Ifo Viewpoint No. 78: Increased prices for spoiled meat?
Munich, 28 September 2006
Politicians must do something about the recent spoiled meat scandal in Germany. Too many detections have been made for them not to take action. But what has happened? While the federal states are prosecuting the offenders, the ministries of agriculture and economics in Berlin plan to introduce legislation that would forbid the resale of meat below the cost price. This, the proponents argue, would dry up the market for spoiled meat.
An economist is dumfounded by this proposal, which at heart is an attempt to reduce the supply of spoiled meat in shops by means of increasing the price for this meat. This experiment will fail. Since the price of spoiled meat will approach the price for good meat, the incentive to supply good meat will be weakened.
Up to now providers of good meat, who have made special efforts to maintain the quality of their products by accelerating transportation and by constructing an uninterrupted chain of refrigeration, have assumed that they would be able to demand a much higher price for their precautions. Their efforts would be rewarded. In future a portion of this reward will be eliminated. Since revenues without this effort will be nearly as high as with the effort, the incentive to take extra precautions will be missing. More spoiled meat will land on the market.
Consumers will also not be in a good position to protect themselves if the price gap between good and spoiled meat decreases. Prices have an information function in the market. People who are prepared to pay a high price can usually assume that they are getting better quality. This information function is impaired if price differences for spoiled meat and for good meat become blurred. Quality-conscious consumers will in future have trouble distinguishing good meat from spoiled meat. They are at the mercy of the scoundrels even more than before.
The prohibition of selling under cost price will also prevent many reasonable transactions that we encounter in everyday life. At the end of the day at a farmers’ market, the vendors sell their remaining goods to the last customers under cost price to avoid the costs of the return transport of the goods or the costs for their disposal. The baker who sells the rest of his bread before closing time acts similarly. This also offers lower-income groups the chance to buy inexpensive provisions without any real loss in quality.
When a car dealer sells last year’s models under cost price in order to clear stocks this is just as legitimate as when sales are offered for computers or cameras to make room for new models. Currently prices for computers fall by almost 25 percent a year. With market uncertainty, remaining stocks inevitably result when a vendor orders sufficient goods to avoid supplying difficulties. The sale of such remaining stocks under cost price is unavoidable due to the rapid decline of market prices.
What a strange concept of markets it is to contemplate a prohibition of sales under cost price, as the two ministries now intend? Or is the idea not strange at all? It is not perhaps a clever reason for price increases that the vendors’ lobbyists are trying to achieve for their own benefit with assistance from the state? Interestingly enough the contract between the coalition parties includes the intention of forbidding sales under cost price. Did the spoiled-meat scandal come at just the right time in order to convince the public that this intention is justified?
Good arguments can be made for the lobby suspicion. It is understandable and common occurrence that vendors hope to ward off competition via limits on low price. The insurance industry succeeded for decades in getting the federal supervision authorities to set minimum levels for premiums allegedly to protect consumers. Regulations on admitting workers from other countries are meant to protect the local trades from foreign competition; minimum wages are aimed at protecting unskilled workers from cheaper competition. We know that. It is always a matter of reducing competition and putting consumers at a disadvantage. The state itself joins the cartel when it helps vendors obtain higher prices than would otherwise be the case under free competition, to the detriment of consumers. Unfortunately, in this case the cake is not only redistributed but it also becomes smaller. The money equivalent utility loss for the consumers is higher than the increase in profit for the providers since overall economic output is restricted.
Ludwig Erhard realised the damage that the Nazi policies of universal price controls had on the economy. He knew that the ideas of Hitler’s economics minister Hjalmar Schacht were not compatible with a functioning market economy, and for this reason he lifted the Nazi price controls in Germany earlier than even the Allies intended. This was the foundation of the German economic miracle. Perhaps the strategists in the two ministries should reconsider whether they wish to put this policy in jeopardy and turn back the wheel of history.
Professor of Economics and Finance, University of Munich
President of the Ifo Institute
Published as “Lobby-Verdacht”, Wirtschaftswoche, No. 39, September 25, 2006, p. 198.