Sunday, August 3, 2014

More on prices

Two articles today in two newspapers bring up the issue of prices.

1) In the NYT, Prof. Robert Frank argues that we need to put a price on pollutants: specifically, CO2 and other chemicals that are effecting global warming. If there is a reason not to pollute, i.e. you have to pay for what you emit, people will be more careful. Right now there is no reason to care about it. Seems pretty clear to me.

2) The Washington Post has an article about Toledo, where there are problems with the water supply. People are buying huge amounts of bottled water to get by. There are two ways to distribute water: you could charge a high price for it and thereby limit how much people buy, or you can charge a low price. When you charge a low price, you won't have enough to sell to everyone who wants it, so people will have to line up, in some cases for hours. In effect, you're charging people in hours instead of dollars, and you're rewarding people with free time over people who have responsibilities. Is that better? On the other hand if you raise prices, what will be the larger effects? Say that water is selling for $1 per liter in Columbus and $2 per liter in Toledo, and you run a grocery story chain. Where do you send your water? You send it to the place with the higher price: the market responds to the increased demand, providing more water. With the time allocation system, why send more water to Toledo? Sure, you get some people saying thanks, and calling you a good citizen, but it seems to me (for some reason) that people are more likely to get water to where it's needed if prices are allowed to rise.

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