On Fair Prices

The debate surrounding what defines a “fair” or equitable price is longstanding. Classical market economists typically assert that a fair price is simply the price that both parties in a transaction willingly agree upon. While this perspective is valid, it raises questions about the practical value of the term “fair price.”

To begin with, it’s important to clarify that price and cost, while interrelated, are distinct concepts. The cost of an item refers to the most valuable alternative that an individual must give up when making a consumption decision. In contrast, the price is the actual monetary payment made for that item.

For instance, consider the price of a gallon of milk, which might be $3.75. The cost incurred by the consumer is the value of what they forgo to obtain that milk—such as time spent driving to the grocery store, selecting the milk, checking out, and returning home.

Cost and price are a response to living in a world marked by scarcity: resources are limited, whereas human desires are virtually limitless. Often, these desires contradict one another, and the available resources cannot meet all of them. Consequently, we are compelled to make choices, each involving trade-offs that create costs and, consequently, prices when transactions are conducted.

Because scarcity is an inherent aspect of our existence, we can argue that, although subjective, cost and price are natural occurrences. They arise from inherent characteristics of nature, despite their construction in human thought.

If both cost and price are natural outcomes, what merit do we find in discussing “fair” prices? Is it just that the Mississippi River nurtures the land as it flows for miles while surrounding deserts remain dry? Or when, during droughts, saltwater intrudes into the river, endangering ecosystems? Such occurrences are also products of nature, yet we do not impose notions of morality or fairness upon them. Why should we do so in the context of prices?

Instances like fraud or theft hint at the notion that we can apply concepts of “fairness” to price. Nevertheless, it’s debatable whether this is an accurate application of the term. When we criticize a fraudster, we condemn the act of deceit, not the price itself. The unfairness lies in the deception, not in the price itself.

Legislation against price gouging, like that implemented in Louisiana, often invokes the concept of fairness (or “appropriateness,” as termed by the Louisiana law) to assess whether consumers are being unfairly charged. Yet, this line of reasoning seems as misguided as lamenting any damage done by natural occurrences. Is it “appropriate” that storms can rip roofs off buildings?

To summarize, while I can empathize with the pursuit of defining a fair price, I believe the subjective nature of prices misleads us into applying moral judgments when it is, in fact, the actions that led to those prices that warrant ethical scrutiny.

Additionally, this post is an exploration of ideas. I would appreciate hearing your responses to my argument, Dear Reader; please share your thoughts in the comments.

[1] The differentiation of prices from costs has long been a topic of interest—Adam Smith, in his Wealth of Nations, devoted several chapters to exploring the distinctions among value, price, and cost. These discussions are certainly intriguing, albeit predating the advent of marginalism. – Ed. Janet Bufton.

[2] Formally, the price is whatever medium is exchanged in a transaction. Here, I am assuming a monetary context, as we operate within a currency-based economy; however, an alternative could be used in barter systems.

[3] Costs are transient, occurring at the decision-making moment (see Cost and Choice by James Buchanan). As such, they reside in the mind of the decision-maker; they are inherently subjective but remain conditions of nature. The assessment of a price is similarly mental. Relative prices guide choices, and the pertinent relative price is defined by the chooser.