Economist's Notebook: Prices and Rationing

I have a great person who cuts my hair in Corvallis.  It used to be easy to schedule an appointment with her but apparently her skills are becoming more well known and now it is much more difficult to find a time that matches with my free time in Corvallis (which is very scarce).  

I have been going to her since 2006 when I first moved back to Oregon and she always reminds me that her prices have stayed the same in that time.  "Still $25, as always!" She proudly proclaims.

This time it was especially hard to make a suitable appointment so she was quite surprised when I responded that I wished it was more so I could make an appointment more easily.  

To her this was crazy talk, but to me this is how scarce resources (her talent in this case) is rationed efficiently - prices rise until demand meets supply.

She still wasn't buying it - especially when I told her she might actually do better with higher prices and a less full schedule.

And so I will continue to struggle to schedule appointments....alas.

The Price Elasticity of Gas...

...is low, but if prices rise high enough: total gas consumption will go down.

Beeronomics: Hops Shortages and the Price System

The current shortage of hops that is affecting the craft brewing industry seems to be a nice teaching moment about the role of prices in the market economy. First some background, courtesy of Beervana: there is a severe hop shortage thanks to some bad weather and dwindling acreage and since supplies take a while to produce, they can't be ramped up overnight. So the bad news in increasing prices - but wait - are higher prices bad news? Well, no.

Sure high prices are bad in the fact that beer prices will follow and that will make it a bit harder for all of us to enjoy beer. But it is these very same high prices that will fix the problem. Without prices going through the roof, no new acreage will be planted, perhaps even more acreage will go to some other, more lucrative, crop. Without high hop prices, in other words, there would be continual hop shortages! Astute observers will complain that if it is mostly a weather story then my contention is a bit thin, but the other way of looking at it is with high enough hop prices, more production will occur and that production will be spread and thus the total exposure to one adverse weather event will be reduced - hopefully leading to lower supply and price fluctuations in the future.

So, let's hear it for high prices!

This leads to a reminder of what the price system does in general. It transmits data about relative demand and supply to all the important economic actors, buyers and producers, and assures that the 'right' amount of stuff is produced. What is remarkable is that prices do this all on their own - they serve as a humongous coordinating device - and they do it incredibly well. Attempts to replace prices with something better have always failed: they have led to shortages, black markets and inflation. This is one of the true wonders of a market based economic system.