The Price is Right
By Allen R. Sanderson
“‘That’s not fair’ is the ubiquitous refrain of six-year-olds and intellectuals.”
Want to find the Washington-DC sniper(s)? In the fall of 2002 we relied on eye-witness accounts, assigned more police to stakeouts, and established a 1-800 tip-line. But we also offered a sizable reward for leads, which were ultimately helpful in apprehending the two suspects. An anonymous tip, likely inspired by the promise of a $100,000 reward, led to the “fingering” of the couple who tried to pull the now-infamous “I found a finger in my chili”-scam on Wendy’s in March 2005.
Want to find a missing child? Broadcasting an “Amber Alert” and using photos of the youngster—and alleged kidnapper—are smart, effective ways to increase the likelihood of a reported sighting. But in the end families and officials usually resort to a large cash reward as well.
Lose your cat, wallet or ski parka and want it back? For best results, post a “$25 Reward” sign on a tree or bulletin board.
Want to round up some subjects for a psychology or economics lab experiment, or for trials involving a new drug or medical procedure? Thumbtack or tape “Want to make $10 in 30 minutes?” notices around campus. (Much of our scientific knowledge in the United States appears to come from research conducted on rats—whom we pay with food and other rewards—and undergraduates, who are paid in cash.)
How about getting firearms off the street? Pass gun-control laws and tougher registration processes. But also try a Cash-For-Guns program to encourage citizens to surrender their arms. (These initiatives tend to be quite worthless as far as public policy goes—because the price offered is so far below the value of the gun to someone intent on using it to stick up a 7-Eleven; but they do turn up some pistols, rifles and the occasional musket.) Or stiffer penalties—that is, a price—for crimes committed with a gun.
In all of the above situations, we understood and used the motivational power of incentives, with money being a pretty decent proxy. (Which would a server at your local restaurant prefer, a thoughtful note thanking him or her for outstanding, courteous service, or a 20 percent tip?)
But what about when we want to get someone to donate a kidney? How about a promise-to-pay of $1,000? Or $10,000? That’s deemed outrageous, immoral, cruel, unfair (though it’s not clear to whom), unethical and, according to the 1984 National Organ Transplant Act, also illegal. And organ shortages persist as a result of not allowing prices to enter into the conversation.
Want to get your dorm room sparkling in time for a visit by mom or a potential lover? Clean it yourself—or pay someone else to do it. But at Harvard, when some student entrepreneurs formed a company to clean rooms for a price, other students objected that the more well-heeled in the student body would be able to buy their way out of the chore. Certainly this can’t be more odious than using the money to slip the maitre d’ $10 to ensure a table away from the kitchen.
And yet when Starbucks wants to “Help Children Get Clean Water” in Africa and other regions, it sells “Ethos” water—at a whopping $1.80 a bottle and donates 5 cents to non-profit organizations (why not include for-profit firms is beyond me). That’s using price to encourage the supply of donations. However, it seems more like a plot to attract new customers; otherwise, why not just increase the price by 5 cents on its existing products. (A good example of this was when Starbucks and local latte drinkers fought a 2003 Seattle initiative that would have imposed a 10-cent ‘espresso’ tax that would have gone to preschool and daycare programs.)
Traditional examples of misallocations of resources as a result of mandated price ceilings include housing and water shortages under rent controls and subsidies to agriculture, respectively. One could even toss into that same basket excessive damages caused by earthquakes and hurricanes—because we implicitly encourage people to build on shores, river banks and other vulnerable locations by agreeing to pick up the rebuilding tab in case of a disaster, rather than letting private insurance markets assess the risk (and put a price on it). But there exist all around us non-traditional cases where creative applications of allowing prices to rise has or could bring about significant improvements in our collective welfare—and failure to keep prices off the table produces disorder and imposes other costs.
When environmental groups want us to conserve energy and reduce pollution, or to encourage recycling and reduce waste from plastic soda bottles or aluminum cans, they lobby for increased taxes—a price—on gasoline and the use of deposits—a price—on disposable containers. These same “consumption police” would also impose taxes—prices again—on fast-food purveyors and obesity-inducing products to get us to slim down and shape up. But then many environmental organizations turn around and oppose tradable SO_2 allowances, which puts a price on pollution.
Yellowstone and Grand Canyon are not just congested; they suffer damage due to the traffic. To reduce overcrowding and to raise revenue to improve and expand the National Park System, the obvious solution is to raise entrance fees. Why not do it? I suspect in part because those who visit these national treasures disproportionately at present, the elderly behind the wheel of their 40-foot RVs or 20-something backpackers with espressos and iPods in hand, most likely conservatives and liberals, respectively, like it the way it is. (Those 62 years of age and older pay a one-time $10 fee and can go and come as they please forever—and for free. These elderly citizens, as a group, are nowadays certainly not poor.)
In higher education, those at the upper ends of the income distribution, in the guise of helping the poor, have hoodwinked state legislatures into holding tuition at public colleges and universities to bargain-basement levels, thus providing far more implicit financial aid to their own children than will ever be redistributed to students from families with more modest means. Raising tuition closer to operating costs, as private higher education institutions do, and then providing generous financial aid to the poor would be a far better solution.
The pitiful wages we pay for jury service contributes in part to low-quality juries. Pay them more than cab fare and fewer people would go to such extremes to avoid serving. And we would get better quality jurors and fewer weird decisions with regard to celebrity trials or personal injury cases. Do you really want someone deciding your fate, or making vital decisions, who values his or her time at $2 an hour? And in the name of public service, politicians can siphon off dollars that would otherwise be paid to jurors to spend on more conspicuous purposes, mainly those with ribbon-cutting photo-ops for the evening news or daily newspapers.
Fines for DUI/DWI are too low to internalize the externalities—property damage, personal injuries and deaths—that drunken drivers cause. The same is true—even in the wake of Katrina—with respect to our pitifully low gasoline prices as well as charges—often zero—for clogging up expressways during rush hours. But a “you can have my SUV when you unwrap the steering wheel from my cold, dead hands” mentality prevails and often drives policies. (One sign of progress: In the 1990s, when the Clinton administration enacted a 4.3 cents per gallon increase in gasoline taxes, “mad motorist disease” was rampant, complemented by Congressional outcries and calls for repeal by Republicans; in August and September 2005, when prices at the pump rose by more than $1, there was far less grumbling. Perhaps we are more accepting of market-based price changes rather than Washington-imposed ones.) The same is true of health care and prescription drugs; we all seem to think they are free, God- or at least Constitution-given rights.
At the moment senders of e-mail spam pay essentially no price for clogging up our in-boxes and wasting our time. Even a penny-per-message charge would lead to a precipitous drop in these unwanted solicitations and scams. In a related matter, it is not obvious that outlawing all telemarketing—essentially quantity rationing, where the allowable quantity is zero—was the right outcome. (Not surprisingly, politicians and charitable organizations made sure that they would be exempt from these legal prohibitions.) There is a price at which I am willing to have my dinner or television program interrupted by someone wanting to talk to me about another credit card or alternative long-distance phone provider. Why not allow individuals to set their own “dollar” bar—a price—and let firms decide whom to call?
France will lead a U.N. effort next year to initiate a tax on airline tickets to help finance efforts to fight global poverty, AIDS, and other infectious diseases in the Third World. Airline tickets were chosen because, among other reasons, airline passengers “are rarely among the poorest citizens.”
And herein lies one source for our seeming inconsistency with regard to our feelings about price as a way of dealing with scarcity and a way to ration goods: equity or fairness. But “fairness” is often a ruse, and frequently provides a convenient cover for schemes to tax the rich, or at least those with consumption habits we don’t like, in the name of equity.
“That’s not fair” is the ubiquitous refrain of six-year-olds and intellectuals. However, alternative allocating schemes are either wasteful of resources (standing in line, violence) or are not necessarily less equitable than price (who-you-know preferential treatment, test scores). Once one rules out price and violence, we are likely to resort to mechanisms in which some people have a competitive advantage and thus will likely fare better when goods are divvied up by alternative means. Those with time on their hands (read: low opportunity cost) prefer standing in line; intellectuals implicitly realize that merit or the political process or sheer brain power will be used instead, and would bestow upon them a decided advantage.
People who are uneasy about relying on prices and market mechanisms—”This is too important an issue to be left to the marketplace.”—fail to understand and appreciate the beneficial effects of prices and the full costs of relying on alternatives. In fact, the opposite case is generally more compelling—the more important something is (the environment, education, health, catching a criminal), the better to leverage the power of prices and self-enforcing incentives. The fault is generally not that we resort to price, but that the price is too low. Conservatives and liberals are both sinners in this congregation.
With apologies to Ralph Waldo Emerson, a foolish consistency may be the hobgoblin of small minds, but a wise consistency about using prices and incentives would make most of us—rich and poor alike—far better off.
*Allen R. Sanderson teaches economics at the University of Chicago.
For more articles by Allen R. Sanderson, see the Archive.