Perhaps partly due to the severity of the Great Recession, in recent years more books, articles, and blog postings than usual have argued against the use of markets to organize different parts of the economy. A subset of this type of literature is opposed not to markets in general, but to the purchase and sale of particular goods and services. One example is the 2012 book by the well-known philosopher Michael Sandel, “What Money Can’t Buy: The Moral Limits of Markets”. Another example is the opposition to a market in kidneys and other organs to be used in transplantation surgeries. Alvin Roth, the latest and highly merited winner of the Nobel Prize in economics, has argued that virtually no country allows such a market because most people feel “repugnant” toward allowing organs to be bought and sold in an open market.
A general criterion that should be used in determining when money prices should be allowed to help bring demand into balance with supply is whether the private and social gains of using prices exceed the private and social costs. One major advantage of allowing money prices is that the cost to buyers equals the revenue to sellers, so that no resources are lost in the process of equating supply and demand. By contrast, when markets are cleared by queues, the waiting time is a cost or price to consumers, but sellers do not receive revenue from this cost imposed on consumers.
Another advantage of prices is that the limited supply of goods will be allocated to consumers who are willing to pay the most for the goods. This is an attractive result when dealing with individuals of similar incomes, but rationing by money price may be a disadvantage if richer persons get most of the medical care or other goods considered necessary for a decent life. However, the way to meet this problem is not by eliminating money prices as a way of rationing supply, but instead by redistributing income to poorer individuals, and sometimes perhaps by directly subsidizing the consumption of goods by the poor, as with Medicaid.
To show how these and other principles work out in practice I will discuss a few examples where the use of markets and prices has been criticized. I start with transplanting of organs since not only Roth and Sandel, but many doctors and others have expressed their opposition to allowing organs to be bought and sold. I concentrate on kidneys since kidney transplants are the most common, and individuals can donate one kidney while they are living as well as allowing their kidneys to be used after they die. The reasons given for opposing buying and selling kidneys are varied, but include Roth’s discussion of “repugnance”, and a claim that many poor persons would either be tricked into giving organs or would give because they were desperate for money.
These and other reasons for opposing using money prices to increase the supply of organs for transplant are not completely without merit, although the vast majority of individuals who need a kidney transplant or have relatives who need transplants want to increase organ supply by buying them and other means. Moreover, there are great costs to the present system that forbids the purchase and sale of organs. In the United States, about 90,000 individuals are waiting for a kidney transplant, and the average wait is about 6 years. The great majority of those waiting are on dialysis, and life expectancy while on dialysis is short. For this reason, about 4,000 individuals die each year while in the queue to get a kidney. Kidney exchanges, introduced in 2005, and other efforts to greatly reduce the waiting time have produced little overall benefit. In fact, the average waiting time rose from 4 years in 2005 to the 6 years wait at present.
Allowing kidneys to be purchased for transplant use would reduce the typical wait for a kidney to no more than a few months, and would eliminate all the deaths because of the time consuming queue to get a kidney. Since in the US and many other countries, governments largely finance transplants, access to transplants under a system when they can be purchased would not greatly depend on a person’s income. In light of these considerations, I do not understand how anyone who is knowledgeable of the great cost imposed by the present system on the many individuals who need kidneys could oppose allowing kidneys to be purchased and sold, even after taking full account of “repugnance” and the other alleged costs of allowing a market in kidneys (for a more detailed discussion of allowing a market in organs, see Becker and Elias, The Journal of Economic Perspectives, Summer 2007, pp 3-24, and my blog post on organ transplants on 1/01/06) .
I briefly discuss two other controversial examples. Traffic congestion is a big problem in most cities in the world, such as Beijing, Los Angeles, and Mexico City. Traffic congestion imposes major costs on drivers since it often greatly increases the time to go from one destination to another. Again, as with the transplant market, time spent in traffic is an inefficient “price” since it wastes the time of drivers without providing benefits to anyone else. Indeed, it harms others because the driving time of other drivers is increased when someone decides to drive during congested times.
One alternative to traffic jams is to place a charge on using roads and highways during congested time periods, as the city of London does by pricing admission to the central business district during prime week day times. This "congestion price" would reduce driving times by encouraging some people to shift their driving to less congested times, to use carpools, to take slower and more indirect routes to their destinations, or to reduce their driving.
Of course, people who place higher values on their time would be more likely to pay congestion fees and continue to use the main roads. Since richer individuals tend to have high values of time, poorer persons would be more likely to shift their driving patterns. However, a better way to help lower income drivers than by using congestion is to use the revenue collected from congestion tolls to help poorer individuals, such as by improving roads in poorer neighborhoods. Congestion is too inefficient a method to ration road use and help drivers who place less value on their time.
My final example deals with the voluntary army that uses pay instead of a forcible draft to get a sufficient number of men and women to serve in the armed forces. Most readers are too young to remember the opposition to eliminating the draft in the US prior to converting to a fully voluntary armed force in 1973. It was then claimed, among other things, that a voluntary army would be “mercenary” and reduce patriotism, that only the poor and minorities would enlist, that a voluntary army would not fight well in difficult wars, and so on.
The evidence from the past almost 30 years in the US and from other countries that use a voluntary army is just the opposite; namely that a voluntary army is very professional and fights hard under difficult circumstances (think of Afghanistan and Iraq), that many young men and women from middle class families, and even upper class families, do volunteer, and that instead of exploiting minorities it provides some of the best opportunities for their advancement (Colin Powell is just one prominent example).
I have not attempted to draw a sharp line between where prices and markets should be used and where they should not be. Nor do I deny that for some activities the cost of using money prices would exceed the gains. I do believe, however, that in the US and other economies, the bigger problem is not excessive use of prices and markets but insufficient use. The examples I discuss illustrate the reasoning behind this conclusion.