In a recent post, I imagined a hypothetical situation where cranberries turned out to be a surefire way to prevent cancer. I described how this would create a huge shift in demand, leading to an increase in prices, which in turn would lead to an increase in supply:
Suppose tomorrow, scientists announce that eating 100 grams of cranberries per day has been proven to make one immune from ever developing cancer. What would happen in the short run? There would be a huge increase in the demand for cranberries – the demand curve would shift sharply to the right. Cranberries, in turn, would become much more expensive, so even though demand will drastically increase, the quantity demanded will not rise by all that much, at least in the short run. What would happen on the production front? For any given cranberry farm, you’d expect there are some marginal adjustments they could make to increase output, but those changes hadn’t been worth the cost of making. But when the price rises, those adjustments become worth making. You’d expect current cranberry farmers to immediately try to maximize their yields and push as many cranberries out the door as they possibly could.
In the longer term, you’d expect them to increase their cranberry production capacity, and you’d also expect to see many other people shift away from growing blackberries or marionberries and start growing cranberries instead. This, in turn, shifts the supply curve to the right as well, bringing the market price for cranberries back down. The process of adjustment will take some time, but if your goal was to make sure lots of people can take advantage of cranberries and their cancer-preventing properties, implementing price controls on cranberries would be your worst enemy, because it would prevent these adjustments from occurring.
At least, the process I describe above is what would ideally happen if cranberries were found to have such amazing properties. Realistically, I suspect what would actually happen is that after the initial demand increase and subsequent price spike, the government would intervene with price controls and regulate the cranberry market into oblivion. And part of what would motivate those policies is a claim we often hear in favor of price controls for some good – that in the absence of price controls, “only the rich” will be able to afford such-and-such, so we need price controls to ensure the good in question is “affordable” for everyone. If the price of cranberries suddenly shot up to $1,000 per serving, there would doubtless be outrage that “only the rich” can now afford cranberries and their cancer-preventing properties. (This outrage often tricks people into thinking the case against price controls somehow overlooks the distinction between “willingness to pay” and “ability to pay” – an elementary yet common mistake, because outrage rarely sharpens one’s reasoning skills.)
The problem with this mode of thinking is that it (like Ferengi economic philosophy!) fails to think past step one. Yes, if such a thing were to happen, “only the rich” would be able to afford cranberries – at first. But the high price would incentivize huge numbers of people to get in on the cranberry market, pushing the supply curve out to the right and bringing the price back down. If you’re stuck in a static, one-stage frame of mind, pontificating about how “only the rich” can afford this or that may seem troubling. But if you can think beyond stage one, you realize how much that view misses.
Given that the way we frame issues has a significant impact on how people view that issue, here’s a framing I think would be helpful: high prices today enable the rich to subsidize access for the poor tomorrow. In the case of cranberries, in order for supply to rise, existing farms will need to be expanded and new farms will need to be created. This involves a great deal of expensive, up-front costs. Letting cranberries be sold for a high price to the rich today is what funds that very process of expansion, pushing out the supply curve and making cranberries abundant for everyone else. That is, allowing the rich to buy at high prices early on subsidizes the process of making goods available to the poor at low prices for the long haul.
This isn’t a fanciful process – this reflects what we can see throughout economic history. Whenever there is some new technology, product, or breakthrough, in the early stages it’s usually very expensive. But as time goes on, costs come down and it becomes more available and affordable. But in order to reach that stage, it needs to be able to go through the “very expensive” step first, to help offset all the costs that went into bringing the product to market, and the still-high marginal costs of production for this new product. Take, for example, electric cars.
A newcomer in the electric car space is Rivian. Their first two vehicles, the R1S and R1T, started at over $80,000 and could easily go for over $100,000 if you added a few basic options. But now Rivian is preparing to release newer, more mass-market vehicles at half the price of the initial generation. In order for Rivian to be able to produce less expensive electric cars more accessible to the average consumer, they first had to go through a process of selling expensive cars to wealthy consumers. Those high income people buying the initial rounds of $100,000 Rivians enabled the company to begin producing more affordable versions of their vehicles.
Almost everything you enjoy today was once an expensive luxury only affordable to the rich. With this in mind, look back and ask yourself what would have happened if any of these things were immediately hit with price controls when they first came to market to prevent “only the rich” from being able to afford them. If you can see why that would have been a bad idea in all those cases, you can understand the same thing in present times as well. The rich paying top dollar for things today is what will make them affordable for you tomorrow – so keep that framing in mind when feeling upset about the high price of something. And remember to always think past step one.
READER COMMENTS
Dylan
Dec 4 2024 at 12:45pm
I like this framing and might try it out! However, I suspect there’s a difference in how people intuitively react to these things. I think most people think that an acceptable advantage of being rich is to get fancy cars and yachts and staying in luxury resorts. But, they don’t want those advantages to trickle down to “essentials,” where everyone needs to have the same chances as everyone else. There’s multiple problems with this way of thinking of course, and you point out one of the biggest, which is that by allowing the rich to get some things first, that makes it affordable for the rest of us to get these things later at an affordable price. Two, even if you put on price controls, the rich still have advantages that allow them priority access (paying someone to wait in line for them for example), at the cost of a big loss in efficiency and missing incentives to bring more supply to the market. Three, If somehow we truly prevent two, we’re also getting rid of a lot of the incentives to improve your lot in life. My suspicion is that few people are truly motivated to work the extra hours so they can get that bigger boat. They want to be able to use the assets at their disposal for things that are more important, buying mom the fancy new knee so that she doesn’t have pain when she walks, or getting tutoring lessons so that your kid beats out all the other kids to get into Harvard. We’re all egalitarians until it comes to the stuff that is really important to us and the people we love.
Henri Hein
Dec 4 2024 at 3:14pm
Another good point along these lines that I stole from somewhere I unfortunately don’t remember is that even in a socialist (or some other alternative) economy, for new technologies you would still need to release product in small supply. In any type of economy, it takes time both to perfect the product and to build out the production facilities. So the customer base is necessarily small at first. If it wasn’t the rich, it would be the politically connected instead.
steve
Dec 4 2024 at 8:04pm
Cranberries are easy to grow. They are cheap. It would be easy to ramp up production. I dont really see the govt intervening. Note that the government actually subsidized vaccines for covid. What is infinitely more likely is that someone would discover it’s possible to use large amounts of cranberries to develop a medicine that prevents cancer. The company that develops it would announce that even though it costs $1000 to produce and recoup R&D costs they will charge $400,000 since that is the value of preventing cancer. (Note that your example is made up and mine based upon recent examples.)
Steve
robc
Dec 5 2024 at 9:07am
Two followup questions:
So priced just like every other product?
What will the price be after the patent expires?
Kevin Corcoran
Dec 6 2024 at 11:21am
Given that the list of things that can be done cheaply and easily but are nonetheless still subject to frequent government intervention is about two miles long, I don’t share your optimism here.
They did, while also putting up significant barriers that made the whole process more expensive. It’s like high fructose corn syrup and the frequent proposals to put taxes on soda because of them as a public health tax. The government uses import quotas to make ordinary sugar far more expensive in America than anywhere else, and then spends billions of tax dollars subsidizing corn, thus making high fructose corn syrup artificially cheap. And after spending billions of tax dollars making high fructose corn syrup artificially cheap, the government now things the solution is to impose even more taxes to make high fructose corn syrup more expensive. The whole thing, in both cases, is less like a wise and well considered policy and more like a tragicomedy.
Okay…so let’s say some pharmaceutical company uses cranberries to make a cancer preventing medication out of them and charges $400,000 for it. So what? The pharmaceutical company can’t force me to buy their $400k product when there are massively cheaper alternatives available. That is, unless they use a heavy dose of regulatory capture to restrict the market, and get cranberries pulled into the absurdly regulated labyrinth and get lawmakers to restrict their use by reclassifying them as “medical supplies” rather than just ordinary produce. Which does sound pretty likely to happen to me, actually. That’s the kind of thing I had in mind when I suggested the government would regulate the cranberry market into oblivion.
MarkW
Dec 5 2024 at 9:13am
But, they don’t want those advantages to trickle down to “essentials,” where everyone needs to have the same chances as everyone else.
But virtually everybody accepts this, even when it comes to ‘essentials’, when they think internationally. So it’s acceptable (albeit unfortunate) that people in wealthy countries with sophisticated health systems and pharma industries get earlier access to life-saving treatments and drugs before those in developing nations. But they also understand that wealthy countries financing the development of medical breakthroughs is essential to these developments eventually being available to the global poor.
Dylan
Dec 5 2024 at 7:04pm
Agree. People do tend to think that way. I think both ideas are wrong. I wish people could see how allowing the rich to pay more for essential items makes them become more quickly available to the rest of us. And, I wish that people didn’t make such distinctions between strangers that live in the same country as they do and those that don’t. But, both problems seem fairly intractible.
David Seltzer
Dec 5 2024 at 6:36pm
Kevin: Slightly off topic about the wealthy subsidizing the poor. Martin Shkreli managed Turing Pharmaceuticals. They bought the rights to the drug Daraprim. It’s used to treat AIDS and malaria. Old Marty announced he was increasing the price of Daraprim from $13.60 to $750. Shkreli had little competition because the ordeal of getting FDA approval to manufacture and distribute competing generic drugs was costly and time consuming. If another company wanted to compete to sell Daraprim it would need to apply for a new generic drug approval. Filing one of these applications with the FDA can cost as much $20 million dollars. On average, it takes about four years for the FDA to approve a single generic application. Reasoning from a price change, It’s apparent how pernicious one-step thinking can be.
Kevin Corcoran
Dec 6 2024 at 11:31am
Indeed, and one thing I’ve found from working in healthcare economics and analytics is that actual doctors are almost shockingly uninformed about how any of that actually works.
And slightly off topic still, one of the least (to me) surprising blog posts Scott Alexander ever wrote was about how doctors do worse than chance when given multiple choice tests on basic statistics. And this was an incredibly easy test – one of the questions was:
Despite how the question itself seems like it’s trying to drag the test taker to the correct answer, the vast majority of doctors get this wrong – and it was multiple choice! It’s actually kind of terrifying how few doctors even understood the difference between “mean” and “median” in my own experience. And I don’t mean they needed a quick reminder about what each term means – I mean they couldn’t wrap their heads around it even if I tried to essentially baby talk them through it (“Okay, so say you have ten people in a room and add up their net worth and divide by ten, but you also have them line up highest to lowest in net worth, and then Bill Gates walks in the room so he goes to the front of the line…”). The most common ending to that kind of interaction is they’d demand to see the numbers for mean and median, and whichever one looked “best” (according to however their metrics arbitrarily define things) is the one they’d insist was right and should be used.
David Seltzer
Dec 6 2024 at 5:59pm
Yeah. Wanna really confuse them? include mode, variance and standard deviation. I’ll stop there. Skew and kurtosis might detonate their minds.
Off topic. If I may ask, where did you serve on active duty? One of my best good friends was a Hospital Corpsman (Doc) who served at Da Nang Marine Airbase during the Vietnam war .
Stephen
Dec 10 2024 at 4:11pm
Interesting post, this. I was wondering though if this thinking broadly applied to rent control. The cranberry analogy supposes that the early (rich) entrants and their high costs invariably lead to a subsidy that benefits the poor. But it is not particularly clear if this applies to housing as then, we would expect, in response, more buildings to pop up at cheaper costs especially in high-end urban centres, driving down rent. This doesn’t generally seem to be the case and the cost of rent tends to trend upwards.
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