Sunday, October 16, 2011

Prices and unintended consequences

One of Hayek's greatest contributions to the field of economics was a powerful work on the impossibility of centralizing information and the role prices play in providing information. It is understood that information is essential in any business but simply by shear numbers no one person or firm could possibly obtain all the information they need to make a decision. What I mean by this is a automobile company doesn't need to know that an iron mine in Argentina collapsed and that the supply of iron will decrease. No. All the relative information they need is the price of iron going up and they must substitute if possible. In a sense prices tell us the entire history of a product and all of its inputs. So in the same sense, prices matter, and they cannot be arbitrarily moved up and down because this new price is a lie in regards to the history of the product.
Unintended Consequences--hmmm---this just about sums up every governmental action ever taken. It seems that for every policy instituted 5 bad things happen and thus 5 more policies are instituted resulting in 5 more problem each. Generally speaking bad unintended consequences occur when someone wants to distort a market by interfering in it. For our purposes let me give an example. No one denies that the price of attending higher education has increased over the years. It is then automatically assumed that we need more scholarships, grants, and student loans to counter this. This may, however, not be entirely accurate. As soon as a third party becomes the paying part to A and B then neither A nor B car as much about the price because C is paying it. The student who receives a grant that covers their school expenses has little incentive to 'haggle' over the price because it really isn't their money being spent. So in the end who is hurt? The students who do not receive grants, scholarships, or low interest student loans. So the question now is, are student loans, grants, and scholarships actually pushing the cost of higher education up? If so this is a major unintended consequence of financial aid.

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