Thursday, 3 November 2011

Goff on markets

Eric Crampton has been marking Phil Goff on his understanding of how markets work. Eric writes,
Now, here's Phil Goff in last night's Leaders' Debate.
At times you have to intervene. The market is a good system. But there's a thing called market failure. And when you've got 10,000 people chasing sections all at the same time, that's not the normal functioning of the market. And if there isn't the supply to meet that, then your property prices are going to be inflated.
Sorry, Phil, that gets you a C- at best. Yes, if there's a shock to demand for standing houses and supply is relatively inelastic, property prices go up.
I have to say a C- seems a bit too generous for me. Yes prices will rise given that  the relative demand for housing has risen, but to say this is a market failure really is bollocks. The rise in prices shows that markets are working exactly how we would expect them to work. To miss this really does show that Goff doesn't understand a really basic point about how markets work, they allocate scare resources via the price mechanism. They bring about equilibrium by cutting off demand and giving incentives to increase supply.

The real problem here isn't the rise in prices, its the lack of response on the supply side of the market which largely due to restrictions on supply due to local government regulation. So the problem is is government failure rather than market failure.

No comments: