Thursday, April 23, 2015

Elastic Raisins

It will surprise no one that I support the Hornes in their legal challenge, currently before the Supreme Court, to the partial confiscation of their raisin crop by the federal government under a price-support program. But this part of Ilya Somin's post attracted my attention:

Michael McConnell, the prominent constitutional law scholar representing the Hornes, pointed out that his clients are probably still net losers from the program, even if you take into account the way in which they benefit from having a higher price. They would likely be better off if they could sell a larger quantity raisins at the lower price that would prevail in a freer market, than by selling fewer raisins for a higher price under the cartel scheme. Deputy SG Kneedler claimed this was not true because the demand for raisins is so “inelastic” that consumers would not buy more of them if the price were lower. That claim goes against basic economics 101, and I highly doubt that the justices will buy it.

Kneedler's estimate of the "elasticity of demand" (i.e., the price-sensitivity of raisin consumers) may or may not be true -- more on this later -- but it doesn't "go against econ 101". On the contrary, it is econ 101, as any actual basic economics textbook will confirm: the demand for some products, over certain price ranges and in certain economic contexts, doesn't change much in response to fluctuations in price. My own demand for raisins would be an example: I don't actually know what I pay for raisins, a pretty sure sign that a fall to any price above zero would not induce me to increase my family's consumption of raisins. Indeed, a rise in price would have to be large enough to attract my attention to the price in the first place before it would have an impact; I suspect that rise would have to be several multiples of its current price.

But I may not be the marginal raisin consumer. Many families whose food budgets are much more constrained "shop the sales" and might quickly switch to other products in response to changes in price. But that is an empirical question and cannot be settled merely by appeals to "basic economics".

1 comment:

genericviews said...

The families that will really be harmed by this are the ones that currently occupy the national raisen board. All those profits they currently get from selling stuff that doesn't belong to them (fencing stolen goods) will stop.

Not to mention that they sell those raisens to schools at below market prices through the USDA, thus satisfying some market demand that would be willing to pay a higher price in a competative market.

The simple fact is that all of those New Deal ag control programs need to end. They distort the market and produce only promissed benefits, not real auditable proven benefits (except for all those regulatory board members who get their skim). It's time to end them all and let food compete in the markets. No more government cheese.