Tuesday, August 24, 2010

Putting Tomatoes on the "Bathroom Scale"

A few days ago I quoted P.J. O'Rourke: "The free market is not an ideology or a creed or something we're supposed to take on faith, it's a measurement. It's a bathroom scale. I may hate what I see when I step on the bathroom scale, but I can't pass a law saying I weigh 160 pounds."

Steven Landsburg has a related post about how to correctly compare the total cost (including all energy costs) to a New Yorker of a locally-grown tomato from a lavishly heated greenhouse in the Hudson Valley and a tomato transported all the way from California. 

"How can we possibly gather enough information to compare the opportunity costs of land, fertilizers, equipment, workers, transportation and energy costs (among many others) and reach a conclusion about which tomato imposes the fewest costs on our neighbors?

Well, it turns out there’s actually a way to do that. You do it by looking at a single number that does an excellent job of reflecting all those costs. That number is known as the price of the tomato."

HT: Don Boudreaux

18 Comments:

At 8/24/2010 9:04 AM, Blogger Hydra said...

That is only true if the price of the tomato incorporates all the costs. There may or may not be any real or significant costs associated with a truck spewing exhaust all the way from California, but if there are, those costs are not included in the price of the tomato.

But, for a first approximation, I believe the idea is correct: if it costs more, it is because it uses more resources.

We seem to have reached a point at which there are an infinite number of whiners who complain about all of these "costs" which supposedly affect them (and always in a negative way). They don't seem to realize that there are also costs invloved in controlling and analyzing these costs. They seem think that they have an infinite right to impose costs on others that will minimize their costs.

That is why I promote the idea that:

Total Cost = Production Cost + External Cost + Government Cost

If your favorite special interest is only one term on the right hand side, you may costing yourself money. The problem still resolves to the question posed: "How can we possibly gather enough information to compare all the costs?"

Particularly when so many are prepared to disseminate disinformation.

 
At 8/24/2010 9:22 AM, Blogger joe armendariz said...

Hydra, you've obviously never heard of the Diesel Engine Rule which is a mandate imposed on all commercial trucks in California by the California Air Resources Board (CARB).

The "rule" requires all trucks in CA to have a 2010 model year diesel engine or equivalent.

So, of course the cost of shipping the tomato from California is calculated in the price...and one of those costs is definitely the cost of complying with environmental regulations particularly as it relates to greenhouse gas emissions regulated under AB32 (Global Warming Solutions Act of 2006).

Now I can't address what is happening in other states but your example was about importing the tomato from California.

 
At 8/24/2010 9:37 AM, Blogger Hydra said...

The "rule" requires all trucks in CA to have a 2010 model year diesel engine or equivalent.

=================================

Sure, and even if somone ran a gasoline or natural gas truck, those (emission control) costs would also be included. But there is no charge for whatever emissions still escape. That cost falls in the "external costs" term, even if we don't know exactly what it is.

The cost of creating and monitoring that regulation falls under "government costs" and the cost of buying and operating that new truck falls under "Production Costs".

Some people insist that there should be NO external costs and some even insist there shoud be NO pollution to cause them, but of course that is impossible to completely achieve and hideously expensive to even approach.

There is also no charge for the emissions that escape from heating the greenhouse, so maybe that is a wash. The greenhouse may very well burn more fuel per tomato than the truck does to bring them from California, and that difference would show up in the price.

My (narrow) argument was that just because price is a good indicator of resources used, it is not a perfect indicator, and it does not (always) tell us which product "imposes the fewest costs on our neighbors".

And then there are some people who just don't care.

 
At 8/24/2010 9:43 AM, Blogger Hydra said...

The "rule" requires all trucks in CA to have a 2010 model year diesel engine or equivalent.

===============================

Nice subsidy for the engine manufacturors.

Probably prevents a lot of Mexican trucks from shipping.

I wonder what kind of pollution controls the engine manufacturors have to endure, and how many miles you would have to drive one of the new engines before you reach the pollution break even point compared to operating an existing engine.

And, how much you want to bet someone doesn't take that existing engine and convert it to some other use (maybe outside of California), so it doesn't even get retired? Every one of those things (that still runs) is going to wind up in a shrip boat somewhere, or something.

 
At 8/24/2010 10:00 AM, Blogger Hydra said...

Don't get me wrong, rules like the Diesel Engine Rule, eventually have some effect, just as the appliance emission rules (and competitive forces) have improved our appliance efficiency over the years.

But I'm still using old appliances, some of which have been "remanufactured" a few times.

 
At 8/24/2010 11:08 AM, Blogger Benjamin said...

This is an excellent post by Perry, except for those glaring weaknesses already mentioned by other commenters:

Price does not capture external costs and government subsidies.

For some reason, it is legal to pollute the air and water other people use.

Just poop in the river and flush it downstream--the property and riparian rights of those downstream mean nothing.

What mean property rights if neighbors can send carcinogens through the air over your property?

The cost of pollution does not show up in the price mechanism (unless we tax pollution, as advocated by Milton Friedman).

And what is the real price of any farm product you buy, when it is simultaneously subsidized and then made artificially scarce by state and federal regulations?

But aside from these huge shortcomings, the price mechanism tells us a lot.

 
At 8/24/2010 11:31 AM, Blogger NormanB said...

Its amazing to me that so many look to marginalizing the pure data that is in prices. Its as if they want the world to be so complicated so as to justify nuances to be used as primary issues. Its as Milton Friedman said, "When the price of pencils goes up it means there aren't enough pencils being manufactured." No need for supply/demand or future uses theories. Its in the price. Use it and prosper.

 
At 8/24/2010 11:42 AM, Blogger bobble said...

does the california tomato price include the cost of building the interstate highway the truck uses?

 
At 8/24/2010 1:39 PM, Blogger Mike said...

Of course I understand the costs are related to the price in many or most cases, but (I believe) as it goes with organics, it goes with other items such as fair trade coffee and many other products in the market.
The sellers, not knowing who is willing to pay more for certain products, find categories to label them and price them according to the willingness of the consumer to pay.
A product grown in CA may cost less than the same product sourced locally - but the seller is using labels to find those willing to pay more without losing the customers who aren't.

I don't believe that the price of any product on the retail level accurately reflects the actual "hard" costs anymore.

 
At 8/24/2010 2:13 PM, Blogger Hydra said...

Its as if they want the world to be so complicated so as to justify nuances to be used as primary issues.

=================================

Precisely. They think their property rights trump all others.

To them, it is worth any amount (paid for by someone else, and therefore a tax against THEIR property rights) to ensure that property rights are not diminished by the probable cost associated with a parts per trillion carcinogen in (what is suddenly) their air.

Dollar bills are in general circulation, the same as air is, but we don't apply the same standards of cleanliness to dollar bills as we do to air. We don't ask (or want to know) what someone did with OUR dollar before we got it. If we did, we would probably never touch one.

What these people are doing is postulating a value for their property (or inventing a price for it) without the willingness to put it on "the scale".

Following Friedman's advice, suppose that everyone were granted a cubic kilometer of air plus one tenth cubic kilometer per year as their share of the atmosphere plus its regenerative capacity. Anyone who wants to pollute the air would have to buy capacity from those that own it. People who want no pollution could raise the price by refusing to sell.

But they might find out that they cannot "control the market" in the same way that they can by lobbying for expensive control mechanisms.

Yet, as Joe A. points out, it is BECAUSE of the control mechanisms that much of the external costs are captured today. The system isn't perfect, but it is better than it was under a totally unfettered market.

As Bobble points out, it depends on where you put the system boundaries when you do the cost comparison.

What is the cost of the California tomato's share of the use of the interstate compared to everything else it is used for?

 
At 8/24/2010 2:15 PM, Blogger Hydra said...

I don't believe that the price of any product on the retail level accurately reflects the actual "hard" costs anymore.

================================

What? Not an efficient market?

Horrors!

 
At 8/24/2010 3:35 PM, Blogger Mike said...

Hydra,

I wasn't really commenting on the efficiency of the market, I was just saying that the price doesn't necessarily reflect the costs of goods....externalities included or excluded.
Actually, I think the pricing oddities may make the market more efficient in some ways for many producers, middle-men and retailers. By that, I mean: in a large, impersonal market, the willingness of consumers to pay a certain price for goods varies greatly - but the only way to know that number, on an individual basis, is by offering "choices". Even if those "choices" don't really differ much in the way of quality or quantity.

 
At 8/24/2010 3:47 PM, Blogger Michael said...

Screw energy. A locally grown tomato in New York, New Jersey, or Pennsylvania is an entirely different and superior product to a tomato that has been shipped from somewhere. That's the reason to pay more for it.

 
At 8/24/2010 7:59 PM, Blogger QT said...

Michael,

Second that. Nothing tastes like a vine ripened tomato.

In all of the discussion of local and external/governmental costs (how any agricultural producer be can responsible for the runaway costs of government over which he/she/it has no control is a matter of utter mystery to me...Hydra?), are we not in danger of losing sight of the incredible choice available to consumers.

50 years ago, my grandfather had never tasted a banana and viewed such an object with deep suspicion ("You aren't going to let your children eat that, are you?"). In Canada, we have a very short growing season and 80% of our fruits & vegetables come from the U.S. Thanks you America...haven't yet developed a taste for boiled treebark, root veggies and pemican in winter.

Greetings from Kanukistan!

 
At 8/24/2010 10:43 PM, Blogger Irrippi said...

No.

Price captures all the supply factors mentioned in the article, but it also captures demand factors.

If some people think a locally grown tomato is better than a mass produced, imported tomato, they might be willing to pay more for it. Ditto for organic products, fair trade coffee, free range chicken, cruelty free eggs, etc.

Price alone will therefore not correctly differentiate the resource costs to bring a good to market.

I do believe though that it remains ambiguous whether locally grown products are less energy and pollution intensive. There are tremendous economies of scale from mass production and transportation. Local produce is yet another left wing boondoggle, assuaging their guilt without a reasonable basis in facts.

 
At 8/25/2010 8:58 AM, Blogger QT said...

Irrippi,

Your arguments on pricing reflecting supply & demand forces are well reasoned. Also agree that "local produce" is not necessarily the most efficient in terms of energy, resources or pollution.

Excellent post

 
At 8/25/2010 9:14 AM, Blogger VangelV said...

Total Cost = Production Cost + External Cost + Government Cost

Price is a much better indicator of cost because you have no way to quantify the terms "External Cost" and "Government Cost".

The Left and the Right love such unquantifiable variables because it lets them create narratives to support political ideology instead of looking at the real world.

 
At 8/25/2010 12:31 PM, Blogger VangelV said...

Price does not capture external costs and government subsidies.

The price of a California tomato does not capture water subsidies and some other factors. But the average price that consumers pay for a tomato is much more reflective of costs than anything that the Left or Right can come up with. States that waste too much money on subsidies for uncompetitive businesses will eventually have a hard time competing for taxpayers.

This is not so say that governments can't distort the cost side for quite some time or that they can't protect inefficient producers by using tariffs to add to the free market price because governments can and distort markets. But the argument is still a valid one. In a relatively competitive market the average price level captures the average costs better than anything else.

 

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