Distorted prices

This is another post in my extraordinarily arrogant series about the misuse of economics terminology by economists.

What is price?

In a market with more than one supplier of a commodity or service, and more than one customer for it, it is what people are prepared to pay. More precisely, it is a ratio, something like demand divided by supply, multiplied by at least one constant, the cost of production (while it is easy to sell below the cost of production, that isn't sustainable).

The consequences of the artificial setting of price are well known - too low and there will be a shortage of supply, too high and there will be a shortage of demand. The latter case provides a mechanism for rationing a scarce commodity or service. There is no longer a free market in that commodity, but demand will be reduced.

Every single advocate of road pricing I have read has referred at some point to this being a "market" solution. But it plainly isn't. What's more, this is the case by design. The imposition of a price that will throttle demand is intended to prevent the use of roads from being regulated naturally by anything resembling a market. If you wanted to establish a market solution to road congestion, you would allow people to build roads privately and to charge for them, in competition with one another where possible.

That might not be practical, and it might be that road pricing is the only possible solution. But it is a misuse of the term to suggest it is a market solution. Prices exist within markets. Prices also exist outwith them. To forget this is to forget the elementary logical principle that although all oranges are fruit, not all fruit are oranges.