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February 12, 2007

The benefit of prices

Most of us think of prices as bad because they represent what we have to pay to obtain a product or a service. But economists look at prices in a slightly different way -- one that actually helps consumers, says N.C. State University's Mike Walden.


"Well let me give you an example: We’ve had a major freeze in California that’s knocked out I think three quarters of the citrus crop in that state. So things like orange juice will go up dramatically in price," explains Walden, a professor of agricultural and resource economics.

"Now the question is, We are going to have less orange juice, so who’s going to get that orange juice? Well, the higher price is a signal to consumers of orange juice that now orange juice is relatively more scarce, it’s more expensive. It’s going to take more of your resources to have orange juice.

"And so what happens is people who really, really, really like orange juice and are willing to pay the price, they will pay the higher price and get it," he adds.

"Those people, for example, who marginally like orange juice, they will say, ‘I like it but not enough to pay whatever more a gallon.’ So they are not going to buy it.

"So the higher price is a way of rationing, in this case, the smaller supply among consumers. And those consumers who value orange juice the most and are willing to pay a higher price actually get the product."

Posted by deeshore at February 12, 2007 08:35 AM

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