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Economic - Supply and Demand Plus Last: 08/31/2014

Supply and demand – Plus subsidizes

Let’s go back to basics. When you lower your price, customers will want more. If you increase your price, customers will want less. Economists call this the principle of “supply and demand”.

So if you subsidize house purchase by giving me tax credits and making it less expensive, I will buy more houses. And if you subsidize my use of health care by making employer health insurance a tax-free benefit, I will use more health care services. And if you subsidize me going to college to study Ethno Musicology, I am far more likely to go to college and study Ethno Musicology rather than perhaps becoming a plumber.

All these subsidies have noble causes. Better health care, better education and better housing. The problem is they eventually have just the opposite impact. With subsidized home ownership prices went through the roof. With subsidized college education, students disregarded tuition costs and did not fight for lower alternatives. With subsidized health care, nobody cared what an MRI cost.

Let’s try eliminating all these subsidies and let the market take care of managing our resources. We will be far better off – and prices will get back to reasonable levels.