Tyler Cowen recently shared a study on the public’s perception of supply and demand in the housing market. The study suggests that while most people want lower housing prices, they do not believe that increasing supply would actually lower prices. This disconnect between public perception and economic theory is not limited to the housing market, but is prevalent in many other contexts as well.
When presented with scenarios where a firm faces higher costs or lower costs for a key ingredient in their product, economists would expect the firm to adjust prices accordingly to maximize profits. However, the average person may not see it this way. There are several reasons for this asymmetric pessimism:
1. Real-world examples of price stickiness may lead people to believe that prices do not always adjust in response to changes in supply or demand.
2. In an inflationary environment, people may focus on nominal prices rather than relative prices, leading to a skewed perception of price movements.
3. Pessimism is often seen as more intellectually fashionable than optimism, leading people to default to negative assumptions.
4. The media’s focus on negative news may influence public perception of the effectiveness of policies in addressing economic issues.
5. Equating greed with high prices may lead people to believe that firms will not lower prices even when input costs decrease.
Despite these factors, it is likely that people understand the basic principles of supply and demand when it comes to the housing market. However, the way they interpret questions about the impact of supply on prices may differ from what economists expect.
To better understand public perceptions, imagine a scenario where one political party opposes building more housing while the other supports increasing housing supply. If these views are widely known among the public, a young voter may have a clearer idea of which party is likely to make housing more affordable.
A recent election in Britain provides an interesting case study. The Conservative party campaigned on a NIMBY (Not In My Backyard) platform, while Labour ran on a YIMBY (Yes In My Backyard) platform. The survey results show that support for increasing housing supply was not solely based on income levels, as even retirees with modest incomes supported the YIMBY party.
In conclusion, public perceptions of supply and demand may be influenced by various factors, but ultimately, understanding the real-world implications of economic policies is crucial in shaping public opinion and addressing economic issues effectively.
