Friday, May 8, 2009

Anything---but just don't raise the price!!

Yesterday while running errands in my car, I listened to the news on NPR. I frequently do this as one way of staying in touch with the mainstream presentation of the news.

The topic was public transportation. Turns out that with the recession, the use of publicly funded transport systems (buses, subways and the like) has increased significantly. In some places, it has even doubled. At the same time, with the economic slump, government is bringing in less taxes. With less money available for government programs, many are running out of money. California's public transportation system will receive $1.1 billion less in aid from the state--a 70% decrease from last year. In Massachusetts, the MBTA is facing a $176 million funding shortfall. New York city's MTA is projecting a $3.4 billion budget deficit for next year.

The solutions proposed by commentators? Raise state and local taxes. Use federal stimulus funds. Cut services. Just about everything you could imagine, except raise prices! The underlying assumption is that because people are unwilling or unable to pay for these services directly, the government must use its power to coerce all of us, even non-users, to fund the system.

This problem involves one of the most basic principles of economics: supply and demand. When demand goes up, the relative supply goes down. The market solution to this problem is to have prices go up --which means that people must take into consideration the full cost of a good or service, including the competing needs of other people. As long as the government subsidizes transportation, the true cost is not experienced by the users, and resources are wastefully employed. A significant cause of why people use cars instead of mass transit is that for decades government has subsidized individual car ownership and use through the public funding of roads and highways.

What does a rise in price accomplish?

Scarce resources must be rationed somehow. Free market prices allow for those rationing decisions to be made voluntarily according to each individual's own priorities in combination with the resources he or she can muster. Governments impose "one size fits all" politically-derived solutions, irrespective of actual resource availability (which is why we run such extreme deficits), and lacks the necessary feedback mechanisms to make adjustments when circumstances change.

Rising prices also increase profits, which then draws inn new investors who create additional supplies. Some of the supply will be more buses, taxis and trains----but some of the "supply" will be alternative solutions to increased transportation costs: more telecommuting, working closer to home, changes in work hours. Some people will choose to pay more money in order to save time on a faster commute, while others will opt to spend more time and less money. Employers will have to adjust pay scales or benefits in order to help workers afford the cost of getting to work. But the fundamental idea is that in order to make accurate choices based on the true costs of resources, prices must accurately reflect supply relative to demand.

The economics is straight forward. Price-fixing leads to shortages. Subsidy leads to over-supply. Right now the lack of a free market in transportation has created a shortage of mass transit and an excess of traffic congestion. Freeing prices from government interference--and requiring users of resources to pay for them--will force people to use those resources in a manner that reflects their true availability. Continued government control will bring further misallocation and wastefulness--as well as loss of creative problem-solving by individuals (and entrepreneurs) faced with solving the problems of daily life.

In order for us to use our resources wisely, we need to know how much is available, how much does it cost, how many other people also want to use the same resource. Free market prices provide that information. Government subsidies and price-fixing disrupt that flow of information---substituting political agenda for supply-demand calculations. The solution to a scarcity is a rise in price, whether in transportation or health care or energy. Let the market set the price of both mass and private transportation, and resources will flow from areas of over-supply to meet the demand in areas of shortage.

Rather than the result to avoid at all costs, a rise price is the solution we need to embrace.

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