Richard McKenzie on Prices

Episode Summary

Executive Summary: Russ Roberts and Richard McKenzie explore how prices, not shortages alone, explain water crises, gasoline lines, flood damage, TSA delays, Christmas sales, and popcorn pricing. The conversation emphasizes unintended consequences, price discrimination, and how regulation or subsidies distort incentives, often creating the very shortages, congestion, or risk they aim to prevent.

Main Topics: Water shortages and price controls: Southern California water crises are framed as a pricing problem: scarcity becomes visible when prices are held below market-clearing levels, discouraging conservation and causing shortages. Flood insurance and disaster subsidies: McKenzie argues that subsidized flood relief capitalizes into property values, encouraging development in floodplains and weakening incentives to avoid or prepare for flood risk. 9/11, TSA screening, and unintended consequences: Increased flight security and fear after 9/11 raised the full cost of flying, shifting some travelers to highways and potentially increasing total fatalities. After-Christmas sales and price discrimination: McKenzie views post-Christmas discounts as a form of intertemporal price discrimination based on changing demand elasticity rather than only inventory clearing. Why popcorn is expensive at the movies: The discussion explains movie-theater popcorn through bundled goods, concession margins, price discrimination, and theater economics rather than simple monopoly pricing. Competition, resale limits, and market complexity: Both speakers stress that real-world pricing is shaped by non-price competition, resale constraints, costs of service, and industry structure, making simple explanations inadequate.

Key Arguments: Prices communicate scarcity and coordinate use; when prices are suppressed, shortages and queues emerge. Water crises in Southern California are driven less by low rainfall than by regulated prices that prevent conservation incentives. Flood subsidies can worsen risk-taking by encouraging people to buy and build in flood-prone areas; relief benefits get capitalized into land values. Security measures after 9/11 increased the full cost of flying, likely shifting some travel to the more dangerous highways. Retail and movie pricing often reflect price discrimination across consumers with different willingness to pay, not just raw monopoly power. Movie theaters use low ticket prices and high-margin concessions as a bundled strategy to attract customers and recoup profit. Many apparent pricing puzzles have multiple causes, including service costs, inventory management, competition, and institutional rules. The profit potential in these markets can spur innovation, better service, and higher-quality products, even if individual prices look odd.

Data Points: Southern California annual rainfall: about 11 inches - Used to illustrate that low rainfall alone does not explain water crises Water consumption reduction from public appeals: about 3%–5% - Estimated effect of official conservation pleas during drought Gasoline line length during price controls: up to a mile away from the pump - Described during the early 1970s gasoline shortage Estimated flood damages vs. price difference example: $20,000 expected damages; $10,000 actual damages; $90,000 floodplain lot vs. $110,000 hillside lot - Illustrates capitalization of flood risk into property prices Flight reduction after 9/11: about 5%–8% - Cornell economists’ estimate of reduced flying in the first 12 months after the attacks Additional highway deaths after 9/11: about 1,250 deaths - Estimated fatalities attributed to increased highway travel after 9/11 Garage door rule in Irvine: open no more than 20 minutes - Example of local/homeowner-association regulation Grass height enforcement: above 6 inches - Reference to a rare enforcement case for overgrown lawns Popcorn price, small size: $5.50 for about 4 ounces - Southern California theater example Popcorn price, medium size: $6.00 for about 8 ounces - Shows lower marginal price than the small size Popcorn price, large tub: $7.00 with free refills - Used to show declining per-ounce cost with refills Movie theater revenue split: about 70% of gate receipts to studios/distributors - Used to explain why theaters rely heavily on concession margins Average movie run length: about 7 weeks - From the discussion of movie-industry uncertainty and distribution timing Some movie runs: as short as 4 weeks - Illustrates volatility and uncertainty in film performance

Pivotal Quotes: "it doesn't rain much water in Southern California, but it also doesn't rain any Mercedes-Benz in Southern California or Snickers candy bars." — Richard McKenzie: Explaining why water shortages are about price controls, not merely low rainfall "the 9-11 terrorists have probably killed more Americans since 9-11 than they killed on 9-11" — Richard McKenzie: Arguing that post-9/11 security changes shifted deaths from air travel to highways "Why do we have crises in water but not in Snickers candy bars or Mercedes-Benz?" — Richard McKenzie: Using a pricing analogy to show how markets prevent scarcity when prices are free to adjust

Implications: The episode argues that well-intended controls and subsidies often create hidden costs, while flexible prices and careful incentives reduce shortages, risk-taking, and inefficiency. For listeners, the lesson is to ask what prices and rules are doing beneath the surface.