Episode #19 – Markets, Efficiency, and Price Signals

Back again for another week of Crash Course Economics!  Aren’t you loving it?  We sure are here at Crash Course Criticism.

This week’s episode was, for the most part, a pretty accurate explanation of the roles of markets, and prices versus a planned economy.  Crash Course does make a few generalizations, but on the whole, this episode surprised me in a good way with its refutation of common economic arguments on “price gouging” and “predatory pricing.”  Let’s get started:

Markets and Efficiency

The problem with central planning is that it’s inefficient.  Now, when economists talk about efficiency, they’re talking about a couple different types of efficiency.

Crash Course doesn’t beat around the bush when talking about government inefficiency.  They don’t tell the audience that governments are usually less efficient, or that there are exceptions to the rule.  And while there are articles that claim this not to be true (like here, here, and here), this is an economic truth, and Crash Course does a great job at explaining why:

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The first is productive efficiency: the idea that products are being made at their lowest possible cost […] Central planners in general, aren’t that focused on cost. But in the free market an individual business owner has an incentive not to be wasteful because they want to maximize profit.

Governments agencies do not have a “bottom line” to meet, so to speak.  They are not worried about the threat of corporate bankruptcy or investors making sure that the organization is making the best decisions.  If someone makes a wrong decision about how many widgets to order or the estimated cost of a project, there is unlikely to be the same negative reaction from superiors that would be seen at a private company.  And when the employees aren’t incentivized to do the best job or produce the greatest value, the entire organization will naturally be more inefficient than its private counterpart.

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The second type of efficiency is called allocative efficiency This means that the things we’re producing are the things that consumers actually want. In other words, our scarce resources are being allocated towards the things we value.  Central planners are less likely to be allocatively efficient because they have a harder feedback about what people want.

Customer service and feedback are a big part of any large business.  Have you ever complained to Uber about a bad ride experience you had?  Uber would usually apologize, refund your ride, and may even give you a discount on future rides.  Now have you ever complained to the DMV about a bad customer experience?

Businesses focus on meeting consumer needs because they don’t want to lose you to their competitor.  They are incentivized to take care of you, since a satisfied customer will likely continue to do business with that company.

Planned Economies do not pay much attention to the consumer in these areas, since there is no incentive to.  If the government controls a sector of the economy, and there is no alternative for consumers, why would they need to take care of the customers?  Where else are they going to go?

Prices

Crash Course explained the role of price signals very well with their example of Skinny Jeans:

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If people are paying high prices for skinny jeans, it tells producers “Society wants more skinny jeans, start making them.” If no one wants skinny jeans, producers start making something else instead.  Here’s another example: tablet computers weren’t really popular until Apple introduced the iPad. After that, boom! The market exploded.

Price signals play an important role of signaling to producers what people want and how much they want it.  These signals allow for more competitors to enter th