Price dikes

post by KatjaGrace · 2016-09-07T21:44:28.000Z · LW · GW · 0 comments

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.

0 comments

Comments sorted by top scores.