What We “Should” Pay

A column in yesterday’s Chronicle asks,

In a competitive market, when the price of raw materials goes down, consumers should pay less for finished goods, right?

The columnist goes on to point out that when cattle prices plunged, the price of beef decreased only slightly. The author concludes that greedy middlemen–beef processors–refused to pass on the savings to consumers.

It may or may not be true that beef processors have used lower cattle prices to increase their own profits. We certainly can’t tell from the article. But what we do know is the price of a finished good is not solely determined by the price of raw materials.

A large number of other costs contribute to the cost of any finished product. Labor, transportation, energy, and compliance with government regulations are only a few of these costs. An increase in one or more of these costs can easily offset any decrease in the costs of raw materials.

Further, supply and demand also play a role in the price consumers pay. If demand increases relative to supply, a decrease in the cost of raw materials may have little or no impact on the price of finished goods.

There is nothing wrong with questioning why the price of a finished product doesn’t decrease when the cost of raw materials goes down. But a rational answer is impossible unless one considers the multitude of variables that contribute to the price paid by consumers.

Instead of doing this, the columnist boldly asserts that consumers are paying more for beef than “they should.” Apparently, the columnist believes that there is some kind of ideal price and when the market doesn’t conform, somebody is to blame. This Platonic idealism is common in economics–the notion of “perfect competition” perhaps being the most notable.

In truth, there is no Platonic price that consumers “should” pay. There is only the market price.

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