Over at Truck and Barter, Ian Cook has written the post I would like to have written about the flu vaccine shortage:
Hold the phone! You mean to say that government purchasing of vaccines at a forced discount has something to do with this? Could these be the mysterious “business reasons” that cause some companies to underproduce vaccines?
I’m shocked. Shocked, I say.
I think Ian’s right. Any time there’s a profit to be made from investing in more production capacity, and over a long enough time horizon that investment doesn’t happen, that means you should check your assumption that there’s a profit to be made from the investment. If you are forced to sell your output at a lower-than-otherwise price, that reduces your investment incentive. Voila.
And yes, the same logic applies to price caps in electric power markets and potential disincentives to investment. There are some similarities — the peaking nature of demand, the seasonality of demand, uncertainty due to weather, and so on.
A group of economists has filed an amicus brief in the Supreme Court hearing of the interstate wine shipment case. George Akerlof, Daniel McFadden, Vernon Smith, Don Boudreaux, Robert Hahn, John Letiche, and Robert Litan is an excellent analysis of the economic issues in the case of interstate wine shipment. This paragraph provides a nice summary:
As we read the briefs submitted by the state parties and their amici in these cases, they do not seriously contest either the economic costs of the regulatory regime nor, by implication, the potential benefits of a national wine market that is free from protectionist inhibitions. Rather, they contend that the existing restrictions are justified by other state interests, such as the promotion of temperance, the protection of minors, tax collection considerations, and the maintenance of orderly market conditions. These concerns, however, cannot justify the discriminatory laws at issue in these cases. More broadly, the history and the contours of state restrictions on direct shipments, as well as the empirical evidence from state markets that lack those restrictions, indicate that the proffered public-interest justifications are not persuasive. The available evidence supports the economists’ expectation that restrictions on market entry often serve to protect highly organized and entrenched interest groups, to the detriment of consumer welfare.
The brief is available both at the Coalition for Free Trade website and at the AEI-Brookings Joint Center for Regulatory Studies website. I heartily encourage you to read it for the eloquence of the argumentation, as well as for the correctness of the position!
Thanks to Stephen Bainbridge on Wine for the pointer.