Price discrimination of health food

A basic tenet of economics is that some customers are willing to pay more than others for a given product. So it’s in any company’s best interest to charge more to customers who are willing to pay more. This practice, called “price discrimination,” is illegal in its most basic form. But it is commonly practiced in many more subtle ways. One example is coupons: customers willing to find and cut out coupons tend to be willing to pay less than customers that don’t want to spend time finding the coupons.

Another prevalent example of price discrimination is first-class vs. coach-class seating on trains and planes. People willing to pay a lot of money for a plane ticket will buy a first-class seat if the experience is significantly better than in coach. I remember reading in Econ 101 that many train companies purposefully degraded the experience in coach class so that anyone who could afford first class would pay the premium. Fortunately, this trick doesn’t work well in a highly competitive marketplace because other providers can win over the low-paying customers by providing them a better coach class experience.

I’ve started to think that the same principle applies to health food. People who want organic, pesticide-free, low-calorie, whole-grain food tend to be people lucky enough to have the luxury to think about such things. In other words, they tend to be richer and have more money to spend on food. Conversely, people who have just barely enough money to get by are more interested in getting the most calories per dollar so they can eat a satisfying meal without breaking the bank. In other words, restaurants and grocery stores know they can get away with selling health foods at a premium, because they know the people most interested in those products are willing to pay more.

I think this explains why healthy food often costs so much more than junk food even when it doesn’t actually cost more to produce. Williams College, which is big enough to purchase directly from food producers, saved money by using more local, organic dining hall food.

This is what happens when voters don’t understand economics

In college I never understood why you were allowed to be a Political Science major without taking any Economics courses. Isn’t it true that money is power? Isn’t politics primarily concerned with protecting and distributing wealth? There are some social issues like education or abortion that seem at first to fall outside of the realm of economics; but Freakonomics shows us how even there, quantitative economic analyses yield important insights.

I only took one Political Economy course and no pure Political Science classes, so arguably I didn’t try very hard to find answers to these questions. But at the very least, I didn’t see how you could have a complete discussion of political issues without bringing economics into it.

In a previous blog post I mentioned a brilliant history teacher who didn’t understand the importance of campaign finance reform. Was he a product of an educational system that allowed people to take no economics classes?

In a heretofore-unrelated line of thought, I also couldn’t understand how Republicans managed to get re-elected by working class voters after repeatedly cutting taxes for the wealthy and cutting services for the working class. I wasn’t satisfied with the easy answer, “there are a lot of dumb people in this country.”

One of my co-workers grew up in rural Indiana. He said he started voting Democrat after moving to Seattle, but his family all voted Republican. Why? He said they weren’t dumb, but “they just don’t know any better.” I was still left wondering, why not? And what exactly don’t they understand?

What’s the Matter with Kansas? by Thomas Frank essentially describes how most of “conservative America” does not believe economics is an important part of politics. The Republican rhetoric is as follows. Anyone who tells you that you deserve more money is insulting you by insinuating that you don’t have enough money (and by extension, insinuating that you are a failure). And anyone who makes arguments based on economic theory you don’t understand are pretentious “elites” who are simply inflating their own egos and insulting you by insinuating that you’re dumb. Why else would they be talking about math, when the issues that really matter are moral issues that they disagree with you about, like abortion and the right to bear arms.

What really struck me, in other words, is that the Republican narrative crucially depends upon widespread ignorance of basic economic theory.

From this perspective, Bill Clinton’s famous rallying cry “It’s the economy, stupid” seems in some ways genius (put the focus back on economics); but also feeds easily into the rhetoric (“he’s calling you stupid”).

Frank points out that the amazing thing about Marxism and Communism historically is that they got everyday people interested in economic theory. Today in America that is not the case. Economics is being systematically belittled by politicians. The system is really quite extraordinary—politicians funded by the wealthy get elected by the working class majority to enact “morally correct” policies which actually turn out to benefit the wealthy. All of this while blaming other politicians for the actual deteriorating prospects of working class Americans.

My case for why we should teach Economics 101 in the first year of high school has never been stronger.