On Fair Prices – Econlib

Discussions on what constitutes a “fair” (or just) price are quite old.  Classical market liberals will typically classify a fair price as any price that is voluntarily agreed upon by the parties in an exchange.  That’s all well and good, but I wonder how useful the concept of “fair price” is.

First, a bit of technicality: while price and cost are related, the price of something and its cost are not the same thing.  The cost of a thing is the highest-valued alternative individual must forego when making their consumption choice.  The price is the money outlay.

For example, the price of a gallon of milk is $3.75.  But the cost of that milk is what was given up to acquire it (i.e., what the consumer would have done otherwise if they were not driving to the store, going to the dairy section, grabbing milk, checking out, and driving home).

Cost, and subsequently price, arise out of the fact that we exist in a world of scarcity: there are limited resources and virtually unlimited wants.  These wants are often mutually exclusive, and the resources available cannot satisfy all the competing wants.  Thus, we necessarily must make choices, which subsequently involve costs.  And those costs imply prices when an exchange occurs.

Because of scarcity, which is a condition of existence, we can say that, despite their subjective nature, cost and price are natural phenomena. In other words, they are caused by nature, even though they exist in the minds of humans.

If cost and price are natural phenomena, do we get much purchase when we speak of a “fair” price?  Is it fair that the Mississippi flows for thousands of miles, enriching the lands around it while deserts remain parched?  Or, that in dry seasons, seawater starts to flow up the Mississippi, threatening the wildlife?  These are also natural events and things, yet we do not ascribe morality or a sense of “fairness” to them.  Why do so with prices?

Activities like fraud or theft do suggest that “fairness” can be applied to price. But again, I am not sure it is a proper use of the word.  When we condemn the fraudster or con-man, we condemn the fraud, not the price.  It is the deception that is unfair, not the price per se.

Price gouging legislation, like that in Louisiana, often appeals to fairness (or “appropriateness” as the Louisiana legislation describes) when determining if prices are gouging consumers.  But that seems to make no more sense than complaining about any sort of damage.  Is it “appropriate” that the winds ripped the roof off a building in a storm?

In short, I understand the impulse to discuss a fair price.  But I think the fact that prices are tied to the human mind deceives us into trying to put a moral spin on them when really what we are morally judging is the action that led to the price.

By the way, this post is experimental.  I’d love to see how you, Dear Reader, react to my argument here.  Please share your thoughts in the comments.

[1] [Distinguishing between prices and costs is also an old concern—in his Wealth of Nations, Adam Smith dedicated Book 1, Chapters 5 (Of the Natural and Market Price of Commodities, or of their Price in Labour, and their Price in Money), 6 (Of the Component Parts of the Price of Commodities), and 7 (Of the Natural and Market Price of Commodities) to teasing out the differences between value, price, and cost. These are interesting, but written before the emergence of marginalism. – Ed. Janet Bufton.]

[2] Technically, the price would be whatever you use to make the exchange.  I am assuming money here, since we live in a money-based economy.  But it could be another commodity, for example, in the case of barter economies.

[3] Costs are ephemeral and occur at the moment of choice (see Cost and Choice by James Buchanan, especially chapters 2–3 and “The Ruler” by G.F. Thirlby in The South African Journal of Economics, 14(4), 253–276).  Consequently, costs exist in the mind of the chooser; they are subjective, not objective.  The cost of an action will always be mental, but it is still a condition of nature.  Same with the evaluation of a price.  Relative prices influence choices, and the relevant relative price is determined by the chooser.