Utopia, you are standing in it!

If we do not have all of every­thing we want, there is a problem of rationing. This is the major corollary of scarcity. An individ­ual cannot escape the requirement for "economizing." How shall he disburse his limited income?

The very impersonal­ity of the pricing mechanism, which the advocate of freedom should consider an asset, does not appeal to the compassionate person determined to do good.

Thus we find widely advocated processes of rationing, founded not on each person bidding in the open mar­ket on the basis of his own scale of priorities, but on direct disposal of goods and services by some pub­lic authority on the basis of what the authority somehow decides are the relative "needs" of the mem­bers of the community…

The Smythean scheme [rationing by prices] achieves a number of desirable results.

First, the rationing is done with a minimum cost in time and in­convenience. Paying a price in terms of money, i.e., generalized purchasing power, is neater (al­though not necessarily smaller in the estimation of everyone) than paying in terms of a specific re­source, in this case, the energy re­quired in arising early and grop­ing to the parking lot by moon­light. That, as Smythe has often said, is why money was invented.

Second, a dispensing bureauc­racy—suffering the temptations of frail men, guided by arbitrary and often nebulous criteria, and subject to no rewards for efficiency or penalties for inefficiency—is avoided.

Third, there is upheld the basic principle that those who get (in this case, the parking spaces) shall pay. Fourth, there is upheld the equally basic principle that gifts and rewards are best given in generalized purchasing power.

Bill Allen

Some economic fallacies don’t die easily. Take the belief that the only determinant of a market price is the cost of producing the particular good. When a price rises or falls, it is commonly assumed that the item’s cost of production must have gone up or down. And there is a tendency to condemn price increases which are not apparently due to higher production costs.

But market prices are not mere reflectors of production costs….

What does determine [prices]… is competition among consumers for the available supply. An increased demand would cause the price to be bid up. A smaller available quantity would further intensify consumer’s bidding. Conversely, a diminished demand or an increased supply would weaken consumers’ competition and cause the price to fall.

There are thus two factors which determine a market price: consumers’ demand and the available supply. Either or both can change without any change in the cost of production…

The lesson is clear. Prices move up or down in order to ration the existing supply among those who demand it. And market-clearing prices can be very different for the same good at different times or in different locations–even though production costs are identical. So long-distance calls are cheaper at night; matinees are cheaper than evening performances; early-bird restaurant specials are less expensive; and U-Haul trucks from Detroit to Houston were much higher priced than the same trucks from Houston to Detroit.

Production costs do influence market prices, but only to the extent that these costs affect the available supply. It is that supply and consumers’ demand which are the real moving forces behind market prices.

Bill Allen