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Tuesday, March 22, 2011

MethodLogical

MethodLogical


Even at low prices (and in poor places) the demand curve slopes downward

Posted: 21 Mar 2011 02:00 AM PDT

My UM econ classmate Austin Davis sent me a link to this great piece by Michael Kremer and Rachel Glennerster in the Boston Review, which summarizes what we’ve learned from RCTs in developing countries and how the results generalize to human behavior around the world. The entire thing is worth reading – they capture, better than I probably could myself, the reasons why I’m working in development economics and the sorts of issues I study.

The best part, though, is this plot of the (inverse) demand curves for a bunch of different products across various settings:

Both uptake and utilization of a variety of goods declines monotonically with their price

I like it for two reasons. First, as the authors point out, it’s fairly common to argue that “people won’t use [whichever good] if it’s free”. All the evidence I’m aware of indicates the opposite: not only the rate at which people take goods, but also the extent to which they use them, is drastically higher if the price is zero.

Second, I’ve occasionally been asked (including once by my roommate who is a fellow economist) whether we “really know” the demand curve for anything. The answer is yes: field experiments that randomly vary prices can identify actual demand curves, eliminating the unavoidable uncertainty that comes from estimating them observationally. From there we can figure out the optimal price to set in terms of cost-effectiveness (since we can use user fees to fund the provision of goods to more people) and, if we’re willing to make some strong assumptions, do social welfare analysis. Beautiful.