Sunday, April 18, 2010

Prices and Scarcity

I love this excerpt from Thomas Sowell's Basic Economics:
"Misconceptions about the role of prices are common. Many people see prices as simply obstacles to their getting the things they want. Those who would like to live in a beach-front home, for example, may abandon such plans when they discover how expensive beach-front property is. But high prices are not the reason we cannot all live on the beach front. On the contrary, the inherent reality is that there are not nearly enough beach-front homes to go around and prices simply convey that underlying reality. When many people bid for relatively few homes, those homes become very expensive because of supply and demand. But it is not the prices that cause the scarcity, which would exist under whatever other kind of economic system or social arrangements might be used instead of prices. There would be the same scarcity under feudalism or socialism or in a tribal society.

"If the government today were to come up with a 'plan' for 'universal access' to beach-front homes and put 'caps' on the prices that could be charged for such property, that would not change the underlying reality of the high ratio of people to beach-front land. With a given population and a given amount of beach-front property, rationing without prices would have to take place by bureaucratic fiat, political favoritism or random chance—but the rationing would still have to take place. Even if the government were to decree that beach-front homes were a 'basic right' of all members of society, that would still not change the underlying scarcity in the slightest."1
1. Thomas Sowell. Basic Economics, pg. 13.
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