Saturday, March 22, 2008

Economics Semiotics Idiotics

Tim Harford in the FT today pondered an eternal enigma: why do prices so rarely rise in the face of a shortage. For example, if there are more UK fuel disruptions, then it would be logical for petrol stations to increase prices instead of allowing huge queues to build up for tiny rations of fuel.

He does not give a complete answer, hence the use of the word "enigma" in his title. But he offers: The intuitive explanation, of course, is that we irrationally object to high prices even when the alternative is rationing, long queues, and uncertainty over whether we can buy what we really want.

I agree, but the "irrational objection" is just the part of human nature that would prefer to see "everyone" suffer equally instead of distributing critical products by financial capability. It appears that the son of the noted monetarist Milton Friedman also suggests evolutionary psychology could explain this sub-optimal behaviour.

But the whole article talked only of price rises. Remember that a previous price is only a signal, I still think consumer reaction to price cuts is equally idiotic.

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