Here is a question I ask my freshmen economics students:
I sometimes feel like the world wishes to live in a “Goldie-Locks Economy.” For example, I often hear complaints about interest rates that are too high (discrimination) AND also about interest rates that are too low (predatory lending); about gas prices that are too high (gouging) and about gas prices that are too low (luring). Is there a “right” price for anything? What do economists mean by the “right” price as opposed to what a Goldie-Locks thinks about it?
It would be too nice of me to suggest an answer to you right now, wouldn’t it? Why am I bringing this up? Because right here in my part of the world, our esteemed Senator Kristen Gillibrand is holding hearings to get to the bottom of the milk price crisis that Western New York dairy farmers are facing. Now I have no idea what the right price for milk should be, but it does seem to be a good deal right now (less than $2 per gallon) and I recall it being more expensive in recent years. One of the Senator’s concerns is that it appears that dairy farmers are being forced to sell their milk for prices below what it costs them to produce it.
Let that last sentence sink in just a little bit.
First of all, of no concern to the senator is that millions of New Yorkers, particularly poorer ones, benefit enormously from low milk prices, but who cares about us? Of more importance, what economic factors would lead to an equilibrium where milk producers are forced to sell their product for less than it cost them to produce it. And I would note to those who have taken price theory, that this is not just a short-run operational phenomenon. Since I know nothing, absolutely nothing, about the milk market I cannot say what is going on, but here are some possibilities (probably in order of importance):
This list could go on … I’d love to ask one question. What is an appropriate price for milk? It is a question similar to what I would like to ask an Earth Scientist, “what is the right temperature?”
Some complementary information..
January NYT article on declining milk prices…
http://www.nytimes.com/2009/01/02/business/02dairy.html?pagewanted=all
U. of Wisconsin graphs on dairy marketing and risk management…
http://future.aae.wisc.edu/annual_values_graph.php?pid=10&area=US&period=recent
http://future.aae.wisc.edu/annual_values_graph.php?pid=10&area=New%20York&period=recent
GREAT post. This bothers me all the time.
If you charge too much, you’re “gouging.”
If you charge too little, it’s “predatory.”
If you charge the same as everyone else, it’s “collusion.”