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WEW-006

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Microeconomics Question from Walter E. Williams:Edit

"In the present real world we seldom observe 'market clearing' prices. Sometimes we even observe zero prices. How can you account for these two phenomena that appear to contradict economic theory?"

Answer:Edit

One possible reason we would not observe "market clearing" prices is market failure due to information asymmetries. Sellers will not have perfect information regarding future market conditions, or even current conditions for that matter (even if such agents are "rational"). Thus, prices may be held above market clearing levels, so as to keep inventories on hand as a buffer to prevent customer dissatisfaction. As an illustration of this point, when I walk into the Food Giant, there are plenty of goods sitting on the shelves, and this market is not presently "clearing" in the strict sense. If I walked in expecting there to be food and there was none, I would likely shift my allegiance to the Food Lion or Safeway.

Zero prices can also be observed on the market. This may also be due to information problems, however it is more likely to be a result of common pool resources where pricing mechanism institutions have not yet emerged <in a Mengarian sense the good could just fail to be economic since it is not scarce>. Institutions may not have emerged for many reasons (e.g., governmental restrictions), but this also may be the case on an unfettered market. Following Demsetz 1967, property rights will only emerge when the benefit of eliminating the externalities exceeds the cost of implementing and enforcing the property structure.

It's worth noting that a "market clearing price" usually refers to a pure dollar amount. Thus an item given away for free is viewed as a zero price while the cost might well be positive. Attractive women, for example, can easily get a "free" meal with an annoying date paying the bill. The price may be zero but the cost is not.

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