Discussions on what constitutes a “fair” (or just) price are quite old. Classical market liberals will typically classify a fair price as any price that is voluntarily agreed upon by the parties in an exchange. That’s all well and good, but I wonder how useful the concept of “fair price” is.
First, a bit of technicality: while price and cost are related, the price of something and its cost are not the same thing.1 The cost of a thing is the highest-valued alternative individual must forego when making their consumption choice. The price is the money outlay.2
For example, the price of a gallon of milk is $3.75. But the cost of that milk is what was given up to acquire it (i.e., what the consumer would have done otherwise if they were not driving to the store, going to the dairy section, grabbing milk, checking out, and driving home).
Cost, and subsequently price, arise out of the fact that we exist in a world of scarcity: there are limited resources and virtually unlimited wants. These wants are often mutually exclusive, and the resources available cannot satisfy all the competing wants. Thus, we necessarily must make choices, which subsequently involve costs. And those costs imply prices when an exchange occurs.
Because of scarcity, which is a condition of existence, we can say that, despite their subjective nature, cost and price are natural phenomena. In other words, they are caused by nature, even though they exist in the minds of humans.3
If cost and price are natural phenomena, do we get much purchase when we speak of a “fair” price? Is it fair that the Mississippi flows for thousands of miles, enriching the lands around it while deserts remain parched? Or, that in dry seasons, seawater starts to flow up the Mississippi, threatening the wildlife? These are also natural events and things, yet we do not ascribe morality or a sense of “fairness” to them. Why do so with prices?
Activities like fraud or theft do suggest that “fairness” can be applied to price. But again, I am not sure it is a proper use of the word. When we condemn the fraudster or con-man, we condemn the fraud, not the price. It is the deception that is unfair, not the price per se.
Price gouging legislation, like that in Louisiana, often appeals to fairness (or “appropriateness” as the Louisiana legislation describes) when determining if prices are gouging consumers. But that seems to make no more sense than complaining about any sort of damage. Is it “appropriate” that the winds ripped the roof off a building in a storm?
In short, I understand the impulse to discuss a fair price. But I think the fact that prices are tied to the human mind deceives us into trying to put a moral spin on them when really what we are morally judging is the action that led to the price.
By the way, this post is experimental. I’d love to see how you, Dear Reader, react to my argument here. Please share your thoughts in the comments.
[1] [Distinguishing between prices and costs is also an old concern—in his Wealth of Nations, Adam Smith dedicated Book 1, Chapters 5 (Of the Natural and Market Price of Commodities, or of their Price in Labour, and their Price in Money), 6 (Of the Component Parts of the Price of Commodities), and 7 (Of the Natural and Market Price of Commodities) to teasing out the differences between value, price, and cost. These are interesting, but written before the emergence of marginalism. – Ed. Janet Bufton.]
[2] Technically, the price would be whatever you use to make the exchange. I am assuming money here, since we live in a money-based economy. But it could be another commodity, for example, in the case of barter economies.
[3] Costs are ephemeral and occur at the moment of choice (see Cost and Choice by James Buchanan, especially chapters 2–3 and “The Ruler” by G.F. Thirlby in The South African Journal of Economics, 14(4), 253–276). Consequently, costs exist in the mind of the chooser; they are subjective, not objective. The cost of an action will always be mental, but it is still a condition of nature. Same with the evaluation of a price. Relative prices influence choices, and the relevant relative price is determined by the chooser.
READER COMMENTS
Knut P. Heen
Oct 21 2025 at 7:52am
Given that both parties have to agree on the price, the price must be fair otherwise both parties would not agree to it. When the price is too high, I don’t buy.
Jon Murphy
Oct 21 2025 at 7:10pm
Very true, but wouldn’t that imply that the exchange, and not the price, is fair? Wouldn’t fairness need to apply to an action/outcome rather than a phenomena?
Knut P. Heen
Oct 22 2025 at 6:01am
Depends on the definition of price. The standard definition is that the price is an executed exchange ratio, for example five potatoes for a fish. In that sense, a fair price and a fair exchange is the same thing.
I realize that people often use the word price for what it says on the sticker on the shelf in a store. I consider that a bid/ask like we see in the stock market or real estate market.
Jon Murphy
Oct 22 2025 at 6:48am
I am using price in the first sense (the economic sense) that you give.
Matthias
Oct 21 2025 at 7:16pm
The standard argument is that a starving man might be a million dollar for a piece of bread, but that this ain’t fair.
Similar for offering a low wage job to someone with meagre prospects. (Hence minimum wage laws.)
I don’t agree with the argument, but it’s what you often hear, and thus should address.
Knut P. Heen
Oct 22 2025 at 5:44am
The starving man would not be starving if he outbids everyone else for bread. The starving man is starving because he is willing to pay less for bread than his competitors.
steve
Oct 22 2025 at 9:15am
Willing or unable?
Steve
Knut P. Heen
Oct 23 2025 at 7:58am
Why are everyone else able to outbid him?
Mactoul
Oct 22 2025 at 9:30pm
Is “fair” exactly the same as “just””?
Starving man is in domain of charity not of prices.
Jon Murphy
Oct 22 2025 at 9:35pm
Fair and just are two separate things.
Mactoul
Oct 24 2025 at 3:04am
Can you expand on difference between fair and just?
Jon Murphy
Oct 26 2025 at 8:50am
Yes. Justice is a negative virtue in three senses. Its rules, like the rules of grammar, are precise. Perhaps most simply put, justice means not messing with other people’s stuff. More precisely:
Thus, one may be perfectly just by sitting in his room all day and doing nothing.
But there are two other senses of justice: what Smith calls “distributive justice” and what Smith leaves unnamed but Smith scholars call “estimative justice” (discussed on pgs. 269-270 of the above citation). Distributive justice involves “a becoming use of what is our own, and in the applying it to those purposes of either charity or generosity,” and estimative justice is “valu[ing] any particular object with that degree of esteem, or to pursue it with that degree of ardour which to the impartial spectator it may appear to deserve or to be naturally fitted for exciting” (ibid).
Fairness, on the other hand, involves giving to one what is due. There certainly is overlap between justice and fairness, but they are not the same. For example, my syllabus outlines how I will treat my students and grade their work. It is both fair and just for me to apply it to everyone equally; I am not messing with anyone’s stuff and I am giving to them what is due (upholding my promise). But, if I show favortism (within the bounds of the rules), say by staying late to help one student but not the other, it is perfectly just but not necessarily fair.
The rules of fairness are much more vague, loose, and context-dependent than the rules of justice.
steve
Oct 21 2025 at 3:24pm
Having managed people for so long much of time has been spent dealing with the issue of fairness. Unfortunately, not that much of life is apples to apples so you are often stuck trying to decide what is “fair” in apples to oranges comparisons. For my part I tried when I could to turn those kinds of problems into a market/bidding system. We would offer X number of dollars to pay people for extra work and then up it until we had enough volunteers. If people complained you can then point out they had a chance to volunteer. I did other things that sometimes worked but sometimes you just have to tell people that either their idea about fair is wrong or the world just isn’t fair sometimes.
I think your explanation makes sense but I have a bit of a hard time seeing practical usages for the distinction in terms. Being older, I like precision in terms and for years there were terms I persisted in using correctly but I eventually gave in as I realized that too many people didnt know what I was talking about and my proper goal was to get patients good care rather than people using correct terms.
Steve
Jon Murphy
Oct 21 2025 at 7:09pm
This certainly is a good point. There is virtue at meeting people where they are. It’s helpful to ask who my intended audience is (I see that as the question implied in your comment). I suppose I am writing for anyone who is thinking about fair prices (or, what comes to the same thing, how justice works with regard to economics).
What is the practical use of my distinction? Good question; I don’t know. Maybe it is just a distinction in search of purpose 🙂
Student
Oct 23 2025 at 10:47am
This is interesting… but I think it leaves out human intention (humans have a will are not just deterministic “robot” behaving purely naturally).
Yes… prices arise from scarcity, human desire, and voluntary exchange. In that limited sense, they’re “natural” outcomes of living in a world of finite means and competing ends. But to move from “prices are natural” to “prices are morally neutral” skips a key step… human intention (which is why there is the undercurrent of people appealing to a sense of [explicitly or implicitly] commutative justice)
Rivers and storms follow physical laws cuz they have no will. But pricing decisions are human acts chosen by people who can act justly or unjustly. Every human exchange involves moral judgment about how we treat others in conditions of scarcity.
When someone commits fraud, the problem isn’t always merely “deception.” Its also possible that the fraud reflects an exploitation of need, strategic hoarding, and/or information asymmetries.
The Scholastics (for ex: Aquinas, Soto, Molina) would have said this violates commutative justice, which demands equality between parties and forbids enrichment at another’s misfortune.
At the same time, they’d warn against the opposite extreme… freezing prices in the name of fairness when scarcity is real. If prices are held below the level needed to cover higher costs or attract new supply, the shelves empty. Shortages aren’t “just,” either… Aquinas would put it, justice is a matter of proportion: it’s unjust to charge beyond measure, but also unjust to make trade impossible.
In practice, this means distinguishing between two kinds of high prices:
– Legitimate scarcity pricing: when costs or risks truly rise… say, transport routes are damaged or replacement goods are harder to find… and sellers adjust prices to reflect those realities. Here, higher prices help ration scarce goods, encourage conservation, and draw in new suppliers.
– Exploitative gouging: when costs stay the same but sellers capitalize on desperation, hoarding inventory or charging whatever a frightened customer will pay. Here, the exchange may be voluntary in form but coercive in substance, because need removes real choice.
Both cases involve higher prices, but only one reflects honest scarcity. The other feeds on distress.
So, a just market must allow prices to rise with true scarcity while restraining those who profit from fear or monopoly or informational advantages. That’s why price-gouging laws persist in spite of our having learned economics. There are many cases where the freedom to bargain collapses.
Not that I have a solution nor any useful criteria for determining where scarcity ends and gouging begins…. but to say prices are beyond fairness because they are “natural” is like saying hunger is beyond morality because it’s biological. Nature sets the stage… reason and virtue decide how we act within it. Prices are natural in origin but moral in use.
Jon Murphy
Oct 23 2025 at 11:21am
Well, no. Rather, my point entirely depends on human intention. The intention affects the action, not the price. The price is incidental.
Student
Oct 23 2025 at 11:42am
Well I understood you as saying… that since prices arise from scarcity (a natural phenomenon), they are like a river’s flow or a storm’s damage, a morally neutral occurrence.
I am pointing out that I don’t think it’s morally neutral based on the natural law.
While it’s true that the formation of the price is rooted in nature (scarcity), the setting of the final offered price is a human action.
Rivers don’t choose their course; humans choose the spot price. This choice, made in a social context with potential for impact on others, inherently involves a moral dimension about how one treats another person under duress.
The price is the final result of all of the circumstances and actions. It’s not incidental… it’s the culmination.
Jon Murphy
Oct 23 2025 at 12:54pm
Correct. They just are.
Exactly my point. The setting and the action matter, not the price. The price just is.
Mactoul
Oct 27 2025 at 7:27am
This is how I define justice.
Perhaps by Adam Smith’s conception but individuals in a society owe something to their neighbors. Not very much perhaps, but still something. There is something called neighborliness. Suppose your neighbor wants some help, perhaps an old man has fallen down and his wife can not get up him. Would it be just for the neighbor to do nothing?
Jon Murphy
Oct 27 2025 at 7:54am
Ok. That’s something of an idiosyncratic definition, though. But you can define things however you want.
Yes, it would be just. It’d not be worthy of approbation (neighborliness is a different virtue than justice), but it’d be just. In fact, one of my very first Econlog posts was on exactly this.
As much as I’d like to, I do not have time to go into details. I recommend reading carefully Smith’s discussion of justice and the other virtues and how they relate to one another, which is found in the citation above. I’ll also try to post some additional links later.
Ron Browning
Oct 27 2025 at 9:07am
I believe Hayek would primarily place “fairness” within decisions of organizations and exclude it from results within a spontaneous order.
I believe Mises stated that all “prices” are historical. Prices are records of transactions that have already taken place, so in his view a number on a sticker on a shelf would not qualify.
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