The price we pay in explanations
The price we pay in explanations
Inflation might be the one thing consumers of news care most about. Explainers from economists tend to slide into just-so stories. Care in bridging that gap can spawn novel policy ideas. [Paid issue.]
Peter Coy wrote of the intricacies of defining ‘price gouging’, or more neutrally, pricing power. The piece was meant to contrast two sets of drivers of prices — legitimate circumstances and motivations for businesses to raise prices and those less so. For the legitimate side, Coy said raising prices “prevents shortages by suppressing demand and giving producers an incentive to increase production”. The first part is well-worn theory. The second part, not necessarily. At least it leaves a lot to unpack.
On the theory, most of the famous economists Coy quoted from a 2012 Booth School of Business survey hewed to the Econ 101 supply-demand model. And before going further, let me be clear, I do too. That simple model is solid for most policy purposes and there’s robust evidence that in many contexts, price controls cause net harm in the aggregate. When you enroll in an Economics PhD, at your initiation, they make you swear to uphold ‘these self-evident truths’ with your hand over a candle. I’m certainly not about to write a take recommending that large businesses should just “absorb these costs”.
The theory or its evidence are not the problem. It is the folksy way in which economists try to explain and justify their policy view to laypeople where the story can get misleading. The ‘incentive to increase production’ is the part where explainers get more creative.
