new (carbon-intensive) goods, thus negating the energy savings.
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