Price and Demand

I'll be the first to admit that I'm no expert when it comes to economics. Yet I think I understand the role of price on supply and demand. The rationing effect of price appears to be widely welcomed in Libertarian circles as the best way of apportioning out limited resources. After all, those who are prepared to pay the most must be the ones who want it the most. This is one of those arguments that I'm uncomfortable with.

I saw it today in an article by Sam Bowman over at ASI regarding allowing universities to offer very expensive privately paid for places. He says:

This kind of shortage is all too predictable – when you set a price ceiling for something, you should expect shortages. For an example of this, look at the 1973 oil crisis. The US and UK imposed price controls and experienced fuel queues and shortages; Japan and Germany allowed prices to rise and consumption dropped in reaction, with fuel going to the places it was most in demand.

It's obvious that a price cap causes shortages - more people can afford the resource than can actually have it. But it isn't clear that a high price ensures that the resource goes to "the places it is most in demand". All it ensures, I think, is that it goes to the places most able and willing to pay.

Consider two families. One is poor and their children go to school 20 miles from their house. One is rich and their children go to school 1 mile from their house. Both drive their kids to school. I would argue that by any sensible measure it is the poor family who most demand the petrol; they want it more and also need it more. Yet price based rationing would give it to the rich one.