Sunday, April 24, 2011

Fair and Unfair

There has been a good discussion over at The Reality Based Community inspired by the recent editorial by Arthur Brooks.  Michael O’Hare gives his response to Arthur Brooks, comments follow.  I participated a bit, adding comments that could be expected considering the things I write here.  The general discussion was valuable so all told I wanted to capture it here.

In particular the subject of price discrimination, charging different prices to different customers because you can successfully charge some people more than others, came up.  This is not discrimination based on race, please note, but rather on how much money you have.  If asked people will almost invariable say that it is unfair.  However, it is also ubiquitous in our economy, engaged in everyone.  From senior discounts, to grocery store coupons, to haggling over the price of a car, to the existence of discount stores, there are innumerable ways in which businesses are able to charge more from wealthier customers (at leas nominally more) than they charge from poorer customers.  Indeed it would hardly be possible to run a business without charging more from those willing to pay more (what would you do, refuse the extra money they are willing to pay?) and not accept smaller sums from those able to meet but only slightly exceed the marginal cost of production (do you turn away a profitable sale because it is not as profitable as some other sale?).  Indeed we have a host of mechanisms to hide this price discrimination.  Profit margins are higher on higher end cars because while the cost of the additional features goes up, the price charged goes up more.  Generic products that are identical to brand name products.   Electronics which are identical inside but with an interface that doesn’t provide access to the additional features.  People don’t generally feel comfortable with price discrimination, but it is all around us.

The relevance to the discussion referenced above is that price discrimination is, in part, behind the progressive tax structure.  It is simply worth more to the wealthy to have their wealth secured by the US Government.  It is perfectly fair and sensible in a market economy to engage in price discrimination and that applies to taxes as well.

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