Scarcity, Parking, and the Price System
JUNE 01, 1959 by WILLIAM R. ALLEN, NORMAN V. BRECKNER
Dr. Breckner is an assistant professor (money, banking, and public finance) and Dr. Allen an associate professor (international trade and finance) in the Department of Economics, University of California, Los Angeles.
As the weather bureau is facetiously blamed for inclemency, the economist is sometimes seriously charged with encouraging a fetish of scarcity. It seems widely held that scarcity is essentially a figment of perverted imaginations, a figment which, if taken seriously, can only inhibit efforts for economic betterment which otherwise could succeed.
Thus Leon H. Keyserling, former chairman of the Council of Economic Advisers, has informed us that "we have not had enough of anything, because we have not used fully the fantastic productive power which could provide us with enough of everything."
Those who have been brainwashed, by others or through self‑infliction, with talk of the present or readily attainable "affluent society" apparently do not fully appreciate that scarcity is a relative, not an absolute, matter. If scarcity could be abolished by each person having a certain minimum income at present prices—$50,000? $100,000?—we could conceive of a time when scarcity would no longer shackle the movement of mankind toward perfection. But even if each person has an income of $100,000 in Buck Rogers’ time, doubtlessly scarcity will still prevail. For scarcity, be it noted, refers to available goods and services relative to desires.
A person who does not have all of everything that he wants is faced with scarcity, regardless of his absolute level of living. If there were no scarcity, there would be no necessity for sacrificing one thing to obtain another; there would be no problem of choosing which desires to satisfy to what degree, for, by definition, all desires would be fully satisfied; in short, there would be no costs.
The economist did not invent scarcity. To be sure, in the absence of scarcity, there would be no central "economic problem," and there would be no role for the economist. But who would desire gainful employment in a world of no scarcity?
If we do not have all of everything we want, there is a problem of rationing. This is the major corollary of scarcity. An individual cannot escape the requirement for "economizing." How shall he disburse his limited income? When he purchases a unit of A, he has less resources to expend on B, C, and D. On the aggregate level, also, the problem of scarcity is with us. Resources devoted to automobiles are not available for refrigerators; the real cost of submarines is the schools, houses, and other outputs which could have been produced with the resources now sunk in the subs.
How shall the rationing be done? Rationing is painful, so it behooves the community to do it so as to minimize the cost and waste.
One might suppose that the method obvious to a libertarian would rely on free, individual choice. Let each person—possessing certain (scarce) resources, having certain preferences, and faced with impersonal price tags on the merchandise—decide how much, if anything, he will spend on articles A and B and C and D.
But a method of private decision-making does not assuage the longing of many to do something for mankind. The very impersonality of the pricing mechanism, which the advocate of freedom should consider an asset, does not appeal to the compassionate person determined to do good. Thus we find widely advocated processes of rationing, founded not on each person bidding in the open market on the basis of his own scale of priorities, but on direct disposal of goods and services by some public authority on the basis of what the authority somehow decides are the relative "needs" of the members of the community.
Basic principles of economics can often be simply illustrated. Consider a hypothetical university—for convenience, call it U.C.L.A.—which has 1,500 faculty members and only 1,000 automobile parking spaces. On the assumption that all 1,500 professors (or at least more than 1,000) desire a parking space, we have a rationing problem. In one way or another, no matter how much the administrative authorities love mankind, the spaces inevitably must be rationed. But how?
The spaces could be given away by U.C.L.A. on a first-come-firstserved basis. The money price of a space would then be zero; but a price would be paid in getting to the campus before dawn in an effort to be near the head of the line. The warm-hearted benefactor of humanity often neglects the fact that scarcity imposes costs and that the costs need not be in money form. Keeping the money price of an article at zero does not necessarily make it free.
The undignified scramble for parking places may be avoided by prior assigning of the spaces: some professors will be allotted a space and others will not. Who will be the lucky ones—or, as the committee dispensing privileges would say, the deserving ones?
There is almost no limit to the ingenuity of dispensing committees in rationalizing their favors. Among the criteria may be: distance from campus, age, health, rank, initials.
Some such criteria for the guidance of the bureaucracy may initially appeal to humanitarian instincts. Few have any attractiveness from the standpoint of a system of social organization conducive to both economic efficiency and over-all freedom.
If distribution by means of central authority for the purpose of better satisfying "needs" were desirable in the case of parking spaces, it is difficult to see why the same system should not be utilized in distributing the entire social output. Most of our would-be benefactors seldom go that far. (Nor do the Russians go that far in practice.) What they enthusiastically champion case-by-case, they dimly recognize as ridiculous when applied in the aggregate.
Free Market Solution
Return to our parking space problem. The land used for such spaces is valuable. It almost certainly has potential uses which could be sold by U.C.L.A. But whether or not it has alternative uses, the parking spaces themselves would fetch a price if auctioned in a free market. In short, so long as U.C.L.A. gives away the parking spaces—either first-comefirst-served or by committee designation—the university is foregoing income it could otherwise have.
To Professor Adam Smythe, this seems to be a peculiar situation. Smythe may have no automobile and wants no parking space. Or perhaps he does drive and will take a space if it is free or priced sufficiently low, but he is not willing to pay the full market value. Smythe, a cold-hearted but thoroughly impractical economist, might reason as follows: Since I put a small (or zero) value on a parking space, would I not be better off to let U.C.L.A. sell the space to someone else and then give me the proceeds (or at least a part of the proceeds greater than my own valuation of the space)? Why should U.C.L.A. give assets only to certain members of the faculty, viz., those (or some of those) who want parking spaces? If these assets are to be used directly for faculty benefit, why shouldn’t the university sell the assets and then disburse the proceeds among all of the staff?
Suppose, for example, that the market would be cleared, i.e., the number of spaces demanded would equal the number available, if the annual price is $90. One thousand spaces at $90 yields receipts to U.C.L.A. of $90,000. If the receipts are disbursed equally among the 1,500 faculty members, each person, irrespective of whether or not he is a buyer of parking space, gets a dividend of $60.
Instead of U.C.L.A. renting out spaces and disbursing receipts, the president of the school could scatter from his office window certificates of possession of parking spaces to the faculty waiting below. A random group of professors would then control the parking spaces and would be allowed to rent them, the market-clearing price still being $90. However, there are questionable features of this rationing method: possessors of certificates who choose not to rent have obtained valuable space free; possessors who do rent out obtain $90 instead of the pro rata $60; and one-third of the faculty receives no dividend at all. Smythe prefers that the renting be done by U.C.L.A.
(Of course, the selling of the spaces and the disbursing of the receipts are separate acts, and U.C.L.A. might choose to do only the first and keep the receipts. Indeed, the university might decide to set the price which would maximize receipts—perhaps in order to accumulate funds for constructing a parking garage. This price could not be less than $90, for all spaces would be sold at that price, and except by coincidence, it would be higher. But a price higher than $90 will mean that not all spaces are sold; perhaps the best price from the university’s point of view is $110, at which level, we may suppose, 900 spaces will be sold, giving receipts of $99,000. One hundred spaces standing empty because of a policy of monopolistic price-gouging! The inevitable wails of protest are too piteous to allow further contemplation of this alternative.)
Weighing the Alternatives
Professor Smythe is, of course, generally known in the faculty club as an ogre who revels in a psychopathic preoccupation with scarcity, but it does appear that his proposal of U.C.L.A. selling and-disbursing may have some merit. Who gains and who loses by his rationing system?
a. The purchaser of the parking space presumably feels that he is better off as a result of the purchase, or he would not have made it in the first place. To be sure, he would be still happier to get the space free, but someone must bear the cost of scarcity, and it seems appropriate that as much of it as possible be borne by those who receive the space.
b. U.C.L.A. is financially indifferent. It is neither better off nor worse off by selling the space and disbursing the proceeds than by giving away the space.
c. Smythe and the other 499 professors without parking spaces—and under any rationing scheme, there will be 500 spaceless men—are benefited by the proceeds of selling the spaces.
The Smythean scheme achieves a number of desirable results. First, the rationing is done with a minimum cost in time and inconvenience. Paying a price in terms of money, i.e., generalized purchasing power, is neater (although not necessarily smaller in the estimation of everyone) than paying in terms of a specific resource, in this case, the energy required in arising early and groping to the parking lot by moonlight. That, as Smythe has often said, is why money was invented.
Second, a dispensing bureaucracy—suffering the temptations of frail men, guided by arbitrary and often nebulous criteria, and subject to no rewards for efficiency or penalties for inefficiency—is avoided.
Third, there is upheld the basic principle that those who get (in this case, the parking spaces) shall pay.
Fourth, there is upheld the equally basic principle that gifts and rewards are best given in generalized purchasing power. When U.C.L.A. gives away parking spaces, only part of the faculty gains, and the beneficiaries must take the gift in the form of only parking space, whereas Smythe would have everyone gain from the university’s generosity, and receive the gain in money which can be used as each recipient sees fit.
It all seems quite apparent. But Adam Smythe is not optimistic that his well-intentioned but mis-, or un-, guided colleagues will even seriously consider the advantages of Adam Smith’s "obvious and simple system of natural liberty."