Price dikes

I like this comment, from Scott Alexander:

I think there’s a general principle that once you pass dumb regulations, it’s going to make bad things happen, and then if you try to solve those bad things by passing further regulations, you’re just going to get caught in an endless trap.

So first they regulate Mylan into a monopoly on EpiPens. Then they realize that made them too expensive, so they regulate that the government gets to set the price of drugs. Then drug companies stop making EpiPens to switch to more profitable unregulated drugs, so the government has to mandate that you’re not allowed to be a drug company unless you make a certain amount of EpiPens below cost. So drug companies leave the US and headquarter overseas to avoid that law, and then the government regulates that only drug companies headquartered in America can sell drugs in America. Then cheaper foreign drugs start coming in as contraband, so the government regulates that all packages must be inspected at the border. Then drug mules ingest contraband medications into their bodies, so now everyone entering the country needs to have an X-ray…

I agree there is a principle “regulating the economy is like playing whack-a-mole”. But why is it like that?

I think of artificially changing the price being much like artificially changing the water level. You can decree that the water should be five feet lower, so you can have a nice city on the would-be continental shelf. You can build a decent wall against the tide. But water seeks out every crack and weakness, and leaks through. You will spend forever mending leak after leak, and everything will always be a bit wetter than you hoped.

Why? Because every molecule of water is being forced downwards by gravity, and so is effectively scoping out your wall and seeing if it can move downwards through the bit of wall it is right next to. That means your entire wall is being carefully examined for leak opportunities, which are being immediately exploited by the molecules that found them.

If there are holes in the wall low down, most of the water will flow through those holes and higher up holes won’t be discovered. But when you fix the lower holes and push the water level further from its equilibrium, more holes will be found.

So it is with artificially distorted prices. If bread is sold at $0.03, and people are willing to pay $3.00 for it, and there isn’t sufficient bread to go around, every person has reason to pay $0.03 for bread and sell it for $3.00. Every person has their eyes out for such opportunities. Every person is like a gravity trying to move bread up the price gradient (okay maybe like anti-gravity). If you want to avoid this, you have to guard every route through which cheap bread may flow to its natural (in the current equilibrium) expensive bread state. As soon as you fix one hole, another will be found, unless your wall is an incredible work of wallsmanship.

This is closely related to a really nice thing about markets: if the price of a thing changes, the system decentralizedly finds the best ways to respond. For instance, if you put a tax on air pollution, the people who can most cheaply reduce their air pollution will be the ones who do it, because people throughout the economy are looking for ways to reduce the quantity of air pollution for profit. Similarly, a body of water is pretty efficient at responding to bits of its surface being lower or higher, relative to say a centrally coordinated pile of blocks.

6 responses to “Price dikes

  1. Let’s assume charitably that the regulators are really trying to achieve a goal (other than just doing random stuff to make the superiors and voters happy). I believe that many wannabe regulators have a problem seeing other people as agents.

    In some sense, this is a natural fallacy. The various existing desires and abilities of the individual agents have probably already created some kind of equilibrium. So it is easy to look at the outcome and believe, mistakenly, that this equilibrium is actually what everyone wanted to achieve. (Mistaking the global outcome for the individual goals.) In that mindset, it seems obvious that if you just tweak one parameter, everything else will remain where it was.

    (More generally, outside of economics the same effect makes some people believe that they are the only deep thinkers out there, and everyone else is just a stupid sheep. Some of them later grow out of this.)

    The regulator is lacking the detailed information about the desires and abilities of people involved in the system. But I suspect the problem often happens at a higher level; that the regulator isn’t even aware of this lack of knowledge.

    Just thinking about the traffic around me… A few years ago the mass transit company decided to raise the costs by 50%, and predicted a 50% increase in revenue. They were surprised to see that many people switched to using cars instead. Later they cancelled the reduced-price tickets for very short distances (just one or two streets in the city), so that people had to pay the full price for every ticket. Again, they were surprised to see that many people decided to walk that one street by foot instead. The train company reduced the number of trains going to certain villages to one per day, expecting the income to remain the same. Instead, people switched to using buses, which provided more convenient schedule. The same mistake repeated over and over again.

  2. Pingback: Platonic market | Technology as Nature

  3. To summarise: never use regulation to do the job of a subsidy.

  4. If you are prepared to face consequences like dying because your labour not worth enough to anybody for you to afford food, or dying because you can’t afford medicine, or dying because someone sells you dangerous fake medicine, then unregulated markets are great.

    When considering whether something is good or bad, it is very useful to have a clear idea of the alternatives. Regulation can look awful..😂except when you compare it to the worst case scenario of lack of regulation.

    You don’t get to have the benefits of regulation without the downside. You do get to have a dynamic balance between both.

    • How does market regulation (rather than a welfare state, which is a separate matter) make it so people whose labor is worth less than food, are able to buy food?

      (Force wages higher? Nobody will hire them at the new wages, they still starve.

      Force people to hire them? Firms go out of business, because most have low margins already – note that indicates they’re being efficient, in most cases.

      Subsidize the firms so they stay afloat? Why not just give the people with no-value labor cash in the first place?

      Price-control food? If the new price is lower than the market clearing price, supplies will drop, possibly to zero, because making food is also economic activity.)

      If you want “to be sure people can always have food”, simply give them food or money to buy it with, don’t try and force “the market” to pay them more or reduce the cost of food.

  5. Another analogy … John Gilmore famously said “The Net interprets censorship as damage and routes around it.” Market prices are also just information. You can try to block that information but it will probably successfully route around.


Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s