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A Water Dilemma

May 8, 2010 • Demand, Supply, and Markets • 136 Views    No Comments

Last week, the Boston area had undrinkable water for several days. Predictably, bottled water sales soared as did bottled water prices in certain stores.  Equally predictably, politicians condemned the increases. Most economists, though, disagreed.

As explained by a Boston Globe journalist, price boosters best served the public interest because they had the incentive to supply more water. Yes, price could even double but, as he describes, “…sales of water are slower [than at the cheaper vendor] and there is a lot of grumbling about the high price. But even late arriving customers are able to buy the water they need…” By contrast, the lower priced vendor had “his entire stock cleaned out.”

The riddle: How can high prices make people happy? 

The answer: When they preserve the supply of a necessity.

The Economic Lesson

Picture a supply curve sloping upward crossed by a demand curve sloping downward. Price is the y-axis and quantity is the x-axis. As price rises, producers are willing and able to create and sell more. Why? Because higher prices mean higher profits. Whenever government steps in and prevents price from naturally rising as the market dictates, shortages result. Do you prefer high or low water prices for Boston?

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