Sunday, July 10, 2005

L&S: Margins of Choice

Glen has just mentioned one of my favorite "economic ways of thinking" - every good and service is really a bundle of qualities, or has "multiple margins of choice." When regulations make it hard to adjust one margin of choice, sellers or buyers will move to other margins. Glen used rent control as an example, where the restrictions on the official price lead to landlords compensating by reducing quality or by finding other "fees" (e.g., a key fee). I've made the same argument about minimum wage laws - employers may respond to a minimum wage by reducing the amount of labor they hire, or they might respond by reducing various non-monetary benefits, or making working conditions marginally less comfortable. Glen's point here is that regulators cannot imagine all of the possible margins of choice, thus any attempt at regulating the conditions of sale are likely to create all kinds of unintended consequences that frustrate the intended goals of the regulation.

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